South Africa Reviews Tax on Debt Instruments, Hedge Funds

South Africa will adjust the way debt instruments, hedge funds and some long-term insurers are taxed, while giving individuals 7 billion rand ($790 million) in tax relief to counter inflation.

“Debt is often used to erode the tax base,” the National Treasury said in the Budget Review, released in Cape Town today. “Closure of artificial and excessive debt has been on the tax policy agenda for more than two years.”

Debt will be treated as shares if there isn’t a realistic possibility of it being repaid in 30 years, or if they are convertible into shares at the request of the issuer. The provision will not apply to banks and insurers.

Companies issuing “excessive debt” to make acquisitions will only be able to roll over the expense for five years, while tax deductions will be limited for interest payments on debt issued to “connected” persons, the Treasury said.

It also intends subjecting hedge funds to the same laws as mutual funds.

“While regulated hedge funds will be treated much the same as other collective investment schemes, unit holders will be required to treat their earnings as ordinary income when realized,” the Treasury said. “A similar regime will be considered for interest-income funds.”

The government forecasts it will collect 810.2 billion rand ($92 billion) in the year through March, or 16.3 billion rand lower than predicted in the budget a year ago. Rather than increase tax rates, Finance Minister Pravin Gordhan opted to cut spending as he seeks to rein in the budget deficit.

Tax Base

“Over the past decade, we have steadily broadened the tax base, both through policy reforms and improved revenue administration,” Gordhan told lawmakers. “This has made substantial tax relief possible, contributing both to household disposable income and a lower cost of doing business.”

The government will raise fuel levies by 23 cents a liter from April 1, while taxes on alcohol and tobacco products will rise 5.7 percent to 10 percent. It will also require foreign businesses supplying digital books, music and other products in South Africa to register for value-added tax, Gordhan said.

Taxes may have to rise to help fund a planned National Health Insurance Fund that will be phased in over 14 years, the Treasury said.

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