A3_bSection 37 of the Tax Administration Act, 28 of 2011 (‘the Admin Act’) requires taxpayers to report a transaction which would qualify as a ‘reportable arrangement’. Failure to do so will result in a monthly penalty being levied against non-compliant taxpayers ranging from between R50,000 to R300,000 per month (section 212), for up to 12 months. The purpose for requiring taxpayers to report certain transactions is obvious: to allow the South African Revenue Service (‘SARS’) to monitor transactions on an ongoing basis which it considers to exhibit potential traits of tax avoidance.

An ‘arrangement’ (defined as including any transaction, agreement, scheme or understanding) is considered to be a ‘reportable arrangement’ if either it meets one of the criteria set out in section 35(1)(a) to (e), or if it is specifically listed in a public notice issued by the Commissioner for SARS.

This article is concerned with only the latter, and such a public notice was issued by the Commissioner on 16 March 2015 in Government Gazette no. 38569 as Notice 212. It lists the following transactions, summarised below, that may constitute ‘reportable arrangements’ as listed in said Notice:

  • Certain hybrid equity instruments (typically convertible or redeemable preference shares) which are redeemable/convertible within 10 years of being issued;
  • Certain hybrid debt instruments (for example convertible debentures or subordinated loans), other than listed instruments. In the case of convertible debentures, these are only potentially reportable if conversion may take place within 10 years of the notes being issued;
  • Share buy-backs by companies amounting to more than R10 million, if accompanied by that company issuing new shares within a one year period from the buy-back having taken place;
  • l Any contributions or payments made by South African tax residents to a non-resident trust in which the South African tax residents have, or will acquire, a beneficial interest which is reasonably expected to exceed R10 million;
  • l Where one or more persons acquire a controlling interest in a company which has, or can be reasonably expected to have, an assessed tax loss exceeding R50 million;
  • l An arrangement whereby a South African taxpayer pays an amount in excess of R5 million to a non-resident person which qualifies as an insurer in that country.

The obvious purpose for allowing the Commissioner to publish a list of arrangements such as the above is to grant SARS the ability to identify transactions and/or structures which are often used by taxpayers in tax avoidance schemes. The ability to publish a list, such as the above, allows SARS to adopt a flexible approach in identifying and monitoring tax schemes and to retain the capability to publish even further transactions that are required to be reported without having to undergo the lengthy legislative process to have these transactions listed in the Admin Act itself.

Other than containing a list of transactions that would per se qualify as reportable arrangements, the Notice also determines that for purposes of those arrangements mentioned in section 35(1)(a) to (e) referred to earlier (as opposed to those listed in the Notice itself), a transaction would not be reportable if the tax benefit arising from the arrangement for all persons involved would not exceed R5 million. This R5 million threshold does however not apply to the list of transactions referred to above and listed in the Notice itself.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)


A2_bAn assessed loss for income tax purposes is a potentially valuable asset: it represents past losses made by a taxpayer which is able of being carried forward to subsequent tax years against which future taxable profits are able of being set off. The set-off of historic losses – in the form of an assessed loss – against existing taxable income has the obvious benefit of resulting in a reduced income tax charge against current and/or future taxable income generated from trade.

It is therefore quite common that such an assessed loss is assigned a determinable value (as a so-called ‘deferred tax asset’) as a secondary benefit when a company with an assessed loss is sold. However, it may happen that a potential purchaser of the shares in a company does so with the sole or main purpose to acquire the underlying assessed loss, and not necessarily the other assets that the company may own. For example, if a natural person were to incorporate his or her profitable business, it would be preferable to make use of a dormant company with a historic assessed loss, rather than incorporating a new company or make use of a shelf company. The established assessed loss can then be used to negate the income tax consequences that would otherwise have arisen from the business.

