Over the last few months, I have helped several companies prepare RA01 submissions for reportable transactions. I have noticed that advisers either forget about reportable arrangements, or accountants often only realise they should have been reported when they prepare the tax return, which asks whether the company has been involved in a reportable arrangement. Anyone who works with complex transactions at least needs to think about them. In this article, I highlight some aspects of reportable arrangements.

Effect of reporting

Reportable arrangements (RAs) are specific transactions that must be reported to the South African Revenue Service (SARS). Reporting does not change the transaction’s tax implications. The transaction may have a possible tax obligation or a tax implication that is open to debate or dispute, and reporting raises that risk with SARS. Reporting itself, however, does not change the tax consequences. These transactions carry risks that SARS needs to be aware of – hence the requirement to report it to them.

What is a reportable arrangement

Part B of Chapter 4 of the Tax Administration Act, 28 of 2011 (the TAA) sets out the requirements. Section 35 prescribes what arrangement to report. It has two distinct parts.

Section 35(1) lists arrangements with certain features or characteristics. Whether those features are present depends on the facts of each specific arrangement. Two examples illustrate the conceptual nature of the requirements:

• One of the triggers is an arrangement with a deduction for tax purposes but no expense for accounting purposes, or revenue for accounting purposes but no gross income for tax purposes.
• Another trigger is an arrangement with the characteristics of a tax avoidance arrangement, for example round tripping or cancelling or offsetting elements. 

To apply section 35(1), one must carefully consider whether the facts at issue display the characteristics listed in that provision.

Section 35(2) states that SARS may issue a public notice. SARS issued such a notice in 2016 (Public Notice 140 in Government Gazette 39650 of 3 February 2016). These indicators are more targeted for specific transactions than section 35(1). The items in the notice are, therefore, arguably easier to spot than those where section 35(1) applies.

Four common listed arrangements

The following are some of the items listed in the public notice that I come across as being reportable (or potentially reportable) fairly regularly:

• The first is an instrument that would be a hybrid equity instrument as defined in section 8E of the Income Tax Act, 58 of 1962 (the ITA) if the prescribed period, which in many cases is three years, were replaced with ten years.
• The second is an arrangement in which a company buys back shares from shareholders, the aggregate value of the buyback exceeds R10 million, and the company issues or must issue shares within twelve months. These are typically transactions that may be subject to the dividend-stripping rules.
• The third is where a person acquires a controlling interest in a company with an assessed loss exceeding R50 million. The requirement looks at the balance of assessed loss for the preceding year, the assessed loss for the current year, or a current year that can reasonably be expected to result in an assessed loss exceeding R50 million. It also extends to the acquisition of a controlling interest in a company that controls such a company. Reporting this arrangement arguably highlights possible application of section 103(2).
• The fourth is where a person pays certain service fees exceeding R10 million to a non-resident who is or will be in South Africa to render the service, either personally or through agents, employees or representatives. This item identifies instances where the service provider may have a permanent establishment or taxable presence in South Africa.

Exclusions

Some arrangements are excluded despite falling within the section 35 or the public notice requirements. Again, similar to section 35, section 36 legislates some exclusions and the public notice adds a few more. The exclusions include:

• An exclusion based on the amount of the tax benefit in the case of arrangements within the scope of section 35(1).
• An exclusion that applies to book versus tax differences, if the tax benefit is not the main benefit, or one of the main benefits, of the arrangement. 

Reporting process

Section 37 of the TAA requires a participant to report the arrangement. It is necessary to consider the detailed definitions to determine who is a participant in the arrangement. That person must report within 45 business days from the date on which the arrangement becomes an RA, or on which the person becomes a participant in an existing RA. It is also important to establish whether someone else has already reported or will report. Section 38 lists the information to be disclosed.

Failure to report attracts monthly fixed amount penalties. The amount depends on the type of participant and the size of the tax benefit. For a twelve-month period, the penalties range from about R600 000 to around R3.6 million.

Take-home message

The first key point is to make sure that you do not forget about reportable arrangements when dealing with complex transactions. To assess whether an arrangement is reportable, it is necessary to look at section 35(1) as well as the public notice and consider the exclusions. If such an arrangement is reportable, you must determine whether you or your client is a participant who must report, and what must be reported. If a person is a participant in such an arrangement, timing matters.