Treatment of trading profits realised by collective investment schemes

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Paragraph 61 of the Eighth Schedule of the Income Tax Act 58 of 1962 (ITA) provides that a holder of a "participatory interest" in a portfolio of a collective investment scheme (other than a portfolio of a collective investment scheme in property), must determine a capital gain or capital loss in respect of the participatory interest only upon the disposal of that participatory interest. Any capital gain or capital loss in respect of the disposal of an asset by a portfolio of a collective investment scheme (other than a collective investment scheme in property) must be disregarded.

Section 25BA(1)(a) of the ITA provides that amounts (other than amounts of a capital nature) are taxable in the portfolio of a collective investment scheme, unless they are distributed to participatory interest holders within 12 months of accrual.

Some collective investment schemes trade frequently in the underlying assets in order to try and maximise the return on investments for their investors. In practice, the trading profits realised by these collective investment schemes are generally treated as being capital in nature and, consequently, disregarded in terms of paragraph 61.

In the Budget Review 2018 (Budget), it was announced that National Treasury has raised a concern that collective investment schemes that trade frequently, by constantly acquiring and disposing of underlying assets, are acting contrary to current case law by treating the realised profits as being of a capital nature. The Budget thus proposes that the current rules for collective investment schemes be clarified to provide certainty on the treatment of trading profits realised on the disposal of underlying assets.