It is unlikely, unless the unit trust investments exceeded certain thresholds – but going forward, it is important that they understand what types of incomes the different asset classes attract.

My mother gave me birthday money to invest in unit trusts for her grandchildren (my children) over the years. The unit trusts are in their personal names, the interest/dividends from these unit trusts were reflected in my tax returns until 2016. They are not tax registered and will next year start working. Will they be penalised tax-wise in this regard? Their income from these unit trusts is below the tax thresholds (dividends, interest and so on). Will Sars be asking questions?

Thank you for your question. For the purposes of this response, we have assumed that your children will be earning taxable income from next year and will hold the unit trust funds in their personal names.

The South African Revenue Service (Sars) recently announced that if all the criteria below apply to an individual, then there is no need to submit a tax return:

• Your total employment income of the year is below R500 000;
• You only received employment income from one employer;
• You do not have a car allowance/company car/travel allowance or other income such as rental or interest income; and
• You are not claiming tax related deductions/rebates such as medical expenses or retirement annuity contributions.

If you are still unsure whether or not a return needs to be completed, there is a further set of criteria that goes into further detail.

The list below is specific to what would apply to an individual owning a unit trust investment.

A tax return needs to be completed if:

• You earned interest exceeding the annual exempt amount of R23 800 for someone below the age of 65;
• You hold any funds in a foreign currency or assets outside South Africa that have a combined total value of R250 000 during the tax year; and/or
• You have a capital gain or loss realised (switching of funds or withdrawal) during the tax year exceeding R40 000.

As such, when looking at the above criteria, if none of your children’s unit trust investments exceeded any thresholds as mentioned in your question, then they will not be liable for tax. Even though the interest/dividends were previously reflected on your tax returns, and assuming that since 2016 no tax returns were submitted in respect of your children, the fact remains that no tax was liable and there were no criteria that obliged them to submit a tax return and, as a result, no penalties would be applicable to your children.

Going forward, it is important to understand what types of incomes the different asset classes attract, and these are listed in the table below followed by an explanation of how each will be taxed.

Interest income

This interest income is subject to income tax and is taxed at your marginal tax rate. Individual taxpayers enjoy an annual exemption on all South African interest income they earn, set by Sars every year. This exemption is R23 800 for individuals under 65 years old and R34 500 for individuals 65 years and older.

Dividend income

For equities (excluding listed property companies), you will incur dividend-withholding tax (DWT) on the dividend income they pay out. DWT of 20% is withheld from your dividends before they are paid out or reinvested.

Property income

Reits, or real estate investment trusts, are taxed differently from other listed companies. They do not pay corporate income tax, and their investors do not incur DWT on the distributions they pay out. Instead, investors pay income tax on the distributions they receive from these Reits at their marginal income tax rate.

What about capital gains tax (CGT)?

CGT is another tax associated with investing in unit trusts. A capital gains event is triggered only when you decide to sell or switch (part or all of) your investments (such as units in a unit trust). If the price of the units has risen since you invested, this increase in value is known as a capital gain (or a capital loss if the value has declined). Currently, only an amount of 40% of this capital gain (not the total gain) is included in your annual income; this makes the maximum CGT rate for individuals paying the maximum 45% marginal tax rate 18%. Individual taxpayers enjoy an annual capital gain exclusion of R40 000.