Latest Tax Developments. June 2017

Transcription

1 Latest Tax Developments June 2017

2 Introduction Monthly webinar 6th of 11 webinars Recent developments: This one June 2017; Cannot cover all developments in detail; Relevance of developments; Some will roll over to next month - time; and If we missed something that you would like us to cover, please let us know for inclusion in next webinar.

3 Overview General developments; Dispute resolution; Pienaar Brothers v C:SARS and Minister of finance (overview); M v C:SARS ITC Judgment date: 30 May 2017; Interpretation Note 51 (issue 4): pre-trade expenditure and losses. BPR 274 venture capital company investing in a company providing and expanding plants for the generation of solar electricity; BGR 31 (issue 2) interest on late payment of benefits; Draft BGR on the meaning of 160 hours for purposes of section 4(1)(b) Due date for comments was 23 June 2017;

4 Overview - contd BPR 271: Acquisition of leased property by lessee pursuant to a liquidation distribution; BPR 270: Restructuring of property portfolio under the corporate rules; BPR 272: deduction of expenditure incurred to acquire land development rights.

5 General Developments Updating of interest rates Table 1: interest rates on outstanding taxes and interest rates payable on certain tax refunds Table 2: interest rates payable on credit amounts For more information: Draft Public Notice requiring the submission of country-by-country master file and local file returns Due date for comments was 22 June 2017 For more information:

6 General Developments - contd Arrangement between the Competent Authority of the United States of America and the Competent Authority of the Republic of South Africa on the Exchange of country-by-country reports For more information: Status Summary of all country-by-country bilateral Competent Authority Agreements For more information: Tables A and B of Average Exchange Rates updated For more information:

7 General Developments - contd Updated summary of withholding tax rates as per the South African Double Taxation Agreements currently in force (Africa and rest of the world) For more information: Tax%20Tables%20-%20Summary%20of%20DTA%20rates%20%20version%207%20(final).zip Notice in terms of section 25 of the Tax Administration Act, 2011 read with section 66 of the Income Tax Act, 1962, specifying the persons to submit 2017 income tax returns and the periods of submission For more information:

8 General Developments - contd Notice in terms of section 25 of the Tax Administration Act, 2011 read with section 66 of the Income Tax Act, 1962, specifying the persons to submit 2017 income tax returns and the periods of submission contd.

9 General Developments - contd Notice in terms of section 25 of the Tax Administration Act, 2011 read with section 66 of the Income Tax Act, 1962, specifying the persons to submit 2017 income tax returns and the periods of submission contd.

10 General Developments - contd Notice in terms of section 25 of the Tax Administration Act, 2011 read with section 66 of the Income Tax Act, 1962, specifying the persons to submit 2017 income tax returns and the periods of submission contd.

11 General Developments - contd Notice in terms of section 25 of the Tax Administration Act, 2011 read with section 66 of the Income Tax Act, 1962, specifying the persons to submit 2017 income tax returns and the periods of submission contd.

12 General Developments - contd Notice in terms of section 25 of the Tax Administration Act, 2011 read with section 66 of the Income Tax Act, 1962, specifying the persons to submit 2017 income tax returns and the periods of submission contd.

13 Dispute Resolution Outcome of Reported Judgments: In favour of SARS 4% 38% 58% In favour of the taxpayer/ appellant Partly upheld (partly in favour of the taxpayer)

14 PIENAAR BROTHERS V CSARS and MINISTER OF FINANCE (OVERVIEW) Issue Section 34 (2) of the Taxation Laws Amendment Act 8 of 2007 (TLA) to be inconsistent with the Constitution and invalid to the extent that it provides that Section 44 (9A) of the Income Tax Act 58 of 1962 which was introduced by virtue of Section 34 (1) (c) of the TLA shall be deemed to have come into operation on 21 February Judgment Application upheld dismissed. Constitutionality of retrospective application Ratio decidendi No rule of law that renders retrospective application unconstitutional. Purpose of the legislation is of importance and may be retrospective.

