National Treasury says it will withdraw a proposed amendment that would have resulted in investors incurring capital gains tax (CGT) when a fund manager merges two collective investment scheme portfolios.
Treasury will proceed with another amendment to the Income Tax Act (ITA) that will remove the tax-neutral rollover relief where shares are converted into unit trust investments. However, the effective date will be moved from 1 January next year to 1 January 2027.
On Tuesday (4 November), Treasury officials briefed the National Assembly’s Standing Committee on Finance on the department’s responses to comments received on the draft Bills and regulations that give effect to the tax proposals announced in the 2025 Budget.
The proposed amendments, contained in the 2025 draft Taxation Laws Amendment Bill (TLAB), are designed to withdraw the rollover relief under sections 42 (asset-for-share) and 44 (amalgamations) of the ITA for transactions involving CISs.
Read: Draft Bill hides a ‘stealth tax’ in your unit trust investments
CISs are treated as conduit or flow-through entities under the ITA. Income earned by a CIS typically passes through to unitholders for taxation in their hands. Paragraph 61(3) of the Eighth Schedule exempts (with some exceptions) a CIS from CGT on asset disposals within the portfolio, with CGT instead applying to unitholders upon disposal of their participatory interests.
The Explanatory Memorandum to the draft TLAB said the interaction between this conduit treatment and corporate rollover relief under sections 42 and 44 enables unintended tax avoidance. Investors can transfer appreciated shares to a CIS without triggering CGT, and the CIS can dispose of them tax-free, deferring or avoiding tax on unrealised gains.
Treasury said it has decided to withdraw the amendment to section 44, taking into account that these amalgamations are performed by the CIS manager and regulated by section 99 of the Collective Investment Schemes Control Act.
Regarding asset-for-share transactions, Treasury said it will proceed with the amendment to prevent misuse, particularly in cases where individual investors initiate such transactions. However, the implementation of this amendment, along with related changes to the Securities Transfer Tax (STT) Act to address the STT triggered by switching off the rollover relief, will be delayed until 1 January 2027. The postponement will allow for additional time for engagement.
Treasury noted comments indicating that not all CISs are affected equally, with “abuse” more prevalent in closely held funds. Treasury indicated it may revisit the issue to craft a definition distinguishing “normal” CISs from those “abusing” the exemption.
Treasury also addressed comments on the treatment of capital distributions by CISs, where the draft TLAB proposed amendments to paragraph 61 of the Eighth Schedule of the ITA 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 accepted a proposal that the tax treatment be aligned with paragraph 76B of the Eighth Schedule. This adjustment means capital distributions will reduce the base cost in the hands of the unit holder, rather than the entire distribution being subject to CGT.
The Association for Savings and Investment South Africa, represented by Chris Beneke, welcomed the withdrawal of the proposal to remove CISs from the provisions of section 44 (amalgamations).
Regarding the postponement of the implementation of the amendment to section 42 (asset-for-share transactions), ASISA supported further consultation with Treasury to develop specific provisions to address its concerns about abuse.
ASISA also welcomed the proposed introduction of an STT exemption for in specie transfers into CIS portfolios, as well as Treasury’s proposal on capital distributions.
