National Treasury has proposed three major amendments affecting portfolios of Collective Investment Schemes (CISs) in the draft Taxation Laws Amendment Bill, 2025 (TLAB). The National Treasury’s vicious crackdown aims to close several tax loopholes and strengthen compliance within the CIS framework.
The first amendment removes tax-neutral rollover relief for “asset-for-share” transactions under section 42 of the Income Tax Act (ITA) for all CISs. National Treasury describes this as a response to “unintended tax avoidance”.
Bypassing proper tax treatment
The Explanatory Memorandum (EM) highlights a scenario in which an investor transfers listed shares to a CIS, which then sells them. The subsequent capital gains remain tax-exempt at the CIS level. This structure, according to the National Treasury’s vicious crackdown, allows investors to bypass proper tax treatment.
The origin of this amendment dates back to 29 September 2016. Just before the SABMiller and AB InBev takeover, the South African Revenue Service (SARS) issued a media release. It warned that a CIS acquiring listed shares from an investor and disposing of them shortly afterwards may be on the income account. SARS also cautioned that such arrangements might constitute impermissible tax avoidance.
The second amendment excludes CIS mergers from the definition of an “amalgamation transaction” under section 44 of the ITA. When one CIS (CIS 1) merges with another CIS (CIS 2), investors in CIS 1 will now exchange their CIS 1 units for CIS 2 units. This transaction will no longer be tax-neutral for the investors.
Instead, it will be treated as a barter or exchange transaction. This will trigger a disposal and result in a capital gain or loss in the investors’ hands. Where there is a capital gain, the unit holders will receive a step-up in the base cost of their CIS 2 units.
The third amendment introduces a new paragraph 82A in the Eighth Schedule. Under this provision, a distribution that is neither gross income nor income, often called a “capital distribution”, made by a CIS to its investors before disposal of their units will result in a capital gain for the investors. There will be no base cost offset allowed.
This article discusses three possibilities for what “capital” in a capital distribution could mean in the context of a CIS portfolio.
Capital as initial investment
The first interpretation is that a capital distribution refers to a return of the initial amount invested by the investors to acquire units in the CIS. If the portfolio distributes this initial “capital” to investors, it creates a capital gain in their hands.
Ideally, such a distribution should reduce the base cost of the investors’ units under paragraph 20(3)(b) of the Eighth Schedule. However, since paragraph 82A would take precedence, the same amount could be taxed twice. This may lead to anomalies, such as a capital gain upon distribution and a capital loss upon redemption of units.
While taxing the return of contributed capital is theoretically incorrect, the National Treasury’s vicious crackdown makes it clear that practical enforcement will likely prevail over theory.
Distributions of previously taxed income
Section 25BA states that an amount, other than one of a capital nature, must be taxed in the CIS if it is not distributed within 12 months of accrual, or within 12 months of receipt in the case of interest.
Under trust law, any amount taxed in the CIS in one year but distributed later becomes part of trust capital. Treating such distributions as capital gains would create economic double taxation for both the portfolio and the unit holder. The portfolio would pay tax on the income at 45 percent, while the unit holder would face CGT of up to 18 percent.
This situation contradicts the conduit principle established in cases such as Armstrong vs CIR and SIR vs Rosen.
Distributions of capital gains from CIS portfolios
Capital gains arising in the portfolio are disregarded under paragraph 61(3) of the Eighth Schedule. Under paragraph 61(1), unit holders account for a capital gain or loss only when they dispose of their units.
Previously, this created a loophole where a portfolio could distribute capital gains before a unit holder disposed of their units. Taxing such a distribution seems reasonable. However, it can lead to unfair results. A capital gain that occurred before a unit holder invested in the CIS could still be distributed to them. This would be inequitable since the unit holder did not benefit from that gain.
It would be fairer to treat such a distribution as a base cost reduction instead. Moreover, CISs generally aim to grow investors’ funds, not to return them prematurely through distributions. Therefore, such practices should remain rare in practice.
Regardless of whether these capital distributions have occurred, paragraph 82A effectively closes the perceived loophole. It also signals the force of the National Treasury’s vicious crackdown on avoidance practices within the CIS space.
The proposed paragraph 82A will take effect on 1 March 2026. It will apply to all disposals occurring on or after that date.
Joon Chong | Partner | mail me | |
Duncan McAllister | Consultant | mail me | |
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