The South African Institute of Chartered Accountants submitted that Section 45 was introduced in 2001 to grant inter-group relief. It had undergone significant amendments to curtail perceived abuse. The Institute emphasised that Section 45 was not required where there was no group, illustrated Section 45 as applied in daily transactions, and in a debt push-down. The problem with the suspension of Section 45 was that there was no mention in the budget; it was retrospective; and it affected legitimate transactions. The proposed solution was the General Anti-Avoidance Rule. Removal of the Value Extraction Tax created problems: it should be retained as part of the new Dividend Tax system to provide certainty to taxpayers regarding their tax liability. The Institute submitted that the proposed medical scheme credits should be more in line with the current costs of medical aids. There should be provision for unused medical scheme credits to be carried forward to successive years of assessment.
Business Unity South
The South African Institute of Tax Practitioners complained at the lack of time to prepare for engagement, given the complexity of the proposed legislation. No economic gain was created by the proposed suspension of Section 45, which had been a long-standing feature to allow assets to be moved within a group. However, the Institute deplored commercial misuse.
African National Congress Members said that mere observations were not required, but concrete alternatives. One of the topical issues in the Bill was the unfriendly provisions on the headquarter companies. Did today's presenters have a different view from those of yesterday? The volume of amendments made it hard for Members to prepare for these sittings. How would the South African Institute of Chartered Accountants suggest to National Treasury that the avoidance of taxes was dealt with? How would Business Unity South
Bravura warned of the dangers of sudden and dramatic announcements (sections 45, 8E and 8EA), emphasised the need for an internationally competitive and equitable tax system (interest deductibility and group taxation), and was concerned about time-frames and process. Time was too short to prepare submissions, given that the Bills and the Explanatory Memorandum amounted to some 376 pages. Unintended consequences of proposed changes included a significant negative impact on Black Economic Empowerment transactions, mergers and acquisitions leading to loss of economic growth and job creation. The suspension of Section 45 eliminated the ability to use the leveraged model; Treasury should consider applying the General Anti-Avoidance Rule or fresh, targeted legislation. Certain previously announced Black Economic Empowerment transactions might no longer be implemented. Existing legislation (through anti-avoidance provisions) already provided the ability to address the intended target of the proposed changes. If still required, proposed changes should be targeted at mischief and not be broad-brushed.
The Southern African Venture Capital and Private Equity Association explained the venture capital industry in
The Banking Association of South Africa said that the South African Revenue Service and National Treasury had to be ever vigilant. If they identified causes of concern, they should take action, but not over-react. The Association explained leakage, which occurred where there was an unanticipated exemption of income, for example, massive interest deductions, that diminished the tax base. At the same time National Treasury had noted many instruments of a hybrid nature. These had characteristics of debt and of equity. However, relief of hybrid equity did not inherently result in tax leakage from the system just as debt did not result in leakage when both parties were South African tax payers. The Association suggested targeted surgical measures rather than the proposed suspension of the Section 45 provisions. The Association proposed that the moratorium should be no more than three months. The Association would take advantage of the invitation to lodge more detailed comments by 04 July 2011.
African National Congress Members said that discussion had focused on Section 45 rather than on the Bill as a whole, asked about turnover tax, and if Bravura would be willing to give details of all the Section 45 Black Economic Empowerment structures that it had put together. A Democratic Alliance Member asked how the suspension of 45 impacted on individual tax payers, whose tax burden would increase if corporate contributions to the fiscus were eroded. The Chairperson said that the final submissions to the National Treasury, and Treasury's report-back, which it would share with Members, would be of great interest. Business Unity South
The Chairperson welcomed delegates, Members and guests.
The South African
The South African Institute of Chartered Accountants (SAICA)'s delegation was led by Mr Muneer Hassan, Project Director: Tax, supported by Mr Wessel Smith, Member of SAICA’s National Tax Committee (NTC), and Mr Puleng Owen Manyaka: Project Manager: SAICA Tax Standards.
In his introductory comments, Mr Hassan commented on the limited time for response. The second submission was due by 04 July 2011. The 2011 Bills were technical in content.
