SAICA ANNUAL TAX BILL UPDATE...5 ABOUT THE PRESENTER Wessel Smit • B.Compt (Hons) HDip Tax MCom...

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SAICA ANNUAL TAX BILL UPDATE

November 2019

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CONTENT PAGESession Topic

Session 1 Introduction

Session 2 Individuals, Savings and Employment

Session 3 Companies

Session 4 Financial Institutions and Products

Session 5 Incentives

Session 6 International Tax

Session 7 VAT

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CONTENT PAGESession Topic

Session 8 Tax Administration (“TAA”)

Session 9 Other Tax Developments

Session 10 Court Cases

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Introduction

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ABOUT THE PRESENTERWessel Smit• B.Compt (Hons) HDip Tax MCom

(Taxation) • CA(SA) and Director of Core Tax (Pty) Ltd• He is a member of the SAICA Tax

Administration subcommittee and previous member of the SAICA National Tax Committee

• Wessel has been a part time tax lecturer at the University of the Free State in the CTA, MBA and post graduate tax courses

• He is an annual contributor to selected chapters in SILKE on Income Tax.

• Wessel provides various taxation related consulting services including tax opinions and has presented more than 200 Taxation Seminars during the last 10 years

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INTRODUCTIONAmendments that are part of this seminar

• Rates and Monetary Amounts and Amendment of Revenue Laws Bill B-37 of 2019 as published on 30 October 2019.

• The Tax Administration Laws Amendment Bill B-38 of 2019 published on 30 October 2019.

• The Taxation Laws Amendment Bill B-39 of 2019 published on 30 October 2019.

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2019 TAX LEGISLATION PROCESS

Subsequent to the tax pronouncements made by the Minister of Finance (the Minister) as part of the 2019 Budget announcements on 20 February 2019, the 2019 annual draft tax bills were published to give effect to the tax proposals announced in the Budget. These 2019 annual draft tax bills include the following, the 2019 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill), the 2019 Draft Income Tax Amendment Bill, the 2019 Draft Taxation Laws Amendment Bill (TLAB), and the 2019 Draft Tax Administration Laws Amendment Bill (TALAB).

The 2019 Draft Rates Bill was first published on the same day as the Budget (20 February 2019), and published for the second time on 21 July 2019 in order to solicit comments on the tax proposals contained therein. The 2019 Draft Rates Bill contains tax announcements made in the 2019 Budget, dealing with changes in rates and monetary thresholds, changes to personal income tax tables, increases of the excise duties on alcohol and tobacco and adjustments to the eligible income bands that qualify for the employment tax incentive.

The 2019 Draft TLAB and 2019 Draft TALAB were published on 21 July 2019 and contain more complex, technical and administrative tax proposals announced in the 2019 Budget.

This year, a separate 2019 Draft Income Tax Amendment Bill was published on 30 July 2019, which contains environmental incentive announcements made in the 2019 Budget that deal with the repeal of the exemption for certified emissions reductions as well as the extension of the of the energy efficiency savings incentives. These changes provide the necessary legislative amendments required to implement the carbon tax, which came into effect on 1 June 2019.

Due to constitutional requirements, the draft tax bills are divided into two separate categories, i.e., money bills in terms of section 77 of the Constitution dealing with national taxes, levies, duties and surcharges (for example the 2019 Draft Rates Bill, 2019 Draft TLAB and 2019 Draft Income Tax Amendment Bill) and an ordinary bill in terms of section 75 of the Constitution, dealing with tax administration issues (for example, 2019 Draft TALAB).

PUBLIC COMMENTS

The 2019 Draft Rates Bill, 2019 Draft TLAB and 2019 Draft TALAB were published for public comments on 21 July 2019 and the 2019 Draft Income Tax Amendment Bill was published for public comments 30 July 2019. The closing date for public comments on the above-mentioned 2019 draft tax bills was 23 August 2019. National Treasury and SARS received written comments from 77 organisations and 600 individuals (see Annexure A and B attached). National Treasury and SARS also 6 engaged stakeholders that submitted comments in more detail through workshops that were held in Pretoria on 5 and 6 September 2019.

National Treasury and SARS briefed both the Standing Committee on Finance (SCoF) and Select Committee on Finance (SECoF) on the 2019 draft tax bills on 3 September 2019. Subsequently, on 10 September 2019, the SCoF and SECoF convened public hearings on these 2019 draft tax bills. There were about 14 organisations that were present at the public hearings held by the joint SCoF and SECoF meeting.

On 18 September 2019, National Treasury and SARS presented to both the SCoF and SECoF the 2019 Draft Response Document on the 2019 Draft Rates Bill, 2019 Draft Income Tax Amendment Bill, 2019 Draft TLAB and the 2019 Draft TALAB. The 2019 Draft Response Document contains a summary of draft responses to the public comments received and proposed steps to be taken in addressing the key issues raised during the consultation process.

After the above presentation the SCoF and SECoF have considered the draft Response Document, presented to it to the Minister for approval, including approving consequential amendments to the 2019 draft tax bills, prior to the formal introduction/tabling in Parliament in October 2019.

Extract from National Treasury Draft Response Document on the 2019 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2019 Draft Income Tax Amendment Bill, 2019 Draft Taxation Laws Amendment Bill and 2019 Draft Tax Administration Laws Amendment Bill.

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INTRODUCTIONAmendments that are part of this seminar

• The Bills have been released on the 30th of October 2019.

• The Bills have not been signed and promulgated yet.

• No explanatory memorandum was released with the Taxation Laws Amendment Bill (“TLAB”) at the time of drafting this course material.

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INTRODUCTIONAmendments

Effective date:

There are different effective dates for the2019 amendments per the tax Bills – see thedetailed slides for the specific amendmentdates.

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Individuals, Savings and Employment

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INCOME TAX TABLES

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INDIVIDUALS, SAVINGS AND EMPLOYMENTTax of individuals, deceased estates, insolvent estates & special trusts

• The above-mentioned tax table has been amended for the 2020 year of assessment: – No changes were made to personal income

tax brackets, while the tax-free threshold increases from R78 150 to R79 000.

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INDIVIDUALS, SAVINGS AND EMPLOYMENTTax of individuals, deceased estates, insolvent estates & special trusts

2018/2019 and 2019/2020

Taxable Income (R) Rate of Tax (R)

0 – 195 850 18%

195 851 – 305 850 35,253 + 26%

305 851 – 423 300 63,853 + 31%

423 301 – 555 600 100,263 + 36%

555 601– 708 310 147,891 + 39%

708 311 – 1 500 000 207,448 + 41%

1 500 001 and more 532 041 + 45%

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Extract from 2019 Medium Term Budget Speech:

“Significant tax increases over the past several years leave only moderate scope to boost tax revenue at this time. Given the size of the required adjustment, however, additional tax measures are under consideration.”

“We will take stronger measures to fight illegitimate cross-border flows and tax evasion. Our approach to money laundering will be reviewed by the Financial Action Task Force. Steps are also being taken to strengthen co-operation between the Financial Intelligence Centre, the South African Reserve Bank and SARS.”

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INDIVIDUALS, SAVINGS AND EMPLOYMENTRebates

2020 2019

Rebates for natural persons (R) (R)

Under 65 – Primary 14 220 14 067

65 and over – Secondary 7 794 7 713

75 and over - Tertiary 2 601 2 574

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INDIVIDUALS, SAVINGS AND EMPLOYMENTTax Thresholds

2020 2019

Tax Thresholds (R) (R)

Under 65 – Primary 79 000 78 150

65 and over – Secondary 122 300 121 000

75 and over - Tertiary 136 750 135 300

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INDIVIDUALS, SAVINGS AND EMPLOYMENTInterest Exemptions

2020 2019

Interest Exemption (R) (R)

Under 65 23 800 23 800

65 and over 34 500 34 500

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INDIVIDUALS, SAVINGS AND EMPLOYMENTTax Free Investment

2020 2019

Tax Free Investment (R) (R)

Annual Limit 33 000 33 000

Lifetime Limit 500 000 500 000

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Any amount received from a tax-free investment is exempt from normal tax (this includes normal income on the investment as well as any profit arising from the sale of the investment). The following requirements must be met:

• The investment must be made by a natural person or the deceased or insured estate of a natural person

• The investment must be a financial instrument or policy that is administered by a person or entity as designated by the Minister of Finance

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INDIVIDUALS, SAVINGS AND EMPLOYMENTMedical Tax Credits

2020 2019

Medical Tax Credit (R) (R)

1st Dependent 310 310

2nd Dependent 310 310

Additional Dependents 209 209

No change were made to the medical tax credits.

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INDIVIDUALS, SAVINGS AND EMPLOYMENTTravel Allowance Deemed Expenditure Table

• Use actual business costs (The value of the vehicle is limited to R 595 000 for calculations of wear and tear while wear and tear over a period of 7 years.

• In the case of a vehicle that is being leased, the total amount of payments in respect of that lease may not in any year of assessment exceed an amount of the fixed cost as determined

• 2020 table not adjusted for inflation

• Reimbursive travel allowance is R3,61 / km for 2019 and 2020 tax years

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INDIVIDUALS, SAVINGS AND EMPLOYMENT2020 tax year travel cost table

Value of the vehicle (incl VAT)

Fixed cost Fuel costMaintenance

cost R R per annum c per km c per km

0 – 85 000 28 352 95.7 34.485 001 – 170 000 50 631 106.8 43.1

170 001 – 255 000 72 983 116.0 47.5255 001 – 340 000 92 683 124.8 51.9340 001 – 425 000 112 443 133.5 60.9425 001 – 510 000 133 147 153.2 71.6510 001 – 595 000 153 850 158.4 88.9Exceeding 595 000 153 850 158.4 88.9

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INDIVIDUALS, SAVINGS AND EMPLOYMENTSubsistence Allowances

Travel in the Republic 2020 2019

Meals and incidental costs 435 416

Incidental costs 134 128

The non-taxable local travel allowance source code is 3714 for the IRP 5.

Travel outside the Republic

Various from country to country. Please refer to SARS website, www.sars.gov.za for latest rates.

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INDIVIDUALS, SAVINGS AND EMPLOYMENTRetirement Fund Lump Sum Withdrawal Benefits (unchanged)

Taxable income Rate of tax

R R

0 – 25 000 0% of taxable income

25 001 - 660 000 18% of taxable income above 25 000

660 001 - 990 000 114 300 + 27% of taxable income above 660 000

990 001 and above 203 400 + 36% of taxable income above 990 000

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INDIVIDUALS, SAVINGS AND EMPLOYMENTRetirement Fund Lump Sum Withdrawal Benefits (unchanged)


R R


500 001 – 700 000 18% of taxable income above 500 000

700 001 – 1 050 000 36 000 + 27% of taxable income above 700 000

1 050 001 and above130 500 + 36% of taxable income above1 050 000

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(ii) The amount of tax levied in terms of item (i) must be reduced by an amount equal to the tax that would be leviable on the person in terms of that item in respect of taxable income comprising the aggregate of—

(aa) retirement fund lump sum withdrawal benefits received by or accrued to that person on or after 1 March 2009 and prior to the accrual of the retirement fund lump sum withdrawal benefit contemplated in item (i)(aa);

(bb) retirement fund lump sum benefits received by or accrued to that person on or after 1 October 2007 and prior to the accrual of the retirement fund lump sum withdrawal benefit contemplated in item (i)(aa); and

(cc) severance benefits received by or accrued to that person on or after 1 March 2011 and prior to the accrual of the retirement fund lump sum withdrawal benefit contemplated in item (i)(aa).

(ii) The amount of tax levied in terms of item (i) must be reduced by an amount equal to the tax that would be leviable on the person in terms of that item in respect of taxable income comprising the aggregate of—

(aa) retirement fund lump sum withdrawal benefits received by or accrued to that person on or after 1 March 2009 and prior to the accrual of the retirement fund lump sum benefit contemplated in item (i)(aa);

(bb) retirement fund lump sum benefits received by or accrued to that person on or after 1 October 2007 and prior to the accrual of the retirement fund lump sum benefit contemplated in item (i)(aa); and

(cc) severance benefits received by or accrued to that person on or after 1 March 2011 and prior to the accrual of the retirement fund lump sum benefit contemplated in item (i)(aa).

