Latest / Tax Break: South African tax for professionals / Section 8E proposal retracted and proposed changes to CIS taxation

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Section 8E proposal retracted and proposed changes to CIS taxation · Tax Break: South African tax for professionals

• 0:11
  Welcome and thank you for joining me for Tax Break.
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  This is a podcast about South African tax, full South African
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  tax professionals and practitioners.
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  My name is Peter Venezuelan, and in each episode I discuss an
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  aspect of the recent development in South African tax.
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  And I try to keep the episode short enough that you can list
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  it in them whenever you've got a few minutes to spay.
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  Now, today's the last episode that I'm going to be speaking
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  about some of the proposals in the draft taxation laws
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  amendment bills that were published on the 16th of August.
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  So just a quick reminder again, the Treasury published these
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  these bills for comment on the 16th of August.
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  They are open for comment until the 12th of September, after
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  which they would be public consultation sessions and the
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  Treasury would then take the the comment from from industry and
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  use that to do then arrive at the the final amendments for the
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  for the 2025 legislative cycle. Now the first, the first aspect
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  or development relating to these amendments that I would like to,
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  to to talk about. So those of you are regular
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  listeners would know if you listen to Episode 51.
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  I spoke about some of the proposals relating to Section 8
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  E of the Income Tax Act. And these proposals were to move
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  away from the current rule based definition as to what is hybrid
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  equity instrument, to move towards a more principle based
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  approach. And the principle that the
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  Treasury suggested were or proposed was to use it for
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  assessor basis for for classifying these instruments as
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  hybrid equity instruments. Now since then on the 3rd of
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  September, the National Treasury issued the media statement
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  saying that they've retracted these proposals relating to
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  Section 8 E. The reasons provided for that is
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  that it cost uncertainty for funding structures and for
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  investment transactions that's currently underway.
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  The media statement also highlights that the concerns
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  raised by industry was that these proposals would in all
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  likelihood make make preferential funding non viable
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  as it would increase the cost of of that funding.
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  I do think the important part here is that if you look at the
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  last paragraph of the media statement, it suggests that
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  there would be a process with more consultation before these
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  proposals are revised, which would indicate to me that the
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  proposals are not off the table, but it would probably move to a
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  next legislative cycle. So it is something to keep in
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  mind then as in the past few weeks are the last key proposal
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  that I would like to talk about today relates to changes to our
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  interests in collective investment schemes are taxed.
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  So just reminder as the previous weeks, what we are talking about
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  now is only proposed changes. It's it's not a final change
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  yet. So it may be that these things
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  don't go ahead in the in the proposed form, right.
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  So let's talk about our collective investment scheme or
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  how these portfolios work. So an investor would make an
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  investment into a collective investment scheme into a
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  specific portfolio of that collective investment scheme.
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  And that portfolio of the collective investment scheme
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  would then go and invest in underlying investments.
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  So if we're looking at it from an income tax perspective,
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  Section 25 A specifically says if you've got income, so not
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  capital amounts that are distributed or that accrued to
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  their collective investment scheme to the portfolio of the
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  collective investment scheme that are distributed to the
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  person who holds an interest in that scheme.
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  Within no later than 12 months after the amount accrued to the
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  collective investment scheme, then the amount will be deemed
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  to have accrued directly to the person.
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  So the implication of that is that there's only one layer of
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  text. That amount is included in the
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  hands of the person holding an interest in the scheme directly.
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  There is not a layer of tax in the scheme and another layer of
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  tax in between the scheme and and the person.
