Taxation of hedge funds
02 June 2014
Posted by: Author: Heinrich Louw
Author: Heinrich Louw (CliffeDekkerHofmeyr)
the release on 12 September 2012 of a proposed framework for the regulation of
hedge funds, the National Treasury and the Financial Services Board released
draft regulations (Draft Regulations), together with an explanatory memorandum
(Memorandum), on 16 April 2014.
Memorandum cites two factors that influenced Government’s decision to regulate
hedge funds, not only at manager level, but also at portfolio level:
the global financial crisis of 2008; and
South Africa’s commitments as member of the G20.
funds are to be regulated in terms of the existing legislative framework
provided by the Collective Investment Schemes Control Act, No. 45 of 2002
(CISCA) and specifically as a scheme declared by the Minister of Finance under
s63 of CISCA.
Draft Regulations define a 'hedge fund' as:
collective investment scheme which uses any strategy or takes any position
which could result in the portfolio incurring losses greater than its aggregate
market value at any point in time, and which strategies or positions include,
but are not limited to –
net short positions".
the Draft Regulations make provision for the registration of hedge fund
managers, and set out various prudential and reporting requirements for
financial regulatory purposes, it is important to appreciate the significance
of bringing hedge funds under the framework of collective investment schemes
for tax purposes.
amendments have already been introduced into the Income Tax Act, No. 58 of 1962
(Act) in 2013 to cater for the taxation of hedge funds as collective investment
schemes, and these amendments will take effect as soon as the Minister
of Finance declares hedge funds to be collective investment schemes under s63
hedge funds are to be taxed on a flow-through basis similar to that of
traditional collective investment schemes. S25BA of the Act provides that
amounts received by or accrued to a portfolio of a collective investment scheme
than property schemes) are deemed to have accrued to the participant if such
income is distributed to the participant within 12 months of accrual to the
portfolio. In these circumstances the portfolio is exempt. However, if no
distribution is made within the 12 month period, the amounts are deemed to have
accrued to the portfolio, and the portfolio will be taxed accordingly. Also,
dividend income will then not be exempt in the hands of the portfolio.
Collective investment schemes (other than property schemes) are however exempt
from capital gains tax in terms of paragraph 61 of the Eighth Schedule
to the Act.
treatment will apply whether the hedge fund is a 'qualified investor' or a
retail fund, and irrespective of whether the hedge fund is structured as a
company, trust or partnership.
respect of the disposal by a participant of a participatory interest in a hedge
fund, s9C of the Act has been amended to include such participatory interest in
the definition of an 'equity share' and the disposal of the interest will be
deemed to be
on capital account where the participant has held the interest for more than
three years (as is the case with 'equity shares' as defined). In other
circumstances the ordinary rules will apply in respect of determining whether
the disposal of the participatory interest should be treated as being on
capital or revenue account.
of hedge funds as well as investors should take note of the Draft Regulations
and understand the tax consequences that will arise when final regulations are
published and the Minister of Finance declares hedge funds to be collective
This article first appeared on cliffedekkerhofmeyr.co.za.