Background to the suspension of Section 45 (Clause 75) in regard to anti-avoidance: suspension of intra-group roll-overs (paragraph 3.22 of SAICA submission)
Measures were in place since 1988. Section 45 was introduced on 1 October 2001. South Africa (SA) had no group tax. The purpose of Section 45 was to grant inter-group relief. It had undergone significant amendments to curtail perceived abuse.
Mr Hassan emphasised that Section 45 was not required where there was no group (diagram, slide 7). He illustrated Section 45 as applied in daily transactions (diagram, slide 8), and a debt push-down (diagram, slide 9).
The problem with the suspension of Section 45 was that there was no mention in the budget; it was retrospective; and it affected legitimate transactions.
The proposed solution was the General Anti-Avoidance Rule (GAAR)
• Specific anti-avoidance against perceived abuse
• Group taxation for South Africa (SA)
(Slide 11 )
Dividends Tax: Removal of the Value Extraction Tax (VET) (paragraph 3.16 of SAICA submission)
Mr Smith said that the proposal removed the detailed VET rules to determine if a payment from a company to its shareholder was a disguised dividend or not.
Removal of the VET created problems:
One of the fundamental principles of tax was certainty, meaning the amount of tax which each individual was bound to pay must be certain, and not arbitrary (Smith, Adam. Wealth of Nations. 1776). The problem was that for most owner-managed small companies, it was often a grey area whether in fact a payment to the shareholder was a dividend, remuneration or even a loan. Without a clear set of rules to guide the taxpayers in this regard, a great deal of uncertainty and confusion among such small companies would exist. This would result in more disputes and tax court cases between the South African Revenue Service (SARS) and taxpayers until a set of rules had been laid down by the courts, which could take a number of years to happen. For example, in the Explanatory Memorandum (EM), an interest free loan to a shareholder was indicated as a disguised dividend. But what about a loan to a shareholder at an interest rate of one or two points below the prime rate? And would a loan to shareholder at prime rate, but who experienced financial difficulties be classified as a disguised dividend, since it could be argued that as the shareholder was not financially sound he or she should not have received a loan at all? (Slides 13-16)
Dividends Tax: Removal of the Value Extraction Tax (VET): proposed solution
The proposal to scrap the VET should be reconsidered and the VET should be retained as part of the new Dividend Tax system to provide certainty to taxpayers regarding their tax liability.
Introduction of medical scheme credits [Clause 10 and 47 / Section 6A and section 18(2)(c)- (paragraph 2.6 of SAICA submission)]
The medical scheme credits to were to replace current system of capped monetary amount deductions for medical aid contributions. The mechanics of current medical aid contribution deduction and other medical expenditure deduction were explained (Slide 18).
Introduction of medical scheme credits - problems
Mr Wessel Smith said that the amounts proposed for the medical credits were very low in comparison to the current capped amounts considering the rising costs of medical contributions and expenses. The EM indicated that the tax breaks were used as a tax structuring vehicle by high income earners to reduce the tax payable, but, he asked, how could it be “structuring” if there was no current alternative to medical aid membership? In terms of existing medical aid legislation, deductions might potentially give rise to an assessed loss. However, section 6A was silent on medical scheme credits that were not used in the year of assessment in which they arose. It would thus seem that such unused credits would be forfeited. In the current system, elderly taxpayers (being 65 years and older – qualifying for a rebate in terms of section 6(2)(b)) and disabled taxpayers, would qualify for a 100% tax deduction for their medical aid contributions. In the proposed tax credit system, these taxpayers would only receive a R216 additional tax credit per month. The additional R216 credit per month might not be sufficient to cover the total medical aid contributions by these special classes of taxpayer, even calculated at an average tax rate of 30%. (Slides 19-21)
Introduction of medical scheme credits - Proposed solution?
