The Commissioner for the South African Revenue Service (SARS) issued an important notice (SARS Notice) on 16 March 2015. The SARS Notice was published in terms of s35(2) and s36(4) of the Tax Administration Act, No 28 of 2011 (TAA). Sections 34 to 39 of the TAA deal with so-called ‘reportable arrangements’. Essentially, if an arrangement has certain characteristics (as listed in s35(1) of the TAA) or if SARS has listed the arrangement in a public notice (in terms of s35(2) of the TAA), then the person who promotes the arrangement (called a promoter) and the person who may derive a tax benefit from the arrangement (called the participant) must report the arrangement to SARS.
In terms of s36(1) to (3) of the TAA, certain arrangements are excluded, and do not need to be reported. Promoters or participants need not report these types of arrangements to SARS. Section 36(4) of the TAA also allows SARS to exclude additional arrangements by way of public notice.
In terms of the SARS Notice, the following arrangements are now also reportable (in addition to the arrangements with the features set out in s35(1) of the TAA):
- Hybrid financial instruments: Certain arrangements that qualify as ‘hybrid equity shares’ in terms of s8E of the Income Tax Act, No 58 of 1962 (ITA) and certain ‘hybrid debt instruments’ in terms of s8F of the ITA (other than listed shares). Put simply, under those anti-avoidance provisions, the incidence of tax in relation to financial instruments which have certain features, is re-characterised.
- Share buy-backs: An arrangement in terms of which a company buys back its shares for a price of more than R10 million and the company issued or is required to issue shares within a period of 12 months of entering into the arrangement or the date of the buy-back.
- Offshore trusts: An arrangement in terms of which a local tax resident makes a contribution to a trust if: (i) the trust is a tax resident abroad; (ii) the resident making the contribution is a beneficiary of the trust; and (iii) the value of the contribution or the interest of the beneficiary in the trust exceeds R10 million. Investments in certain offshore collective investment schemes are excluded.
- Assessed losses: An arrangement in terms of which a person acquires a direct or indirect controlling interest in a company that has, or is likely to have, an assessed loss exceeding R50 million.
- Foreign insurance policies: An arrangement in terms of which a local tax resident pays more than R5 million to an offshore insurer and the return of the insurance policy is determined mainly with reference to the value of particular assets held by the insurer.
However, the SARS Notice does contain some good news: SARS has excluded from the operation of s35(1) of the TAA arrangements where the aggregate tax benefit which may be derived by all the participants to the arrangement is less than R5 million.
The SARS Notice replaces all previous notices issued in relation to reportable arrangements.
Section 38 of the TAA sets out the information that a promoter or participant must submit to SARS. The promoter or participant must submit the information within 45 business days of the date on which the arrangement becomes reportable or, if a person becomes a participant in an arrangement that is reportable, within 45 days of the person becoming a participant (s37 of the TAA).
On receipt of the relevant information SARS must allocate a reference number to the participant for administrative purposes only (s39 of the TAA).
What are the consequences of reporting an arrangement to SARS? Importantly, the fact that a person has reported an arrangement to SARS does not mean that the person thereby becomes subject to tax. The only effect of reporting an arrangement is that SARS will be notified of a transaction which it may be consider to be suspect from a tax perspective and enable SARS to investigate the transaction at an early stage.
What happens if a person does not inform SARS of an arrangement that is reportable? In terms of s212 of the TAA, a person who fails to disclose the information in respect of a reportable arrangement is liable to a penalty for each month that the failure continues (limited to 12 months). The amount of the penalty may be doubled or even tripled, depending on the amount of the anticipated tax benefit realised by the participant.
The SARS Notice raises a number of issues which we will consider in greater detail in our upcoming Tax Alerts.