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Intra-Group Transactions: Recent Developments

05 October 2011   (0 Comments)
Posted by: Author: Andrew Wellsted
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Intra-Group Transactions: Recent Developments

A transfer of assets within a group of companies can still be done without incurring a tax liability if anti-avoidance rules are followed. During June 2011, the first draft of the Taxation Laws Amendment Bill (TLAB) was released by National Treasury. The TLAB contained a number of controversial proposed amendments, including the proposed suspension of Section 45 of the Income Tax Act, 1962. By way of background, Section 45 of the Act deals with intra-group transactions, and is one of the so-called rollover relief rules,which provide relief taxpayers that fall within the scope of these rules in that they are generally able to transfer assets without incurring a tax liability at the date of such transfer.

An intra-group transaction, broadly described, applies to a transfer of assets with in a group of companies. The suspension of Section 45 of the Act, which is frequently relied upon in a number of commercial transactions, was to be operative for a period of 18 months. The proposal was heavily criticised as being a disproportionate response to perceived problems with the section, and for creating uncertainty in the economy. Subsequently, and in an unprecedented step, an interim revised amendment to Section 45 of the Act was published by Treasury during August 2011 which was less onerous than an outright suspension. The revised amendment reinstated Intra-group transactions, however, for the short term (up until 1 January 2014) interim anti-avoidance rules have been introduced into Section 45 of the Act. The significant changes introduced are that:

The consideration payable by a transferee in terms of an intra-group transaction will include the issue of preference shares. However, specific anti-avoidance rules have also been introduced where the consideration given by a transferee constitutes debt or preference shares to avoid any perceived abuse;

• Where the consideration is paid by the acquiring company by issuing a debt instrument or crediting a loan account in favour of the seller, the acquiring company will not automatically be entitled to a deduction of the interest expenditure for that funding, even where that expenditure complies with the normal rules relating to the deductibility of expenditure. Rather, parties to an inter-group transaction will have to apply to the Commissioner for confirmation that the interest expenditure incurred in the circumstances will be deductible. Worryingly, no specific criteria for obtaining the Commissioner’s approval have been included in the legislation. The Minister of Finance will, in time, issue regulations specifying transactions which do not require approval from the Commissioner before interest incurred in respect of a funding loan is deductible. A couple of points are worth noting:

• The rules described above are still in draft form and we are expecting the second (and final) draft of the TLAB in roughly mid to late November 2011. What is said above may this be altered again and we will not have certainty until the second draft legislation is released;

• While it is laudable that SARS took account of the public outcry regarding the suspension of intra-group transfers, it is questionable whether or not liaising with the Commissioner’s office whenever one wishes to utilise intra-group relief is feasible or efficient;

• What taxpayers want primarily from fiscal law is certainty as to their tax liability. Where approval for a transaction is based on rough guidelines, but ultimately the discretion of an official, the required certainty is lacking;

• All parties that may be involved in intra-group transactions in the near future should carefully monitor developments, and in particular, await the release of the second draft of the TLAB where possible.

Source: By Andrew Wellsted, Director, Norton Rose South Africa (Tax Professional)


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