15 PIENAAR BROTHERS V CSARS and MINISTER OF FINANCE Quoted A mere prospective amendment would have encouraged tax payers to exploit the loop-hole in the last few months before the loop-hole was closed The Constitution itself legislation in civil law. certainly does not prohibit retrospective Also, and more significantly, there is nothing internal in the Rule of Law which renders retrospective legislation per se unconstitutional The amendment adopted by parliament was not arbitrary and therefore not in breach of Section 25 (1) of the Constitution. Further, and in any event, the amendment was reasonable and justifiable in terms of Section 36 (1) of the Constitution.

16 M v CSARS TC Issue The issue in this appeal from the Commissioner s assessment of the taxpayer s gross income for the company s 2013 tax year is whether the amounts of the purchase price consideration in respect of certain stands of immovable property sold by the taxpayer in the course of trade, in terms of deeds of alienation entered into during the 2013 tax year, accrued to the taxpayer in that tax year notwithstanding that the taxpayer received payment against transfer of the properties to the purchasers only in the 2014 tax year.

17 M v CSARS TC Facts The Commissioner has assessed the taxpayer for income tax on the basis that the amounts accrued in the 2013 tax year on the grounds that the taxpayer became entitled to the proceeds of the sales during the 2013 tax year. In the alternative, the Commissioner contended that the proceeds are, in any event, deemed, in terms of s 24(1) of the Income Tax Act 58 of 1962, to have accrued to the taxpayer during its 2013 tax year

18 M v CSARS TC Arguments - Taxpayer The taxpayer (a resident) relied on the established meaning of the phrase received by or accrued to in para (i) of the statutory definition of gross income. It contended that the amounts accrued only when it became entitled to receive payment after transfer of the properties to the purchaser. In each case transfer had been given during the taxpayer s 2014 tax year. The taxpayer disputed that s 24(1) of the Act is applicable in respect of the transactions.

19 M v CSARS TC Arguments Taxpayer contd In some cases the agreements included a suspensive condition in respect of the obtaining by the purchaser of mortgage bond finance. An entitlement to payment in those matters could not vest in the taxpayer before such conditions were fulfilled. Counsel for the taxpayer further contended that the taxpayer only became entitled to payment after it had given transfer.

20 M v CSARS TC Arguments CSARS The Commissioner contends, however, that the proceeds of all 25 transactions are deemed to have accrued to the taxpayer by virtue of s 24(1) of the Income Tax Act. Section 24(1) of the Income Tax Act provides: Subject to the provisions of section 24J, if any taxpayer has entered into any agreement with any other person in respect of any property the effect of which is that, in the case of movable property, the ownership shall pass or, in the case of immovable property, transfer shall be passed from the taxpayer to that other person, upon or after the receipt by the taxpayer of the whole or a certain portion of the amount payable to the taxpayer under the agreement, the whole of that amount shall for the purposes of this Act be deemed to have accrued to the taxpayer on the day on which the agreement was entered into.

21 M v CSARS TC Judgement In accordance with the Lategan principle the proceeds of the sales in those transactions therefore actually accrued to the taxpayer as part of its gross income for the 2013 tax year. The other members of the court are in agreement with me that the appeal must be dismissed. It is so ordered. There is no order in respect of costs.9

22 Interpretation note 51 Introduction pre-trade expenses mean expenditure and losses actually incurred by a person before the commencement of and in preparation for carrying on a trade; post-trade expenses mean expenditure and losses actually incurred after the commencement of the trade; section means a section of the Act; the Act means the Income Tax Act 58 of 1962; and any other word or expression bears the meaning ascribed to it in the Act.

23 Interpretation note 51 Background New business formation is vital to the economy. Before the introduction of section 11A only certain pre-production interest [section 11(bA)] and certain finance charges [section 11(bB)] were permitted as a deduction for start-up costs incurred before the commencement of trade. Sections 11(bA)1 and 11(bB)2 have been deleted since the release of the first issue of this Note.

24 Interpretation note 51 The trade requirement in section 11(a) read with section 23(g) The general deduction formula in sections 11(a) and 23(g) reads as follows: 11. General deductions allowed in determination of taxable income. For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived (a) expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature;

25 Interpretation note Deductions not allowed in determination of taxable income. No deductions shall in any case be made in respect of the following matters, namely (a) to (f)... (g) any moneys, claimed as a deduction from income derived from trade, to the extent to which

26 Interpretation note 51 The trade requirement of section 24J(2) Section 24J(2) does not draw a distinction between interest of a capital or revenue nature. It permits a deduction of the amount of interest which is deemed to have been incurred during a year of assessment, from the income derived from carrying on any trade of the issuer in relation to an instrument,3 if that amount was incurred in the production of the income.

