manuel calls bluff of tax-avoidance schemes  
20 March 2008

Finance Minister Trevor Manuel announced that tough measures were in the pipeline to crack down on tax avoidance schemes that used legitimate transactions to generate artificial deductions through excessive financing. Schemes such as black economic empowerment were used as a masquerade for legitimate schemes.

The treasury estimates that the tax sums involved amount to hundreds of millions of rands.

“We again cannot sit idle while legitimate transactions are used as a masquerade for tax avoidance,” Manuel said in a speech in the National Assembly to introduce the Taxation Laws Amendment Bill.

The treasury issued a statement later saying anti-avoidance clauses dealing with these schemes could be included in the Revenue Laws Amendment Bill to be tabled later this year, but that these clauses would be effective from yesterday.

Funnel financing schemes involve a circular flow of funds from a lending bank or financier through a borrowing group of companies, followed by the re-routing of those funds back to the lender in order to create artificial deductions for the lender. Other schemes generate artificial deductions for the borrower by having the lender funnel funds through the borrower in the form of an alleged loan.

Treasury said c rack-down options included a requirement for a higher level of reporting or pre-approval by the revenue service for transactions.

“Aggressive tax advisers” could be held to account “when their opinions are based almost exclusively on wishful thinking in the pursuit of lucrative fees”.

Another option was to deny interest deductions for borrowed capital if the underlying capital giving rise to three deductions stemmed from funds supplied from the taxpayer. Interest deductions could also be denied for borrowed capital to the extent that the funds were invested by the borrower in a tax-exempt investment vehicle.

Furthermore, the treasury proposed that preference shares acting as the sole or main object of a limited recourse loan could be deemed to generate taxable interest . This means that gains would be ordinary revenue with all losses being denied.

Rollover relief in terms of Section 45 of the Income Tax Act could also be denied if the use of section proceeds had to be applied to a tax-free investment at an outside lender’s behest.

Should these proposals become law the denial of interest deductions would be effective from yesterday even if the underlying loans were initiated at a prior date.

Linda Ensor , www.businessday.co.za