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INDIVIDUALS, SAVINGS AND EMPLOYMENTEstate Duty (Unchanged)

Estate Duty 2020 2019

0 – R 30million 20% 20%

R 30million and above 25% 25%

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INDIVIDUALS, SAVINGS AND EMPLOYMENTDonation Tax (Unchanged)

Donation Tax 2020 2019

0 – R 30million 20% 20%

R 30million and above 25% 25%

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SMALL BUSINESS CORPORATIONS

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INDIVIDUALS, SAVINGS AND EMPLOYMENTSmall Business Corporations


R R


79 000 – 365 000 7% of taxable income above 79 000

365 001 – 550 00020 080 + 21% of taxable incomeabove 365 001

550 001 and above58 870 + 28% of the amount above550 000

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CAPITAL GAINS TAXEighth Schedule

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INDIVIDUALS, SAVINGS AND EMPLOYMENTCapital Gains Tax Rates (unchanged)

2020 2019

(R) (R)

Annual Exclusion 40 000 40 000

Inclusion Rate: Individuals 40% 40%

Inclusion Rate: Companies and Trusts 80% 80%

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INDIVIDUALS, SAVINGS AND EMPLOYMENTCapital Gains Tax Exclusions (for natural persons)

2020 2019

(R) (R)

Annual Exclusion 40 000 40 000

Annual exclusion in year of death –gains and losses 300 000 300 000

Disposal of small business by natural person if over age 55 1 800 000 1 800 000

Max market value of assets to qualify as a small business 10mill 10mill

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INDIVIDUALS, SAVINGS AND EMPLOYMENT Capital Gains Tax Exclusions

* First R 2 million gain or loss excluded

2019 2018

(R) (R)

Primary Residence Exclusion 2,0 m 2,0 m

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Par 57 Exclusion – disposal of small business by natural person if over age 55:

This exclusion of any capital gain up to R1,8 million is available only to a natural person, made on the disposal of

• an active business asset of a small business owned by him as a sole proprietor, or

• interest in each of the active business assets of a partnership, to the extent of his interest in the partnership, or

• an entire direct interest, which consists of at least 10% of the equity of a company, in as far as that interest relates to assets of that company qualifying as active business assets.

For a person to qualify for this exclusion, he or she must

• have held the small business for his or her own benefit for a continuous period of at least five years prior to the disposal

• have been substantially involved in the operations of the small business during that period

• have attained the age of 55 years or, if younger, have disposed of the asset or interest in consequence of his ill-health, other infirmity, superannuation or death, and

• have realised all his or her qualifying capital gains within a period of 24 months, commencing from the date of the first qualifying disposal (par 57(2) and (4)).

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INDIVIDUALS, SAVINGS AND EMPLOYMENT Capital Gains Tax Rates

Taxpayer Inclusion

Rate (%)

Statutory

Rate (%)

Effective

Rate (%)

Individuals 40 0 – 45 0 – 18

Trusts

Special 40 0 – 45 0 – 18

Other 80 45 36

Companies

Ordinary 80 28 22.4

Small business corporation 80 0 – 28 0 – 22.4

Employment company

(personal service provider)

80 28 22.4

Foreign co. (SA branch) 80 28 22.4

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EVENTS TREATED AS DISPOSALS AND ACQUISITIONS

Paragraph 20 of the 8th Schedule

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Example:

Company X realises a capital gain of R1 000 upon the selling of a capital asset. Thereafter, the company distributes the capital gain realised to its shareholder by means of a dividend.

Solution:

Company Shareholder

Capital Gain Realised R 1 000

Included in taxable income @ 80% R 800

Normal tax @ 28% R 224

Available for distribution after tax,

therefore dividend= R 776

Dividend Withholding Tax @ 20% R 155.20

Total Tax Paid (R224 + R155.2) R 379.20

Combined Tax Rate: 37.9%

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CAPITAL GAINS TAXEvents treated as disposals and acquisitions

The amendment in paragraph 19 clarifies the interaction between paragraph 19 and paragraph 43A.

Effective date – On promulgation of the Act.

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CAPITAL GAINS TAXExtraordinary exempt dividends

• ‘extraordinary exempt dividends’ means so much of the amount of the aggregate of any exempt dividends received or accrued within the period of 18 months contemplated in subparagraph (1)– as exceeds 15 per cent of the proceeds received or

accrued from the disposal contemplated in that subparagraph; and

– as has not been taken into account as an extraordinary dividend in terms of paragraph 43A(2).’’


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BASE COST OF AN ASSETParagraph 20 of the 8th Schedule

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CAPITAL GAINS TAXBase cost of an asset

The amendment deletes the requirement that expenditure incurred in improving or enhancing the value of an asset still be reflected in the state or nature of the asset at the time of its disposal (par 20(1)(e) of the 8th Schedule).


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CAPITAL GAINS TAXBase cost of an asset

The amendment creates policy certainty by specifically prohibiting bond registration costs and bond cancellation costs from forming part of the base cost of an asset. Par 20(2)(a) of the 8th Schedule)


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PROCEEDS FROM DISPOSALParagraph 35 of the Eighth Schedule

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CAPITAL GAINS TAXProceeds from disposal

The amendment seeks to clarify that theproceeds in respect of a disposal will not bereduced in instances where an agreement iscancelled or terminated, and the asset isreacquired by the person who disposed ofthe asset.


Confirm previous policy decision

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DISPOSAL BY WAY OF DONATION, CONSIDERATION NOTMEASURABLE IN MONEY AND TRANSACTIONS BETWEEN CONNECTED PERSONSNOT AT AN ARM’S LENGTH PRICE

Paragraph 38 of the Eighth Schedule

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CAPITAL GAINS TAXDonations or inadequate consideration

• The amendments delete an obsoletereference to paragraph 67 of the EighthSchedule.

• Paragraph 67 of the Eighth Schedule wasdeleted by section 85 of the Taxation LawsAmendment Act 23 of 2018 with effect fromthe date of promulgation of that Act, namely,17 January 2019, and was replaced bysection 9HB on the same date;

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• Clarify that the provisions of paragraph 38(1) apply where assets are disposed by means of a donation or for an inadequate consideration between persons who are connected persons in relation to each other immediately prior to and immediately after the disposal.

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• The amendment in paragraph 38 (1)(b)deletes the word “and paid” to clarify thatto the amount does not need to beactually paid in order for the base cost tobe recognized for purposes of thisparagraph.


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DISPOSAL BY CREDITOR OF DEBT OWED BY CONNECTEDPERSON

Paragraph 56 of the Eighth Schedule

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CAPITAL GAINS TAXDisposal by creditor of debt owed by connected person

• In 2018, changes were made to the debt forgiveness rules.

• The proposed amendment in subparagraph (2)(a) is a consequential amendment to clarify the interaction of paragraph 56 with the provisions of section 19(3) and paragraph 12A(3).

Effective date – YOA commencing on or after 1 January 2018.

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CAPITAL GAINS TAXDisposal by creditor of debt owed by connected person

Paragraph 56(2)(a) (after amendment)(2) Despite paragraph 39, subparagraph (1) does not apply in respect of any capital loss determined in consequence of the disposal by a creditor of a debt owed by a debtor, to the extent that the amount of that debt so disposed of represents—

a) an amount—i. which is applied to reduce the expenditure in respect of an

asset of the debtor in terms of section 19(3) or paragraph 12A; or

ii. which must be taken into account by the debtor as a capital gain in terms of paragraph 12A(4);

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MICRO BUSINESS TURNOVER TAX

6th Schedule

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Micro-Business Turnover TaxTurnover Tax for microbusiness

Taxable Turnover (R) Tax Rate (R)

0 - 335,000 0%

335,001 - 500,000 0 + 1%

500,001 - 750,000 1,650 + 2%

750,001 and more 6,650 + 3%

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EXTENDING THE SCOPE OF AMOUNTS CONSTITUTING VARIABLE REMUNERATION

Section 7B

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INDIVIDUALS, SAVINGS AND EMPLOYMENTVariable Remuneration

• Variable remuneration is defined in s 7B(1) and includes (before amendment)– overtime pay, bonus or commission– a travel allowance or advance paid in terms of s

8(1)(b)(ii), or– leave pay (an amount which an employer is liable

to pay to an employee due to any leave period which the employee has not taken during the year).

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• If a taxpayer is determining his taxable income during a year of assessment, any amount to which an employee becomes entitled from an employer in respect of variable remuneration, is deemed to have– accrued to the employee, and– constitute expenditure incurred by the employer,

on the date of payment of the amount by the employer to the employee (s 7B(2)).

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• The timing of the accrual and incurral of variable remuneration will therefore be on the payments basis and will only be included in the income of the employee (and be taken into account for employees’ tax purposes) and be expenditure incurred by the employer on the date of actual payment.

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Amendment


Purpose

Match the timing between accrual and payment of various forms of variable remuneration

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Specific payments were added to the list

Apply to:• any night shift allowance;• any standby allowance; or• any amount paid or granted in

reimbursement of any expenditure

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Reasons for change

It has come to Government’s attention that the current scope of section 7B is limited. There are certain types of variable remuneration that are not currently catered for in this section. This includes for example, night shift allowances and standby allowances paid by employers to employees. As a result, the problem that section 7B was intended to address still remains as some types of variable remuneration remain outside the ambit of this section.

Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

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Effective date – YOA commencing on or after 1 March 2020

S 8(b)(ii) & (iii) also amended to state that that where travel allowance was paid and taxed per s 7B when paid, the distance travelled would be deemed to be travelled in the same year that it was taxed.

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DEDUCTION OF INTEREST REPAID TO SARS

Section 7F

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INDIVIDUALS, SAVINGS AND EMPLOYMENTDeduction of interest repaid to SARS

• Section 7F makes provision for interest which were paid by SARS that has to be repaid by that person to SARS to be deducted from that person’s taxable income.

• Amendment:– The deduction is only available to the

extent that the amount of interest is or was included in the income of that person.

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AMOUNTS INCLUDED IN TAXABLE INCOME

Section 8

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INDIVIDUALS, SAVINGS AND EMPLOYMENTExempt allowances

Changes were made in section 8(1) of the Actto exclude exempt allowances or advance interms of section 10(1) from taxable income.What about travel allowances and s 10(1)(o)(ii)exemption where foreign services arerendered.

This is to avoid exempt allowancesbecoming taxable.

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INDIVIDUALS, SAVINGS AND EMPLOYMENTTravel allowances

• Proviso’s were added to align a person’skilometers travelled for business purposeswith the accrual of the allowancereceived in relation to said travel.

• For example s 7B travel allowance on paidin a tax year, relating to businesskilometers travelled a previous tax year.

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Currently, section 10(1)(nA) of the Act makes provision for exemption in respect certain employment-related allowances, for example, a uniform allowance. As a result, if the allowance is exempt in terms of section 10(1)(nA), such amount is excluded from “income” as defined in the Act. However, section 8(1) of the Act includes any such allowance, that are for example exempt in terms of section 10(1) (nA) of the Act directly into a person’s taxable income. This means that, notwithstanding that the allowance is exempt, it becomes subject to tax as a result of its direct inclusion into taxable income in terms of section 8(1) of the Act.


The Act contains section 7B, which makes provision for matching the timing between accrual and payments of various variable remuneration. Section 7B of the Act deems a person’s travel reimbursement to accrue on the date that it is paid. However, there is an anomaly, for example, if a person travels during say February and the reimbursement is paid in March, those kilometers travelled in February cannot be claimed against the following year’s travel allowance. In essence a deduction is forfeited as the distance to which the allowance paid relates is not travelled in the year of assessment the reimbursement is paid.


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INDIVIDUALS, SAVINGS AND EMPLOYMENTAllowance asset

Currently, paragraph 12(2)(c) of the EighthSchedule to the Act triggers a deemeddisposal for capital gains tax purposeswhen an asset which was not held astrading stock commences to be held astrading stock.

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• However, there is no similar deemed disposal and reacquisition rules in the recoupment provisions in section 8(4)(k) of the Act for allowance assets to trigger a recoupment of previous allowances.

• In order to address this anomaly, changes were made in the Act by inserting a new subparagraph (iv) in section 8(v)(k) of the Act.

