A “connected person,” as defined in section 1(1) of the Income Tax Act, goes beyond just relatives. It includes trusts, companies, partnerships, and anyone who may have an economic or personal interest in another’s financial dealings. The idea is not about casual connections like a mechanic or friend, but rather about relationships that could influence the fairness of transactions for tax purposes. Think of spouses, children, in-laws, extended family, or even a family trust—if there’s potential for mutual benefit, SARS wants to know.
SARS’ Interpretation Note 67 explores how this term applies differently depending on the context—whether it involves natural persons, trusts, companies, close corporations, or partnerships. The focus is on identifying non-arm’s-length transactions, meaning deals that look “too good to be true” and could be used to avoid tax, shift profits, or move funds improperly across borders. Transfer pricing and inflated asset sales between connected persons, particularly across countries, are high on SARS’ radar.
For companies and close corporations, holding 20% or more of equity or voting rights generally creates connected person status. Partnerships are also significant—every partner is connected to the other partners, their relatives, and related trusts, even if they don’t know each other personally. The Minister is even considering amendments around “qualifying investors” in en commandite partnerships.
It’s important to note that SARS does not ban transactions between connected persons. However, they must happen at market-related values and on arm’s-length terms. Good practice for businesses includes having a transfer pricing policy, and in complex cases, seeking an Advance Tax Ruling to provide certainty.