SAICA submitted that the amounts (proposed credits) should be more in line with the current costs of medical aids. It proposed that this change became effective at a future date when the members had an alternative (when National Health Scheme became effective). It proposed that the medical aid contribution deduction system of a 100% for elderly taxpayers (being 65 years and older – qualifying for a rebate in terms of section 6(2)(b)) and disabled taxpayers be retained and that these taxpayers be excluded from the new tax credit system to prevent these taxpayers from suffering hardship as a result of a reduction in the tax benefits for their medical aid contributions. It proposed that the legislation should make provision for unused medical scheme credits to be carried forward to successive years of assessment. (Slides 22-24)
(Please refer to the attached presentation document; please see also: Comments letter dated 20 June 2011; and SAICA’s National Tax Committee submission comments in relation to the motivation for group taxation in
Mr Coenraad Bezuidenhout, Executive Director: Economic Policy, Business Unity South Africa (BUSA), explained BUSA's mandate. BUSA was re-enforcing the message of competitiveness, growth and job creation– which required investment and competitiveness. This must be taken into account in tax policy. BUSA) must work ceaselessly towards competitiveness. (Chart, slide 2).
BUSA welcomed the opportunity to make its submission. It was an opportunity for business to reinforce key earlier submissions. There was on-going engagement until 04 July 2011. A full submission would be provided to the Committee. BUSA's message was in support of competitiveness to promote investment, economic growth and job creation (Slide 3) and improved competitiveness (chart, slide 4).
•personal income tax relief;
•transfer duty relief;
•monetary threshold adjustments, including increases in capital gains exclusion mounts;
•measures to enhance the learner-ship and industrial incentive programmes;
•increases in the turnover tax exemption threshold for micro-businesses; and,
•measures to build on South Africa’s role as a regional gateway regime (slide 5)
Supporting jobs and growth
Mr Bezuidenhou called for a review of opportunities for simpler, better tax
•skills development levy;
•securities transfer tax;
•taxes on petroleum products;
•air departure tax;
•the electricity levy;
•the incandescent bulb levy;
•CO2 tax on motor vehicles;
•Customs duties; and,
•Stamp duties and fees.
National Health Insurance
•Frankness & commitment to phased & consultative approach appreciated
•Firm financial foundation required
•One-dimensional focus on generating revenue should be avoided
•Mature debate on merits of different policy instruments needed
Section 45 PP.1
Section 3.22 Anti-avoidance: suspension of intra-group roll-overs (Key provision: section 45)
The Explanatory Memorandum (EM) said:
“Section 45 allows for roll-over relief… [Postponement of capital gains tax allowed to a business that reinvests the proceeds from a profitable sale of an asset, as an incentive for replacing older capital assets with new or better ones] …
The Explanatory memorandum said:
“Section 45 allows for roll-over relief when assets were transferred between members of the same group of companies in exchange for the issue of intra-group shares or of intra-group debt. Unlike other reorganisations, this form of relief creates a market value tax cost in the newly issued shares or debt (as opposed to a roll-over tax cost).”
BUSA advised AGAINST suspension of Section 45:
•Negative impact on transactions for which Section 45 envisaged: lack of a tax neutral environment within group of companies would particularly complicate restructuring.
•Caused uncertainty: negative impact on investment decision.
•20% - 26% Black Economic Empowerment (BEE) transactions were conducted using S45 to ensure a commercial result.
•Arm’s length transactions difficult to justify otherwise would prove problematic without S45.
Section 45: Treasury’s apparent concern
When potential Purchaser acquired the shares in a TargetCo, followed by a sale of the business of TargetCo using S45 to a NewCo held by the Purchaser and where NewCo funded the purchase price with interest-bearing debt; that tax base was eroded by “excessive” debt gearing of the Purchaser, through:
“excessive” interest bearing debt resulting in “excessive” interest deductions in the Purchasing Company’s hands; and/or the debt provider (i.e. the recipient of the interest income on such interest bearing debt) not being subject to South African income tax, either where such debt provider (in the case of a South African resident entity) was exempt from income tax or not subject to tax (in the case of a non-South African entity).
BUSA solution 1: Make better use of existing mechanisms!
•“GAAR” in section 80A: SARS was entitled to challenge a transaction if so-called “impermissible tax avoidance arrangement” occurred.
•Specific Anti-Avoidance Rules in S45: Note “de-grouping measure”.
•Withholding Tax on Interest: Effective 1/1/2013, withholding tax on interest of 10% would become effective.
