Binding Private Rulings issued by SARS – December 2023

Binding Private Rulings 399-403

Private Binding Rulings (PBRs) are formal decisions issued by the South African Revenue Service (SARS) providing guidance on interpreting and applying tax laws. PBRs are legally binding on SARS, the applicant, and any co-applicants involved, providing taxpayers with certainty when planning their tax affairs. PBRs are essential for taxpayers when planning tax affairs, ensuring compliance, and minimising tax-related risks.

Binding Private Rulings 399: Asset-for-share transaction and replacement asset

This BPR addresses the tax implications of an asset-for-share transaction and the subsequent replacement of an asset based on section 8(4)(e), section 12C, section 42(7), paragraph 10, and paragraph 66.

In the scenario, a sole proprietor sells an existing aircraft and purchases a new one to replace it. He plans to transfer his entire business, including the existing aircraft, to the Applicant, a resident company, through an asset-for-share transaction. The transaction involves the transfer of assets and shares, with the Applicant becoming the seller of the existing aircraft and the buyer of the new one. Subsequently, the Applicant intends to dispose of the existing aircraft and acquire the new aircraft within 18 months. The ruling clarifies the tax consequences of these transactions, including recoupment, capital gain, and allowances, under relevant tax laws.

The ruling confirms that the Applicant can make an election under paragraph 66 for the replacement of the existing aircraft and is entitled to claim an allowance for the new aircraft under section 12C. It also outlines the applicability of section 8(4)(e), paragraph 66(2) of the Eighth Schedule, and section 42(7) in relation to these transactions. This ruling guides the tax treatment of asset-for-share transactions and asset replacements, ensuring compliance with South African tax laws.

This ruling is valid for a period of five years from 14 August 2023.

Read the SARS ruling here.

Binding Private Ruling 400: Donations tax implications on the issue of shares at nominal value

The ruling aims to determine whether donations tax will be payable when amending a company’s MOI to issue shares at nominal value to a CSI trust for the purpose of enhancing BBBEE credentials.

The ruling references the applicability of sections 54-58 of the Income Tax Act.

The parties involved are the Applicant (a resident trust benefiting employees of a group), Company A (a resident company holding shares in the group’s listed holding company), and the CSI Trust (a resident CSI trust).

The Applicant and Company A were established to acquire and hold Listco shares for the benefit of the broader group’s BBBEE transaction. The shares will be allocated to employees of the group through an employee share ownership plan (ESOP) and to Black People beneficiaries through the CSI Trust. The ESOP will exist for a few years, while the CSI Trust is intended to exist perpetually.

The ruling states that no donations tax liability arises under section 54 due to the proposed transaction, which includes the MOI amendment, incorporation of ESOP provisions into the trust deed, and the issuance of shares by Company A to the CSI Trust for nominal consideration. The ruling is subject to certain conditions and assumptions, including the registration of CSI Trust as a Public Benefit Organization (PBO) and the absence of connected persons among beneficiaries.

The document does not express a view on the deductibility of contributions to the Applicant or the capital gains tax consequences of the proposed transaction.

The BPR is valid for a period of three years from August 14, 2023.

Read the SARS ruling here.

Binding Private Ruling 401: Leasehold improvement allowance

This ruling addresses the tax consequences for a lessor on improvements made by a lessee.

The ruling focuses on Section 11(h) of the Income Tax Act and pertains to a lessor and lessee, both being resident companies independent from each other.

The lessor intends to upgrade its warehouse to enhance distribution efficiencies. To achieve this, the lessee will sublet the lease area to the lessor under a sub-lease agreement and will be responsible for constructing a warehouse on the lease area. The key terms of the lease agreements include a 50-year ground lease with a nominal rental amount, with conditions for sub-leasing and termination.

The ruling concludes that the lessor may deduct an allowance under Section 11(h) equal to the difference between the inclusion amount and the present value of the inclusion amount, which is determined by discounting it at 6% over the number of years considered for the lessee’s allowance under Section 11(g). The ruling is subject to certain conditions, including a deduction on the lease improvements for the lessee under Section 11(g) over 25 years and including the improvement value in the lessor’s “gross income.”

This binding private ruling is valid for three years from September 11, 2023.

Read the SARS ruling here.

Binding Private Ruling 402: Transfer of long-term insurance business to a local branch of a foreign reinsurer

This binding private ruling, issued under the South African Income Tax Act and Value Added Tax Act, addresses the tax implications of transferring a life reinsurance business from a resident reinsurer to a local branch of a foreign company. The ruling involves various tax provisions and definitions under the Acts, effective January 1, 2023.

The parties involved include the resident reinsurer (the Applicant), a foreign reinsurance company (Company B), a local branch of the foreign company (the Branch), and a resident trust established for insurance regulatory purposes (the Trust).

The proposed transaction includes converting the Applicant’s business from a company to a Branch, with the Branch assuming the Applicant’s insurance liabilities. The ruling guides the allocation of liabilities, the tax treatment of the cash payment, VAT implications, and the registration requirements for the Branch. Additionally, it clarifies the VAT treatment of assets used for exempt purposes and the value of supply rules for connected parties.

This binding private ruling is valid for the year of assessment ending on December 31, 2023, offering insights into the tax aspects of this complex transaction.

Read the SARS ruling here.

Binding Private Ruling 403: Taxation of covered persons in respect of Equity Linked Notes

This binding private ruling examines the tax treatment of Equity Linked Notes (ELNs), specifically concerning “covered persons”, providing insights into the taxation of financial instruments and their associated income tax implications.

The Applicant is a resident company that provides financing to clients using debt and equity instruments. In the proposed transaction, the Applicant issued ELNs to Noteholders during its business. The noteholders are various resident companies subscribing to the ELNs.

Specific characteristics of ELNs:

Noteholders pay a Subscription Amount to the Applicant. The Applicant commits to paying Noteholders a Redemption Amount, linked to the performance of a specified index or basket of listed shares or interests (Equity Basket).

ELNs have an indefinite term but become redeemable at the Noteholder’s option after a minimum of five years. Noteholders do not receive any distributions before the Redemption Date. The Redemption Amount is calculated using a formula considering the Subscription Amount, Equity Basket performance, and capital-guaranteed portion. The Applicant bears the risk of making the Redemption Amount payment to Noteholders. The Applicant retains any profits exceeding the Redemption Amount. These ELNs are recognised as financial liabilities on the Applicant’s Statement of Financial Position, and their fair value changes are recorded in the Statement of Comprehensive Income according to IFRS 9.

The ruling is contingent on the Applicant meeting the definition of a “covered person”, and that specific tax sections (8F, 8FA, and 24JB(4)) do not apply to the ELNs.

Key rulings

The ruling clarifies the tax treatment of Equity Linked Notes (ELNs) for covered persons, providing comprehensive guidance on their income tax implications as per the Income Tax Act.

• Application of section 24JB(2) to the ELNs inclusions or deductions of amounts recognised in the Applicant’s Statement of Comprehensive Income related to ELNs, measured at fair value, under section 24JB(2).
• Section 24JB(3) applies to the Subscription and Redemption Amount.
• Exclusion of the Subscription Amount from the Applicant’s “gross income” in the year of issuance.
• Non-deductibility of the Redemption Amount paid by the Applicant upon redemption from its income under section 11(a) read with section 23(g).

The BRP is valid for five years, starting November 10, 2023.

Read the SARS ruling here.