27 Interpretation note 51 The trade requirement of section 11D(2) Section 11D(2) provides for a deduction of research and development expenditure actually incurred by a taxpayer, in the production of income and in the carrying on of any trade. Such expenditure must be directly and solely for research and development undertaken in the Republic

28 Interpretation note 51 Pre-trade expenses of a capital nature Pre-trade expenses often form part of the cost of creating a source of income. These expenses are therefore mostly of a capital nature. Effect of section 11A Under section 11A pre-trade expenses which would have qualified under section 11 [excluding section 11(x)], 11B, 11D or 24J but for the trade requirement in those provisions, are deductible in the year of assessment in which trade commences, subject to certain requirements, irrespective of when these expenses were incurred, but subject to section 23H.

29 Interpretation note 51 11A. Deductions in respect of expenditure and losses incurred prior to commencement of trade. (1) For purposes of determining the taxable income derived during any year of assessment by a person from carrying on any trade, there shall be allowed as a deduction from the income so derived, any expenditure and losses (a) actually incurred by that person prior to the commencement of and in preparation for carrying on that trade; (b) which would have been allowed as a deduction in terms of section 11 (other than section 11(x)), 11B, 11D or 24J, had the expenditure or losses been incurred after that person commenced carrying on that trade; and

30 Interpretation note 51 (c) which were not allowed as a deduction in that year or any previous year of assessment. (2) So much of the expenditure and losses contemplated in subsection (1) as exceeds the income derived during the year of assessment from carrying on that trade after deduction of any amounts allowable in that year of assessment in terms of any other provision of this Act, shall not be set off against any income of that person which is derived otherwise than from carrying on that trade, notwithstanding section 20(1)(b).

31 Interpretation note 51 Application of the law A pre-trade expense qualifies as a deduction against the income from the trade to which it relates subject to the following four key requirements in section 11A(1): First, the trade, in respect of which the pre-trade expense was incurred, must have been commenced by the taxpayer [opening words of section 11A(1)]. Secondly, the pre-trade expense must have been actually incurred before the commencement of and in preparation for carrying on that trade [section 11A(1)(a)];

32 Interpretation note 51 Thirdly, had the pre-trade expense been incurred after the commencement of the trade to which it relates, it would have been allowed as a deduction under section 11 [other than section 11(x)], 11B, 11D or 24J [section 11A(1)(b)]. Fourthly, the pre-trade expense must not have been allowed as a deduction in that year or any previous year of assessment [section 11A(1)(c)]. Once these requirements have been met, the pre-trade expense will be allowed as a deduction under section 11A(1) in the year of assessment in which the trade to which it relates commences, subject to the ring-fencing requirements of section 11A(2).

33 Interpretation note 51 Apart from triggering a deduction under section 11A(1), the time when trade commences is important because, barring some exceptions, any post-trade expenses will not be ring-fenced against the income to which they relate.

34 Interpretation note 51 Deduction of pre-trade expenses after trade has commenced [section 11A(1)] Commencement of trade Abandonment of a project before the commencement of trade Change in intention or in the nature of the trade Meaning of that trade

35 Interpretation note 51 Pre-trade expenses actually incurred before the commencement of and in preparation for carrying on a trade [section 11A(1)(a)] The expenditure and losses must have been actually incurred by a taxpayer before the commencement of and in preparation for the carrying on of that specific trade. For an expense to be actually incurred there must be an accrued present obligation, whether absolute or defeasible. In order for preliminary expenditure to qualify as a deduction under section 11A(1) it must be incurred in preparation for the carrying on of a trade.

