What is meant by “connected persons”?

On 28 January 2020, SARS released interpretation note 67 providing guidance on the term “connected persons” in section 1(1) of the Income Tax Act. The interpretation note itself is voluminous but worthy of a short discussion as one may fall within this definition without knowing.

The definition allows for the following scenarios to be regarded as connected persons:

  1. In relation to natural persons

Any relative, or any trust of which the natural person or relative is a beneficiary. A collective investment scheme is excluded from this definition.

  1. In relation to a trust

Any beneficiary of the trust, and any connected person in relation to the beneficiary.

  1. In relation to a member of a partnership (or foreign partnership)

Any other member, or any connected person in relation to any other member of such partnership

  1. In relation to a company
  • Any other company that would be part of the same group of companies if at least 50% of the equity shares or voting rights in that company are held.
  • Furthermore, any person other than a company, that individually or jointly with a connected person in relation to that person, holds directly or indirectly at least 20% of either the equity shares or voting rights in the company.
  • The definition also confirms that any other company may be a connected person if at least 20% of the voting rights or equity shares are held by the other company, and there are no shareholders that hold majority voting rights in that company.
  • Any other company if such company is managed or controlled by a person who or which is a connected person in relation to the company, or any connected person in relation to such connected person.
  • If the company is a close corporation, any member or any relative of such member, or any trust which is a connected person in relation to such member. The definition also regards any other close corporation or company which is a connected person in relation to any member or relative or trust as contemplated herein.
  1. In relation to any person

Subsection 1(1) (e) of the definition contemplates that any person who is a connected person in relation to any other person in terms of the provisions herein, such other person is a connected person.

The definition of connected persons is central to specific anti-avoidance provisions contained in the Income Tax Act, which regulate transactions entered into between related taxpayers. The rationale is that transactions between related parties are more likely to be open to manipulation with the purpose of securing a fiscal advantage, than what transactions between unrelated parties would be. This is the central purpose of specific rules relating to connected parties.

What is interesting, and duly pointed out in the Interpretation Note, is that the definition creates a reverse relationship between persons that are connected and the persons described in the definition above.

Timing of the connected person test is further central to the definition, and it is generally considered at the time of a transaction. This would theoretically require persons to be connected just before the transaction is concluded. This is not always the case though, and some provisions in the Act allow for extended periods. Terms such as “during the year of assessment” would be indicative that if parties were connected persons during the year of assessment, the anti-avoidance provisions may be invoked.

It is important to consider this definition and any anti-avoidance provisions that may potentially bring a taxpayer, or client into the net of connected persons. It may even happen unknowingly and unwillingly to some but may have further consequences.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)




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IC Marais

Professional experience:

IC Marais is a certified CA (SA) with public sector and private sector technical knowledge based on 5 years’ Public Sector accounting, auditing and financial management experience and 5 years audit, tax and accounting experience. Detailed knowledge of private and public sector accounting and auditing standards (GRAP, IPSAS, IFRS, IAS, ISA) and public sector financial legislation (MFMA, etc.)

He enjoys the outdoors, hunting and fishing.



Professional experience:

In 1995, Schalk started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and then Mazars Moores Rowland in 2007) in Bloemfontein. In 1998, Schalk was appointed as manager at Moores Rowland, where he became a partner in 2003. Schalk received his Postgraduate Certificate in Advanced Taxation in 2006 and in 2009 he received his Certificate in the Administration of Estates.



Professional experience:

Cedric started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and Mazars Moores Rowland in 2007), Bloemfontein, in 1986. After completion of his articles, he joined the Special Investigations Division of the Department of Finance (SA Revenue Services) as a senior inspector from 1990 to 1991.



Professional experience:

Lucha started her career as a tax inspector at the Inland Revenue Department of New Zealand. After this she worked in commerce in Canada, Mexico and the United States.

On her return to South Africa, she completed her CA training contract with us and has been with Newtons ever since. She became a Partner in 2012.

Apart from her CA(SA) qualification she also holds a postgraduate certificate in Advanced Taxation (2005) and has the overall responsibility for training as our Training Officer.