These dividend funds may attempt to unwind their structures and convert to investments that will not be affected by the proposed tax amendments. The problem that they may face is that their FSB approved supplemental deeds and the limited availability of suitable investments may not allow them to do this. Failing this strategy, they may choose to offer their investors alternative pre-tax investment options similar to those offered by the rest of the market.  (This is a follow up feature, read here for the first post.)

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When one considers the preferential tax treatment of dividend income and capital gains, it is clear that investment strategies focused on maximising dividend income and/or capital gains are attractive and could outperform investment strategies focused on maximising interest or rental income.

These funds are aimed at high net worth discretionary investors and companies. Discretionary investments are investments made in addition to investors’ pensions, provident or annuity investments. Discretionary investors aim to maximise their total after tax returns as tax can erode up to 40% of investment returns. Therefore, investments should not be evaluated on a pre-tax basis. The value of discretionary investments in the South African unit trust industry has steadily grown over the past decade and amounted to R342bn as at 30 September 2010. (more…)

Two tax amendments due to come into force on April 1 2012 are at play. One is the removal of secondary tax on companies (STC), which will make dividends taxable in the hands of the investor.

If you are on the hunt for higher income yields and tax relief, listed preference shares (prefs) should be on your list. Regrettably, confusion caused by pending changes to tax legislation is causing many investors to steer clear of prefs. (more…)