36 Interpretation note 51 Ring-fencing of the deduction for pre-trade expenses [section 11A(2)] Limitation of pre-trade expenses to taxable income from the relevant trade Section 11A(2) limits the deduction allowable under section 11A(1) to the taxable income from the relevant trade. If the pre-trade expenses exceed the taxable income of that trade, the excess pre-trade expenses may not be set off against the income from any other trade notwithstanding section 20(1)(b). Section 20(1)(b) permits a taxpayer to set off an assessed loss incurred in one trade against any income from another trade derived during the same year of assessment. Any pre-trade expenses not allowed because of insufficient taxable income from the particular trade must be carried forward for set-off against any future taxable income from that trade

37 Interpretation note 51 Impact of assessed loss brought forward on ring-fencing Any assessed loss brought forward from the previous year of assessment must be allocated between the various trades to which it relates for section 11A(2) to be applied. The deduction for pre-trade expenses relating to a particular trade is limited to the taxable income from that trade which remains after the set-off of any balance of assessed loss incurred in that trade. Claiming of pre-trade expenses limited by section 11A(2) The opening words of section 11A(1) refer to the determination of taxable income derived during any year of assessment in which the trade is being carried on. The words any year of assessment could be either the year of assessment in which trade commences or any subsequent year of assessment.

38 Interpretation note 51 Repeal of section 11(bA) Before the deletion of section 11(bA), any interest and related finance charges actually incurred by the taxpayer on any loan, advance or credit used by the taxpayer for the acquisition, installation, erection or construction of specified assets to be used for purposes of the taxpayer s trade, were deductible under section 11(bA) in full during the year in which the asset was brought into use for the first time. With the repeal of section 11(bA), all deductions relating to pre-production interest and related finance charges will now be dealt with under section 11A.

39 Binding Private Ruling 274 ( BPR 274 ) Title: Venture Capital Company investing in a Company providing and expanding Plants for the generation of Solar Electricity Issue date: 6 June Summary This ruling determines: The meaning of controlled group company and equity share for purposes of the definitions of qualifying company and qualifying share respectively in section 12J(1) with reference to an operating company that proposes to issue different classes of ordinary shares; Whether an Operating Company will be regarded as carrying on an impermissible trade in immovable property as contemplated in paragraph (a) of the definition of that term in section 12J(1);

40 BPR 274 This ruling determines contd: Whether rental income derived by the Operating Company will be investment income as defined in section 12E(4)(c) and contemplated in paragraph (f) of the definition of qualifying company in section 12J(1); and Whether the Operating Company will be entitled to claim allowances under section 12B(1)(h)(ii)(bb) read with sections 12B(2)(b) and 12D(2). This is a ruling on the interpretation and application of: Section 1(1), definition of controlled group company and equity share ; Section 12B; Section 12D; and Section 12J.

41 BPR 274 Parties to the transaction The Applicant: A company incorporated in and a resident of South Africa that has been approved as a venture capital company as defined in section 12J(1); Operating Company: A company incorporated in and a resident of South Africa; Company A: A company incorporated in and a resident of South Africa, and the general partner in an en commandite partnership (the Partnership); and Individuals: Natural persons who are residents of South Africa and limited partners in the en commandite partnership with Company A.

42 BPR 274 Description of the proposed transaction Investment in Operating Company: The Applicant intends to invest in Operating Company. The remaining shares are held by the Individuals. The Individuals subscribed for their shares in Operating Company and paid a nominal amount. These shares are classed as A shares. The Applicant will subscribe for 20% of the equity shares in Operating Company. These shares will be B shares.

43 BPR 274 Investment in Operating Company contd: The relevant terms of the B shares will be as follows: The holders of the B shares will be entitled to receive an aggregate amount of distributions that will result in them receiving an aggregate amount equal to the subscription amount, plus a cumulative nominal annual compounded monthly return; Dividends in respect of the B shares must be paid regularly out of excess or free cash; A shareholders will not, unless otherwise determined unanimously by the board of directors, be entitled to receive any dividends or distributions until the B shareholders have received the total return as described above;

44 BPR 274 The relevant terms of the B shares contd: Once their return has been received by the B shareholders, the A and B shares will rank pari passu in all respects; and For as long as the return has not yet been paid to the B shareholders, notwithstanding the relative number of A and B shares in issue, the B shares will carry 50% of the total voting rights. However, once the full amount has been paid to the B shareholders, each A share and B share will carry a single vote.

