On 1 January 2023 an amendment to the 'collateral arrangement' definition was brought into effect. The impact of this amendment is that collateral-takers are only able to use listed securities and government bonds ('non-cash collateral') that they have received as collateral in a limited number of ways if they are to benefit from the Securities Transfer Tax (STT) and Capital Gains Tax (CGT) exemptions, namely:
for a further 'collateral arrangement'
for a repo transaction with the SARB
for an interbank repo in terms of Basel III
for Regulation 28 purposes.
Previously, there was a broader exemption for STT and CGT on non-cash collateral which was posted under a 'collateral arrangement' with no limited right of use on the collateral. The 'collateral arrangement' exemption allowed parties to make use of a wide variety of non-cash collateral assets in a financially-viable and tax-neutral way (within the confines of the dispensation), and in so doing ensured liquidity in the markets whilst being able to reduce systemic risk by complying with the regulations requiring collateral to be posted for non-centrally cleared OTC derivative transactions.
To give an example of how the new amendment limits the right of use of the non-cash collateral, and imposes potential tax consequences on parties, consider the following:
Since in Transaction 4 there is a sale of Share ABC, the STT/CGT exemption no longer applies. Since D (the collateral-taker in Transaction 3) sells the asset in Transaction 4, it will also nullify the STT/CGT exemption in Transaction 3.
However, the STT/CGT dispensation is still intact for Transactions 1 and 2 (as neither B as Transferee nor C as Transferee used Share ABC in a way other than as a 'collateral arrangement'). As only the parties contractually linked to the decision-maker (D) will be impacted (i.e. only C and D are impacted by D’s decision to use the collateral assets in a way that is not a ‘collateral arrangement’), there is a legal nexus between C and D; and they can address the tax implications of D’s decision to use collateral assets in their legal agreement such that D could be made to reimburse C for any CGT that accrues if D decides to use collateral assets other than in a ‘collateral arrangement’.
In order to avoid unintended tax consequences as illustrated in the example above, it would be pertinent to include tax indemnities in the event that non-cash collateral is used in a way which is outside the remit of the STT and CGT exemption.