Treasury gives in on Section 45 suspension
04 August 2011
Posted by: SAIT Technical
Business Report - Ann Crotty
The National Treasury has lifted the controversial suspension of Section 45 of the Income Tax Act but has launched a strongly worded assault on what it called a "small clique of aggressive advisors and intermediaries” and is investigating mechanisms for holding them more directly accountable.
It also announced that the proposal to increase the minimum redemption period for preference shares from three years to 10 years would be withdrawn and the minimum redemption period for preference shares would remain at three years and a day. Yesterday’s announcement has been welcomed by business and the main opposition party, which had been critical of Treasury’s unexpected and dramatic interference in corporate activity.
The DA’s Dion George said that the suspension introduced an "unacceptably high level of uncertainty over the taxation implications of pipeline corporate activity”. Section 45 of the Income Tax Act was created to allow group restructurings without incurring any tax liability.
However, the Treasury announced in June that it had suspended, with immediate effect, the use of Section 45 amid concerns of its use in leveraged buyouts that converted equity into interest-bearing debt, which had tax advantages. The announcement explained that the suspension had been imposed because of "the imminent risk of further significant losses” to the fiscus.
In place of the suspension a new system of approval, which is described as a short-term solution, is being introduced to deal with Section 45 transactions. Approval for a transaction will essentially be determined by whether or not it involves the introduction of interest-bearing debt. Transactions that do not involve the introduction of interest-bearing debt are referred to as "green transactions” and will not need approval from the SA Revenue Service (Sars). "Amber transactions” involving interest-bearing debt will require approval, the speed of which will depend on whether or not the fiscus suffers any loss of revenue.
A longer-term solution is planned for 2012 and beyond. Keith Engel of Sars told Business Report that the decision to lift the suspension should not be interpreted as "government backing off on the issues of concern”. He stressed that the new system being implemented provided a more effective means of dealing with those concerns. He said that the suspension, which was initially due to last for 18 months, had been deemed necessary because Sars and the National Treasury lacked the sort of detailed information to be able to identify what were "good” and "bad” transactions. "We have used the past month to extract the facts, we have officially looked at over 50 transactions, and unofficially seen more,” Engel said.
In its statement, the National Treasury defended its decision to suspend Section 45, saying that it had the right to take decisive action to protect the fiscus against excessive revenue losses.