Proposed changes to the taxation of collective investment schemes

In the Budget Speech on 12 March 2025, National Treasury has acknowledged the concerns raised during this workshop, and that consultations with key stakeholders on this topic will continue during 2025. In addition to this positive commentary, Treasury has confirmed “…that it does not intend to tax all CIS returns as revenue”. This is a helpful clarification, and provides some hope for the future of the taxation of these investment vehicles.   

Less helpfully, Treasury has made clear the need for the tax-neutral provisions relating to asset-for-share transactions and amalgamation transactions, and their application to a CIS in particular, to “be reviewed”. Treasury apparently sees a ‘mischief’ at play here, in the form of potential tax avoidance.  

We have summarised below the key takeaways in relation to these items.  

A brief overview of the current cis tax regime in south africa 

While there are many different types of CIS available to investors, these are generally subject to the same income tax rules¹. In essence, a CIS is regarded as a conduit (flowthrough) insofar as amounts of income are distributed within 12 months of their accrual². Such distributions are then taxed in the hands of the unitholders (investors) in accordance with their own specific tax profiles.  

Capital gains are exempt in the hands of a CIS³. Unitholders in a CIS will be subject to tax on the ultimate disposal of their units in a CIS on either a revenue or capital basis, dependent on whether they acquired those units as capital assets, or as part of a scheme of profit-making. In certain instances, units held for at least three years in a CIS in securities or a hedge fund CIS will be deemed to be of a capital nature⁴.  

It is worth emphasising that there are no clear definitions of ‘capital’ or ‘revenue’ in our tax legislation, and the principles laid down in available case law are generally quite archaic, needing to be applied on a case-by-case basis. This can make practical application of these principles a significant challenge, especially in a complex financial services environment like a CIS.  

National Treasury expressed some concern in 2018 over certain CIS which, in its view, were “…generating profits from the active frequent trading of shares and other financial instruments”⁵, and allegedly abusing the capital gains exemption through incorrect classification of these ‘profits’ as capital, and not revenue. Treasury accordingly proposed a legislative change to address this perceived mischief, to the effect that any gains or losses derived from the disposal of a financial instrument within 12 months of the acquisition thereof would be deemed to be revenue in nature.  

This proposal was met with vehement opposition from the CIS industry, professional advisers, and certain industry bodies, resulting in National Treasury abandoning it.  

New cis tax proposals set out in the discussion document 

The key tax proposals set out in the discussion document are summarised below. National Treasury made it clear in the workshop held in January 2025 that its main goal with these proposals is to provide certainty on the treatment of income. It stated repeatedly that the goal is not increased revenue collection - however, industry remains sceptical, especially as there is consensus that the current CIS tax regime works effectively and does not result in any permanent loss to the fiscus (given that tax is ultimately paid whenever unitholders dispose of their units).  

As stated above, and based on the feedback provided during the workshop, National Treasury has made it clear in the 2025 Budget documentation that consultations on these proposals will continue in 2025.  

1. Treat all income in the CIS as being revenue in nature  

In the workshop held in January 2025, the  proposal to treat all income in the CIS as being revenue in nature was unanimously opposed by industry and other stakeholders, on the basis that a similar proposal had already been put forward and withdrawn in 2018/2019.   

Treasury acknowledged this, making it clear in the Budget Speech documentation that it does not intend to tax all CIS returns as revenue. Accordingly, it only cited the remaining three options in that documentation, removing this as a viable alternative. 

2. Amend section 25BA to make CIS fully transparent 

In essence, this proposal pushes the capital versus revenue question away from the CIS (being fully transparent for tax purposes), and on to the investor. This proposal presents a number of challenges, including: 

• Treasury proposes that the capital or revenue nature of income in the investor’s hands will be determined from the perspective and activities of CIS. This is likely to have unintended consequences for long-term investors that are invested into a CIS. These investors would expect to be taxed on a capital basis but, because the CIS is seen by SARS to be ‘trading’, they would be taxed on a revenue basis.  
• A number of stakeholders submitted comments that current IT systems simply cannot handle the complexities of determining daily amounts at an individual investor level. This proposal would therefore require significant and costly infrastructure and reporting upgrades and investment by each CIS.  
• This proposal also presents potential cashflow and liquidity issues for investors where tax may be due, but that investor’s units in the CIS remain unsold.  
• Individual investors would also need to apply for and claim any double tax treaty benefits on their own, rather than this being done on their behalf by the CIS (as is currently done).  

For the reasons cited above, this proposal was largely opposed by industry during the workshop held in January 2025.  

3. Creating a turnover safe harbour 

In this proposal, one would consider annual trade volumes compared to the total portfolio size in order to determine how actively trading occurred in that portfolio. If those trades are within a specified ratio, they would be taxed on a capital basis (i.e. tax-exempt). For trades in excess of the specified ratio, the cumbersome existing capital or revenue principles would need to be applied, based on relevant facts and circumstances.   