•Transfer pricing and thin capitalisation provisions: If debt provider was non-SA resident and connected to NewCo, the interest-bearing debt would be subject to SA transfer pricing (i.e. the interest rate had a cap) and thin capitalisation (i.e. the debt was subject to a minimum debt to equity ratio). Where the interest rate was excessive (transfer pricing) and/or the debt in relation to equity was excessive, the interest was disallowed as a deduction and deemed to be a dividend attracting Secondary Tax on Companies (STC) at 10%.
BUSA solution 2: Legislate for easier options
•The effective date of the amendment of Section 45 of the Act should be some reasonable future date to enable taxpayers whose transactions that were substantially complete to conclude and implement their transactions; and/or,
•The provisions of Section 45 should merely be amended to exclude the specific transactions which were of concern i.e. transactions where any associated debt would be in excess of a specific percentage or any associated debt gives rise to interest payable to a non-resident or exempt entity.
(Please see attached BUSA presentation and Draft Taxation Laws Amendment Bills, 2011. Preliminary submission by Business Unity South Africa (BUSA) 21June 2011. Document)
South African Institute of Tax Practitioners. Presentation
Mr Stiaan Klue, Chief Executive, South African Institute of Tax Practitioners (SAIT), the Institute) complained of the short notice every year to submit comments; the content of the Bill was highly technical and there were many amendments, some of them drastic and which took time to digest. The Institute appealed to National Treasury to give more time to digest the measures, but it acknowledged that it had until 04 July 2011 to prepare a written submission and by then it would also submit to the Committee its final written submission. For the purpose of today it wanted to focus on the main issue. The Institute congratulated the National Treasury on the improved process over the past few years. However, it appealed for further engagement before the final amendment Bill was tabled to the Committee. No economic gain was created by the proposed suspension of Section 45, which had been a long-standing feature to allow assets to be moved within a group. The reason for was that it resulted in a tax neutral position as no economic gain was created by using Section 45 as a measure for a company to move assets in a group. Its common use in
The period of 18 months was too long, since transactions were in progress. These transactions should be allowed to be completed. However, obviously National Treasury had identified a leakage, and sought measures to avoid misuse by a small group. Mr Klue called for a round table discussion with National Treasury in a confidential environment. He pleaded for saving Section 45 to the benefit of the country, job creation and Black Economic Empowerment.
Mr Alton Netshivhungululu, Deputy Chairperson, SAIT, and Mr Klue focused on the unintended consequences of the suspension. (See SAIT's untitled notes.) He referred to the sale of MacDonald's to Cyril Ramaphosa's Shanduka group which might not go ahead. He pointed out that the deal had not been structured with the aim of eroding the tax base. The deal was in the interest of
(Please see SAIT's presentation document and notes, when available.)
The Chairperson asked Mr Klue if his Institute would be making detailed submissions clause by clause; mere observations were not required, but concrete alternatives. Would the Institute be making such submissions to the National Treasury? Prof Engel was eagerly awaiting suggestions.
Mr Klue sought further engagement with National Treasury and replied that if a round table discussion was not possible before the closing of the committee period the Institute would still make specific recommendations for specific anti-avoidance measures and tests to be put in place. But at this stage the suspension was for 18 months and the Institute needed more information on the basis on which it could have further discussion.
Mr D van Rooyen (ANC) said that one of the topical issues in the Bill was the unfriendly provisions on the headquarter companies. Did today's presenters have a different view from those of yesterday?
SAICA had not included this topic in its presentation. However, a pre-approval was preferable.
Dr Van Rooyen said the time frame was an issue last year. It might be the volume of amendments making it hard to respond in the time frame and prepare for these sittings. Perhaps Members needed to correct this unfortunate situation.
The Chairperson thought that for professional bodies focusing on tax the time was surely enough. Members of Parliament (MPs), on the other hand, were not experts like the tax specialists.
Mr Smith replied that SAICA had to source comments from its 26 000 members, and collate their comments.
The Chairperson thought that South Africans needed to hurry up in the conduct of their affairs.
Dr D George (DA) said that the National Treasury had said that the aim of carbon tax was to correct behaviour and not just to generate revenue. Had BUSA seen any behavioural change in its members? Or did BUSA see it just as an additional revenue generator for the fiscus?
Mr Bezuidenhout replied that BUSA's view was that the vehicle emissions tax might have generated revenue or affected sales but not changed emissions. He noted that a 3% growth in the economy would stimulate steel production and hence increase emissions.
