Page 1126 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
B. Changes to the de nition of ‘regulated intermediary’ in section 64D
Currently, in terms of section 64G(2)(c) a company that declares and pays dividends is not required to withhold dividends tax if it pays such dividends to a regulated intermediary. The regulated intermediary has an obligation to withhold dividends tax in this regard. It is proposed that the withholding tax regime applicable to collective investment scheme in securities should be granted to portfolio of hedge funds collective investment schemes and that the de nition of regulated intermediary in section 64D be expanded to include a portfolio of hedge fund collective investment schemes.
IV. Effective date
The proposed amendments will be deemed to have come into effect on 1 April 2015.
3.7 SECURITIES TRANSFER TAX AND CAPITAL GAINS TAX IMPLICATIONS ON COLLATERAL ARRANGEMENTS
[Applicable provisions: Sections 1, 9C(4), 22(4B) and (9), and paragraph 11(2)(n) of the Eighth Schedule, Sections 1 and 8(1)(u) of the Securities Transfer Tax Act]
I. Background
Most debt agreements involve the usage of collateral, more speci cally the use of equity going forward as the demand for liquid assets is increasing due to higher capital and liquidity requirements. The provision of collateral can take two forms, namely, (i) pledge (no transfer of bene cial ownership with no tax implications) and (ii) outright transfer (out and out cession of bene cial ownership with tax implications).
II. Reasons for change
In 1996, a speci c tax dispensation for Securities Lending Arrangements (as currently de ned in the Act) was made in the Act and the Stamp Duties Act (subsequently incorporated in the Securities Transfer Tax Act). As a result, the event of granting collateral by way of a pledge for securities lending is currently not subject to income tax and securities transfer tax because it does not involve the actual transfer of bene cial ownership. The speci c tax dispensation for Securities Lending Arrangements is limited and effectively allows for the deferral of securities transfer tax for a limited period of 12 months.
On the other hand, when an outright transfer of collateral is executed during a securities lending transaction, equity securities are subject to both income tax and securities transfer tax, due to the fact that the outright transfer of collateral involves the actual transfer of bene cialownership.
Regulatory changes applying to the nancial sector have necessitated the urgent review of the tax treatment of collateral. Effectively the regulatory changes will result in nancial sector participants especially the banking and pension fund industries having to:
• meet more stringent capital requirements e.g. Liquidity Coverage Ratio under Basel III for the banking sector; and
• hold collateral posted to the pension fund in the name of the said pension fund under Regulation 28.
The bene ts of an outright transfer of collateral have been identi ed by the nancial sector industry as:
• assistance to the nancial sector industry in meeting regulatory changes and demands;
• increase in availability of high quality liquid assets which directly increases market liquidity;
• reduction of transaction costs and market pricing because of the ability to rehypothecate collateral and reduce tax
costs; and
• making South Africa more attractive as an investment destination.
III. Proposal
In order to minimize the negative effects on business practices and market liquidity, the following amendments are proposed:
A. Securities Transfer Tax Exemption for 12 months and Capital Gains Tax exemption if shares are returned within 12
months
It is proposed that a similar tax dispensation as applies to Securities Lending Arrangements be introduced for the outright transfer of collateral and that no income tax and securities transfer tax implications arise for collateral arrangements for a duration of up to 12 months. Similar to securities lending arrangements listed shares will not be allowed to be provided as collateral for longer than 12 months. This implies that the concept of ‘rolling collateral’ will not be allowed. The 12-month limit will assist to avoid scenarios of sales disguised as collateral transactions or transactions where the collateral is used against rolling debt positions that are designed to keep an collateral position open for longer than 12 months.
B. Listed shares
The proposed exemption for the outright transfer of collateral will only apply to the instruments listed in paragraph (a) of ‘security’ as de ned in the Securities Transfer Tax Act that is listed on an exchange. As a matter of clari cation, the new proposed de nition of ‘listed shares’ will include depository receipts.
C. Identical Share
To ensure that the wording of the Act correctly re ects the policy intent that the return of collateral of the same kind and of the same or equivalent quantity and quality means a share of the same class in the same company as that share originally transferred in terms of a collateral arrangement, it is proposed that a de nition of ‘identical share’ be inserted in section 1 of the Act.
1118 SAIT CompendIum oF TAx LegISLATIon VoLume 2