South African tax policy at a crossroads: Ambition and pragmatism in the 2025 Draft Bills

By Dr Hendri Herbst

On 16 August 2025, National Treasury and the South African Revenue Service (SARS) released the annual draft tax amendment bills, a legislative package that represents a fundamental recalibration of South Africa’s tax policy landscape. Comprising the 2025 Draft Taxation Laws Amendment Bill (TLAB) and the 2025 Draft Tax Administration Laws Amendment Bill (TALAB), this release is far more than a series of routine technical corrections. It signals a deliberate and profound evolution in tax policy, built on an interconnected web of three core pillars: a decisive pivot towards substance-over-form principles, the surgical closure of identified avoidance loopholes, and the continued use of the tax system as a direct instrument of national strategy.

However, the 2025 legislative cycle has been uniquely defined by a fourth, equally significant pillar: pragmatic responsiveness to market realities. This was demonstrated unequivocally on 3 September 2025, when National Treasury announced the withdrawal of its most ambitious and controversial proposal – the redefinition of “hybrid equity instruments” in section 8E of the Income Tax Act. This fortuitous development, prompted by significant stakeholder engagement – before the 12 September deadline for comment on the draft bills – underscores a crucial dynamic in the current policy environment. While the fiscus remains resolute in its long-term strategic objectives, it has shown a willingness to adjust its tactical approach when faced with compelling evidence of unintended, adverse economic consequences.

For practitioners and corporate decision-makers, this is a permanent evolution of the advisory landscape. The 2025 legislative package, viewed through the lens of both the initial proposals and the subsequent Section 8E reversal, reveals a fiscus that is both strategically determined and operationally flexible. This analysis aims to dissect the most critical proposals as they now stand, outlining their mechanics and the strategic imperatives required to navigate this new, more nuanced legislative gauntlet.

Table 1: Summary of Key Proposed Amendments and Effective Dates

Note: The initial proposal to amend Section 8E by redefining ‘hybrid equity instrument’ based on IFRS liability classification was officially withdrawn by National Treasury in a media statement on 3 September 2025. This followed significant stakeholder engagement and concerns regarding the proposal’s potential impact and to “avoid a negative impact on current financing“. The analysis in this document reflects this withdrawal.

Table 1: Summary of Key Proposed Amendments and Effective Dates

Act	Section(s)	Brief Description of Change	Primary Rationale	Proposed Effective Date
Income Tax Act	Section 8EA	Broadens the trigger for third-party backed shares to apply if an enforcement right existed at any point.	Close a loophole involving the temporary waiver of enforcement rights.	1 January 2026
Income Tax Act	Sections 41, 42, 44	Removes the ability for Collective Investment Schemes (CISs) to use corporate reorganisation rules.	Prevent unwarranted tax deferral on gains when assets are transferred to and sold by a CIS.	1 March 2026
Income Tax Act	Section 10(1)(gC)(ii)	Repeals the tax exemption for foreign retirement benefits received by South African residents.	Prevent double non-taxation and align with a residence-based tax system.	1 March 2026
VAT Act	Section 12(h)	Broadens the VAT exemption to cover all supplies of goods and services by registered schools.	Align the law with the policy intent to keep basic education outside the VAT net.	1 January 2026
VAT Act	Schedule 1	Removes the R500 de minimis threshold for VAT on low-value imported goods.	Level the playing field between domestic retailers and foreign e-commerce suppliers.	Date to be announced
Tax Admin. Act	Sections 222 & 223	Clarifies the scope of “bona fide inadvertent error” by linking it to “substantial understatement”.	Address ambiguity and improve the effectiveness of the understatement penalty regime.	Date of promulgation
Tax Admin. Act	Section 45	Expands SARS’s inspection powers to include verification of premises for registration purposes.	Curb VAT fraud and abuse by verifying the existence of a bona fide enterprise at registration.	Date of promulgation

 

PART I: THE INCOME TAX ACT GAUNTLET

A. A Fortuitous Reversal: The Withdrawal of the Section 8E ‘IFRS-ification’ Proposal

The most significant policy development of the 2025 legislative cycle was not a proposed amendment, but rather the withdrawal of one. The initial proposal to overhaul the anti-avoidance rules governing hybrid equity instruments in Section 8E represented the boldest expression of the pivot towards economic substance. Its subsequent retraction is a seminal event, offering profound lessons on the interplay between tax policy ambition and market stability.