Treasury itself stated in the discussion document that any turnover rate proposed would be arbitrary, given the vast diversity of CIS within the industry, and proposes 33%, aligned to the 3 year capital rule currently set out in section 9C of the Income Tax Act.  

Stakeholders emphasised that trade volume is only one measure of determining trading activity, and that frequency of trading is not necessarily an indication of greater profits, but could be for  investment mandate reasons, hedging, etc.. It was also proposed by certain stakeholders that a list of investment transactions that are not considered trading activities be published by Treasury, similar to the UK’s ‘White List’⁶.  

The safe harbour proposal also has the potential to force fund managers to retain underperforming or overvalued assets, or to avoid rebalancing their portfolios when required, in order to avoid exceeding the prescribed ratio.  

Stakeholders generally welcomed further discussions with National Treasury on this proposal, recognising that significant changes and further considerations are required in arriving at a workable solution.  

4. Take hedge funds out of the CIS tax definition 

In 2015, after a multi-year process of engagement between the industry, Treasury and the FSB⁷, hedge funds were included within the CIS legislation. This inclusion provided hedge fund investors with protection, through robust and transparent regulation and compliance. It has also resulted in hedge funds becoming accessible to the public through RIHFs⁸, with financial advisor support, better liquidity, and lower minimum contributions.  

In this light, the proposal to remove hedge funds from the CIS regulation and tax framework was met with opposition from the industry during the Treasury workshop. The discussion document does not propose how hedge funds would be taxed if they were removed from the CIS framework  but, given their complexities and the journey to regularise them in 2015, in our view it would likely take a significant amount of time to develop hedge fund-specific tax legislation.  

Stakeholders were vocal in opposing this proposal and were of the view that the hedge fund industry had been unfairly painted in a poor light throughout the discussion document. In reality, many fund managers manage both hedge funds and traditional CIS, with hedge funds often being marketed as the less risky of these two options.  

There was general agreement in the workshop that further discussions are required on this proposal, and that simply removing hedge funds from the CIS framework will only create further uncertainty. 

Other proposals 

1. Asset-for-share and amalgamation transactions 

As a separate item in the discussion document, National Treasury also proposed that a CIS be removed from the ‘corporate rules’ tax relief set out in section 41, and specifically the ‘asset-for-share’ transaction relief in section 42 of the Income Tax Act. Practically, this would be achieved through the removal of a CIS from the definition of ‘company’, and a unit in a CIS from the definition of ‘equity share’, both as defined in section 41. Definitions of ‘asset-for-share transaction’ and ‘qualifying interest’ in section 42 are proposed to be amended accordingly.  

National Treasury reiterated this intention in the 2025 Budget documentation, widening the application of this removal to amalgamation transactions as well, as set out in section 44.  

Per the discussion document, Treasury’s perceived ‘mischief’ here is an apparent avoidance of tax. These provisions are applied to transactions in which a person transfers shares to a CIS in exchange for units (participatory interests) in that CIS. Where the requirements are met, such transfer of shares occurs tax-neutrally, as with any section 42 transaction. In addition, the CIS itself is exempt from capital gains tax (“CGT”) on the ultimate disposal of those shares⁹.  

The person who transferred the shares will only suffer CGT when the units in the CIS are disposed, on the difference between the proceeds on that sale, and the base cost of the shares initially transferred to the CIS.   

This proposal was also met with strong opposition from stakeholders during the workshop with Treasury in January 2025.  

2. Anomaly in CIS capital distributions 

Our tax legislation currently does not provide rules for the treatment of a capital distribution by a CIS to a unitholder therein. Given such distribution is permitted by the CIS legislation, Treasury has seen fit to propose potential tax legislation to address this scenario.  

The proposal in this regard (set out in the discussion document) is that the unitholder would reduce its CGT base cost of the units (participatory interest) held in that CIS by the amount of the capital distribution so received. To the extent that the capital distribution exceeds the base cost of the unitholder’s units in the CIS, that excess would be regarded as a capital gain.  

While this clarity is welcomed, in practice, it is rare that a CIS would make a capital distribution, which would generally only occur on liquidation of the CIS.  

The takeaway 

While stakeholders welcomed the engagement with Treasury during the workshop held in January 2025, the proposals in the discussion document were generally met with opposition. That being said, stakeholders are eager to continue to engage with and assist National Treasury in establishing certainty on the tax treatment of the CIS industry. While the proposals are a starting point, there is much further engagement with stakeholders required in developing a workable solution, especially in light of the diversity and complexity within the CIS industry. Treasury’s indication in the Budget documentation that these consultations will continue in 2025 is therefore an encouraging development. 

Finally, Treasury has also recognised that the CIS industry is a critical one to the South African economy, both in terms of investment and retirement savings, as well as market liquidity in general. As such, stakeholders cautioned Treasury to take its time in making any changes to the existing tax regime, given the significant impact this may have on the South African economy, and its population’s dire savings culture.  

For reference, the discussion document can be accessed here.  

Authors:

Greg Boy, Senior Manager & Graham Molyneux, Partner