What are the Capital Gains Tax implications of investing in unit trusts?
Unit trusts, or collective investments to give them their proper name, have long been popular investments, particularly for the ordinary investor. The main reason for this is that for a fairly small amount of money, one can gain access to a fairly diversified spread of investments.
The ongoing popularity of collective investments is evidenced by the number of funds available. According to the Association for Savings and Investment South Africa (ASISA), there were 1,884 local and 756 foreign currency-denominated funds as of 31 March 2025.
In contrast, there are only 269 companies listed on the JSE Securities Exchange.
Taking just the local funds into account, given that the number of available funds is around seven times the number of locally listed shares, it would be fair to say that the number of people investing in collective investment schemes far exceeds the number investing directly into the JSE.
Yet despite this, more people are familiar with the tax treatment of share investments than that of collective investments. Of particular concern are the Capital Gains Tax (CGT) implications.
CGT within the portfolio
The nature of collective schemes is such that they receive money from a wide range of investors, which is then pooled to invest in a portfolio of investments according to the mandate of the particular collective investment.
It is the job of the fund manager to manage this portfolio so as to maximise returns. To achieve these returns, underlying investments held by the portfolio are sold from time to time, to be replaced with others.
Under normal circumstances, if a private individual or company were to dispose of all or part of an investment, such disposal would trigger a CGT event. But if the same thing happened in a unit trust portfolio, there is a risk of double taxation in that the portfolio would be hit first, followed by the individual investor when their units are sold.
This situation is fortunately covered, with Paragraph 61 of the Eighth Schedule to the Income Tax Act being designed to avoid such a double taxation issue. According to this paragraph, capital gains and losses within the portfolio of a collective investment scheme are disregarded for purposes of CGT, thereby making them exempt.
The impact of CGT on the unitholder
Unfortunately, tax needs to be paid at some point, and if you are holding units in a collective investment scheme as a long-term investment, you will be subjected to CGT on any gains made upon disposal thereof. This is in terms of Paragraph 67A of the Eighth Schedule.
As is the case with any CGT calculation, you would calculate the capital gain by subtracting the ‘base cost’ from the proceeds. If you held the units before 1 October 2001, the base cost will be the value of the units as at that date.
If you dispose of units acquired on or after 1 October 2001, then the base cost will be the original cost of the units disposed of.
However, it becomes a bit more complicated than that, particularly if, like most investors, you purchase units via a monthly debit order. Added to the complication is the fact that any dividend or interest income is often automatically reinvested in further units at the time of declaration.
When you dispose of units, you normally do not specify which units you are disposing of. As a result, the unit trust management company values your units at average cost, and this is the value that you would normally use as the base cost when calculating the CGT liability.
You are not, however, forced to use this valuation, and can use a different valuation method (such as first-in, first-out) provided that you have the records to substantiate your valuation.
Also, if you held substantial quantities of units prior to 1 October 2001, you would want to calculate your base cost on the 1 October 2001 valuation rather than the original cost, which could be substantially lower and result in a higher CGT liability.
Section 9B is not applicable to unit trusts
In terms of Section 9B of the Income Tax Act, a taxpayer may elect to have the proceeds of listed shares declared as capital, provided that they have held them for longer than three years.
This section does not, however, apply to collective investments. Section 9B applies to “affected shares”, which are defined as listed shares in a company that meets the definition of “listed company” in Section 1. A “listed company” is, in turn, defined as one that is listed on a recognised stock exchange.
Although a collective investment scheme may consist entirely of a portfolio of listed shares, the scheme itself is not listed on the JSE Securities Exchange.
The primary determinant as to whether the proceeds of units sold are to be treated as capital or revenue, therefore, remains the intention of the investor.
While realising part of a unit trust portfolio held for many years is probably fairly cut and dried in favour of capital (although stranger things have come out of the courts), a scheme whereby a portion of the portfolio is sold to provide monthly income may be navigating some murkier waters.
WRITTEN BY STEVEN JONES
Steven Jones is a retired tax practitioner and member of the South African Institute of Professional Accountants.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.