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PRESENTATION TO THE SCoF

2010 06 01

Muneer Hassan: Project Director Tax

Wessel Smith: Member of SAICA’s NTC

Puleng Owen Manyaka: Project Manager Tax

FOCUS AREAS

1.Narrowing the interest threshold exemption

2.Employer-provided motor vehicles

3.Tax-free fringe benefits for employer-

provided professional fess and indemnity

payments

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FOCUS AREAS

1. Narrowing the interest threshold exemption

Page 9 – 11 of the SAICA Submission

2.4 of the Explanatory Memorandum

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NARROWING THE INTEREST THRESHOLD EXEMPTION

Current law: Section 10(1)(i)(xv)

• Exempts interest received by or accrued to “resident

natural persons” as follows:

Under 65 R22 300 (2010: R21

000)

Aged 65 years and older R32 000 (2010: R30 000)

• Of the total interest exemption, the first R3 700

(2010: R3 500) of foreign interest and dividend received is

exempt from tax

NARROWING THE INTEREST THRESHOLD EXEMPTION

Proposed change:

• “these exemptions will be limited to savings through

widely available interest-bearing instruments, such as

bank deposits, government retail bonds and collective

investment money market funds”

• Specific inclusion list – new section 10C of the Act

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NARROWING THE INTEREST THRESHOLD EXEMPTION

Problem statement:

• Taxpayers entitled to consistency and certainty

• Amendment favours certain categories of interest bearing

products

• Affects retired individuals who have invested in private

projects

• Affects legitimate transactions (example 1)

• Big blow for small businesses (example 2)

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NARROWING THE INTEREST THRESHOLD EXEMPTION

Problem statement: Affects legitimate transactions

• Taxpayer A grants 20 year loan to Taxpayer B (house used as

security)

• Loan bearing interest at market rates

• A receives from B interest BUT no interest exemption

• Had A received the cash and then invested in a bank the interest

earned would be EXEMPT

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Taxpayer A

Seller: Primary residence

Taxpayer B

Purchaser: Unable to obtain financing

Unconnected

Problem statement: Big blow for small businesses

• Unconnected person: R278 750

• Options: Either invest in business or bank at 8% return

• Return = R22 300 (R278 750 at 8%return)

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NARROWING THE INTEREST THRESHOLD EXEMPTION

Start up business cannot obtain loan funding from a bank

Unconnected investor: loan funding

Owner: obtain loan from bank and on lends to business

NARROWING THE INTEREST THRESHOLD EXEMPTION

Problem statement: Big blow for small businesses

Investment: R278 750 Return: 8% pa

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Business Bank

Return pa 22 300 22 300

Interest exemption 0 22 200

Balance subject to tax 22 300 0

Tax 8 920 0

Post tax returns 13 380 22 300

Net return as % of investment 4.8% 8%

NARROWING THE INTEREST THRESHOLD EXEMPTION

Proposed solution:

Main

• Remove the proposed exemption to limit the interest

exemption

• Focus on the avoidance schemes

• Current anti-avoidance legislation:

Specific - Sections 7(1) – 7(11)

General - Sections 80A – 80K “GAAR”

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NARROWING THE INTEREST THRESHOLD EXEMPTION

Proposed solution:

Alternative

• Remove the proposed exemption to limit the interest

exemption

• Add specific anti-avoidance legislation after extended

consultation period with stakeholders

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COMPANY CARS

• Pages 1 to 5 of SAICA submission and pages 16 to 20 of

Explanatory Memorandum

• Explanatory memorandum: “The percentage rate for

employer-provided vehicles (including the first) will now

be 4% per month of the vehicle’s determined value

(instead of the current 2.5% rate for the first car).”

• “Determined value” to include VAT and maintenance

plan

• 80% of fringe benefit subject to employee tax (3.2%)

COMPANY CARS – Example “effect of the proposal”

On vehicle with cost of R300 000 excluding VAT, and

employee on maximum marginal tax rate (40%):

•Before amendments: 2.5% cash value = R7 500,

therefore monthly tax at 40% = R3 000.

•After amendments: 4% cash value, but 3.2% subject to

PAYE = R13 680 x 80% = R10 944, therefore monthly

tax at 40% = R4 378.

•After amendments: At year-end, if no business mileage

can be proved, then the monthly tax effect would be R5

472! 13

COMPANY CARS

• Problem: “Determined value” to include VAT

although employer in some cases will be able to

claim back the input VAT!

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Proposed solution:

Where an employer is able to claim the input VAT on a vehicle, the determined value should not include the VAT portion.

COMPANY CARS

• Problem: Maintenance plan also included in

determined value - Vehicles that include maintenance

/ service plans will, if the amendment is effected,

carry a higher fringe benefit rate when compared

to vehicles that do not have maintenance plans.

