During South Africa`s darkest times, a headmaster thought it appropriate to delegate the task of updating his school rules to take account of the general state of unrest.

Not much changed, except for the REPLACE ion of new Rule 13: “Any boy in possession of a knife, gun, bomb or similar device will immediately report himself to the headmaster.” Today, we have similar provisions, in the Income Tax Act, that govern “reportable arrangements”.

The concept is that a taxpayer, who enters into an aggressive tax arrangement, is required to report the arrangement to the South African Revenue Service within 60 days of the first tax benefit arising. Failure to do so can result in a fine of up to R1-million in addition to the tax, plus additional tax and interest charges.

To date, the spectrum of reportable arrangements has been limited to complex “debt hybrid arrangements” and transactions where the payment of the promoter of the arrangement is based on the tax savings achieved. In my limited experience, this has led to the scrapping of such arrangements.

But in 2006, the new General Anti- Avoidance Rules (GAAR) came into effect through the promulgation of Sections 80A to 80L of the Income Tax Act. These provisions are extensive and seek to attack tax structures that lack “commercial substance”. At the same time that GAAR was introduced, the legislature introduced Sections 80M to 80T, which were to take effect from a date to be announced.

These provisions require transactions that fail the commercial substance tests to fall within the realm of reportable arrangements. Sections 80M to 80T have come into effect from 1 April 2008.

This all ups the stakes for the tax nerds. In the old days we dispensed advice on the basis of: “Faint heart never won fair lady. Take a chance, SARS (South African Revenue Service) probably won`t even detect it.”

Nowadays, the scenario I envisage usually involves somebody who has had too much to drink at a dinner party, who utters the famous lines: “I have a friend with an interesting tax predicament ...”

What that means is: “I`m up the creek with my taxes and I need some free advice. We wouldn`t have invited you to dinner otherwise.”

Well, soon somebody will be running to the loo because the answer will probably be that the tax structure he is describing not only lacks commercial substance, and can be attacked by the new GAAR, but also puts him in line for a R1-million fine if he has an unreported reportable arrangement.

This could all get very messy. That`s why so many tax nerds are looking for new careers. I want to be a proctologist. At least they have fewer reportable arrangements, and they don`t have to dispense free advice at the dinner table.

Article provided by 'Staffer - Business Day' and reproduced with the kind permission of TAXtalk South Africa.

Article Added Friday, 23 May 2008 | 973 Hits

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