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• New deemed disposal and reacquisition rulefor any assets held as trading stock whichwas previously not held as trading stock.

• Commenced to hold any asset as tradingstock which was previously not held astrading stock - this triggers the recoupment

• Similar to Para 12(2)(c) of the 8th Schedule tothe Act.

Effective date – On promulgation of the Act

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ESTATE DUTYSection 3(2)

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Estate Duty

• In 2015, changes were made in section3(2) of the Estate Duty Act by inserting anew paragraph (bA). The main aim of theamendments was to prevent individualsfrom avoiding estate duty by making alarge contribution into a retirement annuityfund in the year the individual dies.

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Estate Duty• Consequently, this paragraph makes provision for

inclusion in the estate any amounts that havenot been allowed as a deduction in terms ofsections 11(k), 11(n) or 11F or was not exemptito section 10C of the ITA(essentially the excessnon-deductible contributions created by the largecontributions made to the retirement annuity fund).

• However, section 3(2) (bA) erroneously includesnot only excess contributions in terms of sections11(k), 11(n) or 11F, but also amounts which are nottaken into consideration in terms of the SecondSchedule of the Income Tax Act.

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Estate Duty

In order to close this loophole, retrospectivechanges were made to section 3(2)(bA) ofthe Estate Duty Act.

Effective date – Deemed to come into operation on 30 October 2019 and applies in respect of:a) the estate of a person who dies on or after that

date; and(b)any contributions made on or after 1 March 2016.

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ALIGNING THE EFFECTIVE DATE OF TAX NEUTRAL TRANSFERS BETWEEN RETIREMENT FUNDS WITH THE EFFECTIVE DATE OF ALL RETIREMENT REFORMS

Paragraph 6(1)(a) of the Second Schedule to the Act

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In 2015, changes were made in section 3(2)of the Estate Duty Act to prevent individuals from avoiding estate duty by making a large contribution into a retirement annuity fund in the year the individual dies. Consequently, this paragraph makes provision for inclusion in the estate any amounts that have not been allowed as a deduction in terms of sections 11(k),11(n) or 11F of the Income Tax Act (essentially the excess non-deductible contributions created by the large contributions made to the retirement annuity fund). However, section3(2)(bA) erroneously includes not only excess contributions in terms of sections 11(k), 11(n) or 11F, but also amounts which are not taken into consideration in terms of the Second Schedule of the Income Tax Act. In order to close this loophole, it is proposed that retrospective changes be made to section 3(2)(bA) of the Estate Duty Act.

Comment:

The inclusion of non-deductible contributions in a person’s deceased estate is inequitable as contributions used to reduce annuities and lumpsums received at retirement should not be included in estate duty. Further to the above, the effective dates proposed do not have a desirable impact on tax collection

Response:

Accepted: Legislative changes will be made in the 2019 Draft TLAB to take in to account the provisions of section 10C of the Income Tax Act when determining the deceased’s tax liability for estate duty purposes. In addition, it is proposed that the effective dates for the proposed amendments be changed as follows:

• The proposed amendments shall be deemed to apply to contributions made on or after 1 March 2016 and will apply in respect of the estate of a person who dies on or after the date of promulgation of the 2019 TLAB.

Extracted from 2019 Presentation to SCOF and SEC on the draft response to the 2019 Draft Tax Bills.

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INDIVIDUALS, SAVINGS AND EMPLOYMENTAlligning the effective date

The effective date of the tax neutral transfersfrom pension to provident or providentpreservation funds were aligned with theeffective date of retirement fund reformamendments, which is 1 March 2021.

Effective date – Deemed to have come into operation on 1 March 2019

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EXEMPTION RELATING TO ANNUITIES FROM A PROVIDENT OR PROVIDENT PRESERVATION FUND

Section 10C of the Act

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Background

In 2013, retirement fund reform amendments were effected to the Act regarding the annuitisation requirements for provident funds. The main objective of these amendments was to enhance preservation of retirement fund interests during retirement and to have uniform tax treatment across the various retirement funds, thus resulting in provident funds being treated similar to pension and retirement annuity funds with regard to the requirement to annuitise retirement benefits. These retirement fund reform amendments were supposed to come into effect on 1 March 2015.

However, when Parliament was passing legislative changes to these amendments, Parliament postponed the effective date for the annuitisation requirements for provident funds until 1 March 2016. During the 2016 legislative cycle, Parliament again postponed the effective date until 1 March 2019. Further, during the 2018 legislative cycle, Parliament once more postponed the effective date to 1 March 2021. These postponements were due to continuing negotiations within the National Economic Development and Labour Council (“NEDLAC”).

Reasons for change

Each postponement of the effective date requires several consequential amendments to various provisions of the Act. In making changes to the effective dates in relation to the several consequential amendments required, an oversight occurred with regard to paragraph 6(1)(a) of the Second Schedule to the Act, which makes provision for tax neutral transfers between retirement funds. Failure to change the effective date in the above-mentioned provision resulted in the non-taxable treatment of transfers from pension funds to provident or provident preservation funds with effect from 1 March 2019.

The earlier effective date of 1 March 2019 for the tax neutral transfers from pension to provident or provident preservation funds creates a loophole as the intention was to align the effective date of the tax neutral transfers from pension to provident or provident preservation funds with the effective date of retirement fund reform amendments, which is 1 March 2021.

Extracted from the Draft Explanatory Memorandum to the 2019 Draft TLAB

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INDIVIDUALS, SAVINGS AND EMPLOYMENTExemption relating to annuities

• Provident and provident preservation fund members whoreceive annuities are afforded the same exemption status thatwould be applicable to other retirement fund members (that anynon-deductible contributions be allowed as an exemption whendetermining the taxable portion of annuities received from aprovident or provident preservation fund).

• The ability to deduct any non-deductible contributions made to aprovident or provident preservation fund in determining thetaxable annuity received from such fund will apply in relation toannuities received on or after 1 March 2020.

Effective date – YOA commencing on or after 1 March 2020

72

TAX TREATMENT OF BULK PAYMENTS TO FORMER MEMBERS OF CLOSED FUNDS

New paragraph 2D of the 2nd Schedule to the Act

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Background

In 2014, changes were made in the Act allowing the exemption of non-deductible retirement contributions when determining the taxable portion of compulsory annuities received from a pension, pension preservation or retirement annuity fund. However, this exemption is not applicable to provident or provident preservation fund members. The rationale behind excluding provident and provident preservation funds from this exemption was based on the fact that these fund members were not required by the rules of the provident and provident preservation fund to utilise at least two-thirds of their fund benefit upon retirement to acquire or purchase a compulsory annuity (provident or provident preservation fund members were allowed to receive their full retirement benefit as a lump sum upon retirement).

Reasons for change

With effect from 1 March 2016, Government proceeded with the introduction of some of the broader objectives of retirement reforms in the Act to ensure greater equity across income groups. As a result, contributions by both employers and employees to pension, provident and retirement annuity funds will qualify for a tax deduction, subject to a cap. On the other hand, contributions by employers to pension, provident and retirement annuity funds on behalf of employees will become a taxable fringe benefit in the hands of the employee.

Following the above-mentioned amendments in the Act, members of provident or provident preservation funds receiving an annuity found themselves in a position where any non-deductible contributions could only be off-set against the lump sum received. The balance of the non-deductible contributions in excess of the lump sum received are in effect forfeited or lost.

It has come to Government’s attention that over the past years, a number of provident and provident preservation funds have, by virtue of amending their plan rules, allowed their retiring members the ability to opt to acquire or purchase annuities with their fund benefits.

Proposal

In order to promote Government’s policy of a uniform approach to the tax treatment of all retirement funds, it is proposed that provident and provident preservation fund members who receive annuities are afforded the same exemption status that would be applicable to other retirement fund members (that any non-deductible contributions be allowed as an exemption when determining the taxable portion of annuities received from a provident or provident preservation fund).

The ability to deduct any non-deductible contributions made to a provident or provident preservation fund in determining the taxable annuity received from such fund will apply in relation to annuities received on or after 1 March 2020.

Effective date

The proposed amendments will come into operation on 1 March 2020 and apply in respect of any year of assessment commencing on or after that date.


In 2016, Government introduced some of the broader objectives of the retirement reforms. As a result, contributions by both employers and employees to pension, provident and retirement annuity funds qualify for a tax deduction from employees taxable income, subject to a cap. On the other hand, contributions by employers to pension, provident and retirement annuity funds

on behalf on employees qualify as a taxable fringe benefit in the hands of employees. Consequently, members of provident funds receiving an annuity found themselves in a position where any non-deductible contributions could only be off-set against the lump sum received and the balance of the non-deductible contributions in excess of the lumpsum received is forfeited or lost. In order to promote uniform tax treatment of all retirement funds, it is proposed that provident fund members who receive annuities qualify for the same tax exemption status that would be applicable too the retirement fund members.

Comment:

The proposed amendment should be applicable to provident and provident preservation fund members irrespective of how much of their retirement benefit is taken as a lumpsum upon retirement. Further to the above, the effective date should apply retrospectively with effect from 1 March 2019 instead of 1 March 2020.

Response:

Noted. The requirement for provident and provident preservation fund members to annuitize at least two-thirds of their retirement benefit in order to receive the section 10C exemption shall be set aside until the effective date of the annuitisation provisions,i.e. 1 March 2021. With regard to the comment that the effective date should apply retrospectively with effect from 1 March 2019 ,this is not accepted. The effective date shall remain unchanged ,i.e. will apply with effect from 1 March 2020.

Comment:

The current structure of the provision limits the effectiveness of the relief provided under section 10C, as the allowable deduction is rarely exceeded. The relief measure should be amended, and a R500 000 exemption should apply in instances where a taxpayer has not previously received a lumpsum in their lifetime and such annuity received is below the tax threshold.

Response:

Not Accepted. Changing the structure of the provision will require further amendments to this section once the annuitisation provisions come in to effect, this could result in avoidable complications to the tax system.

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INDIVIDUALS, SAVINGS AND EMPLOYMENT Bulk payments to former members of closed funds

• Provision is made for the payment ofextraordinary lump sums currently heldby fund administrators on behalf ofderegistered funds to qualify for taxexempt treatment, if they meet the criteriato be determined by the Minister ofFinance in the notice.

Effective date – on the date to be determined by the Minister of Finance by notice in the Government Gazette

74

REVIEWING THE TAX TREATMENT OF SURVIVING SPOUSE PENSIONS

Paragraph 2 of the 4th Schedule to the Act

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Background:

In 2007, paragraph 2C was introduced into the Second Schedule to the Act to allow for the income tax exemption in respect of a lump sum benefit or part thereof, received or accrued to a person subsequent to the person’s retirement, death or withdrawal or resignation from a fund and in consequence of, or following upon an event contemplated by the rules of the fund. In 2008 changes were made to paragraph 2C of the Second Schedule to the Act to make provision for the Minister of Finance to prescribe an event by notice in the Government Gazette in terms of which the above-mentioned extraordinary payments by the retirement funds will qualify for income tax exemption. Consequently, in 2009, the Minister of Finance published a notice in Government Gazette No. 32005 (GG 32005) prescribing an event referred to in paragraph 2C of the Second Schedule to the Act in terms of which the following extraordinary lump sum payments by the retirement funds qualified for income tax exemption:

a) Any amount received by or accrued to a person from a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund in consequence of a payment to such fund by the administrator of such fund as a result of income received by the administrator prior to 1 January 2008 that was not disclosed to such funds (loosely referred to as “undisclosed secret profits”);

b) Any amount received by or accrued to a person from a pension fund or provident fund contemplated in paragraph (a) or (b) of the definition of “pension fund” in section 1 of the Act, to the extent that that amount is similar to a payment in terms of a surplus apportionment scheme contemplated in section 15B of the Pension Funds Act, No. 54 of 1956 (“the Pension Funds Act”) (loosely referred to as “surplus calculations”);

c) Any amount received by or accrued to a person from a pension preservation fund or provident preservation fund to the extent that it was paid or transferred to such a fund-

• As an unclaimed benefit contemplated in paragraph (c) of the definition of “unclaimed benefit” in section 1 of the Pension Funds Act (loosely referred to as “unclaimed benefits”); or

• As a result of or in consequence of an event contemplated in paragraph (a) of GG 32005.

