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Investment industry commends Treasury decision to withdraw tax proposals

Tax treatment of collective investment schemes will not change for now.

Investors in collective investment schemes in South Africa – unit trusts, exchange-traded funds and regulated hedge funds – enjoy two specific tax benefits. The first is that no tax is payable within the fund when the portfolio manager sells shares, bonds or other securities. The second is that when investors withdraw their money, it is taxed as a capital gain, not income.

This is not, however, written in law. Funds only enjoy these benefits through a special dispensation granted by the South African Revenue Service (Sars).

So when National Treasury announced proposed changes to tax legislation last month that would alter this state of affairs, this was met with a great deal of consternation by the industry. Treasury’s proposal was essentially that gains made within funds should be taxed, as there were concerns about the way some collective investment schemes were being run.

If securities were sold within 12 months of being bought, Treasury suggested that the gains should be treated as revenue. This would be in line with the treatment of trading by individual tax payers.

“My understanding is they suspected that there were a minority of players who were attempting to avoid tax,” explains Thabo Khojane, MD of Investec Asset Management and deputy chairman of the Association for Savings and Investment South Africa (Asisa). “They looked at two things in particular: the first was the registration of what they term private collective investment schemes, where wealthy individuals or families set up a fund that was never really meant for the general public. Effectively it was meant as a tax avoidance scheme.

“The second issue is a concern on their part that there is excessive churn in portfolios,” Khojane added. “They couldn’t reconcile this high churn with the long-term investment mindset funds were supposed to have.”

Unintended consequences

The proposals were however a shock to the industry. Unit trusts have always enjoyed the tax benefits allowed by the special dispensation from Sars, and taking those away could have material unintended consequences.

Anton Pillay, CEO of Coronation Fund Managers, points out that if South Africa was to adopt a regime where unit trusts are taxed within the fund, it would be one of only two countries in the world that did so. The complexities it would create and the potential prejudice to investors could also be significant disincentives to saving.

For example, a fund manager may be forced to sell a position simply because a large investor withdraws from the fund. That would trigger a tax event that would impact all of the unit holders, even though they have remained invested and the portfolio manager has not actually made a trade.

Treasury appears to have recognised these arguments, as on Wednesday it announced that it would withdraw the proposals and reconsider them only in the 2019 legislative cycle. That will allow time for a more thorough analysis of the issues and how best to address them.

Khojane says that individuals setting up collective investment schemes simply to avoid tax is a legitimate problem and should be addressed, even though it is taking place in only a tiny minority of cases. Treasury’s concerns that there is too much trading taking place within portfolios have however been allayed somewhat following engagements with the industry over the last few weeks.

“We spent a lot of time on this,” Khojane says. “A long term investment mindset doesn’t mean that you must buy a share and hold it for five years. It is managing a portfolio that is diversified, active, and seeks to deliver a particular outcome to the investor. When you see churn it mustn’t trigger suspicion that the portfolio manager has lost sight of the fact that the saver has a long-term objective.”

Improving tax certainty

The fact that the proposal has been withdrawn is, however, not the end of the matter. In fact, the industry would like to see the tax treatment of collective investment schemes written into law so that the special dispensation granted by Sars is formalised.

“We are not anti-law,” explains Asisa CEO Leon Campher. “We want the law crafted properly.”

A proposal has therefore been made for a multi-stakeholder team –  comprising representatives from the industry, Treasury, the Financial Sector Conduct Authority (FSCA) and Sars – to be established to come up with proposals.

“Between the four of us, we will tackle in particular the issue of private collective investment schemes,” says Khojane. “I don’t think that will be that difficult. We have some ideas already. The more difficult thing we have to do is to think about how we improve tax certainty.”

This will present an opportunity for the treatment of collective investment schemes to be formalised.

“Historically, our jurisdiction has been fairly competitive compared to other jurisdictions, despite a lack of certainty,” Khojane notes. “A large part of the conversation will be codifying and formalising what is already in place. The collective investment scheme vehicle is already fairly attractive in its current form – we need to firm that up and put it into law.”

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Yet another ignorant suggestion – thankfully withdrawn. Presumably there’s a focus on getting tax revenue ..but the result of this plan would mean higher the taxes & costs on the few people who are saving ..*obviously* this is not the right thing to do.

The gov still doesn’t seem to realise that the independent taxpayer and saver are like a child that grew up, got a job and is no longer dependent on their parents. If the parent is in financial trouble because they have another ten children who are still dependent ..then they should not interfere with the one child who is not a burden, and who is actually the source of the parents income.

This is rubbish. They want to tax us on EVERYTHING, and as the article said, it would be a disincentive to save which is what this country’s economy also needs. They also mention how it’s a small pool that are possibly trying to avoid tax… so leave it alone!
Can’t believe it.

Where do we as the public voice our opinions? Democracy.

Some years ago, I pondered how long it would take SARS/Treasury to frown upon the issue of “IT3c” (CGT) tax certificates being issued by asset managers, irrespective how long an investor kept his units/ETF’s. ALL withdrawals/repurchases have always been treated as a CGT gain, whereby it benefits an individual with R40K p.a. CGT exemption.

The cost to redesign systems software in order to identify and report withdrawals made before a certain (e.g 1yr) period, will be onerous, and further eat into investment returns.

The only hiding place (it seems?) could be to hold EFT & UT funds in a “Tax Free Savings/Investment Account” product. There is no CGT & income tax on interest, div, CGT gains. But what about Securities’ trading costs? VAT is levied on it, right?

On a slightly different note: I may’ve found a minor loophole in the tax system i.r.o. TFSA investments, which could be open to abuse: at present, only R33K p.a. is allowed to be invested in all TFSA accounts, per indiv p.a. If you say invested the full R33K and later in the same tax year withdraw say R20K funds out of the TFSA (e.g to take profit on a certain fund)…..you CANNOT later add/reinvest the R20K back into any TFSA (as withdrawals does NOT reduce the original R33K amount invested). So you’d have to wait for the next tax year.

Loophole: TFSA’s I have dealt with so far, you can actually SWITCH FUNDS (within the same TFSA account) without tax implication. Say the underlying fund did well, and you want to take profit of part of the R33K invested earlier, just switch the same R20K to a Money Market or similar fund. You remain invested within the same TFSA account (i.e. not considered a withdrawal). So one can play, take profit & reposition the underlying funds in your TFSA, without loosing contribution-flexibility, and no tax implications. Profits, CGT, Div, Int remain tax-free. (Just don’t cash out into your bank account).

….my only worry is, HOW LONG will it take SARS/Treasury to pick up the above-mentioned “abuse” & start changing the Act regarding TFSA’s as well going forward???

This is not a loophole.

This is the exact thing that makes TFSAs worth while and it is by desing. You can rebalance or recalibrate your risk and asset class allocation all the time without tax consequences.

Also one of the reasons to pick a service provider for your TFSA that has a very wide product landscape to choose from. (Although inter-TFSA transfers are possible)

Can you give exact details of the service providers of these TFSA products? Be appreciated.

who would you recommend to set up a private collective investment scheme? =)

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