Page 73 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Costs and Pricing

Reinvestment of Distributions
As we saw when we discussed compounding, most unit trusts in South Africa offer automatic
reinvestment of income as a benefit to investors. Investors who elect automatic reinvestment don’t
receive a cash distribution; instead, the value of the distribution is used by the CIS manager to buy
further units in the portfolio for the investor. From an administrative point of view, this occurs on
the same day that payments are made to those investors who are receiving cash distributions.
Note that what happens with reinvestment of dividends is not the same as what happens in
roll-up funds (also known as accumulating funds).
In a roll-up fund, income received by the portfolio (interest and dividends) is simply absorbed back
into the portfolio. It becomes part of the cash of the portfolio, and can be used to purchase further
assets. A roll-up fund does not report interest accruals to each investor, but accounts for interest and
deals with any tax issues within the portfolio itself. Due to the unfavourable way that roll-up funds
would be affected by tax in South Africa (ie, the portfolio would have to pay income tax on all interest
received and DWT on dividends), there are no roll-up funds in SA at the moment. Some offshore funds
offer investors a choice of “accumulation units” or “income units”.
With reinvestment of distributions, the fund keeps track of income accruals in respect of each and
every investor, and either pays or reinvests the income due to that investor. As previously mentioned,
distributions for a fund holding equities usually consist of two parts, dividends and interest.
Note that the investor receives a statement of the split between interest and dividends for a
particular distribution whether the income payment is automatically reinvested or not. The tax
liabilities of the investor do not change because the distribution has been reinvested – the investor
remains liable for tax on the interest portion if his total interest income exceeds the tax free
allowance for the year in question even if the distribution has been reinvested.
Dividend Withholding Tax (DWT) is deducted from securities before dividends are credited to
a portfolio and to each investor – the dividend portion is net of DWT and therefore there is no
further tax liability for individual investors when it comes to the dividend portion of a distribution.
Certain entities, like companies and retirement funds, are exempt from DWT. If units in a
collective investment scheme are held via a company, application can be made to the fund manager
to pay the gross dividend. Similarly, non-residents holding South African unit trusts may qualify
for a reduced rate of DWT if a double-taxation agreement exists between South Africa and the
investor’s country of residence. Most fund managers provide application forms which investors
can submit to put in place a reduced rate of DWT as applicable. Investors can also apply for DWT
refunds where too much tax has previously been deducted.
Cum and Ex Div
The terms “cum div” and “ex div” (cum dividend and ex dividend in full) derive from the stock
market. They are also used informally in the unit trust industry, however, although the word
“dividend” is something of a misnomer as the distributions made by unit trusts consist of
dividends and interest. As a rule, the word dividend used in the context of a payout by a unit trust
really means the distribution or income declaration.
“Cum” in this context means “with” or “including”, and “ex” means “after” or “excluding”.
Most unit trusts define very specific days for income declaration. This is usually the last day of a
month end, quarter end or year end (eg, 31 March or 30 June). Most funds pay dividends within
three or four business days after declaration.
The income declaration date is akin to the cum div date for a share. An investor buying a
participatory interest on the income declaration date (eg, 30 June) buys “cum div”, meaning he
qualifies for the dividend to be declared at close of trade that day. An investor buying the following
day buys “ex div”, meaning he does not qualify for the dividend.
The income declaration date is important because the unit price, all things being equal, will
drop by the value of the distribution between the cum div and ex div date.
As we saw under pricing, income accruals are for the benefit of investors and are incorporated
into the unit price. When income is declared, the income to be distributed is removed from the

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