Context – Recapping the Ambitious Original Proposal

The original draft TLAB proposed a fundamental reshaping of the preference share market by re-characterising certain tax-exempt dividends as taxable income. The mechanics were twofold. First, the bill sought to repeal the bright-line three-year redemption test, a long-standing rule that, while imperfect, provided a clear safe harbour for instruments structured just beyond a three-year term. Second, and far more profoundly, it proposed to redefine a “hybrid equity instrument” to mean any share or financial instrument that is or would be classified as a financial liability in the issuer’s annual financial statements in accordance with International Financial Reporting Standards (IFRS).

The stated policy rationale was to align the tax character of an instrument with its economic substance, thereby preventing the tax arbitrage that arises when instruments function economically as debt but retain the legal form of equity to facilitate tax-exempt returns for holders. This amendment was initially described as a “monumental shift” because it represented an unprecedented delegation of a key tax-defining power to an external, non-governmental body – the International Accounting Standards Board (IASB). The tax outcome for a financial instrument in South Africa would have become directly dependent on its accounting classification, meaning future changes to IFRS could automatically alter domestic tax consequences without any legislative amendment being passed by Parliament.

The Official Retraction – A Pragmatic Response to Market Realities

In a decisive move on 3 September 2025, the Minister of Finance, acting on the advice of National Treasury and SARS, officially retracted the proposal from the 2025 draft TLAB. The accompanying media statement revealed that the decision was a direct response to feedback from the market. “Numerous commentators” had expressed grave concerns that the broad wording of the proposal would “effectively eliminate preference shares as a viable financing option” in South Africa.

Critically, National Treasury acknowledged that the proposal was not merely a future risk but was causing immediate economic harm. The statement noted that, despite the amendment being in draft form, the uncertainty it created was “already affecting current transactions and potentially delaying investments”. This acknowledgment of a real-time chilling effect on capital markets appears to be the primary catalyst for the withdrawal, demonstrating a pragmatic prioritisation of financial stability over the immediate pursuit of a theoretically pure policy objective.

Analysis – The Fortuitous Implications of the Reversal

The withdrawal of the Section 8E proposal is a fortuitous development with several layers of positive implications for the South African economy and its legislative framework.

First, it provides an immediate restoration of certainty for capital markets. The “chilling effect” on transactions and investment that Treasury itself identified is instantly reversed. Corporate treasurers, financial institutions, and project sponsors can now proceed with planned preference share issuances under the existing, well-understood rules of Section 8E. This will hopefully unblock capital flows that were frozen by uncertainty and allows critical funding for corporate operations, expansion projects, and BEE transactions to resume.

Second, the reversal averts the significant systemic risk of ceding legislative sovereignty. The original proposal’s direct link to IFRS classification would have effectively delegated a core tax-defining power to the IASB, a body with no accountability to the South African electorate or Parliament. This would have created a scenario where technical accounting debates in London could have had automatic, far-reaching tax consequences in Johannesburg, bypassing the national democratic and legislative process entirely.

Finally, the withdrawal should be viewed as a reprieve, not a permanent pardon for aggressive tax structuring. The underlying policy objective – to tax instruments that are economically equivalent to debt as debt – remains a valid and central goal for the fiscus. National Treasury’s statement that any future proposals will “involve a consultative process with all stakeholders” is both a promise of a more collaborative approach and a clear signal that the matter is not closed. The government has strategically retreated to likely redesign a more targeted and less disruptive legislative solution. The market has been granted a valuable opportunity to operate under the current rules, but it must anticipate that a new, more refined set of anti-avoidance provisions for hybrid instruments will likely appear in a future legislative cycle.

