Loophole In South Africa's Capital Gains Tax Law Aids Satrix 40 Investors

by Philip Morton, Investors Offshore.com

21 August 2001

Hailed as the first Exchange Traded Fund (ETF) to open in South Africa, the Satrix 40 was launched earlier this year in a blaze of glory. Primarily aimed at the retail market, the Satrix 40 investment plan follows a basket of the country's top 40 shares and allows its securities to be traded on the Johannesburg Stock Exchange in exactly the same way as any listed shares and can be bought and sold at any time.

South Africa's new Capital Gains Tax (CGT) came perilously close to thwarting the Satrix 40 investment plan but David Leibowitz from CorpCapital, a partner in the investment plan, has told reporters that it is now possible to reduce the double CGT liability levied on individual investors, bringing the plan more into line with unit trust funds. 'CGT would have killed this (Satrix 40) - now CGT will, in the hands of the individual investor, be identical in its effect to their holding units in a unit trust,' commented Mr Leibowitz.

The problem, explained Leibowitz, is that 'there is a provision in the CGT act which says that if a trust distributes a gain in the same year it is earned, that CGT liability will be for the individual.' Profits should be used to buy new shares but CGT would be charged every year meaning that investors would pay the tax each year for net gains in the portfolio regardless of whether or not the Satrix 40 shares had ben sold. Furthermore, investors would also have to pay tax when they decide to sell their shares at a gain.

According to Leibowitz the solution to the problem lay within the company's pension fund investors, who do not have to pay CGT. 'So we make the (CGT) distribution to pension fund investors only. They're allowing us to use their exempt status,' he said. This will also help individual investors because the distribution of profits will be reinvested back into the trust straight away, 'the result of the reinvestment is that no cash actually leaves the trust,' added Leibowitz and because the Satrix 40 is a discretionary trust, it can make these distributions to whichever beneficiaries it so wishes - i.e., the individual investors.

Thanks to this 'accounting exercise', business is booming for Satrix 40 and there are plans afoot to launch two new trackers to mirror the financial and industrial sectors.

Although Leibowitz has admitted that his exploitation of the CGT loophole has not been discussed with the South African Revenue Service (SARS), it is legal and above board - until deemed by SARS as otherwise that is. Leibowitz commented: 'We haven't bounced this off SARS - we're relying on explicit opinions in the Act.'

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