Editorial

• Pages: v-viii
• Author: Des Kruger Kruger
• Published date: 01 September 2021
• DOI: 10.10520/ejc-btclq_v12_n3_a1
• Date: 01 September 2021

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Editorial

DES KRUGER

This issue of BTCLQ once again contains a number of topical and thought-

provoking articles. The first is by Milton Seligson SC and tackles the impor-

tant issue as to whether the refinancing of preference-share financing can

trigger adverse tax consequences under sections 8E or 8EA of the Income

Tax Act of 1962 (the ITA). The article discusses the circumstances in which

sections 8E and 8EA apply generally and then explores whether, and in what

circumstances, the refinancing of the usual type of medium- to long-term

corporate preference-share transaction will escape the perils of sections 8E

and 8EA. The relevant definitions in these provisions are explained and

their application to the refinancing of such a transaction is discussed. The

article also reviews BPR 191 in which SARS considered the refinancing of

loan debt through preference-share funding and ruled that the provisions

of sections 8E and 8EA were not implicated.

There is further analysis of the provisions of section 8EA and their appli-

cation in circumstances where, notwithstanding the existence of enforce-

ment rights which would satisfy the definition of ‘third-party backed

share’, the issue of the shares for a ‘qualifying purpose’ would exclude the

application of section 8EA. The definition of ‘qualifying purpose’ and its

scope are also explored.

Finally, the article considers paragraph (c) of the definition of ‘hybrid

equity instrument’, which applies inter alia to any preference share that

is secured by a financial instrument, and the effect of the proviso which

excludes from that definition a share issued for a ‘qualifying purpose’.

Milton concludes that a genuine refinancing transaction which replaces

a corporate preference-share funding transaction in the normal course

should not give rise to any adverse tax consequences.

The second article is by Michael Rudnicki and addresses two specific

base-cost rules that are provided for in paragraph 20 of the Eighth Schedule

to the ITA, namely expenditure incurred directly in relation to the acquisi-

tion or disposal of an asset (paragraph 20(1)(c) of the Eighth Schedule), and

expenditure actually incurred in effecting an improvement to or enhance-

ment of the value of an asset (paragraph 20(1)(c) of the Eighth Schedule).

The two provisions are then considered in relation to two Private Equity

(PE) related expenses, namely management fees paid by PE investors to the

Private Equity fund manager, and incentive payments paid by PE investors

to the management of portfolio companies upon a successful exit.

The causality between the expenditure and the acquisition and disposal

of an asset is found in the word ‘directly’ in paragraph 20(1)(c) of the Eighth

Schedule. This word is interpreted, mainly by reference to dictionary