Since March 2014 SARS has issued several binding private rulings. A few of the more interesting ones are discussed below. It is necessary to approach private rulings with care, because invariably the published rulings contain only redacted versions of the facts and circumstances. The discussion below should be read with that caveat in mind.
BPR 163 dealt with two issues: interest on replacement loans, and the proceeds of a repurchase of shares.
The parties consist of a resident public company (Applicant) with a number of resident subsidiaries, and a resident private company (Co-applicant). The shares of the Applicant were held as to 49,3% by the Co-applicant, 0,13% by employees of the Applicant, and the remaining 50,57% by various professional individuals either directly or through trusts, companies or the executors of their deceased estates. The Applicant wished to buy back the shares held by the Co-applicant. The method proposed to achieve this was that the Applicant would establish and be the sole shareholder of a company (Newco), which would acquire from the Applicant the shares in the subsidiaries in exchange for further shares in Newco.
The subsidiaries had interest free intra-group loans, which they would refinance by means of interest bearing bank loans, with which they would repay the intra-group loans. These loans had arisen as subsidiaries with surplus cash had from time to time made loans to fellow subsidiaries in need of funds. The use to which the subsidiaries put the loans appears below. The recipient subsidiaries would then use the funds to pay dividends to Newco, their new holding company.
Newco would obtain bank loan funding for the Applicant to use for the share buyback. So the loan funds would flow from Newco via the Applicant to the Co-applicant. The professionals would purchase specified numbers of shares in the Applicant from the Co-applicant. The Applicant in turn would buy back all the shares still held by the Co-applicant.
Three of the loans were to finance working capital, for building projects or to buy capital equipment necessary to conduct the businesses. The fourth was for a future capital expenditure programme that never took place, so the subsidiary concerned had placed the funds in an interest bearing deposit with a bank.
The ruling was as follows:
Firstly, the interest on the first three loans was deductible, but not the interest on the fourth loan. While the ruling about the first three loans is understandable, given that these loans replaced loans incurred for use in the production of income, the reason for the refusal of the interest deduction on the fourth loan is not clear. After all, the funds were used to invest in a deposit generating taxable interest. Perhaps the explanation lies in one of the facts redacted from the ruling;
Secondly, the buyback consideration would be a dividend and subject to the dividends tax. Presumably the Applicant had sufficient reserves to enable it to pay a dividend.
BPR 164 dealt with the buyback of shares at a price in excess of their market value and the possible implications of donations tax.
The Applicant and Company A were both resident companies. Company A, whose shareholders were a broad-based black economic empowerment consortium, had concluded a BEE transaction with the Applicant in terms of which it acquired 40% of the equity share capital of the Applicant. It financed the transaction by issuing cumulative redeemable preference shares (Prefs) to various investors, but mainly a finance house. Company A used its shares in the Applicant as security for redemption of the Prefs.
The first of the Pref funding periods was approaching. The Applicant was reluctant to risk losing its BEE status by a possible default by Company A, so it proposed to buy back from Company A about 20% of the Applicant’s issued share capital at an amount in excess of market value. This would ensure that Company A would be in funds to pay outstanding dividends and redeem all the Prefs. Company A would then hold 25,1% of the Applicant’s issued shares.
Needless to say, the parties were concerned about the donations tax implications of the excessive price paid in the buyback, hence the application for a ruling. The ruling was that the buyback would not constitute a donation. The ruling does not spell out the reason, but one can infer that the desire to protect its BEE status was seen as a sufficient reason for the excessive price paid. In other words, the Applicant was driven, not by motives of generosity, an essential element of a donation, but by the commercial desire to retain its precious BEE status.
This interpretation of the meaning of “donation” can be useful in similar circumstances, especially since there is often an element of apparent generosity in BEE transactions.
BPR 165 dealt with the meaning of “hotel keeper” as defined in the Income Tax Act, 1962.
The Applicant owns residences in the vicinity of educational institutions, which it lets either directly to students or to institutions which then let accommodation to students. The Applicant is responsible for providing meals either directly or by outsourcing.
The question was whether the Applicant was a hotel keeper, defined in section 1 as “any person carrying on the business of hotel keeper or boarding or lodging house keeper where meals and sleeping accommodation are supplied to others for money or its equivalent”. The ruling was in the Applicant’s favour, even though in certain respects the Applicant was outsourcing its functions either to educational institutions (in the case of accommodation) or to other service providers (in the case of meals).
BPR 168 dealt with the disposal of assets within 18 months of acquisition in terms of a transaction under the corporate rules. The ruling provides an example of the need for caution in dealing with binding private rulings, because in the facts provided there is no obvious reason for the ruling.
Three parties were involved, all resident companies. The Applicant was the holding company of Subco and the third party was company X. The Applicant had acquired assets from X in exchange for equity shares in X in an “asset-for-share” transaction in terms of section 42 of the Income Tax Act, 1962. The result was that X held 94% of the equity shares in the Applicant. The Applicant wished to dispose of the acquired assets to Subco in terms of an “intra-group” transaction under section 45 within 18 months of the acquisition by the Applicant. In the absence of a ruling to the contrary, the effect would have been to lose the rollover relief afforded by section 42, in terms of which the Applicant was treated as having acquired the assets at base cost to X.
For reasons that are not apparent, the ruling was that the section 45 rollover provisions would apply to the second transaction.
BPR 169 dealt with section 13quin of the Income Tax Act, the commercial building allowance.
The Applicant was a resident public company, and the other party (Developer), a resident private company.
The parties jointly acquired a piece of vacant land in undivided shares of 57,1% and 42,9% respectively. They intended to register a sectional title development scheme over the property and the buildings they proposed erecting on it. Each party would erect for its own use, and at its own cost, a commercial building consisting of a tower block. The two buildings would be separate above ground but would stand on a single underground parking basement, separated into two parts by a wall on each level, with dedicated parking for each block.
The Property Developer would act as project manager and would contract with a building contractor to erect both buildings.
The question was whether the parties would have access to the section 13quin building allowance. It seems that the parties contemplated the possibility that tenants of the Developer’s would occupy its block prior to registration of the sectional title scheme, and the parties were concerned that this might affect the “new and unused” requirement in section 13quin. The ruling was that the Applicant would be able to claim the 5% section 13quin allowance as soon as it occupied its building, even if tenants had already moved into the Developer’s block. In other words, the fact of the shared basement did not mean that the two blocks comprised one commercial building.