45 BPR 274 Trade of the Operating Company: As part of its business operations, Operating Company will acquire an existing Solar Services Agreement (SSA) from the Partnership. The SSA facilitates the provision, maintenance, and expansion of solar electricity at the sites of its customer. In terms of the sale agreement between the Partnership and Operating Company, it is agreed that Operating Company will acquire, as a going concern, the business of conducting a solar facility at specific sites of its customer. These facilities provide for solar electricity which generates 83 kilowatts and 303 kilowatts at Site 1 and Site 2 respectively. This sale (Phase 1) will, amongst others, involve the Partnership ceding, assigning and transferring all of its rights and obligations in terms of the SSA to Operating Company.

46 BPR 274 Trade of the Operating Company contd: Phase 2 involves Operating Company entering into an installation development contract with Company A as the developer, for the purpose of extending the existing photovoltaic plants. Upon completion of Phase 2, Site 1 will generate 195 kilowatts and Site 2 will generate 808 kilowatts. The business operations will therefore be outsourced and as a result continue to be supplied by Company A that built and supplied the solar panels. However, all of the assets relating to the supply of solar electricity (the assets), including solar panels, transmission cables and other related facilities, will be owned by Operating Company and supplied to the customer in terms of an operating lease as stipulated in the SSA. Neither Company A, nor the Individuals (Seller), are directly or indirectly responsible for the financing needs of Operating Company.

47 BPR 274 Ruling a) For purposes of the definition of qualifying company in section 12J(1), Operating Company will not constitute a controlled group company for as long as the number of equity shares which the Applicant holds constitutes less than 70% of the total number of equity shares in issue, irrespective of the fact that the Applicant would have invested more than 70% of the aggregate share capital in monetary terms. b) For purposes of the definition of qualifying share in section 12J(1), the shares held by the Applicant will be equity shares as defined in section 1(1). c) Operating Company will be entitled to claim 100% of the cost to it in the year in which the relevant asset is brought into use by it, both as regards the assets acquired in respect of Phase 1 and those in respect of Phase 2 under section 12B(2)(b).

48 BPR 274 Ruling d) Operating Company will be entitled to claim the deduction under section 12D of the Act on the basis that any line or cable used for the transmission of electricity is an affected asset as defined, but the deduction is applicable to the assets acquired in respect of Phase 2 only. e) The solar panels are movable assets and therefore Operating Company will not be carrying on an impermissible trade as contemplated in paragraph (a) of the definition of impermissible trade in section 12J(1). f) The income derived by Operating Company in terms of its contracts with its customers will not constitute rental derived in respect of immovable property, as contemplated in paragraph (i) of the definition of investment income in section 12E(4)(c), so that this amount will not be taken into account in determining the investment income for the purposes of paragraph (f) of the definition of qualifying company in section 12J(1). This binding private ruling is valid until 28 February 2022.

49 Binding General Ruling 31 (issue 2) ( BGR 31 ) Title: Interest on late payment of benefits Re-issue date: 23 May 2017 Purpose: The BGR provides clarity on when an amount constitutes interest, as opposed to forming part of the lump sum benefit, for purposes of the Second Schedule to the Act.

50 BGR 31 (issue 2) Background Different practices currently exist in the retirement fund industry relating to the payment of an amount in circumstances when the benefit is paid late. Some administrators include this amount to form part of the lump sum benefit payable to a member, whereas other administrators pay the amount separately to the member as interest.

51 BGR 31 (issue 2) Issue 1 Ruling (4 March 2016): An amount that is calculated after receipt of notification of the claim form until the date that the fund is obliged to pay the benefit in terms of the rules of the fund is regarded to be part of the lump sum benefit. An additional amount that may become payable in circumstances where the fund fails to meet this obligation and is at fault for delaying the payment of the benefit. Such an amount constitutes interest that is not part of the lump sum benefit. The fund must issue an IT3(b) to the member and send a copy to SARS.

52 BGR 31 (issue 2) Issue 2 Ruling: The Interest on the late payment of benefits is any interest that is defined, as such, in terms of the rules of the fund. Any interest that increases a fund s benefit liability does not form a separate component from the benefit that is payable to the member and will be subject to tax under the provisions of the Second Schedule to the Act. The full amount transferred (including fund growth) from one fund to another is considered to be a lump sum benefit and will be subject to the provisions of the Second Schedule to the Act. Interest that arises as a result of late payment of the benefit and therefore in addition to the benefit liability must be reflected separately and an IT3(b) certificate must be issued and submitted to SARS as per the prescribed processes.

