In the 2026 Budget Review, National Treasury outlines proposals to reform the taxation of collective investment schemes (CISs), aiming to simplify the system, encourage savings, and provide clarity to the investment industry.
These changes, which will be detailed in a forthcoming response document following public consultations on a 2024 discussion paper, focus on treating investment returns from certain retail-oriented funds uniformly as capital gains. However, the reforms draw a line between mass-market vehicles and more exclusive hedge funds.
CISs, which include unit trusts and similar pooled investment vehicles, have long been a cornerstone of retail savings in South Africa. These schemes are open to the public, subject to strict regulatory oversight, and incorporate requirements for diversification to protect investors. Retail investment hedge funds, a subset of these, share similar characteristics and are designed for broader accessibility.
The current tax regime for CIS portfolios taxes returns based on their underlying nature: interest is treated as income, dividends incur dividends tax, and capital gains fall under the capital gains tax (CGT) framework. This approach has led to complexity, particularly for retail hedge funds that employ trading strategies or derivatives, resulting in inconsistent tax outcomes for investors.
To address these issues, the Treasury’s draft recommendation proposes taxing all investment returns from regular CISs and retail investment hedge funds as capital. This uniform treatment is intended to incentivize savings by offering a potentially lower effective tax burden – CGT rates are generally more favourable than income tax, particularly for individuals in higher marginal brackets (up to 45% for income versus an effective maximum of 18% for CGT).
As noted in commentary from Cliffe Dekker Hofmeyr (CDH), the focus on CIS taxation stems from ongoing concerns about untaxed “spectacular returns” in qualified investment hedge funds over recent years. Under the existing rules, capital gains at the CIS level are exempt from CGT. The proposed shift would end such exemptions for distributed gains, providing a more structured framework while promoting regulated savings channels.
The reforms target funds that serve retail investors, excluding those catering to high-net-worth individuals. Specifically:
- Regular CISs and retail investment hedge funds will see all returns classified as capital.
- Qualified investor hedge funds, which require a minimum commitment of R1 million and are aimed at more sophisticated investors, will be carved out from the CIS tax regime. Alternative tax options for these funds will be detailed in the Treasury’s response document, potentially reverting to normal tax principles that distinguish between capital realizations (from investments) and revenue (from active trading or business activities).
This distinction will create a distinction between mass-market products and exclusive structures. Retail hedge funds benefit from the favourable regime if they remain accessible to the public, while qualified funds face potential scrutiny on whether their proceeds constitute investment gains or trading profits.
