Dear member,
With the Christmas rush comes the legislation rush, although, so far, not as bad as previous years - on one occasion fifty plus acts arrived in December.
We are mindful that too much information can be detrimental and have decided to forego our usual article for this newsletter. The laws reflected here are numerous and diverse but each very interesting in its own right. However, we are honoured to have an article by Professor Keith Jordaan, who, among other is a co-author of Butterworths Lexis-Nexis's Silke on Income Tax - a well known title to all tax practitioners.
During the course of this week we will also add and comment on the following laws:
Pension funds: amendment of regulation 30 (rules and amendments);
Banks: designation of an activity not falling with in the meaning of the business of a bank; and
National health: regulations relating to the obtainance of information and the processes of determination and publication of reference price lists.
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Until the next law,
Pieter Stassen
CG
www.gazette.co.za
info@gazette.co.za
021-788 3268
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Draft law
Available on www.gazette.co.za
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Available on www.gazette.co.za.
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Regulations
Update: regulations for credit bureau draft verification, review, correction and removal of consumer credit information commenced 1 December 2006 and amendment of regulation 17 (retention periods for registered credit bureau information) and regulation 18 (maintenance and retention of consumer credit information by registered credit bureaus).
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Draft law
Proposed that a registered bank or mutual bank must: collect and capture annexure A information for each completed home loan application form and electronically submit this to the Office within 60 days of each financial year end; provide annexure B information in annual financial statements to be verified in auditor's report; keep records for five years; and notify applicant when application approved or declined.
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Regulations
Alternative dispute resolution method for Internet domain names registered in.co.za. Provides for abusive registrations (unfair advantage or unfairly detrimental to complainant's rights), offensive registrations (complainant cannot necessarily establish rights but the registration is contrary to law, against the public good or is likely to give offence to any class of persons), reverse domain name hijacking (use of regulations in bad faith to attempt to deprive a registrant of a domain name and refusal of repeated attempts. Non-compliance with procedures may result in case being lost. Invitation to apply for accreditation as ADR provider included.
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Regulations
Available on www.gazette.co.za.
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Available on www.gazette.co.za
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Available on www.gazette.co.za
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Available on www.gazette.co.za
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Regulations
Available on www.gazette.co.za
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Available on www.gazette.co.za
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Regulations
To provide for claims of compensation to be lodged before 30 April 2011 where claimant should have been aware of expropriation before 30 April 2010 and one year after a claimant should have become aware of expropriation in all other cases; to provide for steps that must be taken before legal proceedings may be commenced; and to provide for parts of section 10 of the Expropriation Act (offers of compensation to apply).
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Regulations
Available on www.gazette.co.za.
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Regulations
1. SANS 10231-2003 (transportation of dangerous goods, operational requirements for road vehicles) has been re-incorporated into the National Road traffic regulations, 2000 and SANS 1518-2003 will be re-incorporated into the National Road Traffic Regulation, 2000 from 1 July 2007. 2. SANS 1518 stipulates design requirements for normal road tankers transporting dangerous goods and includes the type of materials that may be used in the manufacture of the tankers.
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Draft law
Available on www.gazette.co.za
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Acts
Available on www.gazette.co.za
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Bills
Consolidates and updates laws relating to sexual offences. Businesses are advised to give special attention to the duty to report sexual offences against children and the mentally disabled (section 54), the duty of certain employers to check whether employees or prospective employees are listed offenders (section 45), the duty of certain employees to disclose whether they are listed offenders (section 46), obligations placed on certain licensing authorities (section 47), the Registrar's obligation to protect confidentiality (section 52), the amendments to laws such as the Prevention of Organised Crime Act (schedule) and the application of the law beyond our borders (section 61). Business are also reminded to consider the Interception act provisions on access to employee emails and other correspondence.
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Few changes from version B. Among other, proposed auditing of existing licences instead of re-licensing; written notification of substitution of a responsible person; renewal of a competency certificate procedure; limitation on collectables to inoperable firearms; admission of guilt does not automatically lead to disqualification. Proposed unfitness period determined per individual case; inspections in private dwellings; and extension of license periods. Proposed licence to possess firearms for professional hunting.
