Page 1118 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
c. The third amendment deals with the insertion of the new paragraph 64C of the 8th schedule, which makes provision to disregard any capital gain or capital loss determined in respect of disposal of the restricted instrument by a taxpayer to a connected person as contemplated in subsection (4)(a), (5)(a) or (5)(c) of section 8C.
d. The fourth amendment changes paragraph 80(1) of the 8th schedule to clarify that any gain as a result of this transaction will remain taxable in the trust and will not be attributed to the qualifying employee bene ciary. However, where a qualifying employee bene ciary becomes entitled to a cash amount instead of shares, the qualifying employee bene ciary will have a section 8C gain (on the basis that the bene cial interest in the trust is a section 8C equity instrument). Where the trust then dispose of shares and vests the pro t in the hands of the employee, the capital gain will be attributed to the employee in terms of paragraph 80(2).
e. The last amendment is the insertion of the new paragraph 80(2A) of the 8th schedule which clari es that where the trust disposes of shares and vests the pro t in the hands of qualifying employee bene ciary, then the provisions of paragraph 80(2) will not apply if such amount is to be taken into account in the hands of qualifying employee bene ciary for the purposes of section 8C.
IV. Effective date
The proposed amendments will come into operation on 1 March 2016 and apply in respect of years of assessment commencing on or after that date.
2. INCOME TAX: BUSINESS (GENERAL)
2.1. DEBT-FINANCED ACQUISITIONS OF CONTROLLING SHARE INTERESTS
[Applicable provision: Section 24O]
I. Background
Debt is often used to fund business acquisitions, which can be achieved by either purchasing the business assets of a target company or by purchasing the shares in that target company. The interest expense incurred by a purchaser when using debt to nance the acquisition of a business can only be deducted from income to the extent that such interest expense is incurred in the production of income.
As a de ned term, income’ encompasses those amounts that are received by or are accrued to a person and are not exempt from tax. As such, interest incurred in respect of debt used to fund share acquisitions (as opposed to income producing assets) will not be deductible as the shares produce exempt dividend income. To overcome this preclusion from getting an interest deduction on debt nanced share acquisitions, taxpayers often entered into multiple step transactions in order to obtain interest deductions by using debt-push-down structures.
Following the suspension of debt-deferred intra-group transactions in 2012, it was determined by Government that these debt-push-down structures were not a threat to the scus. It was concluded that the real danger to the scus was the use of excessive debt to fund debt-push- down structures. Further, the fact that interest associated with direct share acquisitions is not deductible while interest associated with indirect debt- nancing through the use of tax-deferred debt- push-down structures is deductible created a contradiction in the law. As a result, a special deduction was introduced in 2012 to accommodate these debt-push-down structures. This special deduction provides for an interest deduction in respect of debt used to acquire controlling share interests in operating companies.
II. Reasons for change
The introduction of the special interest deduction in respect of debt- nanced acquisitions of controlling share interests was aimed at removing the need to implement multiple step debt- push-down structures. These debt-push-down transactions involved –
a. the acquisition by an acquiring company of all of the shares of a target company using a temporary loan.
b. followed by the acquiring company (or a newly established subsidiary of the acquiring company) entering into a tax-deferred acquisition of the business assets of the target company via a tax-deferred section 45 intra-group transaction. Under this step, the business assets of the target company were acquired using long-term debt- nancing.
c. nally, the some of the long-term debt proceeds were then used by the acquiring company (or distributed by the newly established company to the acquiring company) to repay the bridging loan.
As a result, the interest on the long-term debt that was used to acquire the business assets of the target company became deductible. Currently, the special interest deduction is available when a company acquires the shares in an operating company and at the end of the day of that acquisition the company becomes a controlling group company (i.e. holds more than 70 per cent of the shares) in relation to that operating company. The special deduction may be claimed by the acquiring company only for the period that is remains a controlling group company in relation to the operating company. A company can be an operating company in one of two ways. These are: (1) a company that carries on business continuously, and in the course or furtherance of that business provides goods or services for consideration and (2) a company that is a controlling group company in relation to such a company.
The requirements to qualify for the special interest deduction, seek to mimic the conditions present in a tax-deferred debt-push-down structure. Speci cally, it has always been intended that the special deduction should only be available to share acquisitions that would have otherwise quali ed for an interest deduction had they been structured by way of a tax-deferred debt-push-down structure. These include:
a. the requirement that the target company should be a continuously productive company that generates income through its income producing assets; and
b. the share acquisition should result in the acquirer becoming a controlling group company in relation to the target company, and such shareholding should remain in place for a foreseeable future as is the case when entering into a tax-deferred section 45 transaction.
1110 SAIT CompendIum oF TAx LegISLATIon VoLume 2