Third-Party Backed Shares and the “Once-Tainted, Always-Tainted” Principle (Section 8EA)

While the ambitious overhaul of Section 8E has been shelved, the media statement does not reference a highly targeted proposed amendment to section 8EA, aiming to nullify a specific avoidance scheme involving “dispensable enforcement rights”. The proposal broadens the trigger for the provision, which will now apply if a share “constitutes a third-party backed share at any time during that year of assessment or during any previous year of assessment”. This surgical amendment directly targets a scheme where holders contractually waive their enforcement rights immediately before a dividend payment to circumvent the rule, only to reinstate the right afterwards.

Effective from 1 January 2026, this proposed change introduces a “once-tainted, always-tainted” principle. The mere historical existence of an enforcement right during the holder’s tenure permanently taints the instrument, creating an onerous new due diligence requirement for investors on the secondary market, who must now conduct a historical review of an instrument’s terms to determine the tax treatment of a future dividend.

Whether the proposal in current form becomes law will only become clearer once the public consultation process on the bill has been concluded.

Hybrid Debt and Interest Rules: Carve-out for FLAC Instruments (Sections 8F & 8FA)

To support financial sector stability, the proposals introduce a specific exclusion from the hybrid debt (section 8F) and hybrid interest (section 8FA) anti-avoidance rules for “First Loss After Capital” (FLAC) instruments. The policy rationale acknowledges that the hybrid nature of these regulatory capital instruments, designed to absorb losses in a crisis, could cause them to be inadvertently caught by the anti-avoidance rules, which would render interest payments non-deductible. The proposed carve-out prioritises financial stability, aligns South Africa with international best practices for regulatory capital, and ensures the tax system does not undermine prudential regulations.

B. Fortifying the Corporate and International Tax Base

The draft bills contain a suite of technical amendments designed to protect the tax base and provide certainty in cross-border and corporate transactions.

Dividends Tax on Loans to Trusts (Section 64E): A targeted anti-avoidance amendment extends the deemed dividend rules to capture a loan made by a subsidiary of a company to a shareholder trust of its parent company. This closes a clear circumvention strategy where groups could avoid the rule by routing an interest-free loan through a subsidiary instead of providing it directly from the parent company. Following this change, such indirect loans will be treated as deemed dividends subject to dividends tax.

Strengthening the Controlled Foreign Company (CFC) Rules (Sections 9D & 9H): A critical amendment addresses a circular loophole involving the section 9H exit charge and the section 9D “comparable tax exemption”. The proposal stipulates that the hypothetical South African tax used in the 67.5% test must be increased by the tax that would arise from the section 9H exit charge. This breaks the circularity where the exit charge itself could inflate the denominator in the test, effectively sheltering the exit gain from tax. A second amendment ensures that any foreign tax refund received by a shareholder of a CFC is taken into account when determining if the CFC qualifies for the comparable tax exemption, ensuring the test is based on the net effective foreign tax rate.

Limiting Deferral of Foreign Exchange Differences (Section 24I): The rules allowing for the deferral of foreign exchange gains and losses on certain related-party debts are set to be significantly tightened. The proposals will end the deferral on any debt not recognised for financial reporting purposes. Furthermore, a new pro-rata mechanism will ensure that when an exchange item is realised in part, a proportionate amount of the previously deferred gain or loss is triggered. This counters the incentive for taxpayers to indefinitely delay settlement of intercompany loans to defer tax liabilities.

Refining Contributed Tax Capital (CTC) for Minority Buy-Outs (Section 8G): A specific exclusion will be introduced to the anti-avoidance rule in section 8G for transactions where a foreign parent injects new cash into a South African holding company to acquire shares in a subsidiary from independent, third-party minority shareholders. This addresses an unintended consequence of the rule’s broad wording, which was penalising legitimate corporate finance transactions, an overreach acknowledged by National Treasury in the 2024/25 Budget Review.

Aligning Tax and Accounting for “Covered Persons” (Section 24JB): An amendment to section 24JB proposes to align the tax treatment of certain dividends with their accounting treatment for “covered persons” such as banks. The proposal removes the general exclusion of dividends from the section 24JB mark-to-market regime where those dividends are received in respect of a hedging instrument that is measured at fair value in profit or loss in terms of IFRS 9. This ensures symmetry by making the dividend income subject to tax when it is received from an equity investment used to hedge tax-deductible payments.

