Authors: Denny da Silva and Elandre Brandt (Webber Wentzel)
Section 24O was introduced in 2012 as an alternative to so-called "debt push-down structures". The provision allows a company to claim a deduction for interest incurred on debt used to acquire shares in a company, under qualifying circumstances (subject to certain interest deduction limitation provisions in the Income Tax Act).
Under current law, the interest deduction is allowed where a company acquires equity shares in another company that is an operating company (being a company that carries on business continuously and in the course or furtherance of that business provides goods or services for consideration) or a company that holds more than 70% of the shares of an operating company, and that acquiring company becomes the controlling group company of the acquired company at the end of the day of the transaction.
National Treasury is concerned about situations where:
a significant interest deduction is being permitted where the operating company derives a large portion of its value from its non-income producing fellow subsidiaries; and
the indirect acquisition of an operating company through its controlling group company is being abused to obtain an interest deduction on the shares acquisition of a minority stake in an underlying operating company.
National Treasury therefore proposes the following:
An operating company should generate amounts that constitute income in its hands.
The acquiring company and operating company must form part of the same group of companies as defined in section 41(1) (which excludes certain entities from forming part of the same group of companies, for example public benefit organisation or companies that are exempt from tax in terms of section 10).
A controlling group company in relation to an operating company will no longer be automatically considered as an operating company and section 24O will only apply to the acquisition of a controlling group company in relation to an operating company that forms part of the same group of companies as defined in section 41(1). Similarly, it will also be required that the acquiring company should as a result of the acquisition transaction, become a controlling group company in relation to that controlling group company and form part of the same group of companies as defined in section 41(1).
The interest deduction under section 24O will be adjusted in instances where an indirect acquisition is undertaken.
A redetermination of the qualifying share interest for purposes of determining the amount of deductible interest must be done when a controlling group company ceases to be a controlling group company in relation to any operating company, an operating company ceases to be an operating company or any company ceases to form part of the group of companies as defined in section 41(1) in relation to an operating company or a controlled group company in relation to an operating company.
The proposed amendments will come into operation on 1 January 2016 and will apply in respect of years of assessment ending on or after that date.
Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.