Most Read Contributor in South Africa, September 2016
South African residents are taxed on their worldwide
income. In particular, the Income Tax Act includes in
"gross income" any amount received or accrued that is not
of a capital nature. Based on case law, an amount
"accrues" to a taxpayer when the taxpayer becomes
unconditionally entitled to receive it (CIR v Genn and Company
(Pty) Ltd, (20 SATC 113)).
Where a taxpayer receives collateral from another party under a
securities lending agreement in the form of an outright transfer of
cash, it is necessary to consider if such amount of cash collateral
should be included in the taxpayer's "gross
On the basis of the principles established in the Genn
case (supra) where the Appellate Division held that
borrowed money is not received or accrued by the borrower within
the meaning of such terms in the definition of "gross
income", the receipt of cash collateral should be no
different. In particular and in the context of a loan of money,
Schreiner JA in the Genn case held as follows:
"It is difficult to see how money obtained on loan can,
even for the purposes of the wide definition of "gross
income", be part of the income of the borrower, any more than
the value of the tractor which a farmer borrows is to be regarded
as being income received otherwise than in cash. Though a
borrowing for use differs from a borrowing for consumption in that
the borrower in the former case does not become the owner of the
thing borrowed and must return it in specie, while in the latter
case he does become the owner and is only obliged to return what is
similar, for present purposes there would seem to be no difference
between the two cases...
It certainly is not every obtaining of physical control over
money or money's worth that constitutes a receipt for the
purposes of these provisions... At the same moment that the
borrower is given possession he falls under an obligation to
repay. What is borrowed does not become his, except in the
sense, irrelevant for present purposes, that if what is borrowed is
consumable there is in law a change of ownership in the actual
As is the case with a borrower of money, the recipient of cash
collateral is obliged to return the collateral once the collateral
giver has discharged its obligations in terms of the securities
Therefore, where a taxpayer receives cash collateral under a
securities lending agreement, such amount should not be included in
the taxpayer's gross income.
In addition, a further requirement for inclusion in the gross
income definition is that such amount is not of a capital
nature. The cash collateral should therefore be received as
part of a scheme of profit making in order for it to qualify as
gross income. As the recipient of the cash collateral is
typically required to pay interest on the cash collateral to the
collateral giver, the mere receipt of the collateral would not in
itself be an indication of a revenue intent.
If contrary to what is set out above, the cash collateral is
included in a taxpayer's gross income, then the taxpayer should
be entitled to deduct the value of its obligation to return the
cash collateral. To the extent that this is in the same year
of assessment, the taxpayer should be neutral on the receipt of the
On this basis the receipt of cash collateral on an outright
transfer basis should be no different from a tax perspective
compared to the receipt of collateral under a cession in
From a legal point of view, on the other hand, the outright
transfer of cash collateral is preferable for the taxpayer that is
the secured party. On the occurrence of a default by the collateral
transferor, the secured party need not take any steps to enforce
its rights against the cash collateral. Whether pre-insolvency
(under the contractual terms of the securities lending agreement)
or post-insolvency (in terms of section 35B of the Insolvency Act,
24 of 1936), the secured party can simply set off its obligation to
return the cash collateral against the defaulted obligations owing
to it by the defaulting party. Where cash is pledged and ceded
in securitatem debiti, procedural steps must be taken in
order to take over the cash collateral, which steps may result in
delays and losses for the secured party. Given that the tax
treatment of cash collateral should be the same whether transferred
outright or ceded in securitatem debiti, parties to
securities lending agreements would be prudent to continue
receiving cash collateral by outright transfer.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The expansion of the West African regional market to foreign investors, and the search for emerging markets has led to a continuous increase in business mobility and cross border investments with Nigeria.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
The major objective of the waiver is to promote voluntary compliance and consequently generate revenue for government which otherwise, could have been lost.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).