C. Certainty and Adjustments in Corporate Reorganisations

Clarifying the Definition of “Equity Share”: A crucial technical correction is proposed to the definition of “equity share” in section 1(1) to explicitly include references to “foreign dividends” and “foreign returns of capital”. This resolves ambiguity and provides essential certainty that South Africa’s corporate reorganisation rules apply as intended to transactions involving shares in foreign companies.

Limiting Roll-over Relief for Listed Shares (Section 42): The draft legislation clarifies that the special roll-over relief for listed shares in an asset-for-share transaction—which grants the acquirer a stepped-up market value base cost—is explicitly limited to shares acquired from disposing shareholders who each held less than 20% of the equity shares in the target listed company. This aligns the law with its original policy intent to resolve a “practical tracing problem” for acquirers of shares from numerous small shareholders.

Excluding Collective Investment Schemes (CIS) from Reorganisation Rules: In a significant policy shift effective from 1 March 2026, the TLAB proposes to remove the ability for CISs to make use of the corporate reorganisation rules. This is achieved by amending the definition of “company” in section 41 to explicitly exclude any portfolio of a CIS for the purposes of sections 42 and 44. This closes a loophole where investors could transfer assets with unrealised gains into a CIS tax-free, after which the CIS could sell the assets without paying Capital Gains Tax.

D. Individuals and Trusts in Crosshairs

Lowering the Threshold for Ring-Fencing of Assessed Losses (Section 20A): To curb the abuse of setting off non-commercial trade losses, the TLAB proposes to lower the income threshold at which the ring-fencing rule is triggered from the maximum marginal rate to the amount at which the 39% marginal rate becomes applicable. This will broaden the rule’s application, subjecting more high-income individuals’ “hobby” businesses to scrutiny.

Clarifying Income Attribution Rules for Trusts (Sections 7(5)): The TLAB proposes to substitute subsection 7(5) to limit the application to residents and to further clarify that the attribution of income to a resident donor ceases on the first of three events: the happening of the specified event, the death of the donor, or the donor ceasing to be a South African resident. By limiting the attribution rule contained in section 7(5) to residents, it aligns the treatment to that of section 25B. These changes ensure that income retained in a trust is taxed in South Africa if the ultimate benefactor is a non-resident.

Repeal of the Exemption for Foreign Retirement Benefits (Section 10(1)(gC)(ii)): As announced in the Budget and effective from 1 March 2026, the TLAB proposes to repeal the exemption for foreign retirement benefits received by South African residents. Treasury notes that the current blanket exemption can lead to double non-taxation. Removing it ensures such benefits are taxed in line with South Africa’s residence-based system, subject to any applicable Double Taxation Agreement.

Other Notable Amendments for Individuals:

• Remuneration Proxy: The definition is amended to require that the proxy amount be increased by any income that was exempt under the foreign employment income exemption in the prior year, preventing an artificially low proxy from being used.
• Child Maintenance: An amendment to section 10(1)(u) reinstates the exemption for child maintenance payments funded from after-tax income, correcting an inadvertent removal of the exemption in 2008.
• Death Benefits: The definition of “savings component” is amended to clarify that upon a member’s death, their nominees or dependants may elect to receive a lump sum from this component, ensuring it is taxed at favourable retirement lump sum rates.

E. Changes to Capital Gains Tax and Tax Incentives

Taxing Capital Distributions from CISs: A new paragraph 82A is inserted into the Eighth Schedule, stating that any capital distribution by a CIS to a unitholder is to be treated as a capital gain for that holder. This approach was deemed simpler than an alternative proposal to treat such distributions as a reduction of base cost.

Extension of Key Tax Incentives:

• Urban Development Zone (UDZ) Incentive (Section 13quat): The sunset date is extended by five years to 31 March 2030 to allow for a comprehensive review of its effectiveness.
• Energy Efficiency Savings Incentive (Section 12L): The sunset date is extended by five years to 31 December 2030, demonstrating the continued use of tax policy to support national strategic goals.

