New Act to streamline investment

Mar 30 2006 00:00
Sello Mabotja - Media24
Johannesburg - A leading tax expert has expressed concern about the lack of an adequate regulatory tax framework to deal with the implications of the impending Collective Investment Schemes (CIS) Act, which comes into effect early next year.

The CIS will replace the Unit Trusts Control Act of 1981 and the Participation Bonds Act of 1981, and provides for a greater variety of investment schemes.

This will enable the creation of open-end investment companies (OEICs) which deal in different classes of shares, each representing a separate portfolio with a distinctive investment trust.

Currently most investment vehicles are confined to the trust model, for instance property unit trusts, unit trusts and participation bonds.

Paul Ferreira of Werksman Attorneys says: "As with most South African tax rules these days, the tax rules for collective investment schemes are complicated and quite often inconsistent or anomalous.

"And the SA tax rules will not be conducive to having CIS in the form of the internationally familiar OEIC. We have to get the tax rules right as soon as possible."

Ferreira says the absence of a regulatory framework means that the tax treatment of OEICs compared to trusts is likely to be "discriminatory", thereby defeating the nascent legislation's benign intentions.

"The fundamental tax difference will be that the tax burden will be borne mainly by the investors if the collective investment scheme is constituted as a trust and by the scheme if it is constituted as an OEIC.

"The latter is not the intention of a collective investment scheme - the intention is to have the underlying income of the collective investment scheme taxed in the hands of the investors where it retains its nature and character."

However, Ferreira lauds the revolutionary changes, which will be introduced by the CIS with regard to promoting the introduction of new investment vehicles.

"Currently most of our investment vehicles are too confined, restricted and somewhat claustrophobic. But by allowing the creation of open-ended investment companies, the CIS will help attract foreign investments because most offshore investors are familiar with how the OEIC works, particularly those in the European market."

The Act provides for five types of collective investment schemes ranging from collective investments in securities, property and participation bonds, declared collective investment schemes to foreign collective investment schemes.

Most importantly, it will for the first time allow South Africans to purchase hedge funds or alternative investments.

Salient features of the new law

The first feature of the new law is the basic requirement that managers administer collective investment schemes honestly and fairly, with skill, care and diligence.

It also requires managers to act in the interest of investors and the industry.

The Act introduces compulsory disclosures for managers who will have to inform investors prior to transacting on their behalf.

The compulsory disclosures include: investment objectives of the scheme, calculation of the net asset value and dealing prices, charges, risk factors, and distribution of income.

The registrar of the scheme will be empowered to set its liquid requirements.

Every scheme is required to appoint an independent third party to act as a trustee or custodian, depending on the structure of the scheme.

The Act introduces qualifications for trustees. In order to qualify as a trustee or custodian, a party must maintain capital and reserves amounting to not less than R10m.

And lastly, the CIS allows for assets of the schemes to be protected by the application of the principle of segregation and identification.


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