SARS’ list of reportable arrangements, as envisaged by section 35 of the Tax Administration Act, 2011 (TAA), has been widened extensively. The arrangements, deemed reportable, were published on 16 March 2015 in a public notice (‘the Notice’) in the Government Gazette. Reportable arrangements must be reported to SARS within 45 business days after becoming a participant in a reportable arrangement or 45 business days after the date on which an arrangement qualifies as a reportable arrangement. Every participant has the duty to disclose the prescribed information regarding the arrangement to SARS unless the participant obtains a written statement from another participant that the other participant has disclosed the arrangement.
Failure to disclose results in severe penalties. Participants other than the promotor are subject to a penalty of R50 000 per month whilst the promotor is subject to R100 000 per month (up to a maximum of 12 months). If the participant’s anticipated tax benefit exceeds R5 million the penalty is doubled and if it exceeds R10 million the penalty is tripled. SARS may remit up to R100 000 of the penalty in the case of a first incidence or where the non-compliance endures for less than 5 business days. The remission will only be done if SARS is satisfied that reasonable grounds exist for the failure to report and that the issue has been resolved. In all other instances, the penalty may only be remitted in exceptional circumstances.
Where SARS casts the list of reportable arrangement too widely, taxpayers may inadvertently be subject to the draconian penalty regime – even on transactions believed to be normal business. This places an enormous responsibility on the taxpayer and tax advisors. The notice excludes arrangements where the tax benefit to all participants in aggregate does not exceed R5 million, from being reportable. Taxpayers can no longer rely on Ministerial Notice 384, which excluded arrangements where the tax benefit was not the main or one of the main benefits of an arrangement.
The new list has been changed considerably from the list gazetted on 28 December 2012, which contained only two categories, namely an arrangement that would have qualified as:
- A ‘hybrid equity instrument’ (section 8E of the Income Tax Act, 1962 (ITA)) if the prescribed period had been 10 years; and
- A ‘hybrid debt instrument’ (section 8F of the ITA) if the prescribed period had been 10 years (other than listed debt instruments).
These two categories are contained verbatim in the new list, although section 8F was substituted (effective 1 April 2014) and no longer refers to a 3 year period. It is arguable that this category only applies to instruments that were issued pre- 1 April 2014 in respect of hybrid debt instruments.
The Notice includes the following remaining categories of arrangements in terms of which:
- A company buys back shares, from date of publication of the Notice, from one or more shareholders for an aggregate amount of at least R10 million, if the company issued or is required to issue any shares within 12 months of entering into the arrangement or of the date of any buy-back in terms of that arrangement.
- A resident makes contributions or payments, from date of publication of the Notice, to a non-resident trust and ‘acquires a beneficial interest’ in that trust in circumstances where the contributions, payments or the value of the interest exceeds or is reasonably expected to exceed R10 million. Contributions, payments or a beneficial interest acquired in a foreign collective investment scheme in securities or participation bonds, or a ‘foreign investment entity’ as defined are excluded from the ambit of this category. A person(s) acquires the controlling interest in a company (by the acquisition of shares or voting rights from date of publication of the Notice) that has carried forward or expects to carry forward a balance of assessed loss exceeding R50 million from the previous year of assessment to the year of assessment in which the controlling interest is acquired. It also includes the acquisition of the controlling interests in a company that expects to realise an assessed loss exceeding R50 million in the year of assessment during which the controlling interest is acquired. It also includes an indirect acquisition of a controlling interest in a company with this quantum of assessed losses.
- An amount that exceeds or is likely to exceed R5 million is or becomes payable by a resident to an insurer that qualifies as an insurer in terms of any foreign law, if:
- An aggregate amount that exceeds or is reasonably expected to exceed R5 million has been paid or becomes payable by the resident to the foreign insurer (irrespective of when such amounts became or become payable); and
- An amount payable on or after the date of publication of this notice, in cash or otherwise, to a beneficiary in terms of that arrangement is to be determined mainly by reference to the value of particular assets or categories of assets held by or on behalf of the foreign insurer or by another person for purposes of the arrangement.
Section 35(1) of the TAA includes other types of arrangements that are reportable in addition to those listed above and section 36 contains a number of exclusions. We list the other types of arrangements included in section 35(1) below and the excluded arrangements in terms of section 36 immediately thereafter.
Section 35(1) includes arrangements where a person is a participant in the arrangement and the arrangement:
- Contains provisions in terms of which the calculation of ‘interest’ (as defined in section 24J of the ITA), finance cost, fees or any other charges is wholly or partly dependent of the assumptions relating to the tax treatment of that ‘arrangement’ (other than the reason of any change in the provisions of the ITA);
- Has any of the characteristics contemplated in section 80C(2)(b) of the ITA, or substantially similar characteristics, i.e. round trip financing (per section 80D), an accommodating or tax indifferent party (per section 80E) or cancelling or offsetting elements;
- Gives rise to an amount that is or will be disclosed by any participant in any year of assessment or over the term of the arrangement as- o A deduction for purposes of the ITA but not as an expense for purposes of ‘financial reporting standards’; or o Revenue for purposes of ‘financial reporting standards’ but not as gross income for purposes of the ITA;
- Does not result in a reasonable expectation of a ‘pre-tax profit’ for any participant; or
- Results in a reasonable expectation of a ‘pre-tax profit’ for any participant that is less than the value of that ‘tax benefit’ to that participant if both are discounted to a present value at the end of the first year of the assessment when that ‘tax benefit’ is or will be derived or is assumed to be derived, using consistent assumptions and a reasonable discount rate for that participant.Section 36 of the TAA excludes the following arrangements:
- A debt in term of which the borrower receives or will receive:
- An amount of cash and agrees to repay at least the same amount of cash to the lender at a determinable future date; or
- A fungible asset and agrees to return an asset of the same kind and of the same or equivalent quantity and quality to the lender at a determinable future date;
- A lease;
- A transaction undertaken through an exchange, regulated in terms of the Securities Services Act, 2004; or
- A transaction in participatory interests in a scheme, regulated in terms of the Collective Investment Schemes Control Act, 2002.
The section 36 exclusions only apply to an arrangement that:
- Is undertaken on a stand-alone basis and is not directly or indirectly connected to any other arrangement (whether entered into between the same or different parties); or
- Would have qualified as having been undertaken on a stand-alone basis as required by paragraph (a), were it not for a connected arrangement that is entered into for the sole purpose of providing security and if no ‘tax benefit’ is obtained or enhanced by virtue of the security arrangement.
The section 36 exclusions do not apply to an arrangement entered into:
- With the main purpose or one of its main purposes being to obtain or enhance a ‘tax benefit’; or
- In a specific manner or form that enhances or will enhance a ‘tax benefit’. With the extended list of the reportable arrangements it is now even more critical that taxpayers familiarise themselves of these changes to avoid the fiscus commanding the severe penalties that SARS could impose.