Tax on interest earned on unit trusts

[Paul_S]

I'm trying to find out what tax implications there are on unit trusts.

From Fin24:

Unit trusts
There are two possible taxes on unit trusts. First, tax on income earned in the form of interest and dividends. At the end of the tax year, you will be issued with a form, an ITB3 certificate, giving the details of what you’ve earned, which you must include with your tax return.

Second, if you sell your unit trusts – even if you switch between two unit trust funds – you will be disposing of an asset and therefore you are subject to Capital Gains Tax. So you need to bear that tax in mind when you consider jumping ship and going to fund that you feel will bring in better returns.
There are two possible taxes on unit trusts. First, tax on income earned in the form of interest and dividends. At the end of the tax year, you will be issued with a form, an ITB3 certificate, giving the details of what you’ve earned, which you must include with your tax return.

I understand that there is a dividend withholding tax on the dividend payouts (which in my case are automatically reinvested) but how does the tax on interest earned work?
Will I have to pay SARS at the end of each tax season if there is interest earned in the unit trust exceeding the rebate for natural persons?
If so that seems a bit odd as I never received any actual money and will be taxed with CGT when I dispose of the investment.
Talk about an incentive to not invest or save ...

 

[biena]

Will I have to pay SARS at the end of each tax season if there is interest earned in the unit trust exceeding the rebate for natural persons?

Yes you will be paying tax, the investment company will send you the itb3 form.

If so that seems a bit odd as I never received any actual money and will be taxed with CGT when I dispose of the investment.

Don't see why you find it odd, you received interest which you elect to reinvest. So you actually did have the money in you hands..

 

[Paul_S]

Yes you will be paying tax, the investment company will send you the itc form.

Okay. I better put some money away for SARS then.

Don't see why you find it odd, you received interest which you elect to reinvest. So you actually did have the money in you hands..

Well I'm taxed before I put the money in (personal income tax - non RA unit trust), I'm taxed on the interest and dividends earned on it and I'm then taxed yet again with CGT. Triple taxation.
It would have made more sense to only pay tax on the interest if the money left the investment vehicle.
I guess this is why RA's still make financial sense even if they're lower risk and lower growth.

 

[supersunbird]

You do know you would need to have R400 000 in the interest earning assets of the investment (if interest is 6%) to go over that annual R22 500 interest exemption you get...

 

[biena]

Okay. I better put some money away for SARS then.

Well I'm taxed before I put the money in (personal income tax - non RA unit trust), I'm taxed on the interest and dividends earned on it and I'm then taxed yet again with CGT. Triple taxation.
It would have made more sense to only pay tax on the interest if the money left the investment vehicle.
I guess this is why RA's still make financial sense even if they're lower risk and lower growth.

Same could be said for normal interest savings, taxed on the money you invest and taxed on the interest you earn. Don't get me wrong I agree with you this BS of taxing the **** out of everything gets me riled up, simply telling you how SARS sees it.

 

[supersunbird]

Okay. I better put some money away for SARS then.



Well I'm taxed before I put the money in (personal income tax - non RA unit trust), I'm taxed on the interest and dividends earned on it and I'm then taxed yet again with CGT. Triple taxation.
It would have made more sense to only pay tax on the interest if the money left the investment vehicle.
I guess this is why RA's still make financial sense even if they're lower risk and lower growth.

They don't have to be that

Edit:Example:

Syngia RA using the boutique option:
25% each in their top40 and divi index funds, 25% property index fund and 25% in their international something equity fund. Each at a 0.4% annual management cost.

*unable to access the fact sheets and such at work to get the correct naming. DNS issue.

 

[Paul_S]

You do know you would need to have to have R400 000 in the interest earning assets of the investment (if interest is 6%) to go over that annual R22 500 interest exemption you get...

Okay that's not so bad.
It will take many years before the interest earning asset classes in an equity based unit trust hit those levels.

 

[deweyzeph]

Capital Gains Tax is notoriously difficult to enforce, so you could possibly get away with not paying it.

