treasury proposes doubling 12-month rule for collateral arrangement tax treatment
On 1 January 2016, South Africa’s National Treasury (“Treasury”) introduced an exemption from securities transfer tax (“STT”) (and consequential tax relief under other tax statutes) for outright transfers of listed shares as collateral. The introduction of the exemption for “collateral arrangements”, as defined in the Securities Transfer Tax Act, 2007 (as amended) (the “STT Act”), was the long-awaited result of lobbying by the banking, securities lending and derivatives markets.
On 8 July 2016, Treasury released a draft Taxation Laws Amendment Bill (the “draft TLAB”) amending, inter alia, the definition of “collateral arrangement” in the STT Act.
As enacted, the exemption for collateral arrangements largely mirrors the exemption for “lending arrangements”, as defined in the STT Act. Market participants will be familiar with the requirement for both exemptions that identical shares be returned to the transferor within 12 months of the original transfer. In the draft TLAB, Treasury proposes an extension to a 24-month period for returning shares transferred in terms of a collateral arrangement. Although the 12-month rule on collateral arrangements aligned well where the collateral was provided for lending arrangements, requiring a 12-month return of collateral transferred in respect of derivative and funding transactions was seen as overly restrictive and administratively burdensome. Aside from simplifying the administration of a number of types of transactions, the extension will likely assist banks and financial institutions in meeting their regulatory requirements relating to the collateralisation of exposures. Lending arrangements will remain subject to a 12-month return period.
In addition, sections of the draft TLAB clarify that the consequential tax relief under the Income Tax Act, 1962 (the “Act”) that flows from satisfying the collateral arrangement definition applies to listed bonds issued by the government of the Republic of South Africa in the national or local sphere. Finally, the draft TLAB provides that where shares are substituted for listed shares in a corporate action on the Johannesburg Stock Exchange, those substituted shares will qualify as “identical shares” for purposes of the treatment of lending arrangements and collateral arrangements under the Act.
It is proposed that the changes discussed above be effective in respect of collateral arrangements entered into on or after 1 January 2017.
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