Home Articles ANALYSIS: Tightening the screws

ANALYSIS: Tightening the screws


The reportable arrangement (RA) provisions are under renewed focus since the issue of a draft notice of reportable and excluded transactions and the publication of proposed amendments to the Tax Administration Act 28 of 2011 (TAA).

Fines for failure to report can reach R300 000 per month for each non-reporting participant or promoter of the arrangement. The “participant” definition will include natural persons.

The draft notice would appear to remove the exclusion for arrangements where a tax benefit is not one of the main benefits. Arrangements that become reportable upon issue of the notice must be reported to the South African Revenue Service (SARS) within 45 days of the notice being gazetted.


From 1 October 2012, the Tax Administration Act 28 of 2011, Chapter 4, Part B, sections 34–39 contains the reportable arrangement provisions previously contained in Chapter III, Part IIB, sections 80M–80T of the Income Tax Act 58 of 1962 (ITA). Prior to 1 April 2008, similar provisions were contained in section 76A if the ITA. SARS published a useful guide to that old legislation on 1 March 2005.

Broadly, these provisions create an early-warning system for SARS with respect to perceived high-risk tax avoidance arrangements. The promoters of and participants in reportable arrangements must provide details of the targeted schemes to SARS within 45 days so that SARS may take timeous audit and enforcement action against such arrangements. Presumably this will also assist National Treasury and SARS to prioritise the drafting of appropriate anti-avoidance legislation, where necessary.


  • A “promoter” is a person who is principally responsible for organising, designing, selling, financing or managing the arrangement.
  • A “participant” includes the promoter and any person1 who, directly or indirectly, will derive, or assumes, that they will derive a tax benefit or financial benefit by virtue of the arrangement.
  • A “tax benefit” means the avoidance, postponement, reduction or evasion2 of a liability for tax. “Tax” is defined for the purposes of the TAA to be impositions under a tax Act. A    tax  Act includes all Acts administered by the Commissioner (in terms of section 4 of the South African Revenue Service Act Act 34 of 1997) other than the Customs and Excise Act 91 of 1964. It would therefore include, inter alia, income tax, dividend withholding tax, donations tax, PAYE, VAT, Security Transfer Tax, and Estate Duty.
  • A “financial benefit” means a reduction in the cost of finance, including interest, finance charges, costs, fees and discounts on a redemption amount. Note that a financial benefit makes a person a participant but did not previously have any bearing on whether the arrangement was reportable. This is proposed to change (see below).


A participant, including any promoter, must disclose to SARS the required information, detailed below, regarding the reportable arrangement.3


An “arrangement” is any transaction, operation, scheme, agreement or understanding (whether enforceable or not). An arrangement is a “reportable arrangement” in two possible scenarios:

  • If it is listed by the Commissioner in a public notice (see below) in terms of section 35(2),4 or
  • If it contains any of the hallmarks listed in section 35(1)5

    The hallmarks are:

    (a)          Interest, finance costs, fees or other charges are wholly dependent on the tax treatment of  the arrangement (other than by reason of tax amendments)

    (b)          It has a lack of commercial substance, as contemplated in section 80C of the ITA or substantially similar thereto

    (c)           It will result in a mismatch of accounting and tax treatment

    (d)          It does not result in a reasonable expectation of a ‘pre-tax profit’ for any participant, or

    (e)          The tax benefit exceeds the pre-tax profit if both are discounted to present value

Under the proposed amendments, only a participant needs to exist for an arrangement to be reportable in terms of the above rules. Consequently, a financial benefit alone could make an arrangement potentially reportable from 16 July 2014, even if there is no tax benefit (other than with respect to (e) above). Nevertheless, such an arrangement would likely be an excluded arrangement in terms of the existing public notice issued on 1 April 2008 (see below on this important point). Once the new notice, which replaces all previous reportable arrangement notices, is gazetted there will still be a requirement for the tax benefit to exceed R5 million, so an arrangement with no or negligible tax benefit would remain an excluded arrangement.

