Unit Trusts: Fees and Taxation

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When it comes to Unit Trusts it is important for investors to be aware of the fees and taxation applicable so as to help them make more informed decisions when it comes to their investments. By becoming more familiar with the applicable fees and taxation investors can also get a better idea of which fees are payable to the parties involved in their investment.

Fees

There are two main sources of fees when it comes to Unit Trusts, namely those charged by the Asset Manager and those charged by the Financial Planner (if applicable).

Asset Manager Fees:

* Entry Fee: the entry fee refers to the initial fee charged by the asset manager for the purchasing of units in their funds. These entry fees tend to range from: 0.00% – 2.00%.

* Annual Fee: the annual fee is charged annually for the management of the fund as a percentage of the investment value. These fees can either be charged at a flat rate or can fluctuate based on the fund’s performance. These annual entry fees tend to range from: 0.50% – 1.75% per annum.

* Total Expense Ratio: the Total Expense Ratio is often indicated on the Unit Trust fund fact sheet and gives the investor an indication of the fee charged for the operating costs of the Unit Trust. Operating costs include expenses such as trading costs, audit fees, bank charges, etc. It is important to note that this figure includes the annual fee charged by the Asset Manager. This means that if the fund has a Total Expense Ratio of 2.5% and an annual fee of 1.5% then that funds operating costs are 1% in total.

Intermediary Fees:

* Upfront fee: upfront fees refer to the commission payable to the financial planner for the services rendered in setting up of the investment. This fee is normally percentage based and ranges between 0 -3% of the amount invested.

* Trail fee: trail fees refer to the commission payable annually to the financial planner for the ongoing intermediary services rendered. This fee is also normally percentage based and ranges between 0.00% – 1.25% of the amount invested.

Taxation

There are two types of taxation applicable to Unit Trusts:

Tax on Interest Income:

In terms of taxation the returns from Unit Trust investments are taxed at the investor’s marginal rate, however there are exemptions that apply. According to current legislation the first R22 800 of interest earned for persons under the age of 65 is tax free, any interest earned in excess of this amount is taxable.

For persons that are 65 or older the first R33 000 of interest earned is tax free, any interest earned in excess of this amount is taxable. This applies to investments made by individuals; for companies and trusts the taxation structure will differ.

Example: A 25 year old investor that has earned R50 000 worth of interest from their Unit Trust investment will pay tax on R27 200. This taxable amount is the difference between the interest earned (R50 000 in this example) and the annual interest exemption (R22 800 for persons under 65).

Capital Gains Tax:

Capital Gains Tax refers to taxation on the capital gains made on the sale of an asset. In the case of Unit Trusts, Capital Gains Tax is triggered on the sale (repurchase or withdrawal) of the investor’s units in the Unit Trust.

In the case of Capital Gains Tax there are exclusions that apply. As legislation currently stands this exclusion stipulates that the first R30 000 made from a capital gain such as the sale of units in the Unit Trust is free from Capital Gains Tax, 33.3% of any capital gain made above this excluded amount is then included in the taxpayers gross income and taxed at their marginal rate. This applies to investments made by individuals, for companies and trusts the taxation structure will differ.

Example: If the investor makes a capital gain of R50 000, then after the R30 000 exclusion 33.3% of the remaining R20 000 is included in the taxpayers’ gross income and taxed at their marginal rate.

For those of you interested in this type of investment opportunity, you can either approach the investment company of your choice directly or speak to your financial planner for further assistance.

 

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References:

Mike Ronald. (2010). Understanding unit trust fees. Last accessed 17th July 2012. Oldert et al. (2010).

Profile’s Unit Trusts & Collective Investments. 2nd ed. Johannesburg: Profile Media. 89-93. Rob Formby. (2010). Capital gains tax and how it affects unit trust investors. http://www.moneywebtax.co.za/moneywebtax/view/moneywebtax/en/page260?oid=48127&sn=DetailLast accessed 17th July 2012.

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About Author

Raul Jorge is a CFP® professional at PSG. He specialises in estate, investment, retirement and risk planning. Prior to joining PSG, Raul completed his BSc (Honours) in Business Administration through the University of Wales and more recently completed his Postgraduate Diploma in Financial Planning through the University of Stellenbosch.