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Regulations
Revised restrictions that commence 1 January 2007 and end 31 December 2008. Provides for required Special Import Permit Certificate; past performers quotas; new entrants quotas; seizure of goods; withdrawal of Certificate and criminal prosecution; and special circumstances relating to intellectual property. GN R1168 GG29410/24-11-2006 makes minor amendments to tariff headings 6104.3, 6303, 6211.3(90) and 60.05
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Draft law
Among other: a risk equalization fund will provide risk equalization
transfers to relevant medical schemes in accordance with a prescribed risk
equalisation methodology; medical schemes will be required to make financial
transfers from a date provided in writing by the Minister; exemption from
payment is possible for the development of a newly registered medical scheme;
interest is payable on late payments; a schedule for the progressive
implementation of the financial transfers may be determined;a medical scheme
must provide the information that the Registrar requires for purposes of risk
equalization schemes; new offences of R1m and/or ten years imprisonment are
introduced; auditors are required to report certain reportable irregularities to
the Registrar as well; medical scheme rules are amended; limitations may be
placed on the number of benefit options that may be registered; annual financial
statements will be under International Financial Reporting Standards; changes to
corporate governance will be introduced; and regulations on trustee procedures
can be expected.
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Available on www.gazette.co.za
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Deadline extended to 18 December 2006. Proposed approach to anti-dumping investigations and interim, new shipper, sunset and anti-circumvention reviews as well as public interest inquiries. / Among other sets out procedures for different investigations, meaning of key terms, materiality, factors to be considered by Commission, duration of investigations and termination based on negligibility and margins too small to warrant action. The confidentiality clause deserves special attention.
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Definitions for dispense and dispensing fee are introduced; the definitions of logistics fee and logistics services are substituted; new approach to single exit price on packaging and single exit price and dispensing fee on onvoice; new regulation on calculation of appropriate dispensing fees; single exit price may be increased by no later than 1 July 2007 up to a maximum amount of 5.2percent of the ex manufacturer price that prevailed at 1 October 2006; electronic and document information document to be supplied by manufacturer or importer to the Directorate: Pharmaceutical Economic Evaluation; and draft methodology for international benchmarking of the prices.
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Available on www.gazette.co.za
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Contributed by Exclaim - Complete Compliance Software solutions and authored by Prof. Keith Jordaan, National Technical Tax Advisor BDO Spencer Steward and co-author SILKE: SA Income Tax.
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This article explains the important topic of the newly promulgated general anti-avoidance rules in the Income Tax Act. SARS is serious about tax compliance and does not respond kindly to any tax avoidance scheme. Minister Trevor Manuel stated clearly in parliament that SARS is now empowered with the new anti-avoidance rules to bring to book all the anti-avoidance schemes that escaped the tax net for a number of years.
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The Duke of Westminister appeared in the number 1 spot of the ¿Rich List¿ as published by the London Sunday Times some decades ago. This very same Duke was the defendant in the most famous tax avoidance case in modern history. The judges of that court ruled in favour of the Duke and stated that:
"every man is entitled, if he can, to order his affairs so that the tax attaching is less than it otherwise would be".
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This raises an interesting question - is there a correlation between tax planning and wealth and is this quote still relevant in the twenty-first century? What follows may lead to the conclusion that the new GAAR rules are indeed a new beginning.
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Section 103(1) contained the act's general anti-avoidance rule (GAAR) for a number of years. This provision did, however, contain certain inherent weaknesses with the result that a new GAAR was incorporated within the Act. These new provisions were inserted in sections 80A to 80L and apply to any arrangement entered into on or after 2 November 2006.
Section 80A describes what an impermissible avoidance arrangement is. The powers that the Commissioner has with respect to an impermissible avoidance arrangement are set out in s80B. The remaining provisions expand on these first two provisions and deal with certain procedural issues that arise.
