Tax threat for South African investors

The National Treasury is considering changes that could see investors pay even more taxes, potentially resulting in decreased investment in South Africa as wealthy investors take their money offshore. 

The National Treasury is considering significant tax changes to collective investment schemes (CIS) that experts say could have a “seriously negative impact” on investors, forcing CIS to distribute all income to investors annually to avoid paying income tax on gains.

Under the proposal, the amount of money you gain through the Unit Trust would no longer be treated as capital but as revenue. 

However, the Taxation Laws Amendment Bill (TLAB) includes an amendment that may change this.

Steven Hurwitz, portfolio manager at 36ONE Asset Management, explained on The Money Show with Stephen Grootes that the discussion document contains several proposals. 

One proposes that gains are treated as revenue and, therefore, are included at the individual taxpayers’ marginal tax rate in their taxable income. 

Another proposal is to include a turnover threshold, which would mean that for funds that have a turnover greater than that threshold, the gains are treated as revenue for the taxpayer. Funds below that threshold will be treated as capital. 

This would translate to a higher tax burden for investors, though it is unclear how much the National Treasury expects to collect from this change. 

“South Africa already has a shrinking tax base, and we need policies that encourage savings and investment – and unfortunately, this proposal seems to do the opposite,” Hurwitz said. 

“The discussion document states that South Africa has a low savings rate, and yet it fails to include projections of how much tax would be anticipated to be collected.”

“Although I believe it would be significantly less than what Treasury anticipates, given that investors will change their behaviour.”

The investors most affected by this proposal are those with the means to externalise their wealth offshore, where the tax treatment would be more favourable.

Additionally, this money falls outside the pension or provident funds that individuals may have and includes money they have already been taxed through income tax on their salaries, for example. 

“They can do with it whatever they want, whether it’s invested in South Africa or invested overseas,” Hurwitz said.

“And if you consider the fact that overseas markets have done significantly better than the JSE over the last couple of years, this just seems to be an additional incentive to move money offshore.”

He added that predicting the impact of these changes is difficult because a significant amount of money is held in pension and provident funds, which will not be affected.

“It also would depend on which of the three options the national treasury decides to select, and hopefully, they choose none of those options,” he said.

“But we do get the sense that this was pushed through pretty quickly, as there’s only one month for industry participants to make a submission to the National Treasury.”

While it is difficult to predict how these proposals will play out, he said that hopefully, the Government of National Unity will offer some different perspectives in these policy discussions, potentially even shifting the focus from redistribution to wealth creation. 

“We hope that National Treasury, now that they have received comments from industry take those comments into consideration and realise that there are wide-ranging consequences.” 

The important thing to realise, Hurwitz added, is that this doesn’t only concern industry participants, such as fund managers – it also concerns the JSE. 

“There’s a big risk here that should fund managers change their behaviour, that they trade significantly less – the JSE could become a marginal market in global terms.”

“Offshore investors might not have the liquidity that they want to transact on our market and just relegate it and become completely disinterested in what’s happening here.”