Tax treatment of amounts received by or accrued to portfolios of Collective Investment Schemes (CIS)

During the 2018 Taxation Laws Amendment Bill (TLAB) amendments were proposed to tax the profits of certain CISs as revenue instead of capital. It was stated that certain CISs are in effect generating profits from the active, frequent trading of shares and other financial instruments. Those CISs argue that the profits are of a capital nature and therefore not subject to income tax. This argument is based on the intention of long-term investors in the CIS. Government expressed its concern that there is no definition in the IT Act of what constitutes amounts of a capital nature and that reliance based on facts and circumstances and case law has resulted in different applications of the law.

Government therefore proposed the following changes during the 2018 legislative cycle:

• One year holding period-rule: distributions from CISs to unitholders derived from the disposal of financial instruments within 12 months of their acquisition were proposed to be deemed to be income of a revenue nature and to be taxable as such in the hands of the unitholders;
• First-in-first-out method: Where a CIS acquired financial instruments at various dates, the CIS would be deemed to have disposed of financial instruments acquired first. The first-in-first-out method would be used to determine the period that financial instruments were held for purposes of the one year holding period-rule; and
• Treatment of losses: deductions and allowances do not flow through to unitholders and amounts deemed to have accrued to unitholders are limited to amounts of gross income reduced by deductions allowable under s11 of the IT Act.

In the 2018 TLAB Response Document published during September 2018, Government stated that, in view of the fact that CISs are regulated by the Financial Sector Conduct Authority (FSCA), in order to avoid negative impact and unintended consequences as a result of the proposed 2018 TLAB amendment, Government and industry needs to be given more time to investigate and find solutions that may have less negative impact on the industry and holders of participatory interests before amendments are made in tax legislation. It was proposed that the legislative amendments be considered in the 2019 legislative cycle. It was further stated that Government continues to find ways to mitigate tax avoidance risks through regulation by the FSCA.

In the Budget it was reiterated that, after reviewing the public comments on the proposed 2018 TLAB amendments, Government decided that more time is required for it to work with industry in order to find solutions that will not negatively affect relevant groups. Government proposed to conduct a study in this regard for the 2019 legislative cycle.