Reason for change:

Paragraph 2C of the Second Schedule to the Act read together with the notice published by the Minister of Finance in GG 32005 prescribing an event referred to in paragraph 2C of the Second Schedule to the Act, makes provision for instances where the extraordinary lump sum payments are made by registered, active retirement funds.

When the notice was published by the Minister of Finance in GG 32005, some retirement funds were no longer registered. These deregistered retirement funds had already paid the above-mentioned extraordinary lump sum payments to the fund administrators. The fund administrators had not yet paid these extraordinary lump sum payments to the affected members and/or beneficiaries. These extraordinary lump sum payments are currently still held by the respective fund administrators.

In view of the fact that paragraph 2C of Second Schedule to the Act read together with the notice published by the Minister of Finance in GG 32005 makes provision for the extraordinary lump sum payments to be made by registered active retirement funds, extraordinary lump sum payments made by fund administrators in this regards will not qualify for income tax exemption.


75

INDIVIDUALS, SAVINGS AND EMPLOYMENTSurviving spouse pensions

• In order to assist with alleviating the financial burden, the following changes were made:– That the tax rebates applicable to all taxpayers

receiving annuity and other income, including the surviving spouse are not taken into account by the retirement fund(s) when calculating the taxes to be withheld;

– Any PAYE excessively withheld will be refunded upon assessment.

76

INDIVIDUALS, SAVINGS AND EMPLOYMENT Surviving spouse pensions

• Applicable to all taxpayers receiving annuityand other income, including the survivingspouse.

• As a result, retirement funds are required toapply for an annual tax directive from SARS,the tax directives will advise the retirementfund whether or not the fund should bedisregarding the tax rebates when calculatingthe taxes due on amounts paid by them.

Effective date – comes into operation on 1 March 2021.

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Background:

The Act makes provision for members of retirement funds to deduct contributions to their retirement funds from their taxable income when determining their monthly employees’ tax liability and annual income tax payable. Upon the death of a spouse, the surviving spouse may be entitled to receive a monthly pension known as the “surviving spouse’s pension”, which is paid by the retirement fund of the deceased spouse which the deceased spouse was a member of prior to death. This “surviving spouse’s pension” is taxable in the surviving spouse’s hands and is subject to Pay-As-You-Earn (PAYE) withholding by the retirement fund making the payment.

If the surviving spouse also receives a salary or other income, that salary or other income is added to the “surviving spouse’s pension” to determine his or her correct tax liability on assessment. Generally, the result of the assessment is often that the surviving spouse has a tax liability that exceeds the employee’s tax withheld by the employer and retirement fund(s) during the year of assessment, since the aggregation of income pushes them into a higher tax bracket.

Reasons for change

It has come to Government’s attention that in most cases, the surviving spouse does not foresee the additional tax liability as a result of the aggregation of income which pushes the surviving spouse into a higher tax bracket. This creates a cash flow burden and a tax debt for the surviving spouse. Further, this is becoming financially burdensome for the surviving spouses, and has, in many cases had adverse effects on the surviving spouse’s financial capacity.



Members of retirement funds can deduct contributions to their retirement funds from their taxable income when determining their monthly employees’ tax and annual income tax payable. Upon the death of a member, the surviving spouse may be entitled to receive a monthly spousal pension from the retirement fund. This spousal pension is taxable in the surviving spouse’s hands by the retirement fund. If the surviving spouse also receives a salary or other income, that salary or other income is added to the “surviving spouse’s pension” to determine his or her correct tax liability on assessment. The result of the assessment is that the surviving spouse has a tax liability that exceeds the employee’s tax withheld by the employer and retirement fund(s) during the year of assessment, since the aggregation of income pushes them into a higher tax bracket. It has come to Government’s attention that the surviving spouse may not foresee the additional tax liability that creates a cashflow burden and tax debt for the surviving spouse. In order to alleviate the financial burden, it is proposed that the tax rebates should not be taken into account when calculating taxes to be withheld by the retirement funds on the spousal pension.

Comment:

There is no clarity with regard to whom the proposed amendment is meant to apply to, as the draft legislation seems to imply that it would apply to taxpayers other than surviving spouses.

Response:

Noted. The policy rationale regarding the proposed amendment was to assist surviving spouses. Based on the comments received, it has now come to Government’s attention that taxpayers other than surviving spouses are also impacted. In order to cater for this, it is proposed that legislative changes be made in the 2019 Draft TLAB to extend this to apply to any taxpayer receiving two or more sources of employment income, provided that one of those sources is from a retirement fund or an insurer.

Comment:

The proposed amendment would be administratively burdensome for both SARS and retirement funds, and can therefore not come into effect on 1 March 2020.

Response:

Accepted. In order to provide both SARS and taxpayers more time to ready their systems for the changes and implementation required as a result of the proposed amendment, it is proposed that the effective date for the proposed amendment be postponed from 1 March 2020 to 1 March 2021.

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Companies

78

SECTION 1Definitions

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79

COMPANIESDefinition of dividend

• The current definition of “dividend” excludes an amounttransferred or applied that constitutes an acquisition by acompany of its own securities by way of a generalrepurchase of securities as contemplated in the JSELimited Listings Requirements, where that acquisitioncomplies with any applicable requirements.

• In 2016, Government granted exchange licenses to thefollowing stock exchanges, namely, A2X, 4AX, ZARX andEESE.

• As a result, changes were made in the definition ofdividend to apply to the above-newly stock exchanges,provided that they meet substantially the samerequirements contemplated in the JSE Limited ListingRequirements.

Effective date – on promulgation of the Act

80

COMPANIESDefinition of identical share

Changes were made in the definition ofidentical share to apply to the newly stockexchanges, provided that they meetsubstantially the same requirementscontemplated in the JSE Limited ListingRequirements.


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81

COMPANIESDefinition of return of capital

Changes were made in the definition ofreturn of capital to apply to the newly stockexchanges, provided that they meetsubstantially the same requirementscontemplated in the JSE Limited ListingRequirements.


82

COMPANIESDefinition of provident fund

• Clause were inserted that the rules of theprovident fund may provide for anemployee who elects to transfer thewithdrawal interest (thus beforeretirement) to a pension fund establishedby the same employer or a pension fund inwhich that employer participates

Effective date – Deemed to have come into operation on 1 March 2019.

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83

COMPANIESDefinition of withdrawal interest

‘withdrawal interest’ should be determinedon the date on which the member electsto withdraw due to an event other thanthe member attaining normal retirementage;

Effective date – Deemed to have come into operation on 1 March 2019.

84

RETURN OF CAPITALSection 8E

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84

Previously, the withdrawal interest were determined immediately prior to the date on which the member becomes entitled to a benefit from that fund because of an event other than the member attaining normal retirement age, as determined by the rules of the fund

85

COMPANIESReturn of capital

• The amendments to the definition of “hybridequity instrument” clarify the scope of thedefinition of hybrid equity instrument byclarifying that any part redemption of ashare refers to a distribution of an amountconstituting a return of capital or a foreignreturn of capital in respect of that share as itis impossible to otherwise redeem a portionof a share.

86

COMPANIESIssue price

• New definition inserted in s 8E

• issue price’ in relation to a share in acompany means the amount that wasreceived by or that accrued to thatcompany in respect of the issue of thatshare

Effective date – YOA ending on or after 21 July 2019.

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87

ENFORCEABLE OBLIGATIONSection 8EA

88

COMPANIESEnforceable obligation

The definition of an enforceable obligationwere deleted.

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89

TRADING STOCKSection 22

90

Trading Stock

Clarity were provided, confirming thatclosing stock must be included in grossincome (s 22(1)(a)(i) of ITA).

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Trading Stock

In determining any diminution in the value oftrading stock, no account must be taken ofthe fact that the value of some items oftrading stock held and not disposed of bythe taxpayer may exceed their cost price(s 22(1)(a)(ii) of ITA).

Effective date – YOA commencing on or after 1 January 2020.

92

ADDRESSING ABUSIVE ARRANGEMENTS AIMED AT AVOIDING THE ANTI-DIVIDEND STRIPPING PROVISIONS

Paragraph 12A and paragraph 43A of the Eighth Schedule to the Act

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Par 43A / Section 22B

Family Trust

Co B

Co A BBBEE TrustShare

subscription

100%

100% Dividend

94

COMPANIESDividend Stripping

The anti-avoidance rules will no longerapply only at the time when a shareholdercompany disposes of shares in a targetcompany.

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Background

The anti-avoidance rules dealing with dividend stripping were first introduced in the Act in 2009. Dividend stripping normally occurs when a shareholder company that intends on disinvesting in a target company avoids income tax (including capital gains tax) that would ordinarily arise on the sale of shares. This is achieved when a shareholder company (that either controls or has a significant influence over a target company) ensures that the target company declares a large dividend to it prior to the sale of shares in that target company to a prospective purchaser. This pre-sale dividend, which is exempt from Dividends Tax (in the case of a resident dividend that declares and pays a dividend to another resident company), decreases the value of shares in the target company. As a result, the shareholder company can sell the shares at the lowered share value thereby avoiding a much larger capital gains tax burden in respect of sale of shares.

In 2017, amendments were made in the Act in order to strengthen the anti-avoidance rules dealing with dividend stripping. As a result of the 2017 changes, exempt dividends that are paid to a shareholder company within 18 months of a disposal of shares held by that shareholder company are currently regarded as extra-ordinary dividends and are treated as proceeds or income that is subject to tax in the hands of that shareholder company. Further, in 2018, amendments making provision for the anti-avoidance rules dealing with dividend stripping rules to override corporate re-organisation rules which were made in 2017 were reversed to ensure that those 2017 amendments do not hinder legitimate reorganisation transactions.

Reasons for change

It has come to Government’s attention that certain taxpayers have embarked on abusive tax schemes aimed at circumventing the current anti-avoidance rules dealing with dividend stripping arrangements. These schemes involve millions of Rands and have a potential of eroding the South African tax base. These latest schemes involve, for example, a substantial dividend distribution by the target company to its shareholder company combined with the issuance, by that target company, of its shares to a third party or third parties. The ultimate result is a dilution of the shareholder company’s effective interest in the shares of the target company that does not involve a disposal of those shares by the shareholder company. The shareholder company ends up, after the implementation of this arrangement, with a lowered effective interest in the shares it holds in the target company without triggering the current anti-avoidance rules. This is because the current anti-avoidance rules are triggered when there is a disposal of shares while these new structures do not result in an ultimate disposal of the shares but a dilution of the effective interest in the shares of the target company.

Extract from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019 Draft Tax Bills

• The 2019 Budget Review included a legislative proposal under Annexure C to further strengthen the anti avoidance rules dealing with dividend stripping in order to curb the use of new tax structures being used by taxpayers to undermine the 2017 rules. To curb the use of these new structures, proposed amendments were included in the Draft TLAB and it was further proposed that these further strengthened rules would apply with effect from Budget Day(20February2019).

Comment:

The proposed rules are overly broad in their application. These rules have moved away from the original policy at the time that they were first inserted. This has resulted in a situation where any new share issue, no matter how small, would reduce the effective interest of an existing

shareholder in the target company, potentially triggering the rules even where there is absolutely no link between the share issue and the relevant extraordinary dividend. Consideration must be given to requiring a link between the extraordinary dividend and the issue of shares.

Response:

Not Accepted. The 2017 legislative amendments were necessary because the pre-2017anti avoidance rules were limited in their scope and were, as a result, being undermined by taxpayers. The pre-2017anti avoidance rules only applied where the shareholder company held more than 50 percent of the shares in the target company. This threshold was too high and did not focus on the ability of a shareholder company that wishes to dispose of shares in another company to significantly influence the decisions of whether a dividend will be distributed in respect of those shares to achieve the desired reduction of the value of those shares and its effective interest in the shares of the target company. Secondly, anti avoidance rules applied if there was a link between the funding of the subscription amount and the dividend declared. In this respect, the anti avoidance rules applied where such funding was provided for or guaranteed by the prospective purchaser of shares or a connected person in relation to a prospective purchaser. The link between the subscription price and the dividend made the pre-2017anti avoidance rules easy to circumvent as taxpayers broke the link by using funders other than the prospective purchaser or connected persons in relation to the prospective purchaser. Even more worrying was the fact that in cases where the target company had distributable reserves to fund the dividend with.