Dr George asked SAICA and SAIT for their views on National Treasury's findings that Section 45 was being abused. Concern about Section 45 was not new, so it was not so surprising. Were SAICA and SAIT aware of abuses of Section 45, and if so, what were they doing to curb them and stop the leakage?
Mr Netshivhungululu replied that SAIT was not aware of the abuse that had been reported. SAIT wished to emphasise that members of its tax committee include some members of the big four audit and law firms. However, even if there was such abuse, SAIT was of the view that SARS had sufficient anti-avoidance provisions that could deal with this issue efficiently. Also in Section 46 there were some specific anti-avoidance provisions that could deal with this situation.
SAICA had engaged with National Treasury. The tax obligations of foreign investors differed from those of South Africans, and there was potential for abuse. National Treasury should focus on these transactions that involved foreign funders.
Dr George asked SAIT about this document that he had received untitled and unpaginated. He referred to page . Would
Dr Z Luyenge (ANC) asked SAICA on the anti-avoidance clauses in relation to the suspension of Section 45. How would SAICA suggest to National Treasury that the avoidance of taxes was dealt with?
Mr Bezuidenhou replied that BUSA's view was that on anti-avoidance there was an under-use of existing regulations. There was just this blanket withdrawal.
Mr Hassan said that SAICA understood that the new anti-avoidance rules would be more biting. Every year we were told that there was a loophole and that it had been closed. SAICA advised putting the anti-avoidance rules in Section 45. Suspending it for 18 months from now caused big uncertainty in the business community.
Prof Matthew Lester, Tax Analyst, SAICA, said that he did not have any problem with suspension from the date of promulgation. He did not accept suspension from 03 June 2011. He also felt that any deal involving Section 45 should be 'audited to death', and National Treasury should put out a strong message to this effect. There were surely not so many of those deals that they could not be audited properly – if there was tax evasion, they could be 'stamped upon'.
Dr Luyenge asked how to respond to possible impact on the physically challenged of initiatives by SARS and National Treasury.
Mr Douglas, SAICA replied that the costs of medical aids could be quite high for the elderly and disabled and in some cases could be close to R2 000 or R3 000 per month in order to cover such a person completely for the illness or disability that they might have. Due to the caps limitation in the credit system, it might not be possible in future for such persons to get tax benefits for all those costs. BUSA suggested retaining the current system and ensuring that nobody suffered in that area, and that the elderly and disabled tax payers should be able to get a 100% tax benefit for all their medical aid contributions, and even in future for their out-of-pocket medical aid expenditure.
Mr James Aitchison, Head: Structured solutions
Mr Aitchison drew Members' attention to:
∙The dangers of sudden and dramatic announcements (sections 45, 8E and 8EA)
∙The need for an internationally competitive tax system (interest deductibility and group taxation)
∙Time-frames and process
Mr Aitchison pointed out that Australia did something similar with its mining tax and that there was a similar outcry.
Mr Aitchison asked Members to bear in mind that there was a need for equity on the time frames. The Bills and the Explanatory Memorandum amounted to some 376 pages, and there was only 11 working days before presentation to the Committee, whereas National Treasury had had six months to prepare. A month gave a fairer opportunity for comment before coming to the Committee.
Mr Aitchison advised that Section 42 was an alternative relief, and he called for an equitable tax system.
The impact of suspension of Section 45 on BEE transactions
The suspension of section 45 eliminated the ability of using the leveraged model; the Special Purpose Vehicle (SPV) model resulted in transactions:
whose sustainability was dependent on share price and dividend performance
with typically substantially reduced BEE % upon unwinding – BEE would sell shares to pay funding
would normally utilise preference share funding of five to seven years: expensive, short term empowerment (now also subject to section 8E and 8EA)
where Funders typically required at least a 70% debt, 30% equity ratio from BEE - limited to partners with sufficient cash or access to cash or funding to invest
where Holdco had to provide support / guarantees which might also impact on day to day business
where cost to shareholders remained high
(chart, slide 7)
Was there a need for this change?
Bravura discussed the leveraged model, the (SPV) model, existing and proposed legislation.
