Certain financial transactions (referred to as 'arrangements') meeting the requirements set out in section 35 of the Tax Administration Act, 2011 are reportable to the South African Revenue Service (SARS) by the promoter or person who derives a tax or financial benefit from the arrangement (referred to as the 'participant').
Participants are obliged to submit, in a prescribed form, information to SARS within 45 days of the arrangement qualifying as reportable. Upon receipt of this information, SARS will issue the participant with a reference number for administrative purposes only.
In addition to the reportable arrangements already set out in the Act, section 35(2) allows SARS, by public notice, to identify arrangements which may lead to an undue tax benefit, as reportable.
On 16 March 2015, SARS published such a notice identifying reportable arrangements, where:
- a company buys back shares, on or after the date of the publication of the notice, for an amount exceeding R10m and that company issued, or is required to issue, any shares within 12 months of entering into the arrangement or the date of the buy back;
- a resident makes payments, on or after the date of the publication of the notice, in excess of R10m to an offshore trust in which he has a beneficial interest. Investments in certain investment schemes are excluded;
- a person directly or indirectly acquires a controlling interest in a company, on or after the date of the publication of the notice that has, or expects to have, an assessed loss exceeding R50m;
- arrangements which would qualify as 'hybrid equity' or 'hybrid debt' instruments in terms of sections 8E and 8F of the Income Tax Act.
It does not automatically follow that a participant who is obliged to report an arrangement to SARS will be subject to tax. SARS has, however, clearly identified these transactions as arrangements that can create tax liabilities. By placing a reporting obligation on the participants to the arrangements, it allows SARS to be made aware of the transactions at an early stage, and if necessary, they can be investigated.
Participants face heavy penalties when they fail to disclose information on reportable arrangements. A participant can become liable for penalties up to R100,000 for each month that he has failed to disclose this information. These penalties may be doubled or tripled depending on the tax benefit received by the participant.