53 BGR 31 (issue 2) Issue 2 Ruling contd. This ruling constitutes a BGR issued under section 89 of the Tax Administration Act 28 of This BGR applies from the date of issue until it is withdrawn, amended or the relevant legislation is amended.

54 Draft Binding General Ruling: Employment Tax Incentive Due date for comments is 23 June Concerns meaning of 160 hours for purposes of Section 4(1)(b) of the Employment Tax Incentive Act, No. 26 of 2013 ( the Act ).

55 Draft Binding General Ruling: Employment Tax Incentive Background Minimum Wage Requirement If wage paid is less than minimum amounts set out in section 4, employer is not eligible to receive ETI. Section 4(1)(a) applies to employers that are subject to wageregulating measure. Section 4(1)(b) which deals with employers that are not subject to a wage-regulating measure - distinguishes between: employee that is employed and paid remuneration for at least 160 hours in a month; and an employee that is employed and paid remuneration for more than 160 hours in a month.

56 Draft Binding General Ruling: Employment Tax Incentive Background Minimum Wage Requirement contd. Purpose of section 4(1) is to set minimum wage requirement. However, section 4(1)(b)(i) and (ii) refers to remuneration wider meaning than wage. Therefore, uncertainty exists re whether 160 hours in section 4(1)(b) relate to only ordinary hours of work or if overtime is also included.

57 Draft Binding General Ruling: Employment Tax Incentive Meaning of wage Section 1 of BCEA defines wage as: the amount of money paid or payable to an employee in respect of ordinary hours of work or, if they are shorter, the hours an employee ordinarily works in a day or week;. BCEA defines overtime as: the time that an employee works during a day or a week in excess of ordinary hours of work.

58 Draft Binding General Ruling: Employment Tax Incentive Meaning of wage contd. Therefore, to ensure alignment between wage-regulating measure in section 4(1)(a) and remuneration for at least/ less than 160 hours as referred to in section 4(1)(b): 160-hour requirement interpreted as referring to ordinary hours of work only; and Overtime must be excluded. Ruling 160 hours stipulated in section 4(1)(b) must consist of only ordinary hours of work and do not include overtime; and This ruling will apply w.e.f. 1 March 2017 and until withdrawn.

59 Binding Private Ruling 271 ( BPR 271 ) Title: Acquisition of leased property by the lessee pursuant to a liquidation distribution Issue date: 11 April 2017 Summary This ruling determines the tax consequences of the transfer of immovable property, as a liquidation distribution under section 47 of the Income Tax Act No. 58 of 1962 ( the Act ), to the company renting the property.

60 BPR 271 Law considered In this ruling references to sections are to sections of the Act applicable as at 22 March This is a ruling on the interpretation and application of the provisions of: section 8(5)(b) of the Act; and section 47 of the Act.

61 BPR 271 Parties to the transaction The Applicant: A company incorporated in and a resident of South Africa. Co-Applicant: A company incorporated in and a resident of South Africa that is a wholly-owned subsidiary of the Applicant.

62 BPR 271 Description of the proposed transaction The Co-Applicant is the owner of immovable property that is being let to the Applicant at a market related rental. The property is the only fixed asset held by the Co-Applicant. The Applicant has been occupying the property for purposes of its trade and has deducted the rental from its income in past years of assessment. To simplify the group structure, it is proposed that the directors of the Co-Applicant will pass a resolution to liquidate the Co-Applicant and to distribute all its assets to the Applicant. The proposed liquidation will be in accordance with section 47 and the property will be distributed to the Applicant as a dividend in specie in the course of the liquidation.

63 BPR 271 Ruling a) Section 8(5)(b) will not apply to the proposed transfer of the property from the Co-Applicant to the Applicant as a dividend in specie in pursuance of the liquidation of the Co-Applicant This binding private ruling is valid for a period of three years from 22 March 2017.

64 Binding Private Ruling 270 Introduction This ruling determines certain tax consequences resulting from the restructuring of the unlisted property portfolio of a long-term insurer, by making use of the corporate rules. Parties to Transaction The Applicant: A listed company incorporated in and a resident of South Africa, carrying on business as a long-term insurer. The First Co-Applicant: A company incorporated in and a resident of South Africa and a wholly-owned subsidiary of the Applicant.

