Editor’s Note:
In this first newsletter for 2025 we consider the following:
Collective Investment Schemes (CIS) Tax Treatment Review, Amending Acts Promulgated, Retirement Funds now Formally Excluded from the Exit Charge Under Section 9H, Another Concourt Tax Case: SARS vs Medtronic International – CCT79/23, SARS BCRs, BPRs, and Guides Noter-Up
Tony Davey – Editor | Duncan McAllister – Co-Editor
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In November 2024 Treasury issued a Discussion Document on the tax treatment of Collective Investment Schemes (CIS), which stems from statements in the 2020 Budget Review and previous Reviews.
The current position under Section 25BA of the Income Tax Act is that income amounts distributed by a CIS to their investment holders retain their nature as interest or dividends and are taxed in the holder’s hands annually upon distribution, while capital gains (which are also not taxed within the CIS under paragraph 61(3) of the Eighth Schedule) are effectively deferred until the holders dispose of their participatory interests. In essence, the conduit principle applies to annual income distributions, while capital gains are deferred. The Section 25BA dispensation does not define what constitutes an amount of a capital nature and thus normal tax principles apply to its characterisation.
The core issue of Treasury’s proposal is that given the frequency and scale at which a CIS in securities acquires and disposes of such securities, it could be indicative of a revenue intention by such profit-making activities. This determination would result in such gains, on the disposal of securities by the CIS, being characterised as being of a revenue nature.
This outcome is, in Treasury’s view, particularly apt for CIS hedge fund activities, given their leverage and shorting activities. Invitations to comment closed mid-December and we await developments, likely to be announced in the 2025 Budget Speech Review.
AMENDING ACTS PROMULGATED
On 24 December 2024 the following amending acts were promulgated:
- Taxation Laws Amendment Act 42 of 2024
- Tax Administration Laws Amendment Act 43 of 2024
- The Revenue Laws Second Amendment Act 44 of 2024
- Rates and Monetary Amounts and Amendment of Revenue Laws Act 45 of 2024
- Global Minimum Tax Act 46 of 2024
On 9 January 2025 the Global Minimum Tax Administration Act 47 of 2024 was promulgated.
RETIREMENT FUNDS NOW FORMALLY EXCLUDED FROM THE EXIT CHARGE UNDER SECTION 9H
Under section 9H(2) of the Income Tax Act 58 of 1962, a natural person who ceases to be a resident is, subject to the exceptions in section 9H(4), deemed to dispose of all their assets at market value on the day before ceasing to be resident.
The exclusions listed in section 9H(4) include immovable property in South Africa (but not shares in a land-rich company), assets effectively connected to a permanent establishment in South Africa and section 8C equity instruments that have not yet vested. Section 8 of the Taxation Laws Amendment Act 42 of 2024 has now excluded ‘any amount representing the value of the interest in any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund’.
The Draft Explanatory Memorandum on the Taxation Laws Amendment Bill, 2024 explains the reason for the amendment as follows:
‘From a policy point of view, the value of the member’s interest in the fund should not be subject to capital gains tax on exit, since this will result in potential double taxation when the member withdraws, dies or retires from the fund by virtue of the lump sum tables published in the annual Rates and Monetary Amounts Acts or in the form of an annuity (paragraph (a) of the definition of “gross income” in the Act). Such amounts are deemed to be from a South African source under section 9(2)(i) of the Act and thus remain within South Africa’s taxing jurisdiction, despite the member becoming a non-resident. It is therefore proposed that interests in SA retirement funds be excluded from the ambit of the exit charge in a new paragraph (g) of section 9H(4) of the Act.’
The amendment came into effect on 24 December 2024. For persons exiting South Africa before this date, SARS took the view in its Comprehensive Guide to Capital Gains Tax (Issue 9) that the deemed proceeds should be excluded on exit under paragraph 35(3)(a) of the Eighth Schedule on the basis that they would ultimately have to be included in gross income, and that since the contributions would have been claimed as a deduction under section 11F, they would similarly be excluded from base cost under paragraph 20(3)(a).
Of course, whether a lump sum or annuity will be taxable in South Africa on withdrawal or retirement will depend on the terms of the relevant tax treaty applicable to the persons ‘new country of residence at the time of receipt or accrual. For example, article 17 of the tax treaty with the United Kingdom grants the country of residence an exclusive taxing right. That means that South Africa will not be able to tax the lump sum or annuity when the person living in the UK retires or withdraws from the fund.
ANOTHER CONCOURT TAX CASE: SARS V MEDTRONIC INTERNATIONAL – CCT79/23
The Concourt delivered judgment on 20 December 2024, overturning the SCA decision in the matter as to whether a signed and concluded VDP agreement can subsequently be considered for amendment to exclude the interest component of the VDP settlement. (The Concourt held that it had jurisdiction as the issue has a potential impact on many taxpayers).
The majority in the SCA held that once a taxpayer has requested that interest be remitted under Section 39(7) of the VAT Act, the Commissioner, SARS, must consider the request under PAJA. The fact that a VDP agreement (including interest) had already been concluded was not considered relevant. The SCA minority held the view that remission of interest post conclusion of a VDP was legally incompetent.
The Concourt, in upholding the appeal to it by SARS, agreed with the SCA minority view which held that the purpose of a VDP agreement is to have an agreement whose obligations are enforceable, like any other contractual obligation. Thus, the Concourt held that by signing a VDP agreement (including the provision for interest) the taxpayer is bound by such contract which cannot be revisited and undone.