Treasury lists criteria for tax-free restructures - section 45
12 September 2011
Posted by: SAIT Technical
Treasury lists criteria for tax-free restructures
Business Day- Linda Ensor
CAPE TOWN — The Treasury has narrowed the parameters within which the South African Revenue Service (SARS) can exercise discretion when considering the use of section 45 of the Income Tax Act for tax-free group reorganisations.
It has also outlined the criteria that will be applied, a move that was welcomed by tax practitioners. In addition, the Treasury has dropped proposals that would have restricted the use of preference shares for black economic empowerment transactions. It will also retain the current regime for the tax treatment of medical expenses for those over 65 years of age for the next two years.
The Treasury proposed the temporary suspension of section 45 in June to prevent the loss to the fiscus of R3bn-R5bn annually through abuse. But this created a furore and after intense consultation with stakeholders, the suspension was lifted early last month on the basis that all transactions would have to be approved beforehand if they were to qualify for interest deductions.
In a report-back to Parliament’s finance committee yesterday on the latest revisions to the draft Taxation Laws Amendment Bills, the Treasury’s chief director of legal tax design, Keith Engel, said this pre- approval requirement would persist for about two years until the Treasury had resolved the fundamental problem of how to treat debt and equity for tax purposes.
Mr Engel said SARS would give advance rulings for proposed transactions, and its decisions would be subject to objection and appeal. Revised regulations governing these transactions will be published towards the end of the month. SARS would take into account factors such as the potential tax leakage associated with the debt issued to facilitate the reorganisation, and the level of debt to the total equity of the debtor company .
The Treasury will retain the three-year minimum share redemption period for hybrid shares — used extensively in black economic empowerment transactions — dropping the proposal to extend this to 10 years, which was widely criticised for closing the door on empowerment preference share funding, the main source of financing for these deals. Changes have also been made to the proposals to convert the contribution to medical aids from a tax deduction to a tax credit, which will take effect in the 2012 -13 tax year.
Bravura Equity Services senior deal maker James Aitchison welcomed the concessions, which he said reflected a willingness to accommodate legitimate business concerns. However, he was concerned that the approval process for reorganisation transactions was not set by statutory law but was at SARS’s discretion. "This raises the danger of inconsistent treatment between different taxpayers, which can never be supported. That said, its role as a temporary measure to gather more information is understood."