Unit trust investors could be faced with a capital gains tax liability if they have transferred their shares to a collective investment scheme and the scheme restructured or amalgamated with another scheme, if a Treasury tax proposal becomes law.
If promulgated, the proposed amendments, which are intended to address tax avoidance, will come into operation on January 1 2026 and apply to transactions on or after that date.
The proposed measure is strongly opposed by the Association for Savings and Investment SA (Asisa), which raised its objections in a presentation to parliament’s finance committee last week during public hearings on the draft Tax Laws Amendment Bill.
Asisa senior policy advisor on tax Angus McDonald pointed out that such corporate rearrangements did not result in a cash flow to unit trust investors and did not change their economic position. Currently unit trust investors only pay capital gains tax when they cash in their investments, and the tax regime allows for corporate restructuring of collective investment schemes (CIS) without this triggering a tax liability.
In the explanatory memorandum to the draft bill, the Treasury explained that “transferring shares to a CIS without tax implications has allowed for unintended tax avoidance during changes of shareholdings in listed companies, as the realised gains in the shares are not taxed on transfer.”
In terms of the current law, an investor can transfer these shares to a CIS as an “asset-for-share” transaction, which is free of capital gains tax. If the CIS subsequently sells these shares, for example, as part of a corporate restructuring (like a merger or acquisition involving the listed company) or simply as part of its investment strategy, the CIS itself does not pay capital gains tax on the sale.
A CIS (with some exceptions) does not pay capital gains tax when it sells assets within its portfolio.
“The combined effect is that the capital gain on the original shares is “realised” in the market. However, neither the original investor nor the CIS pays tax on that gain at the point of its economic realisation," the explanatory memorandum said.
“The investor’s tax liability is deferred until they eventually sell their units in the CIS, which could be years later, or potentially avoided entirely by untaxed distributions by the CIS. This creates an imbalance compared to an investor who directly sells their shares and immediately pays capital gains tax.
“These provisions can lead to a situation where significant capital gains escape the tax net at the point where they are economically realised. The aim of the proposed amendment is to prevent the deferral or avoidance of tax on realised capital gains when shares are transferred to and subsequently disposed of by CISs.”
Asisa urged that the proposals be scrapped.
McDonald said the proposal would adversely affect the long-term savings objectives of investors, as they may be forced to sell a portion of their holdings in the CIS portfolio to pay any tax as the corporate actions did not generate cash.
“When investors are requested to approve an amalgamation of CIS portfolios (as required by law) or to partake in share-for-asset transactions where their units in one CIS portfolio are exchanged for units in another, the potential tax implications will play a significant role in their decision, and it is unlikely they will approve the transaction.
“It will have a significant negative impact on investors and the savings industry if efficiencies cannot be achieved by the restructure of CIS portfolios,” McDonald pointed out.
“Removing the roll-over relief will stifle new CIS portfolio entrants into the market and innovation in the industry as the business risks will be indirectly borne by investors, who would be reluctant to consider anything but the largest, most established CIS portfolios and management companies. Further, growth of the industry could be impeded.”
McDonald also said that the amendments were contrary to global norms and could potentially deter foreign investment in local CIS portfolios and risk SA becoming less competitive as a fund domicile.
