Mar 24,2015 / News / Legal Brief

The Tax Administration Act requires certain transactions or arrangements to be reported to SARS within 45 business days after the date on which the arrangement qualifies as a reportable arrangement; or within 45 days of a taxpayer becoming party to a reportable arrangement. This is in order to give SARS early notification of possible impermissible tax avoidance transactions, with a view to the SARS possibly applying the general anti-avoidance rule or taking any other steps to attack the arrangement.

On 16 March 2015 the SARS issued a public notice setting out the new list of “reportable arrangements” as well as arrangements that are not required to be reported. If an arrangement constitutes a “reportable arrangement”, full disclosure of the details of the arrangement must be made to SARS. It is important to note that the new notice takes effect from 16 March 2015 and replaces all previous notices. The notice retains some of the arrangements that were previously listed by the SARS as being reportable but crucially lists a number of new reportable arrangements.

HYBRID EQUITY AND DEBT INSTRUMENTS

Section 8E and 8F of the Income Tax Act are anti-avoidance provisions targeting debt that is disguised as equity or vice versa. Transactions are often structured out of the scope of these sections by extending the convertibility or redemption dates of the instruments beyond the prescribed minimum 3 year period. The public notice provides that if the instrument would have qualified as a hybrid debt or equity instrument had the prescribed minimum period been 10 years, then these instruments are reportable arrangements.

This category of reportable arrangements has been in effect for some time and is therefore not a new category.

SHARE BUY-BACKS

A new category of reportable arrangements relates to share buy-backs which are causally linked to a resultant share subscription (or vice versa). In terms of the notice, if a company buys back shares on or after 16 March 2015 from one or more shareholders for an aggregate amount exceeding R10 million and that company issued or is required to issue any shares within 12 months of the date of the buy-back, the transaction will be reportable. The wording of this provision is not ideal, however, the date that is of relevance is the date the share buy-back is implemented.

CONTRIBUTIONS TO FOREIGN TRUSTS

Where a resident makes a contribution to, or acquires a beneficial interest in, a non-resident trust after 16 March 2015 and the amount of all contributions (including those made prior to the publication of the notice) or the value of the interest exceeds R10 million, the arrangement will be reportable. The wording of the notice indicates that this only applies to vested trusts. Contributions to and interests in foreign investment entities and collective investment schemes are excluded from this category.

FOREIGN INSURERS

An arrangement between a resident and a foreign insurer will be reportable where the aggregate amount payable to the insurer exceeds or is reasonably expected to exceed R5 million (note that no period is specified over which this payment is to be made) and any amount payable from 16 March 2015 by the insurer to the beneficiary under the arrangement, is determined mainly by reference to the value of particular assets held by or on behalf of the insurer for purposes of the arrangement.

CONTROLLING INTEREST IN ASSESSED LOSS COMPANIES

If one or more persons acquire a direct or indirect controlling interest in a company, on or after 16 March 2015, the arrangement will be reportable where that company has carried forward or is reasonably expected to carry forward a balance of assessed loss exceeding R50 million from the year of assessment immediately prior to the acquisition; or is reasonably expected to have an assessed loss exceeding R50 million for the year of assessment in which the controlling interest is acquired.

EXCLUDED ARRANGEMENTS

The notice also makes provision for “excluded arrangements”. The notice only provides for a single category, namely, an arrangement in terms of which the aggregate tax benefit which may be derived from the arrangement by all participants to the arrangement does not exceed R5 million. Under a prior notice the threshold was R1 million.

Under a prior notice, transactions were excluded, and thus not reportable, where inter alia a tax benefit was not the main or one of the main purposes of the arrangement. This exclusion is no longer applicable, thereby in our view, significantly extending the scope of the “reportable arrangements” regime.

PENALTIES FOR NON-COMPLIANCE

Failure to disclose a reportable arrangement to SARS can result in a penalty being levied of up to R100 000 each month that the failure continues, up to a maximum of 12 months. The amount of the penalty is doubled if the anticipated tax benefit achieved by the arrangement exceeds R5 million and is tripled if the benefit exceeds R10 million.

Given the onerous nature of failing to comply with the reportable arrangement provisions it is essential that each and every transaction is carefully considered so as to prevent penalties being imposed.