HELPFUL TWEAKS IN THE REGULATORY PLAYING FIELD
All eyes are on the Government Employees Pension Fund. It has more than R900bn under management, and just 5% is allocated to private equity. The suspension and reinstatement of section 45 of the Income Tax Act was an equally significant — though less welcomed — event in the past year.
"Section 45 permits the tax-free transfer of assets within a group of companies. It is one of the cornerstone tax provisions relied upon for many restructurings and mergers and acquisitions, including private equity transactions," says Lele Modise, partner at Bowman Gilfillan.
The reason for the change is that government is concerned about what it sees as excessive debt levels in certain structured deals. Says Grant Thornton associate director Hylton Cameron: "It also has concerns about the level of taxable revenue that is falling outside of the net."
Interest associated with debt used to finance a transaction will no longer be automatically deductible. Instead, the deal-maker can apply to the SA Revenue Service for permission to deduct the interest. If it is felt that the deal will not lead to significant reduction of the tax liability of all the parties who accrue or receive interest, it will approve the deal. "It is a temporary solution to a problem, but it does make things a little more complicated," says Cameron.
The industry was hoping for further clarification on exchange control relaxation. Though the rules are being progressively relaxed, treasury has stopped short of scrapping them altogether. However, it has indicated a move towards fewer required approvals for cross-border investment.
Private equity investors are happy with the amendments to the tax regime that allows foreign limited partners to invest in SA funds without being subject to local taxation.
The new Companies Act aims to promote entrepreneurship and enterprise development by simplifying the procedures for forming companies and reducing the associated costs. It also removes the requirement that small companies be audited.
The Financial Advisory & Intermediary Services (Fais) Act of 2004 was introduced to promote good and proper business practice in the financial services industry. Though requirements are quite onerous, the Financial Services Board drafted a specific code of conduct for financial services providers, which recognises that certain types of clients don't need the same level of protection as is provided for in the Fais Act.
"These reforms reflect government's recognition of SA's economic position in Africa. It aims to remove what are seen as significant barriers to SA's role as the gateway jurisdiction for private equity funds into the rest of Africa," says Modise.