Any transfer of a share issued by a South African incorporated company or listed on a South African exchange is subject to securities transfer tax (“STT”), which is levied in terms of the Securities Transfer Tax Act (“STT Act”). In the context of providing shares as security by transferring ownership of the shares, the STT consequences are therefore an important consideration.
The STT Act contains various exemptions including the so-called “collateral arrangement” exemption, which came into force on 1 January 2016. This exemption essentially provides relief in respect of collateral arrangements, ie, where an outright transfer of collateral of South African listed equities is executed in respect of an amount owed.
Before the introduction of the “collateral arrangement” exemption, the provision of security by transferring South African shares or shares listed on a South African exchange was subject to STT. The Explanatory Memorandum on the Taxation Laws Amendment Bill, 2015 (which introduced the “collateral arrangement” exemption) (“2015 EM”) recognised that regulatory changes applying to the financial sector necessitated an urgent review of the tax treatment of collateral. It also referred to the benefits of an outright transfer of collateral as identified by the financial sector including the “reduction of transaction costs and market pricing because of the ability to rehypothecate collateral and reduce tax costs, and making South Africa more attractive as an investment destination”.
After the introduction of the “collateral arrangement” definition, certain amendments were effected to the definition with effect from January 2017 by:
- extending the 12-month limitation of a collateral arrangement to a 24-month limitation (ie, to extend the allowable period within which the identical shares are returned to the collateral provider by the collateral taker from the date on which the collateral arrangement was entered into);
- broadening the definitions of “identical share” and “identical security” to cater to other specified corporate actions; and
- including listed government bonds as allowable instruments on security lending and collateral arrangements.
Further changes were introduced with effect from January 2018 to extend the tax relief in terms of a collateral arrangement to include listed foreign government bonds to address concerns regarding the limited scope of tax relief in respect of the provision of collateral.
In the 2021 Budget Speech, which was delivered in February 2021, the matter of collateral arrangements was raised. The 2021 Budget Review stated that at issue was the rehypothecation of collateral (ie, where the collateral taker reuses collateral received for trading or as security for its own borrowing through a tax‐neutral collateral arrangement).
It was proposed that changes be made to the legislation to clarify the policy intention that further rehypothecation of the collateral received by the collateral taker can only form part of subsequent collateral arrangement transactions.
These changes were promulgated in the 2021 Taxation Laws Amendment Act by introducing a proviso into the collateral arrangement definition (the “2021 Proviso”). In terms of the 2021 Proviso, a “collateral arrangement” will not include a transaction in terms of which the transferee (ie, the recipient of collateral) has subsequently transferred the listed share or bond contemplated in a manner other than a transfer contemplated in paragraphs (a) to (e) of the collateral arrangement definition (ie a further “collateral arrangement”) unless the listed share or bond is transferred for purposes of:
- a repurchase agreement entered into with the South African Reserve Bank as contemplated in section 10(1)(j) of the South African Reserve Bank Act;
- complying with Regulation 28 of the Pension Funds Act; or
- securing overnight cash placement to comply with the Basel III Supervisory Framework for measuring and controlling large exposures.
Of note is that the above proviso will only come into operation on 1 January 2023 and will apply in respect of any collateral arrangements entered into on or after that date.
The 2022 Budget Review noted that the 2021 amendments were proposed to clarify that the use of collateral for purposes other than subsequent collateral arrangements or proposed limited regulated transactions is against the policy rationale for the introduction of these provisions, and could result in the avoidance of STT or capital gains tax. It did not provide details as to how the STT or capital gains tax is avoided because of the use of a collateral arrangement. The 2022 Budget Review stated that after reviewing the public comments on the bill, government decided to postpone the effective date for these amendments to 1 January 2023 to give both National Treasury and affected stakeholders more time to consider the impact of the proposed amendments. Government proposes to review the impact of the 2021 amendments during the 2022 legislative cycle.
To the extent that changes are not made to the 2021 Proviso during the 2022 legislative cycle, then from 1 January 2023, the collateral arrangement exemption will only apply to the provision of collateral insofar as the recipient does not on-transfer the shares or on-transfers them in accordance with the exclusions in the 2021 Proviso. This means, inter alia, that where the collateral recipient is required to enforce the security by selling the shares, STT will be due and the recipient of the collateral will be on the line for the tax (and potential penalties and interest) in respect of the initial transfer of the shares as security to the collateral recipient. This will negate most of the benefits recognised in the 2015 EM as set out above.
It is therefore important that submissions are made to National Treasury to address the far-reaching implications of the changes which will come into effect on 1 January 2023.
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