1. Foreign pensions:
Section 10(1)(gC)(ii) currently exempts any lump sum, pension or annuity received by or accrued to a South African tax resident from a source outside of South Africa. It is proposed that this section is deleted from the Income Tax Act 58 of 1962 to ensure that foreign retirement benefits received by South African tax residents are taxed in line with our residence basis of taxation. The original intent of section 10(1)(gC)(ii) was to mitigate double taxation of foreign pensions, but the exemption may result in double non-taxation due to tax laws in the relevant jurisdictions, hence the proposed change.
Proposed effective date: 1 March 2026
2. Collective Investment Schemes (CIS’s):
CIS’s, including unit trusts and mutual funds, are popular investment options especially given the current economic climate and its tax effectiveness. CIS’s are treated as conduits for tax purposes leading to effective tax planning opportunities.
Section 42 (Asset-for-Share) and Section 44 (Amalgamation) transactions
Due to tax-free transfers and / or disposals when these reorgansiation rules are applied, the capital gain on the original shares is realised in the marked with the effect that neither the investor or CIS pays tax at the point of economic realisation. Treasury therefore proposes to curb unintended tax avoidance and withdraw CIS’s from section 42 and 44 transactions to prevent the deferral or avoidance of tax on realised capital gains.
Proposed effective date: 1 January 2026
Capital distributions from CIS’s
Paragraph 61 of the Eighth Schedule to the Income Tax Act is not clear on the tax treatment of capital payments made by a unit trust to its investors from the fund’s “capital” pool. It is proposed that capital distributions from a CIS will be treated as capital gains. Although it is not often done in practice, legal certainty was required. After Treasury’s consultation in December 2024 with relevant stakeholders, and to avoid adjusting the base cost of participatory interests altogether, Treasury explained that it would be a simpler approach and that investors could fund the resulting tax liability from the amounts distributed. They conceded that it may lead to earlier tax liabilities for some investors, but it seems that the certainty with the proposed change weighs more in their opinion.
Proposed effective date: 1 March 2026
3. Taxation of trusts and beneficiaries:
To determine who will be taxed on the income received by a domestic trust, the relevant attribution or flow-through principle is applied. The income received by or accrued to the trust can be taxed in the hands of either the donor, the beneficiary or the trust depending on the relevant rules. Based on the 2023-amendments which limited the flow-through principle to resident beneficiaries, Treasury proposed further amendment aims to ensure that the attribution or flow-through principles only apply to resident beneficiaries and resident donors. This means that section 7(5) will not apply to any donations made by a non-resident donor (i.e. if his donation results in R100,000 interest in the trust, the donor will not include the R100,000 in his income tax return, but section 25B will apply and the interest will be taxed in the trust, i.e. if not, for example, distributed to another resident beneficiary). This amendment will also apply to interest free or low-interest loans, and not just donations in the strict sense.
Proposed effective date: 1 March 2026
Tax Administration Laws Amendment Bill, 2025
4. Suspension of payment requests
Clarity regarding reduced assessment applications is given in this proposed amendment in that taxpayers may apply for a suspension of payment of the tax charged in terms of the assessment based on an estimate until SARS has decided whether it will issue a reduced assessment. Should the latter not be successful, the taxpayer may then object to the decision. It is important that all aspects of the dispute process are covered in the suspension of payment request, and SARS may deny or revoke the suspension under the provisions of section 164.
5. “Bona fide inadvertent error” and understatement penalties:
The term “bona fide inadvertent error” was introduced to assist with practical issues specifically relating to the “substantial understatement” test when taxpayers understated their taxes. In its current form, it could be seen as a “first line of defence”. The proposal now directly links “bona fide inadvertent error to the “substantial understatement” test, which means that tax opinions prior to implementation are even more important should SARS be of the opinion that a taxpayer has understated his / her taxes.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)