However, the following refinements are proposed in the 2019 Draft TLAB to help limit the application of the proposed anti-avoidance rules regarding dividend stripping to scenarios that pose the most risk to the fiscus:

Providing certainty regarding the use of the term “effective interest”

• Taxpayers have indicated in both their written submissions and during public hearing that the term “effective interest” needs to be clarified. More specifically, clarity is required as to whether taxpayers are required to assess changes in effective interest held by the shareholder company in a target company in the class of shares that the target company issues.

• Government is aware that taxpayers are already developing tax structures that will manipulate the use of different classes of shares to curb the currently proposed rules. It is Government’s position that the current proposed rules require taxpayers to do a “facts and circumstances” analysis when determining whether a shareholder company’s effective interest in a target company has been reduced. In the first instance, where an extraordinary dividend is paid and shares of the same class are issued, the effective interest test is applied by considering the effective percentage held before the share issue to that held after the shares issue. In the instance that an extraordinary dividend is paid in respect of a one class of shares and shares of a different class are issued by the target company, the reduction in the effective interest of the shareholder company must be considered with reference to the reduction of the value of that shareholder company’s interest in the target company across the different classes of shares.

• That being said, where possible and with regard to instances that Government considers the risk of using different classes of shares to avoid the 2019 proposed changes being used to avoid these proposed rules, limitations will be proposed.

Base cost in respect of deemed disposal

• In the instance that the proposed rules are triggered, the shareholder company must include the amount of extraordinary dividends received in its income, where the shares

are held as tradingstock, or as a capital gain, where the shares are held as a capital asset. However, there is no provision that permits the shareholder to claim a proportional amount of the cost of the shares as a deduction against the income or capital gain. In addition, interaction of the proposed rules with paragraph 19 of the Eighth Schedule result in a situation that when the shareholder company is subject to the inclusions as a result of the proposed rules, paragraph19 also denies that shareholder company the cost of the shares if those shares are subsequently disposed of.

• In this regard, it should be noted that the anti avoidance rules dealing with dividend stripping are meant to curb the use of tax structures to avoid tax ordinarily arising on the disposal of shares. As such, the anti-avoidance rules should achieve this by triggering a tax event (i.e. the inclusion of income or a capital gain) and encourage tax payers to rather enter into share disposal arrangements. As such, parity of the treatment of the cost of the shares between instances of actual share disposal and instances deemed disposal will not be provided for. However, in the instance that a shareholder company disposed of its shares in a target company subsequent to being subject to the anti avoidance rules dealing with dividend stripping in respect of a deemed disposal, changes are proposed to ensure that the cost of the shares may be used to deduct against the proceeds arising from that actual share disposal.

Extraordinary dividends arising in the course of or as part of a corporate reorganisation transaction

• Taxpayers have indicated that it is not entirely clear whether the proposed rules will apply in respect of extraordinary dividends that are paid in the course or as part of a reorganisation transactions. In this regard, consideration of various corporate reorganisation transactions will be considered and where there is no risk associated with their potential use by taxpayers to avoid the application of the anti avoidance rules dealing with dividend stripping, the relevant exclusions will be provided for.

95

COMPANIESExtraordinary dividend

Extraordinary dividend - Provided that a dividendin specie that was distributed in terms of a deferraltransaction must not be taken into account to theextent to which that distribution was made in termsof an unbundling transaction as defined in section46(1)(a) or a liquidation distribution as defined insection 47(1)(a);

Effective date – Dividends received or accrued on or after 30 October 2019

96

COMPANIESDeemed disposal rule• A shareholder company will, for purposes of the anti-

avoidance rules dealing with dividend stripping, be deemed to have disposed of its shares in the target company, if the target company issues shares to another party and after that issuance of shares, it is determined that the effective interest held by the shareholder company in the target company is reduced by reason of that issuance of shares. – In such an instance, the shareholder company will be deemed to

have disposed of a percentage of the shares it holds in the target company immediately after the share issue that results in a decrease in the effective interest it holds in the shares of the target company. The percentage envisaged is the percentage by which the effective interest held by the shareholder company in the target company has been reduced by as a result of the issuance of shares.

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97

COMPANIESEffective Date

Effective date – Deemed to have come intooperation on 20 February 2019 and apply inrespect of shares held by a company in anothercompany if the effective interest of thoseshares held by that company in that othercompany is reduced by reason of sharesissued by that other company, on or after 20February 2019 to a person other than thatcompany.

98

CLARIFICATION OF THE INTERACTION OF THE VALUE-SHIFTING RULES AND THE DEEMED EXPENDITURE INCURRAL RULES FOR ASSETS ACQUIRED IN EXCHANGE FOR THE ISSUE OF SHARES

Sections 40CA of the Act

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99

COMPANIESSection 40CA

The Act contains rules in section 24BA andsection 40CA aimed at preventing thetransfer of high value assets to a companyin return for low value shares issued by thecompany and the issuance of high valueshares for low value assets.

100

COMPANIESValue shifting rules

equal to the sum of the market value of theissued shares immediately after theacquisition of the asset in respect of the asset

Deemed expenditure incurred by a company thatacquires an asset in exchange for the issue of its ownshares

any deemed capital gain which arose ito the valueshifting rules in respect of the acquisition of thatasset.

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100

Background

Section 40CA provides that a company that acquires an asset in exchange for an issue of shares in itself is deemed to have incurred expenditure in respect of the acquisition of that asset that is equal to the market value of those shares immediately after the acquisition. This means that a company that acquires an asset in exchange for the issue of its shares is deemed to have a base cost in the case of capital asset or a cost of trading stock in the case of trading stock for that asset.

On the other hand, section 24BA provides that where a company acquires an asset from a person in exchange for an issue of shares by that company and the market value of the asset immediately before that disposal exceeds the market value of the shares immediately after that issue, the amount in excess is deemed to be a capital gain in respect of a disposal by that company of the shares and the base cost of the shares issued must be reduced in the hands of the person selling the asset by the amount of that excess. Further, where a company acquires an asset from a person in exchange for the issue of shares and the market value of the shares immediately after that issue exceeds the market value of that asset immediately before the disposal, the amount in excess is deemed to be a dividend that consists of a distribution of an asset in specie that is paid by the company on the date of that issue.

Reason for change:

Currently, the provisions of the Act do not adequately address the interaction of the above-mentioned rules. In particular, it is not clear if a company should adjust the deemed expenditure incurred in terms of section 40CA in respect of an asset acquired in exchange for the issue of its own shares with the amount of the capital gain triggered in terms of section 24BA. This lack of clarity results in potential double taxation. Potential double taxation will arise in the instance that the company subsequently disposes of the asset due to the fact that the company would have paid tax on the capital gain triggered by section 24BA which is currently not deemed to be expenditure incurred.


101


Company A

Issues shares R 100 MV

Asset Transfer: R 150 MV

102


Effective date – 1 January 2020 and apply inrespect of acquisitions made on or after that date.

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102

Example 1: Potential double taxation under current rules

Facts:

Company A acquires an asset with a market value of R150 from Person X and as consideration for the assets, Company A issues shares with a market value of R100 after the transaction.

Results:

In terms of ordinary principles, Person X has a base cost of R150 for the shares issued by Company A as he incurred a cost equal to the market value of his asset in order to acquire the shares. In terms of section 40CA, Company A is deemed to have a base cost of R100 for the assets (i.e. being the market value of the shares it issued immediately after the transaction).

Given the difference in value, section 24BA applies to the transaction. As a result, Company A is deemed to have a capital gain of R50 (i.e. the market value of the assets immediately before the transaction of R150 – the market value of the shares issued immediately they are issued of R100). In addition, Person X must reduce his base cost for the shares R50, therefore not allowing for a base cost increase for shares of a lower value.

This results in a situation where Company A holds assets with a market value of R150 in respect of which shares worth R100 and a capital gain of R50.


103

REDUCTION OF COST OR MARKET VALUE OF CERTAIN ASSETS

Section 23C

104

COMPANIESReduction of cost or market value of certain assets

• The amendment seeks to align the policyintention as outlined in the Regulation andclarify that VAT is to be included in the“determined value” used to calculate thefringe benefit arising in the employee’shands.

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104

105

CLARIFYING THE EXCLUSION FROM CLAIMING INTEREST DEDUCTION FOR DEBT FINANCE ACQUISITIONS FOR START-UP BUSINESSES

Section 24O of the Act

106

COMPANIESExclusion from claiming interest deduction

• The clarification of the exclusion of acquisitions of shares in companies that are not operating companies or controlling companies on the date of the acquisition of shares in an operating company seems to be more of a restatement of the current requirements for claiming the special interest deduction.– Section 24O of the Act explicitly provides that an

acquisition transaction envisages a situation where the controlling shares being acquired by a company that is not a part of the same group of companies as the company in which the shares are being acquired are shares in a company that, is on the date of that acquisition, either an operating company or a controlling company in relation to an operating company.

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Background

The Act contains special interest deduction rules in section 24O that make provision for companies to deduct interest in respect of interest-bearing debt used to acquire a direct or indirect controlling share interest in an operating company. The policy rationale for the special interest rules in section 24O was to discourage the use of multiple step debt push down structures used by taxpayers to obtain interest deductions in respect of debt used to acquire shares of income producing business. One of the requirements for these rules is that an operating company must be a company where at least 80 per cent of that company’s receipts and accruals constitute income as defined (i.e. gross receipts and accruals less receipts and accruals that are exempt for tax purposes) and that income must have been generated from its business of providing goods and services.

In 2015, changes were made in section 24O to align these rules with the underlying policy objective and to ensure that taxpayers could no longer claim the special interest deduction when the value of the shares of the holding company of an operating company was largely derived from non-income producing fellow subsidiaries of an income producing operating company. As a result, share interests that qualify for the special interest deduction were limited to shares whose value was largely determined with reference to the value of shares of operating companies where at least 90 per cent of their value was derived from an income producing operating company.

Reasons for change

It has come to Government’s attention that there are conflicting views regarding the application of these rules and that some taxpayers intend on claiming the special interest deduction in respect of newly established companies. For example, a prospective company shareholder would raise interest-bearing debt to capitalise a newly established company. In turn, the newly established company uses the funding from its now shareholder to acquire income producing assets and embarks on its trade. As a result, the shareholder then claims a special interest deduction in respect of the interest incurred in respect of the interest-bearing debt used to capitalise the newly established company when it subsequently generates income and meets the definition of an operating company (at least 80 per cent of a company’s receipts and accruals constitutes income).

The above-mentioned view goes against the policy rationale for the introduction of the special interest deduction. The special interest deduction is meant to provide for a deduction where interest bearing debt is used to acquire shares in established companies with income producing assets that already generate high levels of income.

Consequently, in the Final Response Document on Taxation Laws Amendment Bill, 2018 and Tax Administration Laws Amendment Bill, 2018 (dated 17 January 2019 on page 19), Government stated that the current provisions of the special interest deduction do not support the deduction of interest on interest-bearing debt used to capitalise newly established companies that upon capitalisation do not qualify as operating companies as yet. In addition, the definition of an “acquisition transaction” envisages an acquisition of a controlling interest in a company that is, upon acquisition, already an operating company or a controlling company in relation to an operating company.

Proposal

The proposed clarification of the exclusion of acquisitions of shares in companies that are not operating companies or controlling companies on the date of the acquisition of shares in an operating company seems to be more of a restatement of the current requirements for claiming the special interest deduction. It is, nevertheless, still proposed that changes be made in

section 24O of the Act to explicitly provide that an acquisition transaction envisages a situation where the controlling shares being acquired by a company that is not a part of the same group of companies as the company in which the shares are being acquired are shares in a company that, is on the date of that acquisition, either an operating company or a controlling company in relation to an operating company.

Effective date

The proposed amendments are deemed to have come on 1 January 2019 and apply in respect of interest incurred during years of assessment ending on or after that date.


