Latest / Tax Break: South African tax for professionals / Connected persons vs group of companies

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Connected persons vs group of companies · Tax Break: South African tax for professionals

• 0:11
  Welcome and thank you for joining me for tax break.
• 0:14
  This is a podcast about South African tax 4 South African tax
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  professionals and practitioners. My name is Peter from the swan
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  and in each episode, Ashley, my thoughts with you on a a topic
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  or a recent development in South African tax.
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  And I tried to keep the episode short enough that you can listen
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  to them whenever you've got a few minutes to spare.
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  Now today's episode is not a very long one, but it's worth
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  the topic that if you, your, your understanding of these
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  terms is, is incorrect, could have a massive impact on what
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  you do from a tax perspective. So the topic was motivated by a
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  comment that someone made regarding a structure that they
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  were considering. And without going into the
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  detail of what the transaction and what the structure was, the
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  comment was something along the lines that because the taxpayers
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  are connected persons, it's very likely that we'll qualify for
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  some form of, of of relief in the transaction that that we're
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  doing now. I really hope that this comment
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  would make most of you as uncomfortable as it made me.
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  And this also prompted me to maybe just go back to the some
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  of the fundamental principles that underpin some of the
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  provisions of the tax legislation.
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  So I think the fact is that the concept of connected persons is
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  primarily something that we find in anti avoidance rules.
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  So if we think about, for example, a transaction where an
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  asset is disposed of between connected persons, you find that
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  there's a specific rule that deems the asset to be disposed
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  of at its market value. Because that transaction could
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  be susceptible to price manipulation if the treatment in
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  the for for one person is is more favorable than the other.
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  Or you may have an incentive to shift the asset to another
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  person without charging the full value and incurring tax on the
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  full value. Same with other anti avoidance
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  types of provisions like for example the value shifting rule.
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  So conceptually connected persons requirements fit into
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  these into these anti avoidance rules.
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  So what I suspect the person was actually thinking of is the
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  concept of a group of companies. Now we find that this concept in
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  the corporate rules, in other words, the rules that allow you
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  to do some reorganization transactions, we broadly
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  speaking the asset, the the person remains interested in the
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  asset and you are you moving the asset around within some form of
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  an economic unit. We also find it in, for example,
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  the the date conversation compromise rules where there are
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  certain exceptions if these transactions happen within a
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  group of companies. So the context where we often
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  find the context the the the the concept of a group of companies
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  is in where these concessions in the tax legislation.
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  If you compare the the definitions of the two, you'll
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  also see that the definition for of a connected person, the
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  threshold to be connected is a lot lower than to have a group
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  of companies. So in the context of of
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  companies, a person having a 20% shareholding in a company or 20%
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  or more shielding in a company would would often be a connected
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  person and the natives cost quite wide as to who connected
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  person would be connected persons in relation to each
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  other. So good example of that is if we
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  look at trusts, the beneficiaries of trusts are
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  connected persons and the definition extends even further
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  to say it would also extend to the connected persons of those
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  beneficiaries versus a group of companies where we're looking at
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  a 70% plus the shareholding threshold to qualify as a group
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  of companies. And if we're looking at the
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  Section 41 definition, where you looking at corporate rule
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  relief, that definition incidentally is also used
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  elsewhere, not only in the corporate rules.
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  So it's important to see are you looking at the Section 1
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  definition of the Section 41 definition, But that definition
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  then as the 70, the normal 70% rule as well as some further
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  exclusions of certain persons or entities whose tax may be
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  different from others. So looking at it conceptually,
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  the the connected person definition is very wide.
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  The threshold is quite low because that's where potential
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  transactions that could be susceptible to to to
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  manipulation can happen versus the group of companies threshold
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  that is actually that is quite high where you will then get
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  concessions or specific relief from tax consequences that would
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  have otherwise arisen. I think in each instance it's
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  also important to look at what the actual law and the wording
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  of the law says. Not just to think about it
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  conceptually as to what where you normally find these terms,
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  but in principle I think you are likely to find when you look at
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  this wording of the law. The connected person rules are
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  often anti avoidance types of rules, while the group rules are
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  mostly relief and conservation rules.
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  It's been a short episode, but I hope it gives you something to
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  think about. If you've got any comments,
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  questions, please send me an e-mail.
• 6:12
  My e-mail address is in the show notes.
• 6:14
  If you like the podcast and you want to subscribe, please go to
• 6:18
  your favorite podcast platform and of course, tell all your
• 6:22
  friends and colleagues about the podcast.
• 6:25
  Just a reminder again, as always, nothing in this podcast
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  is intended to be tax advice, so the podcast is only recorded for
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  information purposes. Until next time, goodbye.