Connected persons under paragraph (d)(iv) of the definition of ‘connected person’ in the Income Tax Act : interpretation Note 67 misses the mark?

• Record Number: btclq_v10_n3_a2
• Date: 01 September 2019
• Pages: 1-9
• Author: Milton Seligson
• Published date: 01 September 2019
• DOI: 10.10520/EJC-18c0159060

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© SIBER INK

Connected Persons Under

Paragraph (d)(iv) of the

Def‌inition of ‘Connected

Person’ in the Income Tax Act:

INTERPRETATION NOTE 67 MISSES THE MARK?

MILTON SELIGSON SC*

ABSTRACT

This article considers the meaning and effect of paragraph (d)(iv) of the def‌ini-

tion of ‘connected person’ in relation to a company in section 1 of the Income

Tax Act. That paragraph provides that a connected person in relation to a

company means any person, other than a company as def‌ined in section 1 of

the Companies Act, who individually or jointly with any connected person in

relation to that person, holds, directly or indirectly, at least 20% of the equity

shares or voting rights in the company.

The article discusses other relevant parts of the def‌inition of ‘connected

person’ which give the part of the def‌inition under consideration context, as

well as the def‌initions of ‘company’ in the Income Tax Act and the Companies

Act which must be taken into account in applying the def‌inition.

The article then investigates the meaning and effect of paragraph (d)(iv)

and explores the circumstances in which the def‌inition will be triggered by a

person other than a company as def‌ined, who or which individually or jointly

with a connected person in relation to such person, holds directly or indirectly

at least 20% of the equity shares or voting rights in the company concerned.

The article then considers certain examples given in SARS’s Interpretation

Note 67 (Issue 3), dated 8 December 2017 (‘IN 67’), including Examples 19

and 20. The author points out that in Example 20, SARS suggests that, where

D, a natural person, is assumed to have a 20% stake in ABC (Pty) Ltd and

ABC (Pty) Ltd in turn holds 20% of the equity shares in DEF (Pty) Ltd, both

ABC (Pty) Ltd and DEF (Pty) Ltd being incorporated under the Companies Act

in South Africa, in determining whether D and ABC (Pty) Ltd are connected

persons in relation to DEF (Pty) Ltd, both D’s effective indirect interest of 4%

(20% × 20% = 4%) and ABC (Pty) Ltd’s direct interest in DEF (Pty) Ltd of 20%

must be counted together because they, as connected persons, jointly hold

24% of the equity shares in DEF (Pty) Ltd. This is so despite the fact that in

arriving at D’s indirect interest of 4%, ABC’s interest in DEF has already been

counted; it is then counted a second time. SARS’s conclusion is consequently

that D is a connected person in relation to DEF (Pty) Ltd.

The author criticises SARS’s reasoning and its conclusion in Example 20

of IN 67. He points out, f‌irst, that in Issues 1 and 2 of IN 67 (since archived)

which preceded the current version of IN 67, SARS concluded that D was

* Honorary Member, Cape Bar.