Gordhan proposes new solution on section 45

Thursday, August 4, 2011

Pretoria - Finance Minister Pravin Gordhan has proposed a new short term solution for businesses that use Section 45 of the Income Tax Act.

The section was suspended with immediate effect in June 2011 for an 18-month period. The suspension of clamping down on tax avoidance schemes was used by many companies in intra-group transactions.

On Wednesday, Gordhan said that the suspension on section 45 would be lifted, which would allow companies to go ahead with legitimate transactions.

The minister said the intention of the suspension was to protect the fiscus against the potential loss of R3 billion to R5 billion per annum. "We still have people that want to rape the fiscus," said the minister.

Section 45 allows the transfer of assets within a group of companies tax-free. The section gives companies roll-over relief and facilitated transfers among companies that operate as a single group.

Since putting the suspension into effect on 3 June 2011, Treasury and the South African Revenue Service (SARS) have met with various parties, resulting in week-long meetings with over 30 consultations, relating to over 50 transactions.

"Given the additional facts provided, a solution is now being proposed for the short term. This revised short-term solution should better accommodate the pressing needs of the business community while simultaneously providing effective interim protection for the fiscus," said the minister.

It is proposed that a section be introduced to control interest deductions that are associated with debt used to fund the acquisition of assets in section 44, 45 or 47 transactions. Under the proposal, transactions will follow different channels.

The reorganisation of sections 44, 45 and 47 of the Act that do not involve interest-bearing debt will be able to use the relief without approval by SARS. This would fall under "green transactions."

"Amber transactions" comprise reorganisations that use interest-bearing debt that is subject to automatic pre-approval.

Gordhan said that SARS will continue to investigate a number of pre-existing aggressive transactions that deliberately avoid paying their fair share of the tax burden.

SARS commissioner Oupa Magashula said South Africa is not the only country taking decisions to protect the fiscus.

"This is not only happening to South Africa. It is one of the big things we are grappling with," said Magashula.

A longer term set of solutions to deal with excessive debt is planned for 2012.