Interpretation Note 67 (Issue 4) – Connected persons

Interpretation Note 67 (Issue 4) – Connected persons

• 28 January 2020
• VAT
• SARS

Important:

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

Section 1(1) of the Value-Added Tax Act 89 of 1991 contains a definition of “connected persons”. Apart from the fact that the term is defined in the plural, there are a number of other significant differences between the value-added tax definition and the income tax definition. For example, the value-added tax definition includes the estates of deceased and insolvent persons, a partnership, and in specified circumstances, a branch or division of a person, while the income tax definition does not. Although the two definitions share some common features, this Note focuses on the income tax definition only and should not be relied on for purposes of interpreting the value-added tax definition. Section 1 of the TA Act defines “connected person” as meaning “a connected person as defined in section 1 of the Income Tax Act”.

The Income Tax Act 113 of 1993 introduced the definition of “connected person” into section 1. This definition is central to specific anti-avoidance provisions that regulate the tax consequences of transactions entered into between related taxpayers. Such related-party transactions are more likely to be open to manipulation in order to secure a fiscal advantage than transactions entered into between unconnected parties, hence the need for specific rules to deal with connected persons.

The law and its application

This Note reflects the law as amended by the Taxation Laws Amendment Act 34 of 2019 which was promulgated on 15 January 2020. For ease of reference, the current definition of “connected person” in section 1(1) is quoted in full in Annexure A. The definition of “connected person” identifies connected persons in relation to different types of person, namely –

• natural persons [paragraph (a)];
• trusts [paragraph (b)];
• connected persons in relation to a trust [paragraph (bA)];
• members of partnerships or foreign partnerships [paragraph (c)]; and
• companies and close corporations [paragraph (d)].

The definition also establishes the reverse relationship between the persons that are connected persons in relation to the above persons [paragraph (e)]. In other words, if A is a connected person in relation to B, B is a connected person in relation to A. In identifying the connected person relationship between persons, more than one paragraph of the definition may need to be considered depending on the facts of each case.

This article first appeared on sars.gov.za.

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