In June, the Treasury released the Draft
Taxation Laws Amendment Bills, 2011 that contained a proposal that section 45
of the Income Tax Act be suspended with effect from June 3.
Section 45 of the act allows for qualifying
intragroup transactions to take place without adverse tax consequences and the
South African Revenue Services (SARS) wanted a period of 18 months to allow it
time to investigate what it perceived as abuse of the section.
On August 3, the Treasury and SARS issued another
media release regarding section 45 intragroup transactions that contained
details of more changes to the provision.
In that press release the Treasury and SARS
said that information regarding transactions concluded in terms of section 45
had been obtained. The primary concern identified by the Treasury and SARS
related to excessive debt being created on the transfer of assets concluded in
terms of section 45.
The Treasury has confirmed that
commercially orientated transactions should be allowed to proceed where such
transactions do not result in an erosion of the tax base. S as result the
Treasury has proposed that a new provision, namely section 23K, be introduced
in the legislation to restrict the interest deductions associated with debt used
to finance the acquisition of assets in terms of transactions concluded under
sections 44, 45 or 47.
The Treasury has indicated that the results
flowing from transactions concluded under section 45 will face different
consequences, depending on the nature of the transactions in question.
 |
| It is important that the Receiver has the dedicated resources to deal with applications promptly. |
Interest deductions, relating to
transactions that fall into the so-called “green channel,” will be deductible
automatically. The interest deduction on debt associated with so-called “amber
transactions” will only be permitted upon pre-approval by the authorities. Transactions
that are not approved by the authorities will not be entitled to an interest
deduction.
The authorities have confirmed that the
above-mentioned proposals are intended as a short-tern solution to the problems
identified in administering section 45. It is anticipated that a longer-tern
set of solutions dealing with the deduction of interest on so-called “excessive
debt” and the characterisation of debt, remain on the agenda for 2012 and into
the future.
Originally, the Treasury identified
concerns regarding the perceived abuse of section 45 and the amendments
proposed are intended to take effect from June 3 this year.
SARS and the Treasury have proposed that
the restriction on interest deductions associated with debt used to fund the
acquisition of assets also apply to sections 44 and 47. The amendments to the
interest deduction available in respect of transactions concluded in terms of
sections 44 and 47 are proposed to take effect from August 3.
The Treasury has indicated that preference
shares will be permitted as a means of funding section 45 transferred assets,
subject to the proviso that tax cost associated with intragroup debt and preference
shares will be subject to tighter restrictions.
However, those section 44, 45 and 47
reorganisations that rely on interest-bearing debt will be regarded as falling
into the amber category of transactions which will, in turn, be classified into
two broad groups. Where the interest-bearing debt associated with section 44,
45 and 47 restructures is funded within the group of companies and does not
result in any loss or possible loss to the fiscus, automatic pre-approval is
required. However, a discretionary approval process will apply where the interest-bearing
debt, arising from the restructure, may result in a loss of revenue.
The Treasury has advised that the decision
to approve or decline a restructure relying on debt financing will depend on
the effect of the interest to be incurred on the tax payable by the debtors and
creditors acting as parties to the debt, including the nature of the debt
instrument.
As a result of the proposals issued on August
3, those transactions that can be classified as pure intragroup transfers and
transactions reliant on financing by group companies should, in the main, fall
into the so-called “green channel,” which will be allowed to proceed without
securing prior approval from SARS.
However, those transactions regarded as
leverage buy-outs and securitisations will fall into the so-called “amber
channel” and will be closely scrutinised with SARS o ascertain whether approval
for those transactions should be granted.
Those taxpayers, consisting of members of a
“group of companies” as defined in the act, will be entitled to restructure
their affairs using the intragroup provisions contained in section 45 where no
excessive debt arises as a result of corporate restructure.
Clearly, the Treasury is concerned where
excessive debt is created with the result that profits, which would otherwise have
been subjected to tax, are effectively stripped out through substantial
interest deductions, which may be received by either exempt entities or by persons
who are not resident and, therefore, are not liable to tax on the interest
paid.
The proposal to require that certain
transactions be approved by SARS is understood. What is important, though, is
that SARS has the dedicated and specialised resources to deal with the
applications for approval promptly so as to ensure that legitimate transactions
are not stifled in SA.
On August, 12, SARS published a draft guide
on the disclosure of reorganisation transactions which summarises the proposed
changes to sections 44, 45 and 47 of the legislation, including the insertion
of section 23K into the act.
Further, it is envisaged that taxpayers
will be required to submit a specialised return in terms of section 41(5) where
a taxpayer acquires an asset through an asset-for-share transaction in terms of
section 42, or a transaction envisaged in section 44, 45 and 47 of the act.
Taxpayers will be required to submit a
return under section 41(5) where any f the following circumstances exist:
- The transactions the taxpayer has entered into to acquire an asset or assets cumulatively exceed R30m over a period of 12 months
- An asset or assets are transferred to the taxpayer at market value in terms of an intragroup transaction in terms of which section 45 of the act applies and the total value of an asset or assets exceeds R10m; or
- The taxpayer is required, in terms of section 23K(3) to apply for approval in order to secure a deduction of interest, and such approval was not requested by the company.
Those companies that require approval under
section 23K(3) will be required to identify all parties to the restructure
transactions and supply details of the debt instruments that are used, directly
or indirectly, to acquire the assets in terms of the restructure transaction.
- Dr Beric Croome is a tax executive at Edward Nathan Sonnenbergs. This article first appeared in the Business Day supplement, Business Law & Tax Review, September 2011. Free Image from ClipArt
