The Securities Transfer Tax Act, 2007 (“the STT Act”), and the Securities Transfer Tax Administration Act, 2007 (“the STT Administration Act”) were passed into law on 1 July 2008. The STT Act provides that securities transfer tax (“STT”) must be levied in respect of the transfer of every security. The STT Administration Act contains the administration provisions governing the payment of STT. The STT Act merges the taxes previously imposed by the Stamp Duties Act, 1968 and the Uncertificated Securities Tax Act, 1998. The two taxes were combined in an attempt to simplify the administration of the taxes imposed on the transfer of all securities and to ensure that the rules governing both listed and unlisted securities are consistent.
Previously, stamp duty was levied on the transfer or cancellation or redemption of an unlisted marketable security and uncertificated securities tax was levied in respect of every change in beneficial ownership of a listed security. STT is a combination of stamp duty and uncertificated securities tax and is charged at a rate of 0,25% on the taxable amount of the transfer of every security issued by a company incorporated in South Africa, or a company incorporated outside South Africa but listed on an exchange in South Africa, subject to certain exemptions.
The exemption contained in section 8(1)(q) of the STT Act, provides that a transfer of a security is exempt from STT “if the person to whom that security is transferred is a member who purchased the security for the account and benefit of that person.” A “member” is defined in the STT Act as “any person who is an authorised user as defined in section 1 of the Securities Services Act, 36 of 2004 (“the Securities Services Act”), providing such security services as the rules of exchange permit including services in respect of the buying and selling of a listed security”. An authorised user is defined in the Securities Services Act, 2004 as “a person authorised by an exchange in terms of the exchange rules to perform such securities services as the exchange rules may permit”. The JSE Securities Exchange South Africa (“JSE”) and the Bond Exchange of South Africa (“BESA”) are currently the licensed exchanges under the Securities Services Act. Accordingly, an authorised user is a person authorised by the JSE (or BESA). The authorised users of the JSE are brokers, as secondary trading can only take place through brokers. Therefore, simply put a “member” is a broker.
In terms of section 8(1)(q) of the STT Act, where a broker purchases shares for its own “account and benefit” the broker is exempt from STT in respect of the acquisition of such shares. The purpose of this exemption was to ensure liquidity on the JSE as it was considered that generally the 0.25% STT charge is low and accordingly it would not impact the liquidity of the market. However, it was noted that the STT charge of 0.25% could be significant and pose a problem where brokers operate as market makers. A market maker is a bank or brokerage company that will purchase a share from you when you place an order to sell it, even if there is no seller lined up. In doing so, the market maker is literally „making a market‟ for the shares. This market making typically involves short-term trades with very low profit margins, which will be affected by an STT charge of 0.25%. The current member exemption was introduced in order to ensure that the STT charge does not disrupt these short-term market making trades.
Expanded application of the member exemption
In terms of the Explanatory Memorandum on the Draft Taxation Laws Amendment Bill, 2011 issued on 2 June 2011 (“the Explanatory Memorandum”), it has come to the Government‟s attention that the member exemption is being used in circumstances beyond what it was initially intended for.
In terms of the Explanatory Memorandum, certain financial institutions are operating as market makers for derivatives. The financial institutions offer derivatives to a client while maintaining a perfectly hedged position with a broker. The broker generally holds the underlying shares in its capacity as “principal” and accordingly is able to offset the derivative offered to the financial institution against the share held. The nature of this back-to-back relationship removes the risks and rewards associated with the position for the broker. In exchange for the broker‟s participation, the broker would typically receive a service fee from the financial institution.
The issue of concern is whether these brokers are acting for their own “account and benefit” as required by section 8(1)(q) of the STT Act, in order to qualify for the member exemption, given the fact that the brokers in this situation do not have beneficial ownership of the share acquired (i.e. they do not bear any risks and rewards).
In terms of the Explanatory Memorandum, the Government maintains its view that the broker member must be operating as the “beneficial owner” of the acquired share in order to obtain the exemption in section 8(1)(q) of the STT Act. It continues and states that the treatment as “principal” for JSE purposes is not sufficient by itself to satisfy this beneficial ownership criteria as, if beneficial ownership of this nature was to be accepted, any taxpayer could undermine the member exemption contained in section 8(1)(q) of the STT Act by using a broker as an intermediary. However, as many of the transactions at issue appear to operate as a form of market making in derivatives which was not envisioned by the initial legislation and as these transactions appear to lack tax avoidance motivation, the Government acknowledges that the sudden imposition of STT on these derivative market making positions could disrupt the market and reduce liquidity. As a result of the above, a temporary solution has been proposed whereby, from 1 January 2011, the member exemption will be expanded to cover all broker activities including those where the broker is acting as “principal”. However, this expanded exemption will only last until 31 December 2012.
The interim period will be used to investigate whether the transactions at issue provide meaningful value in terms of liquidity, whether the expanded exemption can be maintained without imposing an undue risk to the tax base, and whether the imposition of STT on these transactions would have an effect on the competitiveness of the JSE.