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  The second element of how these things works work relate to
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  capital gains tax. So paragraph 61 of the 8th
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  schedule. So that's the schedule of the
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  Income Tax Act that deals with capital gains tax specifically
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  states that if the holder of an interest in a collective
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  portfolio and a collective investment scheme disposes of
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  that interest, they would be capital gains tax on their
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  disposal. It also goes on to say that if
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  the collective investment scheme portfolio disposes of an asset,
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  so in other words, the the portfolio disposes of these
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  underlying investments, the capital gains and losses can be
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  there must be disregarded. So again, the effect is that
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  there's a single level of tax and that level of tax is ideally
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  at the level of the investor, not in the fund and again, it at
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  the level of of the investor. Now the concern that the
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  Treasury identified is that if capital gains are not taxed in
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  hands of the fund when the fund disposes of an asset, so there's
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  no capital gains tax at that level.
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  And the fund then distributes that gain to the investor
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  without the investor selling the interest in the fund.
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  So there's a capital distribution from the fund, then
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  that capital distribution would really be tax free if the fund
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  is not closing down because that distribution cannot really be
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  linked to the disposal of the, the, the interest in the fund by
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  the investor. So that then gives you an
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  opportunity to, to possibly have capital gains that through this,
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  this, this fund approach to taxation are not taxed at all.
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  So the Treasury published a paper in 2024 looking at the
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  alternatives as to how to make sure that these things are
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  taxed. The one alternative suggested
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  was to reduce the base cost, but there were concerns about it
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  being administratively difficult to, to, to implement for the
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  collective investment schemes. The other alternative was to
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  say, but then all these capital distributions must be taxed as
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  capital gains. What the paper identified was
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  that the tax would be earlier, but it's a much simpler system
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  to implement. And the proposal then follows
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  the latter suggestion. So what it says is that where
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  there's any amount of a distribution by a portfolio of a
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  collective investment scheme other than an amount that is
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  income or gross income, that distribution is made to the
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  holder of the the interest in the the scheme.
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  That amount must then be treated as a capital gain for the older
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  of the interest in the scheme. And the proposal is that this
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  must be implemented from the 1st of March 2026.
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  Now, I, I think in my mind I've got, I've got 2 points.
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  I won't do perhaps mention and and leave with you do to think
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  about. The first question is they could
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  probably be some debate as to what is a distribution or
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  capital distribution. So this, the proposal doesn't
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  specifically talk about a capital distribution.
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  It talks about any distribution that is not income.
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  So if an amount is, for example, allocated to an investor's
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  account but reinvested, is that the distribution or so?
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  So I think the concept of what the the triggering event, what
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  is a distribution or capital distribution is something that
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  there should be some clarity on if we look at the economics of
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  how these instruments work as a product.
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  So if the investor only pays tax right at the end when the
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  product is or the investment is sold, that means for a much
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  longer period the investor has got a an investment base that is
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  not taxed as the gains are the underlying gains are realised.
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  So that probably gives the investor a bigger investment
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  base from which to then grow their investments.
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  And if you take into account compounding, it probably gives
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  you a room for a higher growth on on your investment.
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  This growth would ever ultimately still be taxed.
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  Now if you pay the tax earlier, the investor would have to take
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  a portion of this investment capital to pay the tax, which
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  means a smaller capital investment base and and by
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  implication then lace, Lace capital growth if you on, on
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  that smaller base. So I do think that this proposal
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  could possibly impact the attractiveness of these products
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  as as investment products for investors.
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  So in summary, two things in this episode to take home and
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  think about. The first one, I think these
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  there's some some welcome relief.
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  The Section 8 E proposals have been retracted for now.
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  It does it does seem as if they are still on the table, but
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  somewhere in the future. The second point is, if you are
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  an investor in a collective investment scheme, it makes
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  sense to keep an eye on, on, on this, this proposed amendment.
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  It may affect the yields that you get from your investment
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  product. That's it for today's episode.
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  If you've got any comments, questions, you're more than
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  welcome to send me an e-mail. My e-mail address is in the show
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  notes. If you like the podcast or if
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  you like this episode, please forward it to one other person
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  who you think would also like it.
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  I think it's a good way to grow the the listener base.
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  And just reminder, as always, nothing in this episode was
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  intended to be tax advice or a replacement for fact specific
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  tax advice. Until next time, goodbye.