Page 53 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Basic Concepts

Tax Free Savings Accounts (TFSAs)
TFSAs (Tax Free Savings Accounts) and Tax Free Investment Accounts (TFIAs) were
introduced in 2015, allowing up to R30 000 per annum to be invested in specially
designated accounts (up to a lifetime limit of R500 000). The annual allowance was
increased to R33 000 in February 2017 (for the 2018 tax year) and to R36 000 from 1 March
2020. The value of a TFSA including growth is not capped, only contributions are regulated. TFSAs
are exempt from both income tax and CGT (capital gains tax). Unit trusts and other collective
investments, including ETFs, are eligible in terms of Treasury rules to accept TFSA investments
(subject to regulatory approval). Exceptions include funds with performance fees and ETPs that are
not registered collective investment schemes.
From 1 March 2018 regulations have made it possible for investors to transfer the balance on a
TFSA account from one service provider to another without negatively affecting their annual or
lifetime contribution limits.

Investment Safety
Collective investment schemes are highly regulated, and investors can be confident that, while
they are subject to investment risks, they are not likely to be victims of fraud or embezzlement.
Unit trusts are a good example of this “investment safety.” For more than half a century, unit
trusts have provided small investors with a way to participate in the stock and bond markets. The
founding fathers of the unit trust industry were mindful of their primary obligation: the protection
of small investors. And their groundwork has paid off – there have been no major scandals in the
unit trust industry in South Africa. This can be attributed to the legislation governing the industry.
Under the Unit Trusts Control Act, unit trusts were divided into three separate legal entities:
the fund, the trustee and the management company – a structure which proved its value in
protecting investors. The current legislation governing the collective investment schemes industry
(CISCA) builds on the foundations of the old Unit Trusts Control Act (see chapter 5).
Performance and Other Reporting
One of the reasons for the early success of unit trusts was the fact that management companies
were legally obliged to release performance statistics and details of underlying investments to the
public on a quarterly basis. There is no such requirement in the pension fund or life assurance
industries, even though some life and pension companies have voluntarily released figures over the
years. The Collective Investment Schemes Control Act has added additional levels of disclosure in
reporting.
In addition to reporting requirements under CISCA, FSB Board Notice 92 of 2014 deals with
advertising, marketing and information disclosure requirements for collective investment
schemes. It defines and standardises the performance statistics which must be published by fund
managers in order to make this information comprehensible and comparable. The notice also
defines the information which managers must include on their quarterly Minimum Disclosure
Documents, or MDDS (sometimes referred to as fund fact sheets). This includes:
The fund’s investment objectives
The risk/reward profile
The fund’s benchmark
Fees and charges
The fund’s size and sector
Distributions
Fund performance
Transparency
Unit trusts have always been more “transparent” than investment vehicles like endowment
policies, and the level of disclosure required from managers increased with the promulgation of the
Collective Investment Schemes Control Act.

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts