In recent years, the tax landscape has been affected by a number of developments, including changes to the tax legislation as well as case law. The South African tax system does not allow for group tax. However, in 2001 the National Treasury introduced corporate rules intended to allow entities that form part of the same group of companies to carry out business transactions without being subject to tax. These rules, however, have been amended almost every year since 2001 for various reasons. Most amendments have been designed to deal with unintended consequences and to close loopholes that have led to the erosion of the tax base.
INTRA-GROUP TRANSACTIONS: Section 45 of the Income Tax Act No. 58 allows entities to transfer assets within the same group of companies without recouping any allowances that were claimed by the transferee on the transferred assets. The transferee does not pay capital gains tax on assets disposed of in terms of section 45. The transferor simply steps into the shoes of the transferee as if they were the ones who have acquired the asset from inception. According to the tax authority, South African Revenue Services (SARS), these provisions have been abused in many ways.
One way in which these provisions have been applied is through a method known as “debt-pushdown”. This is where a holding company that has an operating company as a subsidiary may decide to dispose of this subsidiary, but instead of selling it to a buyer, the holding company introduces a second subsidiary as a sister company to the operating firm. The subsidiary then raises funding from the bank to acquire assets from the operating firm, which disposes of the assets to the subsidiary without paying tax on the sale of assets on the basis that the operating and subsidiary firms are part of the same group of companies. Following this, the operating company declares a dividend to the holding firm and does not pay the secondary tax on companies. Finally, another shareholder acquires a percentage of shares in the subsidiary company at nominal value.
The end result is that the holding company receives money (in the form of a dividend) without paying tax. The operating company is able to dispose of assets without paying tax, and, in addition, has no taxable income as its income-generating assets have been disposed. The subsidiary is also not in a tax paying position as it can deduct interest expense against any income generated by assets acquired from the operating firm. There is also the possibility that the funding bank has tax losses to shield any tax payable on interest received. The biggest loser is the tax collector.
CHANGES: In response to such schemes, the National Treasury introduced a number of changes to the legislation in 2011 to counter the erosion of the tax base. One of these interventions was the suspension of section 45 in June 2011, which was intended to allow the National Treasury sufficient time to readdress section 45’s loopholes. The section was then amended and made subject to section 23K and section 10(1)(hA), the former of which seeks to limit the amount of interest that can be deducted in respect of section 45 transactions. Section 10(1)(hA), on the other hand, exempts from taxable income interest received to the extent that the other party is not allowed to claim interest expense as a deduction in terms of section 23K. Other corporate rules are listed in section 42, 46 and 47 of the act.
TAX ADMINISTRATION BILL: SARS has drafted a bill to combine all administrative procedures listed in various parts of the tax legislation. Outlined in the tax administration bill are the powers of SARS, the ombudsman, the procedures for dealing with disputes and parties that can be held liable for tax liabilities. The bill broadens the definition of the taxpayer and representative taxpayer. In certain cases, representative taxpayers will be held personally liable for payable tax. A person who signs the tax return is regarded for all purposes in connection with the tax act to be cognisant of the statements made in the return. Due to the bill’s legal complexities, one expects a number of tax cases to arise involving this legislation once it is operational.
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