Tax certainty for unit trust, retail hedge fund investors

The gains that unit trusts and retail hedge funds make from the sale of securities are likely in future to be definitively regarded as capital gains and taxed only when investors realise them.

This will be outlined in a yet-to-be released discussion document together with a different tax regime for qualified investor hedge funds, National Treasury indicated in the recent Budget Review.

The Budget Review states that Treasury will recommend taxing all investment returns generated by regulated traditional collective investment schemes and retail hedge funds as capital gains. Currently, gains made from the sale of shares are treated this way in practice but can be subject to a “facts and circumstances” enquiry should the South African Revenue Service (SARS) take the view that a fund manager is trading rather than investing.

Tax uncertainty resolved

Treasury’s policy statement means it is most likely that all collective investment scheme investors, other than qualified hedge fund investors, will in future have certainty about the tax treatment of these long-term savings products.

Treasury first raised concerns about fund managers’ decisions on how to manage portfolios and what should be viewed as short-term or long-term holdings in 2018. It proposed that only when securities were held for at least 12 months could transactions be regarded as capital in nature.

However, this was withdrawn when the industry explained the complexity of modern markets, the instruments used to manage market risk and the complexities of open pooled funds.

Although the proposal was withdrawn, the issue was raised again in a discussion document in 2024 and recommendations were made that could have had implications for all unit trusts, exchange traded funds and hedge funds.

Tax Act amendments

Following further consultation with the collective investment scheme industry, this year’s Budget Review indicates that Treasury will now recommend changes to the tax treatment of qualified investor hedge funds only while the treatment of gains made in traditional funds and retail hedge funds will be confirmed as being on a capital basis.

If National Treasury issues its response to the comments on the 2024 discussion document this year, proposed amendments to sections of the Income Tax Act dealing with collective investment schemes and a new tax treatment for qualified investor hedge funds would probably only be tabled next year, Stephen Smith, consulting policy adviser to the Association of Savings and Investment South Africa (ASISA) says.

The conduit principle

Collective investment schemes have long been held to be conduit vehicles, meaning that income earned and capital gains made in the fund are transferred to the investor for tax purposes.

Income must be distributed within 12 months and investors are taxed on this even if they reinvest the income.

The capital gains that your unit trust, exchange traded fund or hedge fund makes each time your fund manager sells shares, bonds or other securities are not immediately passed on to you, the investor, for capital gains tax (CGT) purposes.

As an investor, you only become potentially liable for CGT when you withdraw your investment.  At that stage, the gain made on the units from the time you invested until you sell your units is calculated, and you become liable for tax on the taxable portion of the capital gain.

How portfolio capital gains are taxed

The Income Tax Act does not define how gains from the sale of securities are to be characterised within a portfolio for tax purposes. The courts have made decisions over time, which can be difficult to interpret and apply given the varied circumstances that these cases entail.

National Treasury’s recommendation could simplify the issue and provide certainty for retail investors.

ASISA members are likely to welcome such an amendment to the Income Tax Act, Smith says.

Tax for qualified investor funds

National Treasury’s thinking on the taxation of qualified investor hedge funds will only be clear when the new discussion document is issued.

These funds are open to investors with at least R1 million to invest only if they can prove they understand the risks of investing in hedge funds or are using a financial adviser.

Qualified investor hedge funds also have fewer restrictions on the investment strategies they can use than retail investor hedge funds.

Hayden Reinders, convenor of the ASISA hedge funds standing committee, says while details of a proposed new tax treatment of qualified investor hedge funds have not yet been released and further engagement with the industry is likely, gains in these funds will probably be subject to tax that depends on the underlying transaction on a look-through basis. This means investors will need to consider their own tax status and take advice.

Qualified hedge funds can be used as investment solutions for retirement funds who have the benefit of actuarial advice. For this reason, regulations concerning investment powers are not as prescriptive, allowing managers greater discretion when designing fund mandates, Smith says.

Professional advice

It can be assumed that individual taxpayers who make use of these funds can access professional tax advice. One solution could be to distribute all portfolio gains within 12 months to tax-paying investors and the onus will be on them to declare their income to SARS, Smith says.

In 2025 the amount invested in retail hedge funds in South Africa overtook the amount invested in the qualified investor hedge funds category, Reinders says. Retail hedge funds accounted for 56.6 percent of the R216 billion of assets under management in 219 hedge funds portfolios at the end of December 2025, the latest hedge fund statistics show.

Retail hedge funds which are open to investors with the minimum investment amount that averages at around R50 000, had net inflows last year of R9 billion – more than double the R4.3 billion of net inflows into qualified investor hedge funds, Reinders says.  

Hedge funds were included in collective investment scheme regulation a decade ago and have enjoyed the same tax treatment since then.