Page 1125 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
3.5 REPEAL OF FINANCIAL INSTRUMENT REQUIREMENT ON AMOUNTS TO BE INCLUDED IN THE INCOME OF A REIT
[Applicable provision: Section 25BB(3)]
I. Background
Currently, section 25BB(3) makes provision for any amount received by or accrued by a REIT or controlled company in respect of a nancial instrument to be included in the income of that REIT or controlled company. The policy rationale for the provisions of section 25BB(3) was to achieve neutrality in tax treatment of amounts received or accrued in respect of nancial instruments and the deductible on-distributions of those amounts by the REIT and controlled company. In the absence of this provision, exempt dividends or partially taxed foreign dividends could have resulted in a full deduction when on-distributed.
II. Reasons for change
The meaning of the term ‘ nancial instrument’ in the current provisions of section 25BB(3) is too wide and it has an unintended consequence of including the repayment of the capital amount advanced as a loan by a REIT or controlled company.
III. Proposal
It is proposed that the provisions of section 25BB(3) be repealed. Moreover, the requirement in the de nition of ‘qualifying distribution’ in section 25BB(1) that at least 75% of a gross income of a REIT or controlled company must be rental income, will ensure that a REIT or controlled company mainly invest in immovable property, REITs, controlled companies or property companies.
IV. Effective date
The proposed amendments are deemed to have come into operation on 1 April 2013 and apply in respect of years of assessment commencing on or after that date.
3.6 TRANSITIONAL TAX ISSUES RESULTING FROM THE REGULATION OF HEDGE FUNDS
[Applicable provisions: Sections 41(1), 42(1), 42(3A), insertion of a new paragraph (bB) of subsection (14) of section of 44 and section 64D]
I. Background
In the 2015 Budget Review, the Minister of Finance made an announcement and on the same day declared the business of hedge funds to be Collective Investment Schemes (CIS) with effect from 1 April 2015. In terms of Government Gazette No 38503 of 25 February 2015, the managers of all hedge funds must within 6 months from 1 April 2015, lodge with the Registrar of Collective Investment Schemes (who is the Executive Of cer of the Financial Services Board (FSB)) an application to register as a manager to operate a hedge fund in accordance with the Collective Investment Schemes Control Act. The FSB will not require a hedge fund to dispose of undesirable assets and reinvest the proceeds in assets of another class prior to its approval by the FSB as a CIS. Undesirable assets may be disposed of after the structure of the hedge fund has been accepted by the FSB and the hedge fund is regulated as a CIS.
II. Reason for change
The regulation of some declared CISs has an unintended transitional tax consequence. The tax consequence results from tax arising on the disposal by holder of an interest in a hedge fund to a trading vehicle which is acceptable to and approved by the FSB.
III. Proposal
In order to allow for effective regulation of a CIS that is approved by the FSB, the transitional tax amendments listed below are proposed in the corporate re-organisations rules to allow the holder of interest in a hedge fund to dispose of its interest to a portfolio of a hedge fund collective investment scheme on a tax neutral basis. As a result, no capital gains tax, normal tax or Securities Transfer Tax will arise on the transfer of the assets by the holder of an interest in the hedge fund to the portfolio of a hedge fund collective investment scheme due to the roll-over relief provided by the proposed changes in the corporate reorganisations provisions.
A. Disposal of an interest in a hedge fund
1. De nitions of ‘company’ and ‘equity share’ in section 41
It is proposed that the de nitions of ‘company’ and ‘equity share’ in section 41 be amended to include a portfolio of a hedge fund collective investment scheme.
2. De nition of ‘qualifying interest’ in section 42
Paragraph (b) of the de nition of the term ‘qualifying interest’ in section 42(1) will be amended to include any equity share held in a portfolio of a hedge fund collective investment scheme.
3. Asset for share transaction in section 42
The proviso to paragraph (a)(ii) of the de nition of ‘asset for share’ transaction in section 42(1) will be amended to provide that the capital/revenue intention test will not apply where assets are transferred to a portfolio of a hedge fund collective investment scheme. As a result, section 42 could be used to unwind unregulated hedge funds even in the case of partnerships. The partner could dispose of its interest in the partnerships to the portfolio of a hedge fund collective scheme in exchange for a participatory interest in the portfolio of a hedge fund collective investment scheme. Thus, when a partner disposes of its interest in an unregulated hedge fund, the partnership is dissolved.
4. Other consequential amendments in section 44 (amalgamation transaction)
Certain consequential amendments are made in section 44 dealing with amalgamation transactions in order to allow for the tax neutral amalgamation of two portfolios into a single portfolio.
SAIT CompendIum oF TAx LegISLATIon VoLume 2 1117