A re-prioritising of sorts - between the anti-avoidance rules and corporate re-organisations

A re-prioritising of sorts - between the anti-avoidance rules and corporate re-organisations

• 19 December 2019
• Corporate Tax
• Louis Botha

Monday, 23 July 2018

Important:

This article is based on tax law for the tax year ending 28 February 2020.

Author: Louis Botha (Cliffe Dekker Hofmeyr)

A re-prioritising of sorts? Proposals regarding the interaction between the anti-avoidance rules on dividend-stripping and corporate re-organisations

In 2017, the Income Tax Act, No 58 of 1962 (Act) was amended to strengthen the anti-avoidance rules dealing with dividend stripping. The Explanatory Memorandum on the TLAB (Memorandum) states that these anti-avoidance rules were initially introduced in 2009 to curb the use of dividend stripping structures, whereby a resident shareholder company would avoid income tax (including capital gains tax) on the sale of shares, by ensuring that the target company declares a large pre-sale dividend to it. This dividend would be exempt from dividends tax and would result in the shares being sold at a lower amount.

The effect of the 2017 amendments, was that exempt dividends that arise in the manner above could now constitute extraordinary dividends, if the resident shareholder company sells the shares in respect of which it received the dividends, within 18 months of receiving the dividends. To the extent that the exempt dividends constitute extraordinary dividends, as defined in s22B of the Act and in paragraph 43A of the Eighth Schedule to the Act, such dividends are treated as income or proceeds received from the disposal of those shares. Furthermore, amendments were also made so that the corporate re-organisation rules in the Act were made subject to these anti-avoidance rules dealing with dividend stripping.

Reasons for change

The Memorandum notes that it has come to Government’s attention that the 2017 amendments providing that the anti-avoidance rules on dividend stripping override the corporate re-organisation rules, may affect some legitimate transactions. Considering this, a number of amendments have been proposed.

Corporate re-organisation rules no longer overridden

To ensure that the anti-avoidance rules dealing with dividend stripping do not affect legitimate transactions, National Treasury proposes that these rules should no longer override the corporate re-organisation rules. Instead, it proposes that these anti-avoidance rules should only be triggered when the corporate re-organisation rules are abused by taxpayers who use the corporate re-organisation rules to subsequently dispose of their shares to unrelated purchasers, outside the realm of the re-organisation rules.

Introduction of the “deferral transaction” and application of the anti-avoidance rules on dividend stripping

To address instances where taxpayers use the corporate re-organisation rules to subsequently dispose of their shares to unrelated purchasers outside of the realm of the re-organisation rules, amendments are proposed to clarify the timing of the trigger of the anti-avoidance rules dealing with dividend stripping. To achieve this, it is proposed that the term “deferral transaction” is introduced under the anti-avoidance rules dealing with dividend stripping, which will be defined to mean transactions in respect of which the corporate re-organisation provisions in the Act will apply.

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This article first appeared on cliffedekkerhofmeyr.com.

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