How much tax do you pay on unit trusts?

Investing in a unit trust is a great way to grow your savings. But, like most other investments, you will have to pay tax on your earnings.

We consider the kinds of profit you can expect from unit trusts, and how each of these is taxed. We then look at the pros and cons of this kind of investment.

Tip: Is a unit trust the right investment type for you? Click here to find out more.

The three kinds of profit – and their respective tax burdens

A unit trust is considered a collective investment, as it pools the funds of numerous individuals, enabling them all to benefit from the gains of a larger investment.

Each unit trust is overseen by a fund manager, who invests the money in a strategic range of external investments, such as bonds and shares.

Wilri Engelbrecht, financial planner at Fiscal Private Client Services, says that when you invest in a unit trust, you will earn three types of profit - interest, real estate investment trust (REIT) income, and dividends.

She explains that the combination of earnings you receive will depend on the underlying assets that your fund manager has selected. For example, your unit trust may only receive interest and dividends, while another unit trust may also receive REIT income.

The three kinds of income you can make from unit trusts are taxed in the following ways:

• The interest earned is taxed in your hands and is subject to an annual exemption of R23,800 for individuals who are under the age of 65 years.
• REIT income has no tax exemption and is taxed in the hands of the investor.
• The dividends are subject to dividends withholding tax at 20%, which is withheld by the fund and paid directly to SARS.

“Upon disposal of the investment, either as a whole or part thereof, you may realise a capital gain. This will be subject to the annual exclusion of R40,000, while 40% of the remainder of the gain will be included in your taxable income,” says Engelbrecht.

She adds that the taxable portion of the gain will be subject to a minimum tax rate of 18%, and a maximum tax rate of 45%.

What are the pros and cons of unit trusts?

Engelbrecht says that investing in a unit trust has a lot of benefits, such as the fact that your annual interest rebate and capital gain exemption are used for tax purposes.

She explains that unit trusts are also highly regulated and managed by professional fund managers, which means that your investment is in safe hands.

“They are great for first-time investors because the investment costs are comparatively low, which means that you can gain access to the stock exchange at an affordable price,” says Engelbrecht.

She notes that the main disadvantage of unit trusts is that the investment fund is aligned to a specific investment strategy, and past performance is not necessarily an accurate predictor of future performance.

Have you invested in a unit trust? Have a look at your options today.