CY JACOBS: Unit trust tax proposal is anti-growth

The Treasury’s proposed tax changes to collective investment schemes (CIS), or unit trusts, threaten not only SA’s investors but also the broader economy. These policies, if implemented, could set off a chain reaction of consequences that would harm savers, local businesses and employment, while further reducing the nation’s already stretched tax base. 

The proposals effectively tax investors on their savings by treating gains within unit trusts as revenue instead of capital. For retail investors this means higher tax bills on funds intended for retirement, education or emergency savings. With rising costs of living, and existing tax burdens already high, this policy will hit middle-class savers hardest. It’s counterproductive to penalise individuals who are responsibly setting money aside for their future. 

Faced with these changes, many investors will withdraw their savings from SA unit trusts and move their money to offshore funds that don’t carry the same tax penalties. This capital flight would shrink SA’s already limited savings pool, undermining our financial markets. 

SA cannot tax its way out of its economic challenges. Overburdened taxpayers, including retail investors, cannot absorb more taxes without severe repercussions. Economic growth, not higher taxes, is the only sustainable way to increase tax revenues. Unfortunately, these proposals do the opposite: they actively discourage investment, which is a key driver of growth. 

Reduced liquidity on the JSE is one of the most alarming outcomes of this proposal. Fewer trades mean lower valuations for listed companies, higher costs of capital and fewer opportunities for businesses to raise the funds they need to expand and create jobs. Small and medium-sized companies, often seen as engines of growth, will be hit hardest as investors shy away from higher-risk, less liquid stocks. 

The JSE is already struggling with liquidity challenges. Changes to Regulation 28, which increased the offshore allocation limit to 45%, led to significant outflows from domestic equities and a wave of delistings. The proposed tax changes will exacerbate these issues, pushing more investors offshore, reducing market activity and diminishing SA’s attractiveness to foreign investors. 

Foreign investment is crucial for SA’s economic recovery, particularly in the wake of renewed optimism under the government of national unity (GNU). However, foreign investors need a liquid market to operate efficiently. By further draining liquidity from the JSE these tax proposals risk turning SA into a marginal market on the global stage. 

The proposed turnover threshold to determine whether gains are taxed as revenue or capital is deeply flawed. While it may seem less impactful initially, it ultimately forces funds to operate below the threshold. This will lead to significantly reduced trading activity on the JSE, further draining liquidity and setting off the same negative chain reaction associated with lower market liquidity: depressed valuations, higher costs of capital and reduced investor interest.

Funds will execute fewer trades to remain below the threshold, making the proposal ineffective as a revenue-raising measure. The proposal risks harming the broader market and economy without achieving its intended goal. 

We understand the Treasury’s need to increase tax revenues. However, this approach will have the opposite effect. A vibrant and growing CIS industry would generate far more tax revenue over the long term than short-term policies that stifle growth and investment.

SA’s future depends on creating a pro-growth, pro-investment environment. Instead of taxing already overstretched investors and shrinking the savings pool, the Treasury should focus on fostering economic growth. Policies that encourage investment, rather than penalise it, are the only sustainable solution to SA’s fiscal challenges. 

The proposed tax changes risk creating an unfortunate cycle of capital flight, economic stagnation and job losses. For the sake of all South Africans — savers, businesses and workers alike  we urge the Treasury to reconsider.  

• Jacobs is CEO and cofounder of 36ONE Asset Management.