A full group tax system in South Africa by ProQuest


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    A                                                A full group tax system
         s expected, because we operate in
         a global economy, South Africa has
    followed the footsteps of the rest of the

                                                                                          in South Africa
    world into recession. This has brought new
    meaning to the term ‘survival of the fittest’
    for the businesses operating here.

    The consequence of recession is that many
    businesses find themselves suddenly in
    a tax loss position. This can, in a small
    way, bring some relief to their cash flow        Furthermore, tax legislation has anti-        The group contribution model involves
    in that they would no longer have to make        avoidance provisions that prohibit a          profitable companies making tax
    payment of income tax to our Revenue             profitable business being moved into a        deductible contributions to their sister
    authorities three times a year to the extent     loss-making company, unless there is a        loss-making companies within the group.
    that the taxable income they generate is         commercial reason for doing so, which is      This effectively ensures that only the net
    offset by their tax loss.                        stronger than the tax reason.                 taxable income of the group is taxed.
                                                                                                   Each company, however, submits its own
    However, many companies do not operate           Thus, although the ownership in the group     tax return reflecting the income from
    in isolation, but are part of a group of         is almost the same as if the group were       contributions made by, or expenditure from
    companies. This latter term is defined           one company, tax laws prohibit the cross-     contributions made to, the sister company.
    differently for different purposes, but in tax   utilisation of tax losses. In a recession
    parlance, put very simply, it largely relates    economy, the ability to cross-utilise the     The group relief model allows group
    to corporate structures in which at least        losses could be viewed as critical for the    companies to transfer losses to profit-
    70% of the shares in a company are held          survival of the group.                        making companies in the group. These
    directly by another company. All members                                                       profitable companies simply use the
    of the group that are held in this way will                                                    losses, which the transferring company
                                                     In other countries, this problem is dealt
    constitute a ‘group of companies’ for tax                                                      then loses. The transferring company
                                                     with in a different way: by what is           transfers the losses until it is in a tax
    purposes.                                        commonly known as ‘group taxation’. The       neutral position. Each company still
8                                                    current group rationalisation provisions      submits its own tax return.
    Currently, a company that has an assessed        in our South African tax legislation,
    loss may only use that loss to offset future     introduced in 2001, were a response           In the Organschaft model, all profits
    income that it, alone, generates. Thus, in       to recommendations made in the Katz           and losses are attributable to the parent
    a group of companies, there may be one           Commission Report (issued in the early        company in the group. In this way the
    or more companies in an assessed loss            1990s) that group taxation needed to be       group is taxed as a whole, through the
    position, and other companies that are           considered for South Africa.                  parent company, and tax is paid only on the
    making taxable income and paying tax                                                           overall taxable profits of the group.
    over to the South African Revenue Service        However, the next step to full group
    (SARS). Often the loss companies in the        
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