The Treasury has agreed to withdraw its tax proposals for collective investment schemes and to reconsider them in the 2019 legislative cycle after further discussions with the industry.
The proposals are contained in the draft Taxation Laws Amendment Bill and have elicited strong protests from the collective scheme industry.
Treasury’s chief director of legal tax design Yanga Mputa told parliament’s finance committee on Wednesday that the proposals will be withdrawn for later consideration. This will give the government and industry more time to find solutions that have a less negative impact on the industry.
The proposals were aimed at frequent trading of shares and some financial instruments by some collective schemes, and would have treated this as income rather than as being of a capital nature. The Treasury proposed that distributions from collective investment schemes to unit holders derived from the disposal of financial instruments within 12 months of their acquisition should be deemed income of a revenue nature and be taxable as such in the hands of unit holders if distributed under current tax rules.
The collective investment scheme industry argued that the proposed amendment would have caused unfairness between unit holders within a portfolio when a large unit holder decided to redeem units, thereby triggering the sale of portfolio assets that have been held for less than 12 months. This would result in a tax liability on distribution to all unit holders.
The industry also argued that the proposed time-based rule would affect all manner of transactions, including unit-holder withdrawals, portfolio rebalancing, index tracking, hedging, and transactions directed at efficient portfolio management.
The industry has commissioned an independent actuarial consulting firm to model transactions for the industry in a bid to make a quantitative impact assessment, but this will not be completed before the finalisation of the tax bill. The industry said the study is crucial in the light of the economic climate and attracting foreign investment.