Whilst there were some ‘bad’ transactions that had been implemented, which Treasury should address either by way of applying the GAAR or by fresh targeted legislation, the proposed changes would mean the end of sustainable BEE transactions with limited or no real expectation of creating value to the BEE parties.
(table, slide 8)
∙Increased unsustainability due to double taxation
High funding cost rates equalled unsustainable empowerment.
(table, slide 9)
Far reaching impacts on BEE
After the release of The Draft Taxation Laws Amendment Bill, 2011 (the Bill) Bravura did a high level overview of some previous and proposed announced BEE transactions. The following was discovered:
•Certain previously announced BEE transactions might no longer be implemented; and
•There were a number of current BEE transactions in place that would be negatively impacted by the proposed changes.
•The following BEE transactions were classic examples of how BEE deals might be impacted: the potential impact on Aveng, African Bank, Altech, Palabora Mining Company (PMC), MTN, and SASAL was given.
(table, slide 10)
Mergers and Acquisitions – Cost of funding
Weighted average cost of capital (WACC) was impacted by the combination of the cost of equity, preference shares or loan funding.
Chart, slide 11)
Far reaching impact on M & A activity
For acquisitions to succeed, efficient funding was essential.
Tax policy to promote economic growth and new jobs – long term positive impact on fiscus.
Tax policy which resulted in a material increase in the cost of funding due to double taxation should be avoided at all cost.
Redeemable preference shares were a fundamental financing tool filling the gap between equity and debt.
The abolishment of Section 45 left redeemable preference shares as the only other term funding alternative to corporates.
Due to the 10 year extension of section 8E and the broad principles in section 8EA which captured normal security arrangements, preference share funding would now become approximately 40% more expensive.
Currently no interest deduction was allowed on the acquisition of shares (unlike in many most modern economies).
Section 45 was the only real viable alternative to bridge the gap between sellers (wanting to sell shares) and buyers (wanting to buy assets) whilst still being able to obtain a deduction for the interest expense incurred, therefore reducing the cost of funding.
Prior to the amendments, in by far the majority of cases, these transactions resulted in no tax leakage to the fiscus and created economic growth which in turn led to increased taxable profits over time.
These proposals led to double taxation and an increase to the cost of doing business in
(slide 12, table, slide 13)
∙ Other far reaching impacts
－ Proposed Section 8EA extremely broad.
•Targeted for transactions akin to debt.
•Did, however, also include any shares subject to pre-emptive rights even at market value.
•Same applied to put and/or call options over shares even if at market value.
•Dividends received on almost all ordinary shares subject to shareholders agreements would now be taxable.
The proposed amendments were aimed at targeting transactions that disguised the nature of income earned.
The proposed changes negatively impacted innocent transactions.
Existing legislation (through anti-avoidance provisions) already provided the ability to address the intended target of the proposed changes.
If still required, proposed changes should be targeted at mischief and not be broad-brushed.
Mr Van der Walt pointed out that it would be extremely difficult to do broad-based empowerment transactions, in which, in the majority of cases there was no leakage to the fiscus. In the view of his firm, tax policies should promote economic growth and jobs. The proposed amendments, however, impacted negatively on the majority of innocent transactions. Existing legislation should be able to address the mischief. Changes should be targeted.
Mr Aitchison said that
(Please see attached document.)
Southern African Venture Capital and Private Equity Association (SAVCA). Presentation
Mr J P Fourie, Chief Executive Officer, SAVCA, said that Regulation 28 of the Pension Funds Control Act had been relaxed so that pension funds could invest more assets; the permanent tax establishment rules were changed at the beginning of this year; and exchange control dispensations allowed private equity fund managers to execute transactions more easily outside South Africa's borders. These three big changes from a regulatory point of view had fostered the development of private equity in
Overview of the venture capital industry in
What private equity was:
∙Typically transformational and value-adding strategies.
∙Specialised skills and experience.
∙Reasons for private equity financing
•increasing its working capital base;
•business expansion and development;
•developing new technologies and products in order to grow and/or remain competitive; to finance acquisitions of other businesses;
•to buy out certain shareholders in order to restructure the ownership and management of the business; and
introduction of BEE.
