Hedge fund and CIS audits have been more prevalent lately with a so-called uncertainty relating to the tax treatment of gains within a Collective Investment Scheme (“CIS” or “CIS’s”). First off, a CIS is a portfolio of assets which is established by a group of investors and operates as an investment vehicle on the investors’ behalf.
National Treasury recently published a discussion document proposing, amongst others, to treat all income in a CIS as revenue in nature. This was, per National Treasury, to establish certainty which will lead to less audits.
Currently CIS’s are exempt from capital gains tax (“CGT”), and amounts which are revenue in nature are taxed within the CIS portfolio if not distributed to the investors within 12 months of the revenue accruing to the CIS.
The discussion document was preceded initially by the 2018 Taxation Laws Amendment Bill (“TLAB”) to clarify and provide certainty on the income tax treatment of trading profits earned by CIS’s, and it has been asserted that the TLAB was necessitated based on some CIS’s that were generating profits arising from frequent trading.
Trading within a CIS is often required to rebalance the portfolio to align with its mandate and risk appetite.
It therefore leads into the classic tax question , i.e. discerning between capital versus revenue to determine the tax treatment.
Four conceptual recommendations were included in the discussion document, i.e.
- Treating all inccome within a CIS as revenue;
- Designing a new tax regime for CIS’s purssuant to section 25BA of the Income Tax Act;
- Using a turnover ratio to create a safe harbour; and
- Taking hedge funds out of the CIS definition.
Wealth tax has long been on the horizon to broaden the South African tax net and one could arguably agree that these proposed recommendations point towards the same trend.
The concern is that if CGT, which is exempt in a CIS, is replaced with income tax, it will be taxed in the hands of the investors, with CGT also being applicable upon disposal.
Given that wealth taxes have been on the horizon to broaden the South African tax net, the question remains whether another tax revolt is lurking between the conceptual recommendations, especially amongst those who invest and contribute to the South African economy.
A workshop was held by National Treasury on 17 January 2025 with industry stakeholders attending. National Treasury reiterated that the document published was not legislation, but remained a discussion document. It stated that the primary goal of the document was to obtain input and create certainty around gains within a CIS to ultimately minimise audits.
It will be most interesting to see what the 2025 Budget Speech will include on CIS’s following the January workshop. For those potentially affected, you can save the date for 19 February 2025.
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