Section 103(2) of the Income Tax Act, 58 of 1962 (‘Income Tax Act’) has been designed to counter exactly this form of abuse if the utilization of an assessed loss is the sole or main purpose of a specific transaction. The provision applies whenever the South African Revenue Service (‘SARS’) is satisfied that any agreement affecting, or any change in the shareholding in, any company has been effected solely or mainly for purposes of utilizing an assessed loss of a company in order to avoid an income tax liability. Should these prerequisites be met, SARS has the power to disallow the setoff of any such assessed loss against any such income generated by the company.

Section 103(2) moreover does not only apply to taxable trading profits, but also where an assessed loss is used to negate capital gains tax exposure, or even where capital losses (as opposed to assessed income tax losses) are at stake. The provision also applies to trusts with assessed losses as much as it does to companies.

Finally, it is worth noting that section 103(2) may be used in the alternative to the general anti-avoidance rules (the so-called GAAR) contained in sections 80A to 80L of the Income Tax Act, and vice versa. It is arguable rather that the provisions of section 103(2) would be more difficult for the taxpayer to escape from, as (unlike the GAAR) it is not a prerequisite of this anti-avoidance measure that an element of ‘abnormality’ linked to the transaction in question also need to be illustrated for section 103(2) to apply.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)


A1_bRetirement annuities are often misunderstood and many people, or their parents, have had bad experiences with them in the past. This sentiment often relates to the investment performance and possibly also the charges related with these products. Some facts need to be considered before you discard this very useful investment vehicle for yourself.

When talking about financial planning and investments it is not uncommon that people say and hold opinions such as “I don’t like retirement annuities, they are terrible investments!” Usually it has to do with the performance and people can’t understand how after 10 years of contributing to a retirement annuity (RA), it is worth less than the amount they have put in.

This sentiment leads to a variety of discussion points, ranging from the fact that an RA is an investment vehicle or product wrapper, not an investment strategy or fund itself, to the fact that returns achieved are as a result of the underlying asset classes invested into, and will thus vary from one RA to the next.

What is meant by an investment vehicle or product wrapper?

Simply put often an investment vehicle, or product wrapper, has been created by legislation and usually tax legislation. Well at least that is the case for RA’s.

The government has for a long time been concerned that people do not save enough money for retirement, and ultimately people that are unable to work due to old age become a burden on the state. The state therefore has to address this and has therefore created specific tax treatments for RA’s in order to encourage people to use them to save for retirement specifically.

The idea is not to get too technical here, as the purpose of this information is not to go deeply into the tax benefits of RA’s save to say that the product wrapper known as an RA is merely one that carries these tax benefits. Briefly however, the contributions that are paid towards an RA are deductible from your gross income, the growth within the product is tax free, and on retirement there are certain tax free portions and thereafter different (more beneficial) tax rates for the lump sum benefits which do get paid out. You should get more information on this from your financial advisor.

What is meant by a fund?

If one understands that the RA is merely the product wrapper used and that this has nothing to do with the investment funds chosen for the actual money that is invested in this wrapper then we can start talking about investment performance. It should now be clear that the two are separate matters. Although it did not necessarily work this way in the past, but most modern RA’s now have a choice of funds the same, or at least very similar, to the funds used to make any other investment. One can even get an RA with a managed stock portfolio as an underlying investment.

The choice of funds is now up to you, with guidance from your financial advisor. The underlying assets of the fund must be matched to the objectives you are trying to achieve and your risk profile as an investor. As the objective of RA’s – retirement, is something that will usually only happen many years down the line you have the time available to use a lot of equity in your portfolio. Equity will give you the best returns over a longer period of time.

So by choosing the write underlying investment portfolio for your product wrapper, in this instance the RA, you would find that the investment performance of your RA should be no different had you invested in the fund directly and not used an RA, except that you have added tax benefits, which can actually boost your returns. You now have the tax benefits of the RA product wrapper and the performance of the fund you chose to invest in. Now your only hurdle is choosing the right underlying investment.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)