Abstract
The income tax treatment of portfolios of Collective Investment Schemes in Securities (CISS) and investors in these portfolios is regulated in a special tax dispensation in terms of section 25BA(1) of the Income Tax Act 58 of 1962 (ITA) read with paragraph 61 of the Eighth Schedule to the ITA. However, there is an ongoing debate as to whether the amounts received or accrued by a CISS from the frequent sale of shares within a CISS are capital or revenue in nature. Although there are case law principles that could assist in this, these have not been specifically applied by the courts in the context of a portfolio of a CISS in practice. It seems as if the prevailing and default tax practice applied by portfolios of a CISS is to classify amounts received from the frequent disposal of securities in a CISS as capital in nature, with the resulting effect that the gains and/or losses from such disposals are excluded from the provision of section 25BA(1) of the ITA read with paragraph 61 of the Eighth Schedule to the ITA, without any considering of the relevant legal authority to support such income tax treatment. The research objective of this study was to identify and explore objective factors/tests deduced from relevant case law to justify whether amounts received or accrued from the frequent trading of securities in a portfolio of CISS are revenue or capital in nature.
The inquiry for this study was qualitative in nature. The study applied doctrinal research as method to explore section 25BA(1) of the ITA guided by the interpretation of relevant case law. The study identified court cases that dealt with the disposal of shares by companies and natural person taxpayers and explored the common law principles to distinguish between capital versus revenue in nature. Based on the findings, the common law principles do not necessarily support the blanket income tax treatment of amounts received by portfolios of a CISS from the frequent trading of securities to be classified as capital in nature. It is recommended that National Treasury together with industry heads and stakeholders in the CISS sector need to agree to the income tax treatment of frequently traded securities in a portfolio of CISS to clarify its income tax treatment. Any anomalies identified in this study based on possible deviate from the current default income tax treatment and its application when measured against the principles of relevant case law, are recommended to be considered and addressed for clarification by National Treasury and/or SARS.
KEYWORDS: securities, collective investment schemes, frequently trading, income tax