The Tax Administration Act (the TAA) contain provisions which require taxpayers who have entered into so-called Reportable Arrangements to report the details of these arrangements to the South African Revenue Service (SARS). The purpose of the “reportable arrangements” provisions is to give SARS early warning of transactions that have the objective of obtaining a tax benefit in an undue manner.
On 16 March 2015, the Commissioner for SARS issued a public notice which includes a number of new transactions which will be regarded as reportable arrangements with effect from date of issue of the notice. These include:
Assessed loss companies.
Arrangements in terms of which one or more persons acquires a controlling interest in a company, on or after 16 March 2015, will be a reportable arrangement where that company:
A controlling interest in the ‘assessed loss’ company can be acquired through the acquisition of shares, voting rights or a combination of both.
The public notice refers further to arrangements in terms of which a controlling interest is acquired in a company that directly or indirectly holds a controlling interest in a company described above.
The public notice therefore requires the reporting of both the direct and indirect acquisition of a controlling interest in an assessed loss company.
Where on or after 16 March 2015, a company buys back shares with an aggregate amount exceeding R10 million from one or more shareholders and that same company has issued or is required to issue any shares within a period of 12 months of the buy-back transaction, the transactions will be reportable. The shares need not be of the same class, nor be bought back from the same party who will hold the newly issued shares.
The rules relating to hybrid instruments in the Income Tax Act are aimed at combating schemes in which equity is used to facilitate what is in substance a loan or vice versa.
Where such instruments are successfully targeted by SARS, taxpayers will be either taxed on dividends deriving from them or will be denied deductions on interest paid in respect of them.Usually, hybrid instruments may be identified by the fact that they are convertible into shares or debt within prescribed periods.
Often parties to such instruments attempt to sidestep the anti-avoidance legislation by extending the convertibility dates beyond the prescribed periods.
The public notice provides that if the instrument would have qualified as a hybrid debt or equity instrument had the prescribed period been 10 years, then these instruments are reportable arrangements. (It is noted that in the case of hybrid debt instruments, the application of the public notice is unclear.
It appears that the public notice would only have an effect on hybrid debt instruments that were issued prior to 1 April 2014, as after this date any debt instrument that is convertible into shares may be classified as a hybrid debt instrument regardless of the convertibility period).
Contributions to and acquisitions of a beneficial interest in a non-resident trust on or after 16 March 2015 where the amount of all contributions or payments, whether made before or after 16 March 2015, or the value of the beneficial interest exceeds or is likely to exceed R10 million will be reportable. Contributions to and beneficial interests in collective investment schemes and foreign investment entities are excluded.
Arrangements with residents and foreign insurers will be reportable where:
Affected arrangements must be reported to SARS:
The public notice also provides for “excluded arrangements”. These are arrangements where the aggregate tax benefit which may be derived from the arrangement by all participants to the arrangements does not exceed R5 million.
Prior to publication of the notice, arrangements were excluded where the obtaining of a tax benefit was not the main or one of the main purposes of the arrangement. This exclusion appears to have been removed, significantly widening the ambit of the legislation However, whilst the reportable arrangements rules notify SARS of possible impermissible tax avoidance transactions as contemplated in the general anti-avoidance rules (GAAR) provisions, the obligation to report an arrangement to SARS does not mean that it is automatically deemed to be an impermissible tax avoidance transaction for purposes of GAAR, nor does it have any effect on the substantive consideration of normal tax liability for SARS.