The proposed relaxation of income tax provisions relating to company restructurings announced in the 2005/6 Budget on Wednesday by Finance Minister Trevor Manuel will help simplify future black economic empowerment (BEE) transactions, Marina Vayanos, Ernst & Young’s senior tax consultant said on Thursday.
The new amendments to the tax regime complement President Thabo Mbeki’s pledge to speed up broad-based BEE announced in his State of the Nation speech on February 11.
Vayanos noted that for the past few years, legislation has been in place that grants tax relief on company restructuring transactions. In general terms, in order to qualify for tax relief, transactions are required to take place between companies within the same group.
“A group was fairly narrowly defined, with the requirement of a 75% direct or indirect holding. It has been proposed that this now be relaxed to a 70% direct or indirect holding, making the tax relief provisions more accessible,” said Vayanos.
“In addition, further tax relief has been proposed where capital expansions are to be financed by means of the issue of equity shares. More specifically, it is proposed that stamp duty be scrapped on the issue of equity shares and that the minimum 25% shareholding requirement after the exchange of assets for shares be reduced.”
Vayanos pointed out that tax avoidance legislation currently in place which limits tax allowances and capital losses claimable on transactions between connected persons may be considerably widened in that persons not acting at arm’s length may be treated as connected persons regardless of their relationship.
“This may have a negative impact on black empowerment deals which do not fall within the requirements for tax relief granted on company restructurings if the South African Revenue Service regard any element of these transactions as having been concluded on a non-arm’s length basis. This would seem an unnecessary amendment given the general anti-avoidance provisions that already exist in the legislation,” she said.
It was not clear at this stage whether the amendment will extend the secondary tax on companies relief in respect of dividends declared within the same group of companies. – I-Net Bridge