Refining the BEV/HPV Production Incentive (Section 12V): To ensure the tax incentive for local production of battery electric and hydrogen-powered vehicles is correctly targeted, the term ‘motor vehicle manufacturer’ is being defined more precisely by cross-referencing definitions in the Automotive Production and Development Programme Regulations and the Customs and Excise Act.

PART II: THE VAT OVERHAUL

A. Significant Policy Shifts in VAT

Major Overhaul of the Exemption for Educational Services (Section 12(h))

Effective 1 January 2026, the VAT exemption for educational services is set for a significant overhaul to align the law with the policy intent of keeping basic education outside the VAT net. A new provision will exempt any supply of goods or services by a school registered under the South African Schools Act. This change, while simplifying the VAT position for schools, will have significant transitional consequences. Schools currently registered for VAT will need to deregister and calculate a potentially substantial exit VAT charge on assets for which they previously claimed input tax, a cost likely to be passed on to parents. To manage this, a new provision will allow the exit VAT to be paid in 12 monthly instalments.

Removal of the De Minimis Exemption for Low-Value Imports (Schedule 1)

In a move to level the playing field between domestic and offshore retailers, the TLAB proposes the removal of the R500 de minimis exemption for low-value imported goods. This addresses concerns from domestic industry that the exemption provided an unfair tax advantage to foreign e-commerce suppliers. The effective date for this change will be announced by the Minister.

B. Technical Refinements and Anti-Avoidance

Temporary Letting of Residential Properties (Section 18D): Amendments provide legislative certainty, ensuring a property developer who made an initial output tax adjustment on a temporarily let unit can claim a corresponding deduction if later required to make a full output tax adjustment based on the property’s open market value. This prevents double taxation and codifies the position previously set out in a SARS ruling.

Narrowing the Zero-Rating for the National Housing Programme (Section 8(23)): To address unintended fiscal leakage, the zero-rating provision is being narrowed by replacing the broad reference to “a national housing programme” with a specific reference to the “Housing Subsidy Scheme”. This anti-avoidance measure is intended to stop the incorrect application of the zero-rating to supplies not originally targeted.

Legislative Response to Capitec Bank (Section 1(1)): In a direct response to the Constitutional Court’s decision, the definition of “insurance” in the VAT Act is being amended to add a proviso stating that for a contract to be considered “insurance” for VAT purposes, a premium must be paid. This nullifies the outcome of the court case, where the provision of “free” credit life insurance was found to be a taxable supply, entitling the bank to claim input tax on payouts.

C. Cross-Border and Intermediary Supplies

Expanding Intermediary Provisions (Section 54(2B)): The provision allowing an intermediary to account for VAT on behalf of a principal is being expanded by removing the requirement that the principal must be a non-resident. This administrative simplification will ease the compliance burden on large marketplace platforms that act for both local and foreign suppliers.

Zero-Rating for Testing Services Supplied to Non-Residents (New Section 11(2)(z)): A new provision will zero-rate testing services supplied to a non-resident, even if the testing involves movable property or persons located in South Africa. This resolves a practical difficulty where a literal interpretation of existing rules could have subjected services in sectors like clinical trials to standard-rate VAT.

Clarifying VAT on Airtime Vouchers for Export Use (New Section 8(31)): Legislative certainty is being provided for airtime vouchers sold in South Africa for exclusive use in an export country. A new provision deems that the supply of the underlying telecommunication service is disregarded for VAT, but any margin retained by the vendor is deemed to be consideration for a standard-rated supply of distribution services.

D. Amendments to VAT Regulations

Domestic Reverse Charge (DRC) for Valuable Metals: Draft amendments effective from 1 April 2026 propose to broaden the definition of “residue” by removing the requirement that it be “derived from or incidental to a mining operation” and to refine the definition of “valuable metal” to clarify certain exclusions.

Clarification of Export Regulations: To resolve a practical difficulty, the regulations are being amended to clarify that the delivery of goods to a “terminal operator operating under a license of the port authority” qualifies for zero-rating. This addresses situations where a strict interpretation could disqualify exports handled by licensed private terminal operators. This amendment will take effect on 1 April 2026.

