<p><br/></p><p>ABSTRACT<br/>The lack of specific tax legislation and practice dealing with the taxation of derivatives<br/>in South Africa necessitates the construction of a framework for the taxation of<br/>derivatives: the subject of this dissertation. The lack of sophistication within the Income<br/>Tax Act, No. 58 of 1962 and the lack of clarity provided by the South African Revenue<br/>Service with regard to derivatives, specifically in a hedging context, is expected to be<br/>overcome to a large degree by virtue of the contents of this dissertation.<br/>The dissertation considers the meaning of a derivative and a hedge in a tax context and<br/>culminates in the drafting of suggested definitions of a derivative and a hedge to be<br/>housed within our tax legislation. The definitions have been constructed from key<br/>themes and features extracted from various comparative studies.<br/>Given the changes in accounting methodologies and practice of derivative transactions,<br/>it is considered that the need, from a tax perspective, is to move closer to the accounting<br/>treatment of gains and losses on derivative transactions. The analysis in this dissertation<br/>favours this approach in the instance specifically where derivatives are transacted as a<br/>hedge of an underlying capital transaction.<br/>The purposes for which derivatives are used are finally considered specifically in the<br/>context of the common law doctrine of substance over form. The subjective test of the<br/>taxpayer’s mindset plays a major part in balancing the legal form of a transaction and its<br/>legal substance.<br/>It is hoped that a fresh view on the taxation of derivatives and the construction of this<br/>framework provides users of tax legislation with a concise pathway to the tax effect and<br/>consequences of their application.</p>