Investors to pay more tax

UNIT TRUSTS: HARSH AMENDMENTS PROPOSED FOR COLLECTIVE INVESTMENT SCHEMES

- Amanda Visser

Those who invest in a collective investment scheme (CIS) should take note of the "seriously negative impact" the latest proposed tax changes to these schemes could have for them.

The most drastic proposal in the recently published discussion document is to treat all income in a CIS as revenue in nature.

This will force a CIS to distribute all income to its investors annually to avoid paying income tax on any gains.

CISs are exempt from capital gains tax, but amounts considered as revenue in nature are taxable in the portfolio of a collective investment scheme, unless they are distributed to participatory interest holders within 12 months of accrual.

Webber Wentzel partner Joon Chong says the proposal would result in unit holders being subject to income tax annually on all net income of the CIS.

Unduly punitive

The government is eager to collect taxes, but is trying to increase its tax revenue from an ever-shrinking tax base.

It has been reported that 3% of taxpayers contribute around 76% of all personal income tax.

"We do not recommend this proposal as it is unduly punitive to investors, particularly individuals who invest in CISs for long-term growth and who want to have available cash prior to retirement," says Chong.

She adds that the income tax payable by the unit holders would be a "dry tax" if the investors do not sell their units in the CIS.