PART III: THE ENFORCEMENT MANDATE: SHARPENING SARS’S TOOLS

A. SARS Powers and Taxpayer Rights

Expansion of SARS’s Inspection Powers (Section 45, TAA)

The Tax Administration Laws Amendment Bill (TALAB) proposes to expand SARS’s powers to conduct inspections at business premises without prior notice to verify information provided during registration for VAT, the employment tax incentive, or PBO status. This allows SARS to confirm that the physical address exists and the premises are suitable for the declared activities, a measure aimed at curbing fraud from the registration phase. This change will be effective from the date of promulgation.

Suspension of Payment Pending a Reduced Assessment (Section 164, TAA)

The TALAB provides crucial legislative clarity by explicitly allowing a taxpayer to request a suspension of a tax debt arising from an estimated assessment while they have a request pending with SARS for a reduced assessment. This codifies an existing practice and ensures taxpayers are not forced to pay a potentially inflated assessment while it is being corrected, thereby strengthening taxpayer rights. This change will be effective from the date of promulgation.

B. Understatement Penalties and Errors

Clarifying “Bona Fide Inadvertent Error” (Sections 222 & 223, TAA)

The TALAB aims to resolve long-standing contention around this concept in the understatement penalty regime. The amendment removes the general exclusion for such an error from the main charging provision and explicitly links it to the remission of penalties for a “substantial understatement”. This clarifies that a bona fide inadvertent error is a basis for remitting a penalty in the case of a “substantial understatement” (an objective, quantum-based test), but not for other penalty categories that already have a behavioural element. This change, effective from the date of promulgation, seeks to create a clearer and more effective penalty framework.

C. Other Notable Administrative and Technical Amendments

Representative Taxpayer for Insolvent Estates (Section 1, ITA): The TALAB proposes to amend the definition of “representative taxpayer” to reinstate a provision clarifying that a trustee or administrator is the representative taxpayer for income that accrued to an insolvent person prior to sequestration.

Certificate for Donations (Section 18A, ITA): To address uncertainty, the requirement for an “audit certificate” for certain public benefit organisations is changed to a “certificate of examination”, and the Commissioner is empowered to prescribe its minimum information content.

VAT Modernisation: The VAT Act is being amended to insert foundational definitions for “e-invoice”, “e-reporting”, and an “interoperability framework”, paving the way for the future implementation of a voluntary e-reporting system in South Africa.

Conclusion: The New Imperative for Tax Advisors

The 2025 draft tax bills, especially when considered in light of the Section 8E withdrawal, signal an unwavering yet pragmatic trajectory for South African tax policy. The legislative package is far more than a series of disconnected technical fixes; it represents a coherent and strategic reinforcement of the tax system, built on the foundational principles of substance, transparency, and administrative efficacy.

The events of this legislative cycle reveal two parallel truths. First, the strategic direction of the fiscus remains firmly pointed towards aligning tax outcomes with economic reality, as evidenced by the numerous other anti-avoidance and base-protection measures that remain in the bills. The era of relying on purely legalistic structures that defy economic substance is definitively waning. A holistic approach that considers the economic drivers of transactions is no longer just best practice—it is a strategic necessity for survival.

Second, however, the implementation of this strategy is subject to pragmatic adjustment based on credible, evidence-based feedback from the market. The saga of the Section 8E proposal serves as a powerful case study: the initial proposal demonstrated Treasury’s ambition to push the boundaries of substance-over-form, while its withdrawal demonstrated a commendable pragmatism in the face of demonstrable economic risk.

This creates a new, twofold imperative for taxpayers and their advisors. The first imperative is to continue preparing for a substance-based tax environment, as the underlying policy direction is unchanged. The second, and perhaps more critical, imperative is to recognise the proven value of proactive, constructive, and well-reasoned engagement during the public consultation process. The withdrawal of the Section 8E proposal is the single most powerful evidence that industry voices, when backed by sound economic argument, can and do shape final legislation. This elevates public participation from a compliance formality to an essential component of strategic tax risk management.