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13 May 2024
BY Magda Snyckers

Recent tax changes and their impact on share lending arrangements and collateral arrangements

The Income Tax Act (the “Act”) contains definitions of a “securities lending arrangement” and a “collateral arrangement” which are relevant to determine the tax consequences in instances where, inter alia, equity securities listed on a South African exchange (“Listed Shares”) are transferred in terms of a share loan or provided as security for an amount owed.  

To the extent that the transfer of the Listed Shares qualifies as a “securities lending arrangement” or a “collateral arrangement” (as defined), then the transfer is tax neutral for the lender and borrower or collateral provider and collateral receiver, and in some instances effectively disregarded. For example, for capital gains tax purposes the transfer of the Listed Shares is not regarded as a disposal (irrespective of the fact that beneficial ownership is transferred) in terms of paragraph 11(2)(h) and/or (n) of the Eighth Schedule to the Act. In addition, section 9C(4)( of the Act deems an identical share returned by a borrower to a lender in terms of a “lending arrangement” to be one and the same in the hands of the lender.   A similar provision applies to shares transferred in terms of a “collateral arrangement” in terms of section 9C(4A).

To the extent that financing for the acquisition of the Listed Shares was obtained by the lender/collateral provider (or another related company that indirectly funded the acquisition of the Listed Shares) by the issuance of preference shares, the provisions of inter alia section 8EA are relevant. 

Section 8EA of the Act deals with the taxation of dividends and foreign dividends received by a taxpayer in respect of shares which qualify as “third-party backed shares”.  A “third-party backed share” is defined in section 8EA and includes preference shares where the holder of the preference share has an enforcement right which may be exercised as a result of the holder not receiving a dividend or return of capital from the issuer. An enforcement right includes a right to require to a person other than the issuer to acquire the shares from the holder or to make payments to the holder in terms of a guarantee, indemnity or similar instrument.  Certain enforcement rights are excluded when determining if a preference share constitutes a “third-party backed share” in instances where the preference shares were issued for a “qualifying purpose”.  A “qualifying purpose” is a further defined term and includes the direct or indirect acquisition of an equity share in a listed company.  For example, the acquisition of Listed Shares referred to above could constitute a “qualifying purpose” if all the other requirements are complied with.

The Taxation Laws Amendment Act No 12 of 2023 recently amended section 8EA.  The amendment applies to any dividend or foreign dividend received or accrued during years of assessment commencing on or after 1 January 2024. The amendment provides that certain enforcement rights may not be disregarded if the shares referred to in the definition of “qualifying purpose” are no longer held by the person (the “Exclusion”).

The question is how the Exclusion impacts Listed Shares transferred in terms of a “securities lending arrangement” or a “collateral arrangement”.  Absent a specific provision in the Act, a company that issued preference shares to raise finance (“Issuer”) in order to acquire Listed Shares and transferred the Listed Shares in terms of a “securities lending arrangement” or “collateral arrangement”, should not be the holder of the Listed Shares whilst the shares are held by the borrower/collateral receiver. This is because a “securities lending arrangement” or “collateral arrangement” results in the transfer of ownership of the Listed Shares. 

Although section 22(9) of the Act deems a share held as trading stock to be held and not disposed of, this only applies in instances where the trading stock was lent in terms of a “securities lending arrangement” and an identical security has not been returned by the borrower in that year of assessment. 

Therefore, in instances where an Issuer held Listed Shares as trading stock, lent them out in terms of a  “securities lending arrangement” and the latter has not been closed out in the relevant year of assessment, section 22(9) of the Act should deem the Issuer to hold the shares and the Exclusion should not apply.  However, the deeming provision does not apply if identical shares have been returned to the Issuer. In such an instance the question is whether the Exclusion may apply to the Issuer as the Issuer would not hold the shares referred to in the qualifying purposes definition because the Issuer holds identical shares returned to it. Is this sufficient for the Exclusion not to apply to the Issuer?

What if the Issuer held the Listed Shares as capital assets? Although the Issuer may be regarded as not having disposed of the Listed Shares in terms of paragraph 11(2)(h)  of the Eighth Schedule to the Act, legally it does not own the Listed Shares. Would it be deemed to hold the Listed Shares if it is regarded as not having disposed of the Listed Shares? 

For the reasons set out above taxpayers that are funded by preference shares and have on-lent shares or provided shares as security should consider the impact of the “securities lending arrangement” and collateral arrangement” definitions on the dividends, it declares on the preference shares. This is because if an enforcement right is not disregarded for purposes of section 8EA, and the shares constitute third-party-backed shares, then any dividend received by the holder of the preference shares would be included in the holder’s income and be subject to income tax.


Magda Snyckers

Executive | Tax