The Association for Savings and Investment South Africa (ASISA) has urged National Treasury to scrap proposed amendments to the Income Tax Act that would result in unit trust investors incurring a capital gains tax (CGT) liability even if they have not sold any units.
The 2025 Draft Taxation Laws Amendment Bill (TLAB) proposes removing the roll-over relief that applies to asset-for-share transfer and amalgamation transactions involving collective investment scheme portfolios.
Another proposed amendment will treat any CIS distribution that is not income or gross income as a CGT event for the investor.
Read: Draft Bill hides a ‘stealth tax’ in your unit trust investments
ASISA’s senior policy adviser, Angus McDonald, told the National Assembly’s Standing Committee on Finance last week that the current tax-neutral provisions foster operational efficiency and safeguard long-term investor outcomes.
Section 41 of the Income Tax Act contains definitions that apply to section 42, which enables asset-for-share transfers. Section 44 governs portfolio amalgamations.
These mechanisms, McDonald said, mirror those available to ordinary companies and are indispensable for regulated investment vehicles such as unit trusts. “Just like normal companies, management companies administering CIS portfolios, what we all know as unit trusts, which are regulated investment vehicles, use section 42 and 44 to manage their corporate affairs more efficiently and in the best interests of their unit holders,” he said.
Currently, sections 42 and 44 facilitate these corporate actions without immediate CGT implications for investors or entities, and without triggering securities transfer tax (STT) at 0.25% for the entity receiving the assets in the transaction.
He pointed out that these corporate actions do not alter investors’ economic reality: “These corporate actions do not result in a cash flow to unit holders, and they do not change an investor’s economic position. In other words, they remain invested as they were before.”
McDonald highlighted that amalgamations are initiated by the management company, not the investor.
He provided examples of why amalgamations become necessary.
- Smaller or sub-economic portfolios are amalgamated to reduce costs, directly benefiting unit holders.
- CIS portfolios of similar mandates are amalgamated to simplify a product offering, creating efficiencies.
- To respond to evolving market conditions, such as a sharp decline in the available securities within a sector.
Treasury’s rationale for the changes
Clauses 27 to 29 of the draft TLAB propose to remove all references to CIS portfolios in sections 41, 42, and 44.
National Treasury’s Explanatory Memorandum, published alongside the draft TLAB in August, frames the amendments as essential safeguards against tax base erosion. The provisions exploit CIS-specific exemptions under paragraph 61(3) of the Eighth Schedule, where internal capital gains within the portfolio are disregarded.
The Explanatory Memorandum zeroes in on section 42: “An investor transfers listed shares to a CIS, which then sells them, with the subsequent capital gains being tax-exempt at the CIS level.” Here, appreciated shares enter the CIS at the investor’s base cost, crystallizing no gain on transfer. The portfolio then realises exempt internal gains upon disposal, leaving investors to exit with a deferred or substantially reduced tax liability.
For section 44, Treasury seeks consistency: “A merger where investors in CIS 1 exchange units for CIS 2 units is no longer tax-neutral and is treated as a barter or exchange transaction.”
McDonald said National Treasury, during workshops on 22 September, had suggested postponing the effective date – 1 January 2026 – to allow for further consultation on the proposals and industry recommendations.
“ASISA members believe that further consultation should take place and be concluded before any legislative change is proceeded with due to the impact of the proposals. Legislation effectively subject to further consultation creates uncertainty notwithstanding the extended effective date.”
Risks to investors and the industry
McDonald unpacked the potential repercussions if the proposals are implemented.
Investors in CIS portfolios will no longer have the relief from CGT, and CIS portfolios will no longer have the STT relief arising from these provisions. This will adversely impact the long-term savings objectives of investors because they may be forced to sell a portion of the holdings in the portfolio to pay any tax, given these corporate actions do not generate any cash or change or their economic position.
When investors are asked to approve an amalgamation under section 44, or to partake in share for asset transactions under section 42, where their units in one CIS portfolio are exchanged for units in another, the potential tax implications will play a significant role in their decision, and it is unlikely they will approve the transaction.
“This will have a significant negative impact on investors in the savings industry if the efficiencies cannot be achieved by the restructure of CIS portfolios.”
On a broader scale, the amendments threaten sector stagnation: “Removing the roll-over relief will also stifle new CIS portfolio entrances into the market and innovation in the industry, as the business risk will be indirectly borne by investors, who would be reluctant to consider anything possibly going forward. But the largest most established CIS portfolios are management companies. Further growth of the industry could be impacted negatively,” McDonald said.
In addition, the amendments are not in keeping with international best practice.
“Jurisdictions such as the United Kingdom, Australia, Ireland, and Luxembourg offer roll-over or deferral mechanisms for fund re-organisations to promote investor protection and market efficiency. So, these removals will then place South Africa out of step with global norms, potentially deterring foreign investment in our local CIS portfolios and making South Africa potentially a less competitive jurisdiction as a fund domicile,” he said.
ASISA’s recommendations
ASISA recommended that the proposed changes to sections 41,42, and 44 not be made.
Regarding section 42, instead of the proposed changes, ASISA recommends that specific targeted anti-avoidance measures be introduced under sub-section 8A of section 42 to curb the abuse about which National Treasury is concerned. If that is not acceptable, then ASISA urges:
- Retaining section 42 transactions initiated by the management company (not by investors) and concluded by long-term insurers (investing money in respect of policyholders); and
- An additional exclusion in the Securities Transfer Tax Act be incorporated into the Income Tax Act.
ASISA believes section 44 should be retained in its existing form because amalgamations are initiated by management companies and require the approval of the Financial Sector Conduct Authority and the holders of the majority of units.
Capital distributions
McDonald also commented on proposed amendments to paragraph 61 of the Eighth Schedule and a new paragraph 82A, which would recharacterize capital distributions – proceeds from fund capital, not income – as fully taxable CGT events for investors, without any set-off the investor’s base cost.
Treasury’s rationale is to neutralise evasion: “Capital gains derived by the CIS (in the current or previous year) could be distributed before a unitholder disposes of their units, potentially avoiding tax at the unitholder level.” Such payouts, described as “infrequent and relatively minor”, would ensure that gains surface at the investor level.
McDonald said the proposal is problematic for the following reasons:
- In the case of an equity share capital distribution, the current tax treatment is to reduce the base cost, so, there will be an anomaly between the two.
- It could lead to unfair tax outcomes for investors if an investor’s base cost is high, because taxing the full distribution as a capital gain may overstate the taxable amount.
- It is not aligned with global best practice, because most jurisdictions adjust the base cost to reflect capital distributions, ensuring an accurate capital gain calculation.
- It undermines one of the core benefits of collective investment schemes, which is compounding because of the potential for earlier growth.
ASISA recommended that National Treasury implement the suggestion contained in his discussion paper of reducing the base cost first to the extent of the cost of the participatory units and thereafter treating the excess as a capital gain, with the proviso that this proposed amendment does not apply where the capital distribution itself is taxed in the investor’s hands either as revenue or as capital.