65 Binding Private Ruling 270 Parties to Transaction Contd The Second Co-Applicant: A corporate REIT to be listed on the Main Board of the JSE The Proposed Transaction The Applicant holds unlisted prime real estate with the objective of delivering long-term returns and matching policyholder liabilities. In some instances the Applicant owns 100% of the properties and in others less than 100%. The First Co-Applicant owns a 25% undivided interest in Property X.

66 Binding Private Ruling 270 The Proposed Transaction Contd The Applicant s funds established and maintained in accordance with section 29A exposed to the property portfolio are the the the the untaxed policyholder fund; individual policyholder fund; risk policy fund; and company policyholder fund. The Applicant and the First Co-Applicant propose to transfer a portion of the property portfolio and Property X to the Second CoApplicant.

67 Binding Private Ruling 270 The Proposed Transaction Contd The proposed steps to implement the restructuring will be as follows: The Applicant will dispose of a portion of its undivided interest in the property portfolio, which includes associated letting enterprises, to the Second Co-Applicant in exchange for units in the Second Co-Applicant. As the Applicant and the Second Co-Applicant will become co-owners of the property portfolio they will, in instances in which they hold a 100% undivided share in properties, create a separate unincorporated joint venture for purposes of conducting the letting enterprise of the property portfolio.

68 Binding Private Ruling 270 The Proposed Transaction Contd The First Co-Applicant will dispose of a portion of its undivided interest in Property X, including the associated letting enterprises, to the Second Co-Applicant in exchange for units in the Second Co-Applicant. As the Second Co-Applicant will become a co-owner of Property X, the Second Co-Applicant will be integrated in the pre-existing unincorporated joint venture for purposes of conducting the letting enterprise of Property X. The units in the Second Co-Applicant will be proportionally allocated by the Applicant to the relevant funds in accordance with section 29A.

69 Binding Private Ruling 270 The Proposed Transaction Contd None of the allowances noted in section 25BB(4) were claimed by the First Co-Applicant prior to the proposed transfer of a portion of its undivided interest in Property X to the Second Co-Applicant.

70 Binding Private Ruling 270 Ruling The disposal of the portion of the property portfolio (including the rights attaching to the property portfolio and the letting enterprises) by the Applicant to the Second Co-Applicant will qualify as an assetfor-share transaction as defined in paragraph (a) of the definition of asset-for-share transaction in section 42(1). However, section 42 will not apply insofar as it relates to the untaxed policyholder fund. Insofar as the disposal of the portion of the property portfolio relates to the untaxed policyholder fund, the Second Co-Applicant will obtain a base cost for the relevant portion of the property portfolio (including the relevant portion of the rights attaching to the property portfolio and the letting enterprises) equal to the market value of the Second CoApplicant s units issued to the Applicant immediately after acquiring the property portfolio.

71 Binding Private Ruling 270 Ruling Contd Insofar as the disposal of the portion of the property portfolio relates to the untaxed policyholder fund, the Applicant will obtain a base cost for the units acquired in the Second Co-Applicant equal to the market value of the relevant portion of the property portfolio (including the relevant portion of the rights attaching to the property portfolio and the letting enterprises) disposed of. The Second Co-Applicant will not be liable for transfer duty as section 9(1)(l)(i) of the Transfer Duty Act will apply to the acquisition of the portion of the undivided interest of the Applicant in the property portfolio. However, the public officer of the Second Co-Applicant must make a sworn affidavit or solemn affirmation confirming that the transaction complies with the section.

72 Binding Private Ruling 270 Ruling Contd The disposal of the portion of Property X (including the rights attaching to the property and the associated letting enterprises) by the First CoApplicant to the Second Co-Applicant will qualify as an asset-for-share transaction as defined in paragraph (a) of the definition of asset-forshare transaction in section 42(1). The Second Co-Applicant will not be liable for transfer duty as section 9(1)(l)(i) of the Transfer Duty Act will apply to the acquisition of the portion of the undivided interest of the First Co-Applicant in Property X. However, the public officer of the Second Co-Applicant must make a sworn affidavit or solemn affirmation confirming that the transaction complies with the section.

