A commentary on SARS’ proposed fair value tax on financial instruments

Abstract

On 5 July 2012 the South African National Treasury released its draft Taxation Laws Amendment Bill, which included the proposed insertion of section 24JB into the Income Tax Act. The proposed section will require all banks, company members of the JSE Securities Exchange (stockbrokers) and hedge funds to include in or deduct from their taxable income amounts in respect of financial assets and financial liabilities (as defined) according to the profit recognised on those instruments in terms of International Financial Reporting Standards. The effect will be to introduce a fair value tax on the financial instruments of those entities, within the scope of the proposed section. This constitutes a significant change from the current approach that is mostly realisation based. South Africa is not the first country to consider the introduction of a fair value tax on financial instruments, therefore there is precedent. However, both the timing and the approach of the proposal are possibly problematic.This paper discusses the theoretical tax and economic implications of this proposal and attempts to identify positive and negative potential outcomes. A number of unanswered questions are raised that should be addressed before such legislation can be effectively introduced in South Africa. Interview evidence obtained from tax forum meetings, as well as the tax department of one of the banks that would fall within the scope of this legislation, is used to augment the interpretation of this proposal The main findings are that the postulated benefits of the change are unlikely to be realised, that the proposed greater reliance on accounting figures can have unintended consequences and that taxpayers within the scope of the proposed section will lose the benefit of capital gains tax on certain items.