The taxation of hedge funds : the cart before the horse

• Published date: 01 December 2013
• Date: 01 December 2013
• Author: Michael Rudnicki
• Pages: 13-22
• DOI: 10.10520/EJC174100

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© SIBER INK

The Taxation of Hedge

Funds:

THE CART BEFORE THE HORSE

MICHAEL RUDNICKI1

ABSTRACT

Few understand the mechanics and purpose of hedge funds; a perceived

alternative asset class with interest limited to high net worth individuals and

the institutional community.

The taxation of hedge funds is at present not regulated in the Income Tax

Act 58 of 1962, although certain amendments have been proposed by the

Taxation Laws Amendment Bill 39 of 2013. The proposed new tax rules are

directed at hedge funds structured in the form of partnerships and trusts.

In contrast, hedge funds as an industry are also not regulated. This article

will examine the various regulatory proposals considered over the past decade

which, in any form, are yet to be approved.

The article explains the key components of a hedge fund and considers

various related def‌initions. It seems that the original construction of a hedge

fund has been transformed into a non-publicly tradable, non-listed collec-

tive investment scheme-type arrangement, utilising a variety of exotic

instruments.

The article examines the unique basis of taxation of hedge funds that

applies at present, that is, prior to promulgation of the amendments proposed

by the 2013 TLAB in relation to partnerships and trusts. It then considers

the impact of the new proposed tax rules. Some interesting peculiarities are

considered, particularly in relation to hedge funds structured as partnerships.

INTRODUCTION

Recent proposed amendments to the Income Tax Act 58 of 1962 (‘the Act’)

will incorporate specif‌ic rules in relation to specif‌ied f‌inancial instruments.

Some amendments are intended to curb tax abuse (including preference

shares, hybrid debt and equity instruments), while others are intended to

create tax certainty as well as consistency in terms of related regulations.

The latter includes legislation particular to collective investment schemes

and, more recently, hedge funds.

The Taxation Laws Amendment Bill 39 of 2013 (‘the 2013 TLAB’) has

attempted to address the taxation of specif‌ic elements of hedge funds. The

proposed legislation is intended to accord with future regulations which

will govern hedge funds. The diff‌iculty, though, is that the regulations are

1

Tax Director: KPMG.