South Africa's Finance Minister Pravin Gordhan announced on Wednesday that the controversial suspension of Section 45 of South Africa’s tax laws, which had been used to facilitate a number black economic-empowerment (BEE) deals and other leveraged transactions, had been lifted.

The section had been suspended for 18 months on June 2, owing to concerns of possible “tax leakage” and a potential loss of R3-billion to 5-billion a year to the fiscus.

Speaking at a media briefing in Pretoria, the Minister said that the National Treasury had been concerned about the abuse of the tax-free mechanism to obtain interest deductions linked to excessive debt.

Legitimate deals could, however, proceed, while work is completed on a longer-term set of solutions to deal with excessive debt and the characterisation of debt.

The temporary relief was granted following more than 30 consultations relating to more than 50 transactions. Through these interactions it was decided that commercially orientated transactions should be allowed to proceed as long as such transactions do not contain “unacceptable tax leakage”.

But the South African Revenue Service (Sars) would continue to investigate a number of preexisting “aggressive” transactions that deliberately avoided paying their fair share of the tax burden.

Gordhan stressed that it had never been government’s intention to impede commercially-drive transactions, but merely to prevent certain taxpayers and their advisors from exploiting weaknesses in the tax system.

Kosie Louw of Sars explained that it had found that a large portion of debt was being financed by entities that did not pay tax on interest receipts, while deductions for interest were claimed in full.

“In the most aggressive schemes interest deductions are the start of a long chain of payment, through multiple entities, with the same funds ultimately returning in the form of exempt preference dividends, dubbed funnel schemes."

A number of BEE deals had been pursued under the structure. But Gordhan stressed that these types of transactions were not exclusively linkd to BEE deals.

Through a consultation process Sars had now categorised 50 transactions into three groupings, with transactions that see different units within the same company being realigned and essentially staying tax neutral getting the green light.

Reorganisations that use interest-bearing debt would fall into an amber category. Louw said that those company's would have to arrange for further interaction with Sars in order to receive a go-ahead.

But, companies abusing the Act would get the red light.

The Minister said that certain short-term amendments had been tabeled and would be brought before Parliament by the end of August. A final decision on the amendments was expected by the end of September.

"However, this is really a long-term problem for which we will have the final answers in 18 months," said Gordhan.