The latest investment fad, hedge funds, as well as the controversial structured, capital-guaranteed, index-linked investments are likely to be included in the government's investigation into "hybrid" financial instruments.
Finance Minister Trevor Manuel announced in his Budget speech this week that there is an urgent need to "improve current anti-avoidance legislation relating to hybrid instruments".
Manuel specifically mentioned financial products which combine both debt and equity characteristics and which can switch between the two. The main focus of the investigation will be:
- Convertible instruments, which can switch between interest and equity;
- Debt with principle that is effectively never repaid;
- Shares with required repayment of capital; and
- Differences between domestic and foreign hybrids.
National Treasury sources say the investigation is likely to be very extensive, stretching into the derivative markets and including instruments such as hedge funds and structured investment products that make extensive use of derivatives.
Patrick McGurk, a tax expert at accounting company KPMG, says you should expect any new taxation of hybrid financial instruments to be enforced from February 28 this year. McGurk says he does not expect any new taxation to be retrospective.