Amending the special interest deduction in respect of share acquisitions funded by debt to allow for deductions after an unbundling transaction

The Act contains special interest deduction rules in section 24O that make provision for companies to deduct interest in respect of interest-bearing debt used to acquire a director in direct controlling share interest in an operating company. In some instances, a company may be unable to acquire a direct controlling interest in an operating company, but instead may acquire an indirect controlling interest by acquiring the shares in a controlling holding company in relation to that operating company. Legislative amendments were included in the Draft TLAB to allow taxpayers to continue utilising the special interest deduction in instances where an unbundling transaction involving a company (that previously held an indirect controlling share interest in a holding company) results in a direct controlling share interest in an operating company.

Comment:

It may happen that an indirect shareholding in an operating company is transferred to the acquiring company rather than a direct shareholding, continuation of the deduction should also be provided for in such instances.

Response:

Not accepted. The policy rationale for the introduction of the special interest deduction in 2012 was to discourage the use of multiple step debt pushdown structures that resulted in the acquisition of productive assets. The decision to allow taxpayers to be able to carry on claiming the special interest deduction after acquiring a direct shareholding by way of an unbundling was to encourage the acquisition of the shares of a productive company rather than a holding company in relation to a productive company, thus have a more direct interest in the productive assets. As such, no further concession is being considered in respect of indirect shareholdings.

Extracted from 2019 Presentation to SCOF and SECoF on the draft response to the 2019 Draft Tax Bills

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Example:• A prospective company shareholder would

raise interest-bearing debt to capitalise anewly established company.

• In turn, the newly established company usesthe funding from its now shareholder toacquire income producing assets andembarks on its trade.

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Result: • The shareholder then claims a special

interest deduction in respect of the interestincurred in respect of the interest-bearingdebt used to capitalise the newly establishedcompany when it subsequently generatesincome and meets the definition of anoperating company (at least 80 per cent of acompany’s receipts and accruals constitutesincome).

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AMENDING THE SPECIAL INTEREST DEDUCTION RULES IN RESPECT OF SHARE ACQUISITIONS FUNDED BY DEBT TO ALLOW FOR DEDUCTIONS AFTER AN UNBUNDLING TRANSACTION

Section 24O of the Act

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COMPANIESShare acquisitions

The legislation now clearly state that wherean unbundling transaction results in acompany holding a direct controlling shareinterest in an operating company, thatcompany may continue to claim thespecial interest deduction.

Effective date – 1 January 2019 and apply in respect of YOA ending on or after that date.

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Background

Since the introduction of section 24O in 2012, a company may qualify for a deduction in respect of interest it incurs on an interest-bearing debt that it issues, assumes or uses to fund an acquisition of a direct controlling share interest in an operating company or an indirect controlling share interest in an operating company held through a controlling group company in relation to that operating company. The companies involved must, however, form part of a domestic group of companies. The acquiring company can continue to claim the special interest deduction as long as it also remains within the same domestic group of companies as that operating company or that holding company in relation to that operating company.

Reasons for change

In some instances, a company may be unable to acquire a direct controlling interest in an operating company but may be able to acquire only an indirect controlling interest by acquiring the shares in a controlling group company in relation to that operating company. The interest incurred in respect of the debt used to fund the acquisition of the shares in the controlling group company will be deductible if the acquisition meets requirements of section 24O. It is uncertain, however, if that company may continue to claim the deduction in respect of such interest should the controlling group company unbundle the shares it holds in the operating company to that company, i.e. if the indirect controlling interest acquired by that company in the operating company is in effect converted to a direct controlling interest in the operating company.

Taxpayers have submitted that certainty should be provided in such an instance the company can still claim a deduction in respect of the interest incurred on the debt as it would in any event have qualified for a deduction had it initially acquired a direct controlling interest in the operating company. Furthermore, following an unbundling there will no longer be any concerns about an indirect shareholding whose value may not be significantly derived from the value of an operating company.


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COMPANIESShare acquisitions

Section 24O will also apply where directshareholding was now acquired by way ofs 46 or s 47 transactions.

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CLARIFYING THE TAX TREATMENT OF TRANSFER OF INTEREST-BEARING INSTRUMENTS IN TERMS OF CORPORATE REORGANISATIONS

Sections 24J and 41 of the Act

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COMPANIESInterest Bearing Instruments

To ensure accrued interest and a changein market value of an instrument as a resultof changes in market interest rates arereflected in the taxable income of thetransferor of an instrument, the corporaterules does not override the application ofsection 24J of the Act.

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COMPANIESInterest Bearing Instruments


As a result, the transferor will realise anadjusted gain or adjusted loss on transfer ofan interest-bearing instrument in terms ofsection 24J of the Act despite transferring theseinterest bearing instruments in terms of thecorporate rules.

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Background

The Act contains specific provisions in section 24J that regulates the incurral and accrual of interest in respect of “instruments”. In this respect, section 24J defines the term instrument to include "any interest-bearing arrangement or debt". In the event an “instrument” is disposed of, section 24J(4) of the Act requires the holder of an instrument to account for an adjusted gain or adjusted loss on transfer or redemption of an instrument in the year of assessment during which the instrument is transferred or redeemed.

The adjusted gain or adjusted loss on the transfer of an instrument for the holder of an instrument equals the “transfer price” of such instrument plus any payments received by the holder during the accrual period in which it is transferred less the “adjusted initial amount” at the beginning of that accrual period less the accrual amount for that accrual period less payments made by the holder during that period. The “transfer price” is defined in section 24J of the Act as “the market value of the consideration payable or receivable, as the case may be, for the transfer of such instrument as determined on the date on which that instrument is transferred.”

Sections 42, 44, 45 and 47 of the Act provide for the deferral of tax when assets are moved between companies forming part of the same ‘group of companies’, as defined in section 41 of the Act. However, when the transferor company disposes of an interest bearing instrument, those sections deem a disposal of the interest bearing instrument to be an amount equal to the base cost of such an interest bearing instrument or the amount taken into account in terms of section 11(a) or section 22(1) or (2) of the Act.

Reasons for change

As stated above that the Act contains corporate reorganisation rules aimed at providing tax neutral transfer of assets between companies that form part of the same group of companies. However, the current corporate reorganisation rules do not specifically address the interaction of the definition of “transfer price” in section 24J of the Act which is equal to market value as stated above with the deemed proceeds prescribed by the corporate reorganisation rules of the Act which is equal to the base cost of such an asset or the amount taken into account in terms of section 11(a) or section 22(1) or (2) of the Act.


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CLARIFYING THE TAX TREATMENT OF TRANSFER OF EXCHANGE ITEMS IN TERMS OF CORPORATE REORGANISATIONS

Sections 24I and 41 of the Act

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COMPANIESTransfer of exchange ito corporate rules

In order to clarify the interaction between corporatereorganisation rules and provision governing theinclusion and deduction of exchange gains orexchange losses amendments were made in thecorporate reorganisation rules to ensure that whenan exchange item is transferred, the unrealisedand deferred exchange differences on thatexchange item should be realised and is notdeferred.

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Background

A. Foreign exchange differences

A taxpayer may carry out transactions denominated in a currency other the South African Rand (i.e. a foreign currency). Currencies, including the South African Rand, are volatile and as a result, the price or amount for which the currency of one country can be exchanged for another country's currency, referred to as an exchange rate, fluctuates. For tax compliance purposes, a taxpayer must reflect the transactions entered into by that taxpayer in South African Rands and therefore must translate the foreign currency amounts to South African Rands. When currencies are translated from one to the other, exchange differences (either a gain or loss) will arise depending of the performance of the South African Rand in relation to that of the foreign currency that denominated a taxpayer’s transaction.

Section 24I of the Act determines the exchange differences (foreign exchange gains and losses) in respect of exchange items that must be included in or deducted from a taxpayer’s income.

These differences are determined at the end of each year of assessment or on the date that exchange item is realised or transferred. However, in the instance of differences in respect of exchange items between connected parties and companies that form part of the same group of companies, there is a deferral of inclusions and/or deductions in respect exchange differences until the exchange item is realised.

B. Corporate reorganisations

The Act contains corporate reorganisation rules that make provision for roll over relief in respect of the transfer of assets and the assumption of qualifying debt between taxpayers. This, therefore, includes assets or liabilities that may be denominated in foreign currency. Furthermore, for purposes of applying the roll-over provisions, currently the provisions governing the corporate reorganisation rules override (unless specifically indicated to the contrary under those provisions) the other provisions of the Act.

Reasons for change

At issue is that the current corporate reorganisation rules do not provide clarity on the interaction of these rules and the realisation of exchange gains or exchange losses in respect exchange items that are transferred under a reorganisation transaction.

There are conflicting views on whether unrealised and deferred exchange differences on exchange items transferred in terms of corporate reorganisation rules should be deferred under corporate reorganisation rules or whether an exchange difference should be included or deducted (as the case may be) when an exchange item is transferred in terms of a reorganisation rule.

Proposal

In order to clarify the interaction between corporate reorganisation rules and provision governing the inclusion and deduction of exchange gains or exchange losses it is proposed amendments be made in the corporate reorganisation rules to ensure that when an exchange item is transferred, the unrealised and deferred exchange differences on that exchange item should be realised and is not deferred. As a point of departure, these changes are necessary as currently section 41(2) provides that the corporate reorganisation rules override all other provisions of the Act. As such, is it proposed that section 41(2) should be amended to clarify that the corporate reorganisation rules do not override the provisions of section 24I in respect of triggering gains or losses upon the realisation or transfer of an exchange item.


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• As a point of departure, these changes are necessaryas currently section 41(2) provides that the corporatereorganisation rules override all other provisions of theAct.

• As such, section 41(2) were amended to clarify that thecorporate reorganisation rules do not override theprovisions of section 24I in respect of triggering gains orlosses upon the realisation or transfer of an exchangeitem.

• The proposed interaction between corporatereorganisation rules and section 24I of the Act can beillustrated with the following example:

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Facts:

Company A advanced a loan of $100 to foreign subsidiary company B during year of assessment 1 when X$1:R1. The loan was not hedged and was disclosed as a long-term loan for financial reporting purposes. The following table details the sequence of events.

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Year 1:Loan advanced by Co A to foreign SubCo B $ 100Transaction spot 1Year-End spot 5

Year 2:Transfer of loan to Local Subco CTransaction spot 6Year-End spot 7

Year 3:Settlement of loanRealisation spot 10

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Company A Foreign Sub B

Year 1 Exchange difference on translation ito 24I(3)(a)

400

Deferral in terms s24I(10A)(a)

(400)

Year 2 Exchange difference on realisation ito 24I(3)(a)

100

Exchange difference on realisation ito 24I(10A)(b)

400

Exchange difference on translation ito 24I(3)(a)

100

Deferral in terms s24I(10A)(a)

(100)

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Company A Foreign Sub B

Year 3 Exchange difference on realisation ito 24I (3)(a)

300

Exchange difference on realisation ito 24I(10A)(b)

100

In summary, the seller is taxed on all previous exchange differences upon realisation of the exchange item, whilst the purchaser may only defer exchange differences from the date of acquisition of the exchange item.


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HARMONISING THE TIMING OF DEGROUPING CHARGE PROVISIONS FOR INTRA-GROUP TRANSACTIONS AND CONTROLLED FOREIGN COMPANY RULES

Sections 9D, 9H and 45 of the Act

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COMPANIESIntra-group transactions and CFC rules

• In order to address the misalignment,changes were made in the tax legislation andthe capital gain as the exit charge for intra-group transactions in the case of a foreigncompany ceasing to be a controlled foreigncompany be triggered on the date before theday the transferee company ceases to be acontrolled foreign company.

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COMPANIESIntra-group transactions and CFC rules

• The changes will enable the capital gain to be taken into account in the net income to be imputed to residents when a foreign company ceases to be a CFC.


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Background

A. Controlled foreign company rules

A Controlled Foreign Company (CFC) is defined in section 9D of the Act as any foreign company if more than 50 per cent of the total participation rights or voting rights in that company are directly or indirectly held or exercisable by one or more persons that are residents. In 2017, changes were made to the definition of a CFC in section 9D of the Act to regard as a CFC as any foreign company where the financial results of that foreign company are reflected in the consolidated financial statements of any company that is a resident as required under International Financial Reporting Standards (IFRS) 10.