On 28 December 2012, the former Commissioner issued a public notice listing arrangements identified as being likely to lead to an “undue tax benefit” in terms of the current wording of section 35(2):

(a)          Any arrangement involving a “hybrid equity instrument” as defined in section 8E of the ITA,  if the prescribed period had been ten years, and

(b)          Any arrangement involving an unlisted “hybrid debt instrument” as defined in section 8F of the ITA, if the prescribed period had been ten years6

The Acting Commissioner has also recently released a draft public notice identifying reportable arrangements as follows:

(a)          Where fees in excess of R5 million (or are reasonable expected to exceed R5 million) are or may become payable by a resident to a non-resident for services rendered in the Republic to that non-resident7

(b)          A share buy-back (by a company from shareholders) of R10 million or more, if that  company has issued or will issue shares within 12 months of the buy-back or arrangement

(c)           Any arrangement which results in a foreign tax credit in excess of R5 million

(d)          A contribution or payment for the acquisition of a beneficial interest in an offshore trust  where such contribution, payment or beneficial interest has a value in excess of R10 million (other than a collective investment scheme or foreign investment entity)

(e)          The acquisition of a controlling interest in a company with carried forward losses in excess of R20 million (in the prior or current year)

(f)           Where a resident becomes liable to pay R5 million to a foreign insurer, where the amount payable to any beneficiary is determined mainly with reference to the value of specific assets held by the insurer, or another person, for the purposes of the arrangement

The above listed arrangements shall only be reportable from the date the notice is published in the Government Gazette. A number of aspects remain unclear. For example, are the thresholds per transaction or per annum? It would also appear that relatively routine transactions with non-residents may need to be reported in terms of item (a). Notably, hybrid equity instruments are not mentioned in the draft notice, even though the 2012 notice making them reportable will be cease to have effect once this new notice is gazetted.

The second-round deadline for submission of comments on the draft notice was 23 June 2014.


Section 36 of the TAA lists so-called “excluded arrangements” (that is, non-reportable arrangements) as follows:

(a)          A debt in terms of which either (i) the borrower receives cash and agrees to repay at least the same amount at a future date, or (ii) the borrower receives a fungible asset and agrees   to return the same or equivalent asset to the lender at a future date

(b)          A lease

(c)           A transaction on a regulated exchange, or

(d)          A transaction in participatory interests in a collective investment scheme8

These arrangements are only excluded, however:

(a)          If they are undertaken on a stand-alone basis and not in connection with any other arrangement, where directly or indirectly, or

(b)          If they would have qualified as a stand-alone arrangement but for another arrangement with the sole purpose of providing security, provided the security arrangement does not create or enhance a tax benefit

Furthermore, an arrangement is not excluded if it is entered into:

(a)          With the main purpose, or with one of its main purposes, being the obtaining or enhancing of a tax benefit, or

(b)          In a specific manner or form that enhances or will enhance a tax benefit

In addition, on 1 April 2008 (and apparently not as an April Fool’s Day joke) the then Minister of Finance, Trevor Manuel, issued a notice in terms of the old section 80N(4) stating that an arrangement will be an excluded arrangement where the “tax benefit”:

(a)          Does not exceed R1 million9, or

(b)          Is not the main or one of its main benefits

In terms of section 269(1) of the TAA, rules, notices and regulations issued under the provisions of a tax Act which were repealed by the TAA (such as section 80N) and that were in force immediately before the commencement of the TAA on 1 October 2012, remain in force as if they were issued under the TAA until new notices are issued under the equivalent TAA provisions. It is submitted that as no new notice has been issued under section 36(4) of the TAA, the section 80N(4) notice of 1 April 2008 remains in force.

Consequently, despite the proposed amendments to section 35 to exclude the requirement for a tax benefit to exist (for example, if there are only participants with a financial benefit), an arrangement will in any case be excluded (non-reportable) if a tax benefit is not a main benefit of the arrangement in terms of the notice issued on 1 April 2008. Furthermore, if the tax benefit does not exceed R1 million (to increase to R5 million) then the arrangement is excluded in any case.

It is notable that the new draft notice does not contain this “not a main benefit” exclusion. Consequently, once the new notice is issued in terms of section 36(4) of the TAA, it will supersede the old notice issued under the repealed section 80N and the exclusion for “not a main benefit” will no longer exist.10 Such an eventuality will have significant implications, since an arrangement would be reportable even if a tax benefit is not a main benefit of the arrangement provided there exists a tax benefit that exceeds R5 million. At the date of writing, the notice had not been gazetted as final.


All participants (including promoters) must report any reportable arrangements to SARS. If a participant has obtained a written statement from a promoter or another participant that the reportable arrangement has already been disclosed to SARS, they need not disclose it themselves.

The following information must be submitted regarding the arrangements in terms of section 38:

(a)          A detailed description of all steps in the arrangement, including any larger arrangement of which the reported arrangement is but a part

(b)          A detailed description of the assumed tax benefits for all the participants

(c)           Details of all the participants, and

(d)          Any financial model that embodies its projected tax treatment

Forms are available on the SARS website to facilitate the reporting, which are directed to the Large Business Centre (LBC) at Megawatt Park. SARS then issues a reference number to each participant.

