PLAYERS in the structured finance industry have welcomed proposed changes to the Income Tax Act, saying they will bring more clarity and certainty to tailor-made financing plans.

"This is going to encourage greater transparency in transactions and the way they are structured," said Ian Matthews, executive director of specialist finance house Bravura.

He was responding to the publication last week by the South African Revenue Service (SARS) of a booklet outlining the content of draft legislation proposed at the end of last year.

The aim of the planned changes is to clamp down on tax avoidance in structured deals.

Banks and other structured finance players such as niche speciality finance houses Cadiz, Mettle and Bravura will be obliged to lodge certain "reportable" transactions to SARS.

"Previously, some players may not have structured deals above board, hoping that SARS would not pick up on them. By applying this legislation, cowboys in the industry will fall by the wayside," Matthews said.

Under the proposed changes, reportable transactions would have to be lodged with SARS before they could proceed .

"The proposed legislation is aimed at very specific types of transactions, where banks and financiers would obtain benefits from tax deferrals. The banks would then pass on some of those benefits to the clients by way of a cheaper funding rate," he said.

The head of structured finance at one of SA's major banks said the changes would provide the industry with more clarity, and less risk.

"As it stands, we structure deals using our interpretation of the tax rules, especially as it relates to more complex derivative based deals. It will provide much greater certainty if we know that SARS does not disagree with our interpretation before we close deals," he said.

He said there was a chance the new laws could increase deal flow as structured finance has largely remained a mystery to many and had been seen as outside of the mainstream of a bank's activities. By opening it up to scrutiny, the industry's image would improve and more players could take advantage of the benefits of structured finance deals.

Matthews said the changes would lead to more appropriate application of tax laws, in line with international practice, and would result in better financial services transactions .

Deloitte tax partner Des Kruger believes the changes will have a big impact on the way financiers do business.

"A lot of these structured finance deals are sold to clients on the basis that if they are challenged by SARS, it is for the account of the client.

The banks are now going to have to bite the bullet and take the risk, and I assume this will be reflected in the pricing of any deal," he said.

"This will be in line with global industry best practices where banks do not have recourse against clients where the anticipated tax consequences do not arise."

May 20 2004 07:14:22:000AM Stephen Gunnion Business Day 1st Edition