Section 80L defines the terms arrangement, avoidance arrangement, impermissible avoidance arrangement, party and tax benefit for use in the GAAR. It is important to note that these terms draw heavily on the provisions and interpretation of the previous s103(1), with the exception of the new terms impermissible avoidance arrangement and party.
New legislation is always complicated, especially if one is confronted with unfamiliar terms. Diagram 1 will provide the reader with an overview of the new rules and will assist in the understanding of these new rules.
Once all the s80A requirements of an impermissible tax avoidance arrangement are present, s80B empowers the Commissioner to take certain action:
disregard or combine any steps in the arrangement,
deem different parties as one and the same person, or
to re-allocate or re-classify any receipts or accruals, expenditure or rebates.
The Commissioner must, in terms of s 80B(2), make the necessary and appropriate adjustments to the applicable tax liabilities to ensure the consistent treatment of all the parties to the arrangement. These adjustments are subject to the normal three year prescription rules. The adjustments are also subject to objection and appeal.
It is important to note that the provisions of s 80 may be applied to any part of an arrangement or to the arrangement as a whole (s 80H).
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The general anti-avoidance rule can be applied if an avoidance arrangement (in other words, an arrangement that results in a tax benefit) is an impermissible avoidance arrangement.
An impermissible avoidance arrangement arises if
1. the sole or main purpose of the avoidance arrangement was to obtain a tax benefit (it is always presumed that an avoidance arrangement was entered into with the sole or main purpose of obtaining a tax benefit (s 80G)) and
2. a tainted element is present. There are three tainted elements:
2.1 Abnormality (ss 80A(a)(i), ss 80A(b) and 80A(c)(i); or
2.2 Lack of commercial substance (s 80A(a)(ii)); or
2.3 Misuse or abuse of the provisions of the Act (s 80A(a)(ii)).
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Section 80C provides a general rule for determining whether an avoidance arrangement lacks commercial substance for the purposes of s 80A, as well as a non-exclusive set of characteristics that serve as indicators of a lack of commercial substance.
The general rule is that an avoidance arrangement lacks commercial substance if it results in a significant tax benefit for a party but does not have a significant effect upon either the business risks or the net cash flow of that party (s 80C). Examples of indicators of a lack of commercial substance, according to s 80C(2), include:
situations where the legal substance of a transaction differs from the legal form, or
round trip financing is present, as described in s 80D, or
a tax-indifferent party, as described in s 80E, is introduced as part of the arrangement, or
elements are present that have the effect of offsetting or cancelling each other. These elements are typically present when one transaction creates a significant tax benefit while another transaction effectively neutralises the undesired consequences of the first transaction.
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Section 80D provides a non-exclusive description of round trip financing. This essentially relates to a transfer of funds between parties that results in a tax benefit and a significant reduction, offset or elimination of business risk.
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Holdco owns all the shares of company A and company B. Company A owns an administrative building on which no capital allowances can be claimed. A sale-and-lease back transaction was concluded between company A and company B in terms of which Company A sold the building to company B who immediately leased the same building back to company A. Company B has an assessed tax loss and therefore incurs no tax cash flow resulting from the lease income that it receives. Company A entered into this arrangement to eliminate the risk associated with the ownership of the building.
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Is round trip financing present?
Round trip financing is present in this arrangement. Funds were transferred from company B to company A when the building was bought. Company A will repay the same funds to company B by means of the future lease payments. Company A obtains a tax benefit from this transaction since the lease expenses can now be claimed as a tax deduction by company A.
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Can the new GAAR be applied?
Question 1 (see diagram): Was an arrangement entered into? If yes, a number of transactions were entered into then a sale transaction as well as a lease transaction was entered into.
Question 2: Is a tax benefit obtained? The deduction of the lease expense presents a tax benefit, thus the arrangement now constitutes an avoidance arrangement as defined.