• It is also submitted that part of the 4% monthly fringe

benefit value already includes a portion for the fringe

benefit relating to the employer incurred maintenance

cost.

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COMPANY CARS

• Problem: Maintenance plan included (continued)

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Proposed solution:

The maintenance plan should be excluded from the determined value to achieve an equitable outcome for all vehicles as it relates to an operating expense.

COMPANY CARS

• Problem: There is no distinction made between

“tool of trade” vehicles and the company car

“schemes”. By “tool of trade” we mean that the

vehicle is an essential tool that enables the

employees to perform his / her duties, for example

a delivery man that has the dedicated use of a

small bakkie, van or delivery vehicle.

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COMPANY CARS

• Problem: “tool of trade” vehicles (continued)

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Proposed solution:

We propose that the legislation be amended to distinguish between benefit “schemes” such asthose that allocate funds from a Cost To Company package and a “tool of trade” vehicle given for legitimate business use.

COMPANY CARS

• Problem: We submit that the 4% value applied

against the value of the vehicle is not in line with

the actual cost of maintaining and running the

vehicle.

• On R200 000 vehicle AA rates cost = R7 186,

while the fringe benefit value would be R8 000!

• The fringe benefit is therefore higher than the

actual benefit received.

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COMPANY CARS

• Problem: 4% value (continued)

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Proposed solution:

The rate of 4% should be revised to bring it in line with the actual benefit received, i.e. the expense incurred by the employer or the expense that the employee would have incurred if he/she had purchased, maintained and run the car themselves.

COMPANY CARS

• Problem: Employee tax - Employees that do

travel frequently for business would have a higher

percentage of business travel mileage than 20% of

their total. It follows that such employees would

only be able to claim relief on assessment. We

believe that the delay experienced between the

monthly employees’ tax charged and the refund

upon assessment could create hardship for

employees.

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COMPANY CARS

• Problem: Employee tax 80% (continued)

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Proposed solution:

The employer should have the ability to, on a discretional basis; lower the percentage from 80% toa lower percentage for the purposes of withholding employees’ tax on a monthly basis. Alternatively, the employee should have the option to apply to SARS for a hardship directive to fix the percentage of tax withholding on a monthly basis in this regard.

COMPANY CARS

• Problem: This proposal will also now include 80%

of the deemed private use of the vehicle (4%) in

the calculation for amounts due for Skills

Development (“SDL”) and Unemployment

Insurance Fund (“UIF”).

• The presumption of private use is, therefore,

extrapolated to the SDL and UIF contributions due

for these employees regardless of actual business

use.

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COMPANY CARS

• Problem: SDL and UIF contributions (continued)

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Proposed solution: The SDL and UIF contribution should both exclude a travel allowance and the fringe benefit on employer provided motor vehicles.

FOCUS AREAS

3. TAX-FREE FRINGE BENEFIT FOR

EMPLOYER-PROVIDED

PROFFESSIONAL FEES AND

INDEMINITY INSURANCE

Page 11 – 12 of the SAICA Submission

2.8 of the Explanatory Memorandum

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TAX-FREE FRINGE BENEFIT FOR EMPLOYER-PROVIDED PROFFESSIONAL FEES AND INDEMINITY INSURANCE

Current law:

Paragraph 13(2)(b) of the Seventh Schedule to the Act

• Professional fees and indemnity insurance paid by employers

on behalf of their employees are exempted from fringe benefit

tax under paragraph 13(2)(b) of the Seventh Schedule.

Example of such fees are membership fees paid to

professional bodies and insurance indemnity payment in the

following professions:

Charted Accountants; Medical Doctors; Attorney’s;

Engineers

TAX-FREE FRINGE BENEFIT FOR EMPLOYER-PROVIDED PROFFESSIONAL FEES AND INDEMINITY INSURANCEProblem Statement:

Paragraph 13(2)(b) of the Seventh Schedule v Sec 23(m) of the Act

• The exemption provided under paragraph 13(2)(b) of the Seventh Schedule on the payment of the professional fees and indemnity insurance payments is discriminatory.

• Proposed amendment only favours certain categories of taxpayers (e.g. only taxpayers who receive this kind of benefit from their employers).

• Taxpayers who do not enjoy this privilege of being provided with this kind of benefit by their employers and have to pay these fees for themselves are not allowed get a tax deduction in terms of section 23(m) of the Act.

• Taxpayers entitled to consistency and certainty.

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TAX-FREE FRINGE BENEFIT FOR EMPLOYER-PROVIDED PROFFESSIONAL FEES AND INDEMINITY INSURANCE

Proposed solution:

Main

• Clarity that the legislation provides in terms of

paragraph 13(2)(b) of the Seventh Schedule is

welcomed.

• HOWEVER we propose the relief be extended to also

allow professional fees and insurance indemnity

payments as a tax deduction for the employee in terms

of section 23(m) of the Act.

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