An amendment to the Income Tax Act proposed by the Treasury would have a negative effect on saving in SA, the Association for Savings and Investment SA (Asisa) argued in parliament on Tuesday.
“It will undermine policy consistency, negatively differentiate SA from collective investment scheme taxation in other jurisdictions, encourage withdrawals in favour of less regulated saving and promote externalisation to foreign collective investment schemes,” Asisa deputy chairman Thabo Khojane said in a submission to parliament’s finance committee during public hearings on the draft Taxation Laws Amendment Bill.
Currently the Income Tax Act does not define what constitutes an amount of a capital nature and the Treasury has proposed an amendment in the draft bill that all gains and losses derived from the disposal of financial instruments within 12 months of their acquisition in collective investment scheme portfolios be deemed to be income of a revenue nature. This will be taxed as ordinary income in the hands of the unit-holder at his/her marginal tax rate.
Capital gains tax is much lower than income tax rates.
The Treasury has justified the proposed change on the grounds that collective investment schemes are generating profits from the active and frequent trading of shares and other financial instruments and are claiming that the profits are of a capital nature because investments in collective investment schemes are of a long-term nature.
Khojane noted that Asisa had been actively advocating for improved certainty across the tax system for all long-term saving portfolios. However there had not been consultation on the proposed amendment.
He acknowledged that there might be instances where the transactions of a portfolio manager might be questionable but said this could be better addressed through financial markets legislation rather than by means of a tax rule.
“Managers have made submissions, suggesting that liquidity will be adversely affected. We have no doubt that assets of R2.3-trillion in collective investment schemes are systemically significant. The artificiality of the 12-month period could introduce a ‘lock-in’ effect within the market and potential price distortions in the asset-pricing model (prices have a time bias).”
Khojane said Asisa had employed the services of an independent actuarial consulting firm to model transactions for the collective investment scheme industry to attempt to quantify the effect of the proposed amendment.
He also argued that the introduction of a tax rule based on time would disturb fairness between unit holders within a portfolio. “For example, a large unit holder’s decision to redeem units in less than a year could result in the sale of portfolio assets that have been held for less than a year — thus generating a tax liability that has to be distributed to all unit holders. To make matters worse, the exiting unit holder may escape the tax event entirely, leaving patient investors in the fund with a liability. This is clearly inequitable.”
The proposed amendment would also cause conflicted duties on the part of the portfolio manager, Khojane said.
“Portfolio managers are employed to manage money in a prudential manner. We believe that fiduciary duty should be the manager’s primary focus rather than tax optimisation. A tax hurdle will now impede those decisions whether related to asset allocation, liquidity provision or the use of financial instruments as insurance against loss.”
Coronation Fund Managers’ head of personal investments, Pieter Koekemoer, independently registered its objection to the proposed rule saying it would have “far-reaching implications that will be detrimental to millions of ordinary South Africans. It will undermine capital formation by incentivising informalisation of the savings pool and externalisation of assets from SA.
“The classic canons of taxation are fairness, convenience, efficiency and certainty. The proposed rule fails on all counts.”
Koekemoer said the proposed measure would require a wholesale change to the administrative systems of the industry which values assets on weighted average cost rather than a first-in-first out basis as required by the proposed rule.