The global playing field (pie-chart, slide 4).
Most activity was expansion/development-focused: Analysis of investments by stage based on cost of investments (bar-chart, slide 5).
BEE investment activity: Cost of BEE investments made during the year (excluding Captives – Government) (Rbn) (bar-chart, slide 6).
Third party funds raised were sourced from various geographies. Geographic sources of third party funds raised. (Bar-chart, slide 7).
Facts and figures of the industry and the economic impact thereof
2006 to 2009 private equity achieved:
Employment growth rates of 9% p.a. JSE business’s growth rates of 4% and 1% across all businesses in SA
Employment of 5% of South Africa (SA)'s formal sector employees which equates to around 427 000 jobs
Average turnover growth of 20%, compared to 18% for JSE businesses
Pre-tax profit growth of 16% per annum compared to 14% for JSE businesses
Average R&D expenditure growth of 7% compared to 1% for JSE listed businesses
Reasons for debt push-down
∙Make the acquisition more feasible for the investors;
∙Optimise debt security by direct access to assets and cash;
∙Debt advanced to a newly-formed company;
∙Uplift market values of assets; and
∙The legal structures could be simplified.
History of South African private equity
Cost of investments made during the year (R billions)
(bar-chart, slide 14)
Landscape in 2006-2008.
∙Positive sentiment and growth forecasts;
∙World was flooded with liquidity and cheap debt;
∙Foreign bond markets were very active;
∙A handful of deals were funded by means of foreign bonds;
∙Local banks were lending on more generous terms;
∙A few debt packages were tranched (senior debt and mezzanine debt); and
∙Up to 70% third party debt.
Landscape post 2008
∙No new foreign bond issues;
∙Mezzanine funding for the big deals had dried up;
∙Local banks had remained very cautious in providing the debt;
∙50% of local bank debt only in a deal; and
∙Interest rates were in the range of Jibar plus 2% to 4% therefore not excessive.
Typical capital structure (share capital, shareholder loan, mezzanine, and bank debt)
(bar-chart, slide 17)
“Much of which carries a subordinated or junior ranking”
∙In 2006-2008 some deals included mezzanine debt (10% - 15% of capital structure);
∙Not a feature of capital structures post;
∙Shareholder loans were the only subordinated debt; and
∙Exchange control limits the interest rate to prime.
SARS tool kit
∙Shareholder loans were limited to a 3:1 ratio;
∙New thin capitalisation rules from October 2011; and
∙Withholding tax on interest from 2013.
Discussion of the impacts of the suspension of Section 45
Suspension of Section 45
∙Eroded confidence in South Africa;
∙Foreign investment would go elsewhere;
∙National Treasury and SARS had always been aware of debt push-down – SAVCA engagements in 2006/7;
∙Deals were being abandoned;
∙18 months would be a significant setback for the industry;
∙No consultation or warning; and
∙Need to restore certainty – SAVCA would like to urgently engage with National Treasury (as per 2007)
Mr Mark Linington, Head:Tax,Webber Wentzel, asked what had spooked National Treasury. Since 2007 the deal flow had normalised and there were lots of positive sentiment in the world. The foreign bonds markets were very active. Local banks were managing well. Tranches had been introduced, whereby one stood back in the queue for repayment. In those days you could get gearing in a company. There were no new foreign bond issues. In the mezzanine funding there was a lot more risk. The local banks had remained cautious in providing debt. The interest rates were not excessive on those shareholder loans. What had spooked National Treasury and SARS? They looked at the deals done in 2007. 2007 was a global anomaly. He did not think that he would see those dynamics again. There was no threat to the tax base in those deals. The 18 months suspension would have a severe impact on the industry. He would be happy to meet National Treasury offline and discuss the issues further.
Mr Lenington commented on the ten year change to preference shares. In long term life assurance one could not put debt on the balance sheet. In such instances, preference shares were normally issued. It was the South African banks that subscribed to these preference shares, so there was no loss to the system. The requirement for 10 years would eliminate this source of funding. Banks had come grudgingly to live with three years; they would not accept 10 years. The change would do a lot of damage.
(Please refer to the presentation document.)
