The current position is that capital gains made by CISs are exempt from the payment of capital gains tax.  Pursuant to recommendations made, the intention is now that all investment returns generated by regular CISs and retail investment Hedge Funds be taxed as capital.  This will encourage savings and provide the industry with certainty about the tax treatment of these type of vehicles.  However, it has already been indicated that Hedge Funds will (from 1 January 2027) not qualify for asset-for-share transactions, even though they would qualify for amalgamation transactions.

It has also been indicated that, generally, distributions of capital receipts by a CIS will be treated as a capital gain for the holder of a participatory interest with effect from 1 March 2026.  Distributions of capital gains would therefore no longer be exempt.

The issue is now that some Hedge Funds that are not open to the general public will be removed from this favourable tax regime. It has been indicated that these funds will be removed in circumstances where they have minimal investment criteria and only cater for those able to invest a minimum of R1 million.  Hedge Funds that are open to the general public will still qualify for the favourable tax regime.

The announcement is welcomed in the sense that the industry has been the subject matter of much uncertainty over the last few years in respect of the treatment of gains pursuant to the realisation of investments.  The one key issue is that certainty is required, which will now be provided on the basis that investment returns will be treated on capital account, and thus be exempt.  However, Hedge Funds will be removed from this favourable regime and normal tax principles will apply with reference to investment returns, especially whether the proceeds can be said to constitute the realisation of an investment as opposed to an active business in deriving profits.