Draft Interpretation Note on 'group of companies' definition
17 March 2013
Posted by: SAIT Technical
By Danielle Botha and Heinrich Louw (DLA Cliffe Dekker
Hofmeyr Tax Alert)
article reflects on the recent draft Interpretation Note that provides
guidance on the interaction between the definitions of 'group of
companies' found in sections 1 and 41 of the Income Tax Act.
On 13 March 2013, SARS released a draft Interpretation
Note (IN) to provide guidance on the interaction between the definitions of
'group of companies' as it appears in s1(1) and s41(1) of the Income Tax Act,
No 58 of 1962 (Act).
The definition of 'group of companies' is of particular importance in respect
s45 of the Act, which provides for the transfer of assets between group
companies without triggering any taxes.
The draft IN provides that the definition in s1(1) must first be applied
to the relevant companies in question. Once it is established that these do
constitute a group of companies as defined in s1(1) of the Act, s41(1) of the
Act should be applied.
The definition of 'group of companies' in s41(1) of the Act excludes
certain companies from being group companies for purposes of the special rules
relating to companies. Likewise, the definition excludes certain equity shares
from being taken into account when determining whether the companies in
question constitute a 'group of companies' in terms of s1 of the Act. Taking
s41(1) into account then, the definition in s1 of the Act should be re-applied
– obviously only in respect of the remaining companies and eligible equity
shares. Where the remaining companies fall within the definition of 'group of
companies' in s1 of the Act, they will constitute a 'group of companies' for
purposes of the special rules relating to companies.
Unfortunately the draft IN does little to ease the difficulty encountered
in interpreting the awkwardly worded definition of 'group of companies' in s1
of the Act in the first place. While the definition might appear to be
concisely stated, it often requires more than one read to establish its meaning
in the context of applying it to a given set of companies.
The following is a breakdown of the definition of 'group of companies'
in s1(1) of the Act:
There must be two or more companies;
One company, referred to as the controlling group
company, must directly or indirectly hold shares in one or more of the other
companies, referred to as the controlled group companies.
The controlling group company, or one or more of the
controlled group companies, whether together or alone, must hold at least 70%
of the equity shares in each controlled group company, in order for that
controlled group company to form part of the group.
The controlling group company must directly hold at
least 70% of the equity shares in one controlled group company in order for
there to be a group at all.
The circular interaction between the definition in s1 of the Act and the
definition in s41(1) of the Act unfortunately compounds the complexity.
It is submitted that, while the wording of the definitions and their
interaction are not patently incomprehensible, it might be worthwhile to
revisit the legislation for the sake of simplicity.