Banking Association of
Mr Cas Coovadia, Managing Director, BASA and Mr Geoffrey Howes, Chairperson, BASA, completely accepted that SARS and National Treasury had to be vigilant all the time in examining transactions that were under way to make sure that there were no major unexpected leakages in the tax system that reduced the South African tax base. If they identified causes of great concern, they should take action, but the action that they planned probably overstated what was needed.
Leakage occurred where there was an unanticipated exemption of income, for example, massive interest deductions, that diminished the tax base, with no reciprocal change on the other side. When the lenders and the recipients of income on the other side were themselves within the tax base, there was no leakage as far as the tax base was concerned. There was a deduction amongst one group of tax payers, and there was an inclusion of income in a group of other South African tax payers. Where leakage would occur was when the lenders were outside the tax system, for example, if they were tax exempt within
The Association suggested targeted surgical measures rather than the proposed suspension in the Section 45 provisions as they now stood, National Treasury was concerned that the provisions were used to finance takeovers rather than inter-group transfers. He proposed that, given the National Treasury's view point, the moratorium should be no more than three months and National Treasury should think about a surgical approach. It was National Treasury's job to protect the South African tax basis, but suspension would bring long term problems; restructuring would be halted with this moratorium of 18 months: a shorter period of surgical measures would address the issues.
There were other areas which gave rise to concern. The Association would take advantage of the invitation to lodge more detailed comments by 04 July 2011.
(Please see presentation document, when available.)
The Chairperson sensed that Members were missing an opportunity to talk about the Taxation Laws Amendment Bill as a whole, as the focus of the meeting had been the suspension of Section 45. Not enough attention had been paid to the other amendments, perhaps because of the gravity of the suspension of Section 45. Very little had been said about turnover tax. He hoped Members would look into that aspect in their subsequent consideration of the submissions.
Ms N Sibhidla (ANC) asked Bravura if it would be willing to give details of all the Section 45 BEE structures that it had put together.
Bravura responded that it had met with National Treasury' in 2008 in which it explained all the methods of structuring BEE transactions and the commercial reasons for structuring them on that basis. It had done the same with the Department of Trade and Industry (DTI). It would be willing to do that again, and had a discussion the previous evening with National Treasury in which it had accepted such an invitation.
Dr George asked how the suspension of Section 45 impact on individual tax payers who struggled every day to make ends meet, and who would bear the burden of higher personal income tax if
The Banking Association of South Africa completely accepted that corporates must do their part as contributors to the fiscus, and that National Treasury should be safeguarding that contribution, but its actions should be more surgical and not as broadly based. No leakage should be allowed to occur that had a negative effect on individual tax payers. The Association was aware of the significant imbalance in wealth in
Dr George noted that the Banking Association of South Africa had spoken about the imbalance in the tax system, and its various recommendations to the National Treasury. In the event that the National Treasury did not agree to these recommendations, the Association had recommended that the National Treasury reconsider allowing a deduction for interest on debt to acquire shares. Was this a recommendation of last resort?
The Banking Association of South Africa acknowledged that the issue of the imbalance in the tax system was an overriding one. If its other recommendations were not accepted, then there should be an allowance of deduction for interest on debt to acquire shares. However, it was the fundamental imbalance in the tax system that caused so many of the problems that were of concern to the National Treasury.
The Chairperson noted that this was the end of the two days of public hearings. The final submissions to the National Treasury would be of great interest. He asked for copies of these which the Committee would study together with National Treasury’s report-back which it would share with Members. BUSA had captured the issues very well, in particular, employment creation, sustainable growth of the economy, and developing the fiscus in support of the country's needs.
The meeting was adjourned.
- South African Institute of Tax Practitioners Untitled notes
- Southern African Venture Capital and Private Equity Association (SAVCA) presentation
- South African Venture Capital & Private Equity Association presentation
- South African Institute of Charted Accountants presentation
- South African Institute of Charted Accountants comment
- South African Institute of Charted Accountants submission
- Business Unity South Africa (BUSA) submission
- Business Unity South Africa (BUSA) presentation
- Bravura Appendix C
- Bravura Appendix B
- Bravura Appendix A
- Bravura presentation
- Bravura Letter
- Banking Association of South Africa submission
- We don't have attendance info for this committee meeting