{"id":196664,"date":"2025-09-04T09:49:55","date_gmt":"2025-09-04T09:49:55","guid":{"rendered":"https:\/\/www.premium-partners.net\/?p=196664"},"modified":"2025-09-06T16:59:14","modified_gmt":"2025-09-06T16:59:14","slug":"new-draft-tax-bill-hides-a-stealth-tax-in-your-unit-trust-investments","status":"publish","type":"post","link":"https:\/\/www.premium-partners.net\/fr\/builder\/new-draft-tax-bill-hides-a-stealth-tax-in-your-unit-trust-investments\/","title":{"rendered":"New draft tax bill hides a “stealth tax” in your unit trust investments"},"content":{"rendered":"

This post<\/a> was originally published on this site<\/a><\/p>

<\/p>\n

For millions of South Africans, a unit trust or a portfolio of a Collective Investment Scheme (CIS) is one of the pillars of their <\/span>financial<\/span> <\/span>future, serving as a vehicle for retirement savings, children’s education funds, and long-term wealth creation. Under the National Treasury’s proposed amendments in the draft Taxation Laws Amendment Bill (TLAB), these CIS investors could face an unexpected tax bill on their holdings even if they have not sold any units.<\/p>\n

 <\/p>\n

The issue arises from the effective exclusion of CIS mergers from the definition of an ‘amalgamation transaction’ under section 44 of the Income Tax Act (ITA). This means that the exchange of participatory interests in a CIS during a fund merger will no longer qualify for tax-neutral treatment.<\/p>\n

 <\/p>\n

Current rules provide for tax neutrality<\/strong><\/p>\n

Imagine your investment manager decides to merge the CIS you are invested in (CIS 1) with another fund (CIS 2). This is a common practice done for various non-tax commercial reasons such as industry consolidation, achieving economies of scale, or realigning investment mandates. Crucially, these decisions are made entirely outside an investor’s control.<\/p>\n

Under the current rules, this merger is tax-neutral for all parties under section 44 of the ITA. In a merger, CIS 1 transfers its assets to CIS 2 in exchange for units in CIS 2, which CIS 1 then distributes to its investors. Upon completion, CIS 1 is terminated. For tax purposes, while investors exchange their CIS 1 units for new CIS 2 units, the investors are deemed to have disposed of their CIS 1 units at their tax cost. As a result, any tax is ‘rolled over’ until they eventually sell their new CIS 2 units. This means capital gains tax (CGT) is deferred until a sale of CIS 2 units occurs.<\/p>\n

 <\/p>\n

Proposed section 44 exclusion triggers potential CGT for CIS investors<\/strong><\/p>\n

The draft TLAB proposes to scrap this relief for CISs entirely. The merger of CISs and subsequent distribution of new units to unitholders would no longer be tax-neutral. Instead, the merger would have the same tax impact as though investors had sold their CIS 1 units for the market value of the new CIS 2 units, triggering an immediate CGT liability for the unitholder on any capital gain.<\/p>\n

 <\/p>\n

An investor who wishes to remain fully invested would have to fund the CGT as a ‘dry tax’ either in provisional tax payments or upon assessment. Alternatively, they could be forced to sell a portion of their new CIS 2 units to pay the tax bill. The result is that the investor’s overall asset worth is reduced by the CGT payable, even though they never chose to exit their original investment.<\/p>\n

Notably, the <\/span>Explanatory Memorandum<\/i> <\/span>(EM) provides no specific examples of how section 44 amalgamations are being used for tax avoidance.<\/p>\n

 <\/p>\n

Removal of section 42 tax-neutral rollover relief applying to CISs<\/strong><\/p>\n

The draft TLAB also removes tax-neutral rollover relief for ‘asset-for-share’ transactions under section 42 for all CISs due to the National Treasury’s concerns about ‘unintended tax avoidance. The EM highlights a scenario where an investor transfers listed shares to a CIS, which then sells them, with the subsequent capital gain being tax-exempt at the CIS level.<\/p>\n

 <\/p>\n

This potential for tax avoidance was noted in the <\/span>Discussion Document on the Taxation of Collective Investment Schemes<\/i>. During a January 2025 workshop, participants suggested that this risk could be better managed by disallowing section 42 relief only for closely held CIS rather than a blanket ban for all CIS. Unfortunately, the draft TLAB favours a comprehensive removal over a specific remedy. As written, the proposed amendments will no longer provide for tax-neutral section 42 CIS transactions.<\/p>\n

Capital distributions would trigger CGT<\/strong><\/p>\n

Another proposed amendment would treat any CIS distribution that is not income or gross income as a CGT event for the investor. The EM notes that capital distributions are typically “infrequent and relatively minor<\/i>,” arising from the fund’s ‘capital’ rather than its income or profits. While the National Treasury’s observation on the frequency is correct, the quantum may be anything but minor, considering the proposed amendments to section 44 to exclude CIS mergers. Further, it is unclear what constitutes a capital distribution in a CIS context.<\/p>\n

 <\/p>\n

Read with the proposed amendments to section 44 for CIS mergers, the distribution of CIS 2 units in the CIS merger example above would be considered a ‘capital distribution’, triggering a potential capital gain for investors. This is because the new CIS 2 units distributed would not be income or gross income distributions from CIS 1.<\/p>\n

 <\/p>\n

Proposals undermine CISs as a long-term investment vehicle<\/strong><\/p>\n

The proposals introduce potential ‘stealth’ taxes for investors and negate the intended long-term, tax-efficient compounding that makes a CIS an attractive investment vehicle. This policy shift is especially concerning when viewed against the backdrop of South Africa’s precarious savings landscape, with fewer than 6% of South Africans being able to retire and maintain their standard of living.<\/p>\n