Section 9D(2)(b) of the Act makes provision for the determination of a CFC income when a foreign company ceases to be a CFC. When a foreign company ceases to be a CFC at any stage during a year of assessment before the last day of the foreign tax year of that foreign company, section 9D(2)(b)(ii) of the Act determines that an amount equal to a proportional amount of the net income of the company must be included in income of residents. The foreign tax year is stated to end on the day the foreign company ceases to be a CFC and the proportional amount is calculated from the first day of the foreign tax year of the CFC to the day before the company ceases to be a CFC.

B. Ceasing to be a controlled foreign company

When a foreign company ceases to be a CFC, section 9H(3) of the Act triggers an exit event for a foreign company that ceases to be a CFC. The CFC is deemed to have disposed each of its assets on the date immediately before the day on which that foreign company ceased to be a CFC and reacquired those assets on the day that the foreign company ceased to be a CFC. Furthermore, the foreign tax year of a foreign company that ceases to be a CFC is deemed to have ended on the date immediately before the day it ceased to be a CFC and the next foreign tax year is deemed to have commenced on the day it ceased to be a CFC.

C. Exiting the group of companies in terms of corporate reorganisation rules

Section 45 of the Act provides for the deferral of tax when assets are transferred between companies forming part of the same ‘group of companies’, as defined. However, whenever the transferee company exits the group of companies in relation to the transferor, but retains an asset acquired within the last six years under an intra-group transaction, a deemed capital gain is determined for the asset. This is commonly referred to as a de-grouping charge. This de-grouping charge could also be triggered for an asset that constitutes an equity share if the transferee ceases to be a CFC in terms of section 45(4)(bA)(i)(bb) of the Act. In this scenario, the capital gain is taken into account in the determination of the net income of the foreign company in its year of assessment when it ceases to be a CFC. That would be the day after the foreign tax year ends in terms of section 9H(3)(d)(i) and the day after the proportional amount of the net income is determined in terms of section 9D(2)(b)(ii).

Reasons for change

At issue is the misalignment in the timing of the rules for the determination of net income of a CFC under sections 9D, 9H and 45 of the Act due to the fact that the de-grouping charge provisions in the corporate reorganisation rules deem a capital gain to arise in the year of assessment in which a de-grouping takes place. However, the provisions for determining the net income of CFCs and the provisions for ceasing to be CFCs, when read together, determine that the year of assessment in which the ‘de-grouping event occurs’ commences and ends on the same day but the period for which the net income should be determined ended on the day before the foreign company ceases to be a CFC.


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AMENDING THE CORPORATE REORGANISATION RULES TO CATER FOR COMPANY DEREGISTRATION BY OPERATIONAL LAW

Section 41 of the Act

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COMPANIESCompany deregistration by operational law

• To ensure that statutory amalgamations andmergers are not unfairly excluded fromqualifying for tax deferral, the current list ofsteps taken for liquidation, winding-up andderegistration were amended by includinginstances where companies lodge a notice tothe Commissioner as contemplated in section116 of the Companies Act.

Effective date – 1 January 2020 and apply in respect of acquisitions made on or after that date.

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Background

The Act contains corporate reorganisation rules that make provision for roll over relief in respect of the transfer of assets between companies forming part of the same economic unit as well as their natural person shareholders. Further, in order to qualify for the roll over relief, the corporate reorganisation rules contain certain requirements and anti-avoidance provisions that taxpayers must adhere to. With regard to corporate reorganisation rules dealing with amalgamation transactions and transactions relating to liquidation, winding-up and deregistration, these rules currently contain a requirement for the liquidation, winding-up or deregistration of one of the parties to these transactions.

In the case of an amalgamation transaction, these rules require that an amalgamated company (i.e. the company that disposes of all its asset to another company in respect of an amalgamation transaction) must be terminated soon after that amalgamation transaction. In the case of a transaction relating to liquidation, winding-up and deregistration, these rules require that a liquidation company (i.e. a company that disposes of all its assets to its shareholders in anticipation of or in the course of its liquidation, winding-up or deregistration) should also be terminated soon after that transaction.

Further, these corporate reorganisation rules contain measures that disqualify taxpayers from benefiting from roll over relief if the necessary steps to liquidate, wind-up of register an amalgamated company or a liquidating company have not been taken within 36 months of the transaction. However, a longer period than the above-mentioned 36 months may be allowed if the SARS Commissioner determines that such longer period is justified as envisaged in the Act.

Reasons for change

In the case of two of the corporate reorganisation rules (namely, “amalgamation transactions” and “transactions relating to liquidation, winding up and deregistration”), the Act currently contains a requirement for the liquidation, winding-up or deregistration of one of the parties to these transactions. In particular, it is required that an amalgamated company (i.e. the company that disposes of all its asset to another company in terms of an amalgamation transaction) must be terminated soon after that amalgamation transaction. In the case of a transaction relating to liquidation, winding-up and deregistration, it is also required that a liquidation company (i.e. a company that disposes of all its assets to its shareholders in anticipation of or in the course of its liquidation, winding-up or deregistration) should also be terminated soon after that transaction.

In order to ensure that taxpayers comply with the requirement regarding the termination of an amalgamated company and a liquidating company, the income tax act contains rules that disqualify taxpayers from benefiting from tax deferral if the necessary steps to liquidate, wind-up or deregister an amalgamated company or a liquidating company have not been taken within 36 months of the transaction. A longer period may however, be allowed if the Commissioner of the South African Revenue Service determines that a longer period is justified. In this regard, the envisaged steps are specifically listed in the tax legislation.

In this respect, section 116 of the Companies Act, No.71 of 2008 (the Companies Act), requires that a notice detailing the amalgamation or merger must be prepared in the prescribed manner and form after a resolution approving an amalgamation or merger has been adopted by each company that is a party to that arrangement. Furthermore, it is required that the notice should be furnished to the Companies and Intellectual Property Commission (the Commission). Once the Commission has received this notice, section 116(5)(b) empowers the Commission to deregister any of the amalgamating or merging companies that did not survive the amalgamation or merger. However, companies which deregister in terms of section

116(5)(b) of the Companies Act, pursuant to a statutory amalgamation or merger have not been catered for in the list of steps contained in the Act.


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REFINING THE INTERACTION BETWEEN THE ANTI-AVOIDANCE PROVISIONS FOR INTRA-GROUP TRANSACTIONS

Section 45(5)(b)

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COMPANIESInteraction between the anti-avoidance provisions for intra-group transactions

Changes were made to ensure that the zerobase cost rule is not triggered subsequent toa de-grouping charge.

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Refining the interaction between the anti-avoidance provisions for intra-group transactions

Section 45 which provides for tax deferral (i.e.roll over relief) when companies transfer assets between group companies also contains multiple anti avoidance rules to ensure that they are not abused by taxpayers. In Annexure C of the 2019 Budget Review, Government proposed that it would make legislative changes in the Income Tax Act to clarify how the multiple anti-avoidance rules applicable to intra-group transactions should interact with each other in order to ensure that they do not give rise to double taxation. During internal consultative meetings on the drafting of the Draft TLAB, the potential for double taxation was regarded as an interpretation issue and that legislative intervention is not required it could be clarified by way of interpretation guidelines and no changes were proposed in the Draft TLAB.

Comment:

It is understood that a de-grouping should only be accounted for once and cannot be triggered again by the operation of another anti-avoidance rule. However, the anti-avoidance rule applicable where assets are transferred on loan account between connected person which provides that the loan receivable has a zero-base cost does not interact well with the de-grouping charge. Should the de-grouping charge subsequently be triggered, and the tax deferral be reversed, there is no need for the zero base cost rule to still apply. The degrouping charge should be the final charge as it reverses the tax deferral.

Response:

Accepted. Legislative changes will be made to ensure that the zero base cost rule is not triggered subsequent to a de-grouping charge.

Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019 Draft Tax Bills

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Financial Institutions and Products

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CLARIFICATION OF THE DEFINITION OF RENTAL INCOME IN A REIT TAX REGIME IN RESPECT OF FOREIGN EXCHANGE DIFFERENCES

Section 25BB of the Act

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FINANCIAL INSTITUTIONS AND PRODUCTSRental income in a REIT tax regime: Foreign Exchange Differences

• Changes were made to the definition of “rental income” in section 25BB of the Act to include any foreign exchange gains and deduct foreign exchange foreign exchange losses arising in respect of an “exchange item” relating to a “rental income” of a REIT or a controlled company.

Effective date – 1 January 2020 and apply in respect of YOA commencing on or after that date.

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CLARIFICATION OF THE INTERACTION BETWEEN CORPORATE REORGANISATION RULES AND REITS TAX REGIME

Sections 25BB, 42, 44, 45 and 47 the Act

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Background

The special tax dispensation of a listed company that is a Real Estate Investment Trusts (“REIT”) or a company that is a subsidiary of a REIT (“controlled company”) makes provision for a flow-through principle in respect of income and capital gains to be taxed solely in the hands of the investor and not in the hands of REIT or a controlled company. In turn, a REIT or a controlled company may claim distributions to its investors as a deduction against its income. This deduction may only be claimed if a distribution is a “qualifying distribution” that is more than 75 per cent of the gross income of a REIT or a controlled company consisting of “rental income”.

The term “rental income” is defined in section 25BB(1) of the Act to mean any of the following amounts received by or accrued to a REIT or a controlled company:

a) an amount received or accrued for the use of immovable property, including any penalty or interest charged on the late payment of such amount;

b) any dividend, other than a share buy-back contemplated in paragraph (b) of the definition of “dividend” in section 1(1) of the Act, from a company that is a REIT at the time of the distribution of that dividend;

c) a qualifying distribution from a company that is a controlled company at the time of that distribution;

d) a dividend or foreign dividend from a company that is a property company at the time of that distribution;

e) any amount recovered or recouped under section 8(4) in respect of an amount of an allowance previously deducted under section 11(g), 13, 13bis, 13ter, 13quat, 13quin or 13sex of the Act.

Reasons for change

In order for REITs or controlled companies to diversify and multiply returns for its investors, many South African REITs or controlled companies have embarked on investments in real estate outside South Africa. In order to hedge its exposure to foreign currency fluctuations, as well as secure stable returns to investors in respect of its foreign real estate investments, a REIT or a controlled company may enter into forward exchange contracts (FEC).

At issue is the current tax treatment of any unrealised exchange gains or losses determined on the above-mentioned FECs of a REIT or a controlled company. Any unrealised exchange gains or losses arising from the above-mentioned FECs of a REIT or a controlled company are in terms of paragraph (n) of the definition of gross income in section 1 and in section 24I(3) of the Act taken into account in determining the taxable income of such REIT or such controlled company. This implies that unrealised exchange gains or losses arising from the above-mentioned FECs of a REIT or a controlled company do not qualify as “rental income” of a REIT or a controlled company, even though they are incurred solely for the earning of such “rental income”.


Clarification of the definition of rental income in a REIT tax regime in respect of foreign exchange differences

The special tax dispensation for listed and regulated property companies (REITs) makes provision for an exemption for REITs of income and capital gains and for dividends to be taxed in the hands of the investor and not in the REITs. In turn REITs may claim distributions to

investors as a deduction against its income. This deduction may only be claimed if the distribution is a “qualifying distribution” that is, if more than 75 percent of the gross income of the REIT consists of “rental income”. At issue is the fact that the definition of “rental income” does not include unrealised exchange gains or losses arising from the forward exchange contracts entered into by a REITs to hedge its exposure to exchange differences in respect of rental income. In order to address this, it is proposed that a REIT or controlled company include foreign exchange gains and deduct foreign exchange losses on exchange items in the definition of “rental income”.

Comment:

The proposed amendment is welcomed however inclusion of exchange differences in rental income should be extended to all exchange differences of a REIT or controlled company which directly or indirectly relate to REIT activities.

Response:

Not accepted. The proposed amendment is intended to assist taxpayers and will for now only cater for foreign exchange differences relating to “exchange items” that hedge amounts defined as “rental income”.

Clarification of the definition of rental income in a REIT tax regime in respect of foreign exchange differences

Comment:

The proposed amendment should be amended to include foreign exchange gains only and disregard foreign exchange losses because reducing the “rental income” by foreign exchange losses will make it harder for the REITs or controlled company to reach the 75 percent of“ gross income” target needed to make a “qualifying distribution”.