Question 3: Is it an impermissible avoidance arrangement? if yes, there is a lack of commercial substance for a number of reasons: (1) round trip financing is present and (2) there is a significant tax benefit for a party but it does not have a significant effect upon either the business risks or the net cash flow of that party.
The business risk of Holdco remained unchanged, but a tax benefit arose for one of its subsidiaries. One may argue that Holdco is not a party to the transaction. This will not have any impact since the Commissioner may deem connected persons as one and the same party (s 80F(a)). Alternatively, different entities may be deemed to be the same party for GAAR purposes (s 80F(b)).
The GAAR can certainly be applied. The sale and lease back transaction as well as the resulting tax benefits may be ignored when SARS raises a tax assessment. Interest will also be levied on the amount of taxes that would have being paid if the transaction was never entered into.
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The round tripping provision applies to any round tripped funds without any regard to the timing or the sequence, means or manner in which round tripped amounts are transferred (s 80D(2)). The fact that the flow of funds takes place during different years of assessment is therefore irrelevant.
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One of the indicators of a lack of commercial substance in a transaction is when a tax-indifferent party is accommodated in the transaction.
A tax-indifferent party is accommodated when:
a party receives an amount that has no impact on his tax liability (he is, for example not subject to tax or the receipt is offset either by any expenditure, loss or assessed loss of his) and
that amount would have had an impact on the tax liability of another party if the amount was received by this party (if, for example, this second party would have been subject to tax on that amount if he received it or the amount would have constituted a non-deductible item for him).
(Section 80E(1)).
A person may be an accommodating or tax-indifferent party whether or not that person is a connected person in relation to any other party (s 80E(2)).
The presence of a party to a transaction will not be considered as accommodating a tax-indifferent party if:
the tax actually paid in other jurisdictions amounts to more than two-thirds of the income tax that would have been paid in the Republic (s 80E(3)(a)), or
if ongoing active business operations (of at least 18 months) in connection with the avoidance arrangement are carried out through a substantial business establishment in the Republic or elsewhere (s 80E(3)(b)).
These safe harbour rules under which section 80E does not apply is very necessary if, for example, a South African company buys a stock item from a foreign company, the transaction could (in the absence of the safe harbour rules) have being classified as accommodating a tax-indifferent party. This is because the proceeds of the sale of the stock item would have been subject to tax in the Republic if those stock items were bought from a South African company. The safe harbour rules of s 80E(3) may assist in an attempt to ensure that the foreign company is not seen as a tax-indifferent party to the transaction.
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Section 80F allows the Commissioner to combine connected persons and disregard an accommodating or tax-indifferent party or to combine it with another party for the purposes of determining
whether an avoidance arrangement lacks commercial substance or
whether a tax benefit exists.
The Commissioner must give notice, with reasons, of an intention to invoke the GAAR. The taxpayer generally has 60 days to reply to the notice but may request an extension to reply. On receipt of the reply or expiry of the period for a reply the Commissioner has 180 days to raise further queries, withdraw the notice, or invoke the GAAR. If additional information comes to the knowledge of the Commissioner the reasons for invoking the GAAR may be modified or a new notice may be issued if a prior notice has been withdrawn (s80J).
Interest charges by SARS may not be waived in terms of s 89quat(3) or (3A) if the GAAR has been invoked (s80K). The implication of this is that SARS must levy interest on the amounts of tax that was not paid due to the fact that the taxpayer entered into a tax avoidance arrangement.
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All future transactions should be considered for abnormality, lack of commercial substance or misuse of the Income Tax Act. Any of these factors may result in the application of the new general anti-avoidance rules. The question is do we misuse the Act by planning our tax affairs? If we do, GAAR applies!
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This IRMSA Legal Brief Service is not intended as legal or professional advice and has been prepared as a summary and opinion on general principles of law or other common practice and is published for general information purposes only. Only specific professional advice should be relied upon as what is herein contained may not be appropriate in particular circumstances. This is not a substitute for legal or other professional advice. Note also that the views expressed by the editor of Legal Brief might not necessarily be the views of IRMSA.
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