Distant rumblings in the tax corridors could have implications for your almost uninhibited accumulation of capital in unit trusts if local unit trusts are placed on a similar footing as other investment products and unit trusts in other countries.
An advisory sub-committee of the Katz commission of inquiry into taxation is investigating the comparative tax position of South Africa's financial institutions and the different financial instruments, including unit trusts.
Professor Michael Katz told Personal Finance the sub-committee was not targeting unit trusts in particular, nor any other single type of institution or security, but unit trusts would be included in the study.
"I must emphasise that we are very much aware that unit trusts are special institutions in that they have an obligation to buy back units and that obligation means there has to be certainty about the price," he said.
"If the tax regime were to create uncertainty about a possible tax liability, it could undermine the nature of unit trusts."
At present unit trust funds themselves do not pay tax. They distribute all the investment income they receive in the form of interest and dividends to their unit holders.
In your hands, interest income exceeding R2 000 a year is taxed at your marginal rate and dividends (which are the distribution of a listed company's after-tax income) are not taxed.
Capital gains, which come from the increasing value of shares held by the unit trust fund, are not taxed. If you own shares or fixed property which you buy and sell regularly you are classified by the taxman as a speculator.
If you are classified as a speculator and not an investor you have to pay tax on the capital gains.
However so far, people speculating in unit trusts do not seem to have run foul of the taxman.
It is possible at present for unit holders to speculate by switching investments between different funds without incurring any tax liability, although in theory the threat is there.
Switching between funds has become far easier and far greater volumes are being switched between different funds because of the so-called product factories, which link different financial products of different companies. The product factories negotiate low bulk switching costs stimulating the trend of investors to follow top performing unit trusts.
Substantial switching also takes place in bond funds before and after interest payments are made by investors looking for capital growth but attempting to avoid receiving taxable income.
They switch out of bond funds, which pay taxable interest and not untaxable dividends, avoiding paying tax but being able to take advantage of capital gains.
Unit trust management companies, which are paid to look after your money, are normal companies and pay tax on their profits.
Unit trust funds are treated differently from funds invested with life assurance companies. The life assurance companies must pay 30 percent on the after-expenses interest and rental income they receive on money invested on your behalf.
In other countries tax treatment of unit trusts is different from the practice in South Africa.
For example, Harold Hands, the chairman of the Investment Funds Institute of Canada, said in an interview while visiting South Africa last week that Canadian unit trust funds are taxed on what are termed "realised capital gains" in the fund, as well as on income distributions to investors.
If an investment fund trades shares during a quarter, the profit made on those trades is declared and is taxed at the taxpayer's marginal rate of tax.
In Canada investment funds are one of the main avenues of saving for retirement and, recognising this, the government allows individuals to save up to Canadian $13 500 a year tax free in investment trusts.
Selwyn Feldman, chairman of the Association of Unit Trusts, said he was aware the Katz commission intended investigating the issue.
He said the unit trust industry was comfortable with the current system of taxation where the income made by the individual unit trust is transferred directly to the investor who pays tax according to personal circumstances.
Feldman said the unit trust industry was modernising the Unit Trusts Control Act which could alter the present structure of unit trust funds.
A number of options were being studied including systems used in other countries, which could impact on the tax structure as well.