Currently the report must be made within 45 days of an amount being received or accrued, or paid or incurred, by a participant, in terms of the arrangement. It is proposed that from 16 July 2014 reports be due from each participant within 45 days of the arrangement becoming reportable, or 45 days from the date that the person became a participant, if this was after the arrangement become reportable. This means that existing arrangements can become reportable, for example in terms of new legislation or a new notice, and not just newly implemented arrangements. Furthermore, new participants in existing arrangements will have their own reporting requirement.

Where an existing arrangement becomes reportable (and/or a person becomes a participant) only after publication of the notice in the gazette, the 45-day reporting window commences on the date of publication of the notice. Consequently taxpayers will need to carefully consider all existing arrangements once the notice is issued and submit reports within 45 days. SARS could be inundated with reports after the notice comes into effect.

An extension of a further 45 days may be granted by SARS if reasonable grounds exist for such an extension.


The penalty for failure by a participant (which includes a promoter) to report a reportable arrangement is governed by Chapter 15, section 212 of the TAA (Administrative Non-Compliance Penalties).

The penalty is imposed each month that the arrangement goes unreported, for up to 12 months. Currently, the penalty is R50 000 per month for participants and R100 000 per month for promoters. The penalty is doubled if the tax benefit exceeds R5 million and tripled if the tax benefit exceeds R10 million.

Failure to report is not, however, a criminal offence.11


(a)          It is important to note that the reportable arrangements provisions operate independently  of the General Anti-Avoidance Rules (GAAR) in sections 80A to 80L of the ITA. While reporting may assist SARS in identifying situations where the GAAR may apply, there is no direct link between an “impermissible tax avoidance arrangement” and a “reportable arrangement” other than the cross-reference in section 35(1) to section 80C with respect to  “non-commercial purpose”. An important similarity, however, is that both provisions currently exclude from their ambit any arrangements where obtaining a tax benefit is not the main purpose thereof (or main benefit thereof, with respect to RAs). The new notice, if issued in its current form, will remove this “not a main benefit” exclusion for reportable arrangements, however.

(b)          A reportable arrangement is completely different from, and in addition to, a reportable irregularity (RI), which must be reported to the Independent Regulatory Board of Auditors (IRBA) by registered auditors.

(c)           The reportable arrangements provisions have no impact on legal professional privilege. Of course, if the promoter (or participant) of a reportable arrangement happens to be an attorney in practice, he or she must report the arrangement. Correspondence and communications between participants and their attorneys with reference to the arrangement will, however, remain privileged, subject to the usual stipulations. ❐


  1. The legislation currently includes only a company or a trust in the definition of participant. The amendment to “any person” is proposed to come into force from 16 July 2014, as with all amendments noted in this article.
  2. “Evasion” is a proposed new addition to the definition of “tax benefit”.
  3. Currently, only promoters are required to report, unless the promoter is non-resident, in which case the participants must report. The rule change from 16 July 2014 requires reporting by all participants and promoters.
  4. The amendment proposes that the requirement for an undue tax benefit be removed and that only a participant need exist (see also note 5).
  5. The amendment proposes to remove the requirement for a tax benefit and instead refers    only to the existence of a participant. Note, however, that the definition of “participant” requires that there be a tax benefit or financial benefit.
  6. This notice updated the one issued on 1 March 2005 by the then Minister of Finance, Trevor Manuel, listing arrangements in terms of the old section 76A where the sections 8E and 8F prescribed periods were set at five years for the purposes of those reportable arrangements. The other difference is that the old notice did not apply to listed section 8E instruments.
  7. The original draft notice applied only to certain services and only if the non-resident satisfied certain conditions (for example had a bank account in South Africa). The new draft notice has no such conditions. The term ”fee” has not been defined.
  8. These are the same excluded transactions listed in the public notice of 1 March 2005 with respect to the old section 76A.
  9. The revised draft notice proposes to increase the reportable tax benefit threshold from R1 million to R5 million.
  10. The cover letter to the draft notice in fact states that the notice shall replace all previous notices issued under sections 80M(2)(c) and 80N of the ITA, and section 35(2) of the TAA.
  11. This was confirmed in the explanatory memorandum to the TAA 2011.

Author: Dan Foster is a director at Webber Wentzel Attorneys