The reportable arrangement provisions were established by the South African Revenue Service (SARS) with the objective of obtaining information on certain types of transactions. The circumstances under which a person should report an arrangement to SARS, as defined in section 34 of the Tax Administration Act, 2011 (the TAA), are contained in sections 34 to 39 of the TAA. Essentially, if an arrangement has certain characteristics as listed in section 35(1) of the TAA or if SARS has listed the arrangement in a public notice in terms of section 35(2) of the TAA (listed arrangements), then the person who promotes the arrangement (promoter); any person who may, directly or indirectly, derive a tax benefit from the arrangement (participant); or any person who is a party to a listed arrangement, must report the arrangement to SARS.
In terms of section 36(1) to (3) of the TAA, certain arrangements are excluded, and do not need to be reported. Section 36(4) of the TAA also allows SARS to exclude additional arrangements by way of public notice.
The draft revised public notice listing arrangements for the purposes of section 35(2) and 36(2) of the TAA was published by SARS on 21 February 2019 (Draft Revised Notice) for public comment due by 8 March 2019. It is proposed to add a new listed arrangement to the existing list, namely, any arrangement in terms of which a closure rehabilitation company or trust as referred to in section 37A of the Income Tax Act, 1962 (ITA), prior to the final closure plan of the relevant prospecting right, mining right or mining permit has been approved by the cabinet member responsible for mineral resources, that impacts or could impact the funds, assets or guarantees etc. of the rehabilitation trust as listed in the Draft Revised Notice (see paragraph 2.7 of the Draft Revised Notice here). For example, where a rehabilitation trust (directly or indirectly) distributes, authorises the withdrawal or transfer, or authorises the use as security of an aggregate amount of more than ZAR10-million in any year of assessment of its assets.
Apart from the proposed reporting requirements in terms of the Draft Revised Notice, section 37A(10) of the ITA already requires a rehabilitation trust to submit a report to the Director-General of National Treasury, within three months after the end of any year of assessment, setting out (i) the total amount of contributions to the trust; (ii) the total amount of withdrawals from the company or trust; and (iii) the purpose for which any amount of those withdrawals were applied.
The aforementioned Draft Revised Notice will place an even bigger administrative burden on a closure rehabilitation company or trust as they are obligated to report to the Director-General of National Treasury in terms of section 37A(10) of the ITA and will in the near future, upon the publication of the public notice in the current form, report any arrangement listed in the Draft Revised Notice to SARS.
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 days of the date on which the arrangement qualifies as a reportable arrangement or, if a person becomes a participant in an arrangement that is reportable, within 45 days of the person becoming a participant. On receipt of the relevant information, SARS must allocate a reference number to the participant for administrative purposes only.
Importantly, the fact that a person has reported an arrangement to SARS does not mean that a person thereby becomes subject to tax. The only effect of reporting an arrangement is to enable SARS to investigate the transaction at an early stage. In terms of section 212 of the TAA, failure to disclose a reportable arrangement to SARS can result in a penalty being levied of ZAR50 000 for the participant and ZAR100 000 for the promoter each month that the failure continues, up to a maximum of 12 months. The amount of the penalties is doubled if the anticipated tax benefit achieved by the arrangement exceeds ZAR5-million and is tripled if the benefit exceeds ZAR10-million.
Given the onerous nature of failing to comply with the reportable arrangement provisions, it is essential that each and every transaction is carefully considered so as to prevent penalties from being imposed. It is therefore submitted that, if any person contemplates or intends to implement the aforementioned arrangement, it is essential that the reporting obligations be taken into account.
Authors: Kristel van Rensburg and Emile Cronje