 

[biena]

Capital Gains Tax is notoriously difficult to enforce, so you could possibly get away with not paying it.

Not in this case, it get reported by the investment company to SARS. Yeah you could run the risk of not declaring it when you submit your SARS return but that would be a stupid move.

 

[sgs]

You don't need to worry - you're not taxed "three times" at all.

CGT isn't charged on interest - its charged on capital gains. e.g. if you invest in 1 share worth R1000, and the share's value increases, it ends up being worth R1200. There was a capital gain of R200, and that will be taxed as its deemed as "income". No interest here at all.

If you invest the same R1000 in a money market account, you will earn interest paid out to you monthly. The value invested in the account doesn't ever increase (unless you re-invest the interest), so there is no capital gain in this case. Therefore the interest is rather taxed as income.

Most unit trusts are a combination of the above (shares, money markets, bonds etc.), so might have both Capital Gains as well as interest and dividend payouts. But they are all applicable on different types of investments - so you won't ever pay CGT on interest re-invested. (It gets more complicated as that interest might then buy a share which may then appreciate in value - but the management company will figure all that out when they send you the certificate.)

So there you go - entirely separate taxes charged on entirely different events and with no overlap whatsoever!

(Sorry if this is obvious - just thought I'd clarify. And no, I don't work for nor have any affiliation to SARS - just like understanding what I have to pay so that I can pay as little of it as possible )

 

[senyetse]

I guess this is why RA's still make financial sense even if they're lower risk and lower growth.

The new generation RAs are unit trust based so growth/peformance depends on the unit trust/s selected. Risk also depends on the unit trust selected. And some RAs have pretty low fees.

 

[Paul_S]

You don't need to worry - you're not taxed "three times" at all.

I beg to differ.
You're taxed multiple times even if the tax does not overlap.
Let's say I take R1000 per onth of my salary to invest and my marginal tax bracket is 40%.

1. SARS take R400 for personal income tax and I'm left with R600 to invest.
2. The investment earns interest so I pay some more tax if it's over the exclusion rate.
3. Dividends are paid out so I pay more tax (dividend withholding tax).
4. The investment is disposed of so I pay CGT.
5. I spend the money on goods/services and pay VAT.

That's five taxes.
No wonder most people retire poor.

 

[supersunbird]

I beg to differ.
You're taxed multiple times even if the tax does not overlap.
Let's say I take R1000 per onth of my salary to invest and my marginal tax bracket is 40%.

1. SARS take R400 for personal income tax and I'm left with R600 to invest.
2. The investment earns interest so I pay some more tax if it's over the exclusion rate.
3. Dividends are paid out so I pay more tax (dividend withholding tax).
4. The investment is disposed of so I pay CGT.
5. I spend the money on goods/services and pay VAT.

That's five taxes.
No wonder most people retire poor.

They retire poor because they don't save, wether it be because they don't earn enough to save (life hand to mouth), they just spend all they earn or other factors. Tax on growth cannot be the reason. So what if they tax 15% DWT on that R100 dividend, I'm still R85 better off than I was.

Anycase, hopefully in there will be new government mandated savings products (equity and cash) available from 2015 where you can save up to R30 000 a year in where the growth in it will not be taxed. One would be able to withdraw money from these products whenever one wants to.

 

[Paul_S]

They retire poor because they don't save <snip>

A lot of people do save via pension/provident funds but still retire poor.
The more government tax people on savings and investments now the less people will have in future and the more of a burden they will be on society (government pension, public health, etc.)
Fortunately I'm currently in a position where I can put away a little bit more than the company mandated minimum pension but not everyone has the luxury to earn as much as I do.
My domestic worker will never be able to retire comfortably even if she puts away 1/3rd her current salary because living expenses do not increase linearly across different income groups. When she retires a R100 bottle of cough medicine will cost her far more in relation to her pension than it will to me yet our needs are similar.

Anycase, hopefully in there will be new government mandated savings products (equity and cash) available from 2015 where you can save up to R30 000 a year in where the growth in it will not be taxed. One would be able to withdraw money from these products whenever one wants to.

It's long over due.