National Treasury has produced some sensible yet transformative proposals for the tax treatment and regulation of hedge funds. Changes to the Income Tax Act contained in the Taxation Laws Amendment Bill of 2013, as well as forthcoming changes to the Collective Investment Schemes Control Act (CISCA) will open up attractive new options for private investors.
Hedge funds have to date been unregulated, with the result that they could not be promoted or offered to the man in the street. Beyond this, hedge funds carried tax risks in that investment gains could be taxed as ordinary income either in the fund or the hands of the investor depending on the fund structure. This placed hedge funds in a highly unfavourable position relative to traditional collective investment schemes (CIS) where no tax could arise in the fund or the investor irrespective of the level of trading activity undertaken. Furthermore, all gains realised on withdrawal from a CIS fund would be treated as capital gains unless the investor engaged in active jobbing in and out of funds.
Regulators worldwide have battled to embrace the hedge fund industry because the products and investment strategies covered by it are extremely varied, ranging from those aimed at producing stable low-risk returns to highly geared ones aimed at producing outsized returns with commensurate risk. Regulators have doubtless been reluctant to provide the tacit endorsement implicit in bringing such funds within the regulatory fold without a means to capture and control their activities within suitable definitions. A further complication in the case of South Africa has been that it would be hard to deny hedge funds the same generous tax treatment that collective investment schemes have long enjoyed if they were brought under the same legal and regulatory framework. The cost of such reluctance has been that hedge funds have been the preserve of high net worth and institutional investors while the man in the street has been deprived of a savings vehicle that could have usefully been incorporated in many an investment strategy.
Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.