Although under discussion, the Draft Taxation Laws Amendment Bill makes it clear that the use of Section 42 in transactions involving collective investment schemes is under scrutiny, with an intention to curb an unintended deferral of capital gains tax.
With an implementation date set, if you hold a highly concentrated position in a single stock within your portfolio, pay attention. A mechanism originally built for corporate restructurings has evolved into a way to swap a single concentrated shareholding for a diversified portfolio without triggering immediate Capital Gains Tax (CGT).
In a country where wealth is often tied up in one counter, through executive share schemes or decades-long holdings, it has become more than a technical provision. It’s a pressure-release valve for investors locked into concentrated equity exposure.
Investors can reduce concentration risk, diversify globally and reposition portfolios, all without the tax drag that may accompany such a move. The base cost of the original shares rolls into the new structure, and the capital gains liability is deferred.
It frees investors from regret-driven paralysis. Eventually, capital preservation matters more than stretch returns, and restructuring assets improves the chances of achieving long-term lifestyle, legacy and philanthropic aims.
Government tightens the net
National Treasury has moved to tighten the rules. The Draft Taxation Laws Amendment Bill that clarifies the use of Section 42 in transactions involving collective investment schemes is under scrutiny. The direction is clear, even if the final legislation is being refined. An implementation date of 1 January 2027 has been proposed.
Structuring, evaluating and executing these transactions takes time, particularly for more complex ownership structures involving companies and trusts. By the time the legislation is finalised, the effective window to act may be significantly shorter.
The most pressing concern is not around tax, as SARS will be remunerated in time. The core issue is concentration.
South African investors tend to carry significant single-stock risk. Whether it is a long-held position in a retailer, bank, mine or global technology proxy listed locally, portfolios often become dominated by what has worked before.
The result is a structural imbalance in which wealth becomes tied to a single corporate outcome, management team and set of risks. The longer the position is held, the harder it becomes to unwind. For many executives there is a deeply human dimension. The holding represents a lifetime of effort, identity and achievement embedded in a company. To acknowledge the controllable and uncontrollable factors shaping outcomes requires a degree of objectivity not easily reached.
Section 42 has, until now, offered a rational solution to this irrational standoff. It has allowed investors to reset their portfolios by transitioning it into a structure better aligned with future objectives. Diversification, global exposure and risk management can be introduced without an immediate tax penalty.
When tax policy shifts, it tends to do so decisively. The investors who benefit are those who act while the rules still allow for flexibility, not those who wait for certainty.
Not every concentrated position should be unwound, and not every investor will benefit from a Section 42 transaction. The mechanics are complex, and suitability depends on individual circumstances, tax profiles and objectives. For investors with meaningful embedded gains in a single stock, the question is whether the opportunity to diversify effectively still exists and for how long.
For many investors, the bigger risk is allowing a concentrated position to persist by default, particularly when the tax and regulatory environment is changing.
If Section 42 is being considered, timing matters. Once the rules change, the ability to diversify without an immediate CGT event may be reduced or removed. The key is to assess options early enough to execute a transaction, if appropriate, before the window narrows. For investors evaluating Section 42, the practical value is in aligning tax advice, portfolio construction and long-term objectives, and ensuring the implementation is coordinated across all parties.
