On Thursday, 2 June 2011, National Treasury released the Draft Taxation Laws Amendment Bill, 2011 ("DTLAB"), Explanatory Memorandum on the DTLAB 2011, Draft Taxation Laws Second Amendment Bill, 2011 ("DTLSAB"), as well as a Media Statement on the DTLABs 2011.
The DTLAB comprises 183 pages of significant changes to the fiscal laws of South Africa.
The one change that requires specific comment is Government's proposal to suspend the intra-group relief available in section 45 of the Income Tax Act, Act 58 of 1962, as amended ("the Act"), with effect from 3 June 2011.
Most of the proposals contained in the DTLAB were announced in the 2011 Budget presented to Parliament by the Minister of Finance on 23 February 2011.
From an examination of the 2011 Budget Review, published by National Treasury, it is clear that no mention whatsoever was made of the proposal to suspend section 45 of the Act. It has become customary that most of the changes contained in the Tax Bills are announced in the Budget documentation so that taxpayers know what changes they are likely to face and, more importantly, the likely date on which those changes may take effect.
Section 45 forms part of the so-called "group restructuring rules", which were introduced into law by section 44 of the Second Revenue Laws Amendment Act No. 60 of 2001. This section has undergone significant amendments over the years as the authorities have sought to refine the provisions and curtail the perceived abuse thereof.
The corporate restructuring rules were introduced into the Act with effect from 1 October 2001, that is, the date on which capital gains tax took effect in South Africa, to enable groups of companies to restructure their affairs without adverse tax consequences arising.
There were similar measures in place since 1988 to allow for companies to restructure their affairs without incurring tax liabilities where a qualifying group of companies restructured its affairs.
The Media Statement issued by National Treasury on 2 June 2011, refers to the fact that the DTLAB contains a number of new anti-avoidance measures and contained a separate annexure dealing with the suspension of intra-group roll-over relief currently contained in section 45 of the Act. The DTLAB specifically provides that section 45 will not apply in respect of any asset disposed of on or after 3 June 2011 and before 1 January 2013. Thus, section 45 has, for all practical purposes, been suspended for a period of 18 months to allow the National Treasury to investigate the perceived abuse of the section.
National Treasury, in its Media Statement, points out that the section 45 intra-group roll-over relief was originally intended to facilitate transfers amongst companies which constituted a group as defined in the Act. Thus, the purpose of section 45 was to ensure that the tax system did not pose a barrier to intra-group transfers, whether the transfer took place by way of an exchange of shares, debt or cash, or as a dividend. National Treasury makes the point that intra-group relief is a common feature of most advanced tax systems around the world.
National Treasury is concerned about the way in which section 45 is being used, as taxpayers have, in its view, sought to use it as a means of acquiring businesses and that the section involves what is referred to as "debt push-down structures". National Treasury contends that section 45 allows for the use of excessive debt schemes and creates the means whereby taxpayers utilise so-called "funnel schemes", whereby debt proceeds are indirectly linked to tax-free preference share dividends.
Left: In light of the suspension of intra-group relief, big corporations are reviewing their corporate structures on an on-going basis.
National Treasury has indicated that section 45 will be suspended for a period of approximately 18 months, during which period the purpose of the section will be re-evaluated, particularly to deal with the concerns that National Treasury has regarding excessive debt. National Treasury has identified the following issues relating to section 45 as part of a larger set of problems and these include:
- The free use of excessive debt to eliminate substantial amounts of operating income for an extended duration.
- The seeming freedom to re-characterise shares as debt (or debt as shares) with little regard for accounting and commercial concepts.
- Excessive tax losses available in the tax system and the potential to move losses amongst entities if a viable business purpose can be asserted.
- The need for section 45 within an intra-group context, as well as the need for the movement of losses within a single domestic group.
- The need to allow for interest deductions stemming from leveraged buy-outs, regardless of the form of that acquisition.
It must be remembered that South Africa does not impose tax on a group basis and, thus, section 45 alleviated the adverse tax consequences that would otherwise arise where business assets are moved from one company in a group to another.
To summarily to suspend section 45 of the Act, without prior notice in the Budget documentation, by way of a Media Statement, is extremely draconian.
It is questionable also whether this proposal be enacted is valid under the Constitution of the Republic of South Africa, Act 108 of 1996, as amended. Numerous companies have prepared agreements to transfer businesses in terms of section 45 of the Act and the costs they incurred would now appear to have been wasted as a result of this immediate suspension of section 45. It is unfair that businesses should be expected to carry these costs in light of the manner in which section 45 has been suspended. The proposal undermines the rule of law insofar as the tax system is concerned, and cannot be supported.
In addition, corporates are reviewing their corporate structures on an on-going basis and, no doubt, many companies in South Africa were in the process of evaluating the most appropriate manner to rationalise their businesses in South Africa.
The manner in which section 45 has been suspended in the proposals relating thereto create great uncertainty for taxpayers in South Africa and does not bode well for foreign investors who own groups of companies in South Africa, who are currently in the process of reviewing the manner in which those operations are structured. Investors in a country require certainty as to the legal framework within which they are required to operate.
The manner in which section 45 has been amended, effectively by way of a press release, seriously undermines the certainty to which both domestic and foreign investors have come to expect in South Africa. This cannot bode well for future economic growth and development and job creation in South Africa.
It is hoped that Parliament will recommend that the proposals contained in the DTLAB, insofar as section 45 are concerned, should be removed from the DTLAB and that the matter should be investigated further before the section is summarily suspended.
If National Treasury and the South African Revenue Service ("SARS") have concerns about the manner in which section 45 is being utilised by taxpayers, the authorities should rely on the General Anti-Avoidance Rule ("GAAR") contained in sections 80A – 80L, which was introduced in November 2006, and not merely suspend the section whilst the matter is investigated further. The GAAR was introduced after much discussion and debate to replace the anti-avoidance rule contained in section 103(1) of the Act.
However, it would appear that the Commissioner: SARS is reluctant to rely on the GAAR to attack a perceived abuse of the tax system by taxpayers. This also raises the question of whether the GAAR serves any purpose in the Act, with no cases yet having been reported dealing with the application of the GAAR.