Given this stark reality, every aspect of fiscal policy should be geared towards actively promoting and simplifying long-term savings using CISs. By introducing unexpected tax liabilities and eroding the tax efficiency of CISs, the proposed amendments actively deter the very savings culture South Africa desperately needs.<\/p>\n

* Chong is a partner and Viljoen is a director at Webber Wentzel.<\/em><\/p>\n

PERSONAL FINANCE<\/strong><\/p>","protected":false},"excerpt":{"rendered":"

For millions of South Africans, a unit trust or a portfolio of a Collective Investment Scheme (CIS) is one of the pillars of their\u00a0financial\u00a0future, serving as a vehicle for retirement savings, children’s education funds, and long-term wealth creation. Under the National Treasury’s proposed amendments in the draft Taxation Laws Amendment Bill (TLAB), these CIS investors could face an unexpected tax bill on their holdings even if they have not sold any units.\u00a0The issue arises from the effective exclusion of CIS mergers from the definition of an ‘amalgamation transaction’ under section 44 of the Income Tax Act (ITA). This means that the exchange of participatory interests in a CIS during a fund merger will no longer qualify for tax-neutral treatment.\u00a0Current rules provide for tax neutralityImagine your investment manager decides to merge the CIS you are invested in (CIS 1) with another fund (CIS 2). This is a common practice done for various non-tax commercial reasons such as industry consolidation, achieving economies of scale, or realigning investment mandates. Crucially, these decisions are made entirely outside an investor’s control.Under the current rules, this merger is tax-neutral for all parties under section 44 of the ITA. In a merger, CIS 1 transfers its assets to CIS 2 in exchange for units in CIS 2, which CIS 1 then distributes to its investors. Upon completion, CIS 1 is terminated. For tax purposes, while investors exchange their CIS 1 units for new CIS 2 units, the investors are deemed to have disposed of their CIS 1 units at their tax cost. As a result, any tax is ‘rolled over’ until they eventually sell their new CIS 2 units. This means capital gains tax (CGT) is deferred until a sale of CIS 2 units occurs.\u00a0Proposed section 44 exclusion triggers potential CGT for CIS investorsThe draft TLAB proposes to scrap this relief for CISs entirely. The merger of CISs and subsequent distribution of new units to unitholders would no longer be tax-neutral. Instead, the merger would have the same tax impact as though investors had sold their CIS 1 units for the market value of the new CIS 2 units, triggering an immediate CGT liability for the unitholder on any capital gain.\u00a0An investor who wishes to remain fully invested would have to fund the CGT as a ‘dry tax’ either in provisional tax payments or upon assessment. Alternatively, they could be forced to sell a portion of their new CIS 2 units to pay the tax bill. The result is that the investor’s overall asset worth is reduced by the CGT payable, even though they never chose to exit their original investment.Notably, the\u00a0Explanatory Memorandum\u00a0(EM) provides no specific examples of how section 44 amalgamations are being used for tax avoidance.\u00a0Removal of section 42 tax-neutral rollover relief applying to CISsThe draft TLAB also removes tax-neutral rollover relief for ‘asset-for-share’ transactions under section 42 for all CISs due to the National Treasury’s concerns about ‘unintended tax avoidance. The EM highlights a scenario where an investor transfers listed shares to a CIS, which then sells them, with the subsequent capital gain being tax-exempt at the CIS level.\u00a0This potential for tax avoidance was noted in the\u00a0Discussion Document on the Taxation of Collective Investment Schemes. During a January 2025 workshop, participants suggested that this risk could be better managed by disallowing section 42 relief only for closely held CIS rather than a blanket ban for all CIS. Unfortunately, the draft TLAB favours a comprehensive removal over a specific remedy. As written, the proposed amendments will no longer provide for tax-neutral section 42 CIS transactions.Capital distributions would trigger CGTAnother proposed amendment would treat any CIS distribution that is not income or gross income as a CGT event for the investor. The EM notes that capital distributions are typically “infrequent and relatively minor,” arising from the fund’s ‘capital’ rather than its income or profits. While the National Treasury’s observation on the frequency is correct, the quantum may be anything but minor, considering the proposed amendments to section 44 to exclude CIS mergers. Further, it is unclear what constitutes a capital distribution in a CIS context.\u00a0Read with the proposed amendments to section 44 for CIS mergers, the distribution of CIS 2 units in the CIS merger example above would be considered a ‘capital distribution’, triggering a potential capital gain for investors. This is because the new CIS 2 units distributed would not be income or gross income distributions from CIS 1.\u00a0Proposals undermine CISs as a long-term investment vehicleThe proposals introduce potential ‘stealth’ taxes for investors and negate the intended long-term, tax-efficient compounding that makes a CIS an attractive investment vehicle. This policy shift is especially concerning when viewed against the backdrop of South Africa’s precarious savings landscape, with fewer than 6% of South Africans being able to retire and maintain their standard of living.Given this stark reality, every aspect of fiscal policy should be geared towards actively promoting and simplifying long-term savings using CISs. By introducing unexpected tax liabilities and eroding the tax efficiency of CISs, the proposed amendments actively deter the very savings culture South Africa desperately needs.* Chong is a partner and Viljoen is a director at Webber Wentzel.PERSONAL FINANCE<\/p>","protected":false},"author":1,"featured_media":196666,"comment_status":"open","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-196664","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-builder"],"_links":{"self":[{"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/posts\/196664","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/comments?post=196664"}],"version-history":[{"count":1,"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/posts\/196664\/revisions"}],"predecessor-version":[{"id":196665,"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/posts\/196664\/revisions\/196665"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/media\/196666"}],"wp:attachment":[{"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/media?parent=196664"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/categories?post=196664"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.premium-partners.net\/fr\/wp-json\/wp\/v2\/tags?post=196664"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}