Section 35(2) of the Tax Administration Act No. 28 of 2011 (the “TAA”) currently provides that an arrangement will be reportable, inter alia,if it is listed as such by the Commissioner for the South African Revenue Service (“Commissioner” or “SARS”) by public notice, and if the Commissioner is satisfied that the arrangement may lead to an undue tax benefit. Such inclusions are, however, subject to the provisions of section 36 of the TAA, which inter alia provides that the Commissioner may determine an arrangement to be an excluded arrangement by public notice if he is satisfied that the arrangement is not likely to lead to an undue tax benefit.
We set out below a brief overview of the current notices issued for purposes of sections 35(2) and 36(4) of the TAA, as well as the proposed amendment thereto.
Current exclusions
The Commissioner issued a notice in terms of the reportable arrangement rules previously contained in the Income Tax Act No. 58 of 1962 (the “Act”) in terms of which an arrangement will be an excluded arrangement, inter alia, if the tax benefit which is or will be derived is not the main or one of the main benefits of the arrangement (which notice should remain in force for purposes of section 36(4) of the TAA, in terms of section 269(1) of the TAA).
Current inclusions
The Commissioner published a notice for purposes of section 35(2) of the TAA on 28 December 2012 (Government Gazette Notice No. 36038, the “Notice”), which includes as a reportable arrangement, an arrangement which is or would have constituted a “hybrid equity instrument” for purposes of section 8E of the Act had the prescribed period for determining this been ten years as opposed to three. A “hybrid equity instrument” for purposes of section 8E of the Act is defined, inter alia, as including “any share, other than an equity share if the issuer of that share is obliged to redeem that share in whole or in part…within a period of three years from the date of issue of that share“.
The Notice further includes as a reportable arrangement, an arrangement which is or would have constituted a “hybrid debt instrument” as defined in section 8F of the Act if the prescribed period in that section had been ten years as opposed to three, excluding any instrument listed on an exchange regulated by the Securities Services Act No. 36 of 2004 (the “SSA”). A “hybrid debt instrument” is defined as, inter alia, “an instrument that is convertible into or exchangeable for a share in the issuer thereof at the option of the holder thereof within three years from the date of issue of that instrument.”
Proposed amendment
A draft notice on reportable transactions for purposes of sections 35(2) and 36(4) of the TAA (the “Draft Notice”) was released for comment on 12 June 2014, and is set to replace all previous notices for purposes of sections 35(2) and 36(4) of the TAA. Various specific transactions are listed as reportable, to the extent that same take place after the date of publication of the draft notice (which has not yet occurred).
The exclusion discussed above will furthermore be replaced by a de minimus rule which excludes arrangements in terms of which the tax benefit derived or to be derived does not exceed R5 million.
Careful consideration will accordingly have to be given to the reportability of transactions following the date of publication of the Draft Notice, having due regard to its final form.