National Treasury proposes amendments to CIS tax regulations

NATIONAL Treasury has proposed three major amendments affecting portfolios of Collective Investment Schemes (CISs) in the draft Taxation Laws Amendment Bill, 2025 (TLAB).

- JOON CHONG and DUNCAN MCALLISTER

The first amendment is the removal of tax-neutral rollover relief for 'asset-for-share' transactions under section 42 of the Income Tax Act (ITA) for all CISs. This change is due to what the National Treasury terms “unintended tax avoidance”. The Explanatory Memorandum (EM) highlights a scenario in which an investor transfers listed shares to a CIS, which then sells them, with the subsequent capital gains being tax-exempt at the CIS level.

The provenance for this amendment can be traced back to September 29, 2016, shortly before the SABMiller — AB Inbev takeover, when the South African Revenue Service (Sars) issued a media release warning that a CIS acquiring listed shares from an investor and which disposes of them shortly afterwards may be on income account or may be engaging in an impermissible avoidance arrangement.

The second amendment excludes CIS mergers from the definition of an ‘amalgamation transaction’ under section 44 of the ITA. A merger of one CIS (CIS 1) with another CIS (CIS 2), where investors in CIS 1 exchange their CIS 1 units for CIS 2 units will no longer be tax neutral for the investors. It will instead be treated as a barter or exchange transaction, triggering a disposal and, hence, capital gain or loss in the investors’ hands. To the extent there is a capital gain, the unit holders will receive a step up in the base cost of their CIS 2 units.