07 Sep 2016

Exemption from Securities Transfer Tax for Collateral for Longer Than 12 Months

Practice Area(s): Tax |

The Securities Transfer Tax Act 25 of 2007 ("the STT ACT") imposes Securities Transfer Tax ("STT") if there is a "transfer" of South African securities, in other words, where the beneficial ownership of the shares is transferred.

There are two types of collateral used in most debt agreements, the first being a pledge, whereby there is no transfer of beneficial ownership and as such, there are no tax implications. The second form is an outright transfer, which is an out and out cession of beneficial ownership with both income tax and STT tax implications.

For years, the SA securities lending industry had been lobbying for an exemption from STT for the outright transfer of listed equity securities as collateral. The exemption is for purposes of benefitting the industry by removing adverse tax consequences.

The adverse tax consequences of outright transfer of collateral had forced businesses into a position where collateral could effectively be placed by way of either cash or pledge. As the cost of funding cash collateral was an expensive option, businesses were opting for non-cash options. However, the pledged collateral was accompanied by an increased cost which added to the cost of the underlying transactions, resulting in the local financial sector being less competitive than the offshore equivalents.

After prolonged lobbying for the STT exemption from the banks, securities lending and derivatives markets, National Treasury finally introduced the exemption on 1 January 2016 in respect to collateral arrangements entered into on or after that date. The current definition of ''collateral arrangements'' in the STT Act requires, amongst other things that lent securities be returned to the lender within 12 months of transfer.

The exemption came as good news to the SA securities lending market and others, however, the concern was that from a market liquidity perspective, it only affected a relatively small amount of collateral which was listed shares where the collateral arrangement does not exceed 12 months. In addition, the banks require access to both shares and debt instruments over periods in excess of 12 months without adverse tax consequences and as such the Banking Association of South Africa continued to lobby National Treasury on behalf of the financial services industry for an expanded dispensation.

The legislator obliged the request as on 8 July 2016, the Taxation Laws amendment Bill introduced a proposed advantage by extending the time period from 12 months to 24 months.

The 24-month period for this exemption enables the parties to be able to access both shares and debt instruments over periods in excess of 12 months without adverse tax consequences, which should a welcomed amendment and improvement to the fairly recent introduction of the long-awaited collateral exemption.