73 Binding Private Ruling 270 Period of Validity This binding private ruling is valid for a period of two years from 29 March 2017.

74 Binding Private Ruling 272 ( BPR 272 ) Issued on 11 April 2017 Concerns: deduction of expenditure incurred by Applicant to acquire land development rights to develop land on another person s property at Applicant s own risk and to exploit it for its own account; and Sections 1(1) definition of trading stock, 8(4)(a), 11(a), 22, 23(g), 23H and 24J of Income Tax Act, 1962 ( IT Act ) as at 13 December 2016.

75 BPR 272 Parties to Proposed Transaction Applicant residential property developer, listed company incorporated and resident of RSA. Holdco landowner, company incorporated and resident in RSA. Propco subsidiary of Holdco, special purpose vehicle, incorporated and resident in RSA and will take ownership of land from Holdco. Subco A company incorporated and resident in RSA, wholly owned subsidiary of Holdco. Purchasers eventual acquirers of residential units to be developed. Applicant (developer) Holdco (landowner) Propco (acquirer of land) Subco A Purchasers (acquirers of residential units)

76 BPR 272 Details of Proposed Transaction Applicant proposes to conclude agreement with Propco to acquire land development rights Applicant will then build and sell rights to occupy residential sectional title units. Applicant will acquire land (99-year lease in casu), develop it and sell residential units at profit. Property will be held as trading stock. Proposed Steps to Implement Transaction Propco (after acquiring land from Holdco) will grant right to develop land to Subco A, ito a development of rights agreement ( DRA ). Applicant (developer) Holdco (landowner) Propco (acquirer) Purchasers Subco A Right to develop land

77 BPR 272 Proposed Steps to Implement Transaction contd. Subco A will cede to Applicant right to develop residential units on land and to market them at Applicant s risk and account Applicant will in turn pay Subco A various amounts; Propco will enter into 99-year lease with Applicant ( township lease ) and will be registered against title deed; Township lease Applicant (developer) Holdco (landowner) Propco (acquirer) Purchasers Subco A Cession of right to develop units

78 BPR 272 Proposed Steps to Implement Transaction contd. Residential units (held under sectional title) will be disposed of as follows: Once units constructed by Applicant, Applicant entitled to: Call on Propco to cancel township lease with Applicant and conclude a 99-year lease directly with Purchaser iro residential unit; and Receive purchase price from Purchaser. Purchaser s lease agreement will be registered against title deed of unit; and At end of 99-year period, lessee entitled to renew lease for further 99-year period, against payment to Propco of 3,5% of fair value of unit at this time. Township lease (cancelled) Applicant (developer) Holdco (landowner) Propco (acquirer) Subco A Purchasers New 99-year lease

79 BPR 272 Proposed Steps to Implement Transaction contd. Consideration for rights ito DRA requires initial amount at signature and payment in instalments of balance, as units are sold. This described as: 15% plus VAT of amount (excluding VAT) payable by a Unit Purchaser for leasehold title in respect of a Unit Subject to stipulated minimum amounts payable by set annual dates and stipulated maximum amount. If there is shortfall at any of annual dates, must be made good by next date; and If there is surplus may be deducted from minimum amount due by following date. DRA permits Applicant an early redemption discount if payments made in full on/before certain date in future reduced amount is specified. If early redemption payment occurs after that date, amount payable is calculated by reference to an interest rate.

80 BPR 272 Ruling Payments which Applicant will make to Subco A ito DRA are deductible under section 11(a) read with sections 22 and 23(g); Section 23H not applicable to deductions above; Should Applicant exercise right to pay early redemption discounted amount à recoupment under section 8(4)(a) iro discount received; Obligation to make payments ito DRA not constitute an instrument under section 24J. Therefore, section 24J not applicable to payment arrangement; and Not subject to any conditions or assumptions and valid for 10 years from 13 December 2016.

81 Roll-Overs None.

82 Not covered Customs and Excise Act.

83 Thank you for listening Tax Consulting South Africa Jerry Botha This Month s Contributors: Marius Engelbrecht, GTP; Craig Rocher, CA(SA); Rina Fourie, Bcom Honours (Tax); Natasha Wilkinson, admitted attorney; Christopher Renwick, admitted attorney; and Darren Britz, admitted attorney.