Response:

Accepted. Changes will be made in the 2019 Draft TLAB to exclude foreign exchange losses when determining a “qualifying distribution” for the purposes of section 25BB.


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FINANCIAL INSTITUTIONS AND PRODUCTS Corporate reorganisation rules and REITS tax regime

In order to ensure that the rules for the REITstax regime are aligned with the corporatereorganisation rules, amendments were madein the tax legislation so that corporatereorganisation rules do not give rise tocapital gains tax on disposal of assetswithin 18 months after their acquisition by aREIT or controlled company under a corporatereorganisation rule.


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FINANCIAL INSTITUTIONS AND PRODUCTS Corporate reorganisation rules and REITS tax regime

The following assets will not be subject to thecorporate rule anti-avoidance charges as it isexcluded from CGT in the REIT per the normalREIT rules:

– immovable property– a share or a linked unit in a company that is a

REIT on the date of disposal, or– a share in a company that is a controlled

company on the date of disposal.

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Background

The Real Estate Investment Trusts (REITs) tax regime, allows for the tax-free earning of rental income and capital gains a REIT. The investor is taxed on dividends declared by the REIT and also on gains from the disposal of shares in the REIT. In order to enable this tax treatment under the REIT regime, the REIT is allowed to claim distributions to its investors as a deduction against its income. This deduction may only be claimed if a distribution is a “qualifying distribution” that is, more than 75 per cent of the gross income of the REIT consists of rental income including income from property entities.

Further section 25BB(5) of the REITs tax regime in the Act makes provision for a capital gains tax exemption in respect of the following disposals by a REIT or a controlled company:

a. immovable property of a company that is a REIT or controlled company at the time of disposal;

b. a share or a linked unit in a company that is a REIT at the time of that disposal; or

c. a share or a linked unit in a company that is a property company at the time of that disposal.

A disposal by a REIT or controlled company of any asset that is not listed above as envisaged in section 25BB(5) of the REITs tax regime is subject to normal tax, including capital gains tax if applicable.

In turn, the Act contains corporate reorganisation rules aimed at providing for the tax neutral transfer of assets between companies that form part of the same group of companies, provided certain requirements are met. For example, when a transferor disposes of an allowance asset and the transferee company, in turn, acquires that allowance asset as such, the corporate reorganisation rules allow for the tax neutral transfer of such allowance asset. However, the corporate reorganisation rules make provision for certain anti-avoidance measures to be triggered, for example, the rolled over capital gain to be added back to the taxable income of the company, if a company that acquired the asset, disposes of such asset within a period of 18 months of acquisition.

Reasons for change

At issue is the interaction of the above-mentioned anti-avoidance measures contained in the corporate reorganisation rules and the provisions of section 25BB(5) of the REIT tax regime.

In certain instances if the immovable property is disposed of by a REIT within 18 months, the anti-avoidance measures contained in the corporate reorganisation rules require that the rolled over capital gain in respect of such immovable property be added to the taxable capital gain of the REIT for the year of assessment in which the disposal of the immovable property takes place. On the other hand, section 25BB(5) of the REITs tax regime provides for capital gains exemption in respect of disposals of certain immovable property by a REIT. The anti-avoidance measures contained in the corporate reorganisation rules when read with the provisions of section 25BB(5) of the REITs tax regime create a discrepancy because in general, corporate reorganisation rules override the provisions for the taxation of REITs in section 25BB of the Act.


135

CONSEQUENTIAL AMENDMENTS TO THE TAX TREATMENT OF FOREIGN REINSURANCE BUSINESS OPERATING A BRANCH IN SOUTH AFRICA

Sections 28 and 29A of the Act

136

FINANCIAL INSTITUTIONS AND PRODUCTSForeign reinsuranceIn order to provide clarification on the tax treatment of a foreign reinsurerthat is a long-term insurer that conducts insurance business through abranch in South Africa and falls under the ambit of section 28 of the Act,the following changes were made in the Act:

New section 28(3) of the Act• A new subsection be introduced in section 28 of the Act that allows a

foreign reinsurer that is a long-term that conducts insurance businessthrough a branch in South Africa to deduct insurance liabilities basedon the concept of “adjusted IFRS value” as used in section 29A ofthe Act. This will have the effect that insurance liabilities will bedetermined net of negative liabilities and the other adjustments undersection 29A will create alignment with the taxation of domestic insurersthat are conducting the same type of business than the foreign insurerthrough its South African branch.

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136

Background

The Insurance Act No. 18 of 2017 (the Insurance Act) which was promulgated on 18 January 2018 is aimed at replacing and/or consolidating substantial parts of the Long-term Insurance Act and the Short-term Insurance Act. The Insurance Act also makes provision for foreign reinsurers to operate a reinsurance business in South Africa through a branch, provided that the foreign reinsurer is granted a license, establishes a representative office as well as a trust in South Africa.

Consequently, in 2017, changes were made in section 28 of the Act, dealing with tax treatment of short term insurance business. These changes made provision for a foreign reinsurer that is a long-term or short-term that conducts insurance business through a branch of that foreign reinsurer as envisaged in the Insurance Act to be deemed as a short-term insurer for purposes of the Act.

The above-mentioned 2017 changes in the Act follow changes that were made in the Act in 2015 and 2016, as a result of introduction of Solvency Assessment and Management (SAM) Framework for a short-term insurer and long-term insurer.

With regard to short-term insurer, the 2015 amendments to section 28(3) of the Act made provision for a short-term insurer to claim deductions in terms of this subsection that is equal to the sum of liabilities on investments contracts relating to short-term insurance business in accordance with International Financial Reporting Standards (IFRS) and amounts recognised as insurance liabilities in accordance with IFRS relating to premiums and claims reduced by the amounts recognised in accordance with IFRS in respect of amounts recoverable under policies of reinsurance and further reduced by deferred acquisition cost.

However, with regard to long-term insurers, the 2016 changes made to section 29A of the Act made provision for the following: (i) introduction of a new definition of value of liabilities, (ii) introduction of a new definition of adjusted IFRS value, as well as (iii) transitional rules aimed at prescribing a phasing in amount and the method and period of phasing in.

Reasons for change

At issue is whether the 2017 changes to section 28 of the Act making provision for a foreign reinsurer that is a long-term insurer that conducts insurance business through a branch of that foreign reinsurer as envisaged in the Insurance Act to fall under the ambit of section 28 also changed the nature of taxation of a foreign reinsurer that is regarded as a long-term insurer in terms of section 29A of the Act.

In particular, it is not clear which of the IFRS liabilities in a long-term insurance business conducted through a branch of a foreign insurer would be allowed as a deduction in terms of section 28(3) of the Act. Further, section 28(3) of the Act due to the fact that a deduction is only allowed for the amount of insurance liabilities recognised in accordance with IFRS, relating to “premiums” and “claims”.


137

FINANCIAL INSTITUTIONS AND PRODUCTSForeign reinsurance

B. Section 29A of the Act • In addition, it is proposed that changes be

made in section 29A of the Act to clarifythat insurance business conducted by anon-resident reinsurer through a SouthAfrican branch must be taxed only in termsof section 28 of the Act.


138

REFINEMENT OF THE PHASING-IN TRANSITIONAL RULES FOR LONG-TERM INSURERS

Section 29A of the Act

137

138

139

FINANCIAL INSTITUTIONS AND PRODUCTSTransition rules

• Cessation rules were introduced to accelerate the phasing-in of the new IFRS valuation methodology for long-term insurers ceasing to conduct long-term insurance business during the phase-in period of six years.


140

Incentives

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Background

Before 2016, the taxation method for determining taxable profits of a long-term insurer in section 29A of the Act was based on transfers from the Untaxed Policyholder Fund (UPF), Individual Policyholder Fund (IPF), Company Policyholder Fund (CPF) and Risk Policy Fund (RPF) to the Corporate capital Fund (CF). The taxable transfers were determined as the difference between the market value of the assets allocated to the policyholder funds and the value of the liabilities of these funds. The value of liabilities was calculated on the basis determined by the Chief Actuary of the Financial Services Board (FSB) in consultation with the Commissioner of SARS.

In 2016, amendments were made in section 29A of the Act, regarding the tax valuation method for long-term insurers due to the introduction of Solvency Assessment and Management Framework (SAM). These amendments included the following:

a. definition of “value of liabilities”;

b. definition of “adjusted IFRS value”;

c. transitional rules: “phasing-in amount” and period of phasing-in

In particular, the transitional rules dealing with the “phasing-in amount and a phasing-in period” of six years were introduced as an interim measure aimed at stabilising tax collections by SARS and reducing the financial impact on certain long-term insurers due to these regulatory proposed changes. The “phasing-in amount” is the fixed amount representing the difference relating to policies allocated to a fund between the liabilities for tax purposes and the liability disclosed in the insurer’s published audited annual financial statements for 2017 adjusted to the manner of disclosure and reporting applied in 2015. The “phasing-in amount” is applied by including a reducing amount in the calculation of adjusted IFRS value over a period of six years for years of assessment ending after June 2018.

Reasons for change

At issue is the fact that unlike other phasing-in provisions available in the Act, the current phasing-in transitional rules for long-term insurers in section 29A of the Act do not address the treatment of any portion of the “phasing-in amount” not yet phased-in, if the taxpayer ceases to be in the business of long-term insurer during the six-year period.


141

PBO'S AND RECREATIONAL CLUBS

Sections 30 and 30A of Income Tax Act

142

PBO’s and recreational clubs

PBO’s or recreational clubs seekingretrospective approval as an exempt entityshall be granted such approval, which shallremain at the Commissioner’s discretion,subject to meeting certain additional criteria.

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The Act currently affords the Commissioner the discretion to approve an organisation as a public benefit organisation (PBO) (in terms of section 30(3B) or recreational club (in terms of section 30A(4) retrospectively. Once approved as a PBO or recreational club, the receipts and accruals of such entity are exempt from income tax provided that certain provisions in section 10 are met. In the 2019 Draft TLAB, changes were made in the Act to delete sections 30(3B) and 30A(4) of the Act and to remove obsolete transitional measures initially introduced to provide organisations that were exempt from the Act under the repealed legislation the opportunity to re-apply under section 30 and section 30A of the Act. Organisations were granted until December 2004 to re-apply under section 30 and until December 2010 to reapply under section 30A of the Act.

Comment:

The deletion of the provisions allowing the Commissioner to retrospectively approve a PBO or recreational club as an exempt entity will have adverse financial effects for such entities due to the limited resources available to such entities makes it difficult for them to deal with tax technical issues on a timeous basis.

Response:

Noted. The granting of the retrospective approvals to PBO’s and recreational clubs that have been in existence for several years has the consequence that previously taxed receipts and accruals become exempt. This results in refunds having to be paid by SARS with interest, dating back, including years that have already prescribed. As opposed to deleting the relevant provisions, PBO’s or recreational clubs seeking retrospective approval as an exempt entity shall be granted such approval, which shall remain at the Commissioner’s discretion, subject to meeting certain additional criteria.


143

ALIGNING THE PROVISIONS OF SPECIAL ECONOMIC ZONE (SEZ) WITH THE OVERALL OBJECTIVES OF THE SEZ PROGRAMME

Section 12R of the Act

144

INCENTIVESSpecial Economic Zones

Qualifying companies to only qualify for the income tax benefits provided that the

companies

• Carrying on a trade • In a location that is approved (or subsequently approved)

as a zone• Before 1 January 2013• On or after 1 January 2013 any trade not previously

carried on by that company or any connected person in relation to that company in the Republic in a location that is approved / subsequently approved as a zone

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144

145

INCENTIVES Special Economic Zones

• On or after 1 January 2013 commenced any trade and that trade—• comprises of the production of goods not previously

produced by that company or any connected person in relation to that company in the Republic;

• utilizes the use of new technology in that company’s production processes; or

• represents an increase in the production capacity of that company in the Republic.’’.


146

REVIEWING THE SEZ ANTI-PROFIT SHIFTING AND ANTI-AVOIDANCE MEASURES

Section 12R of the Act

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146

Aligning the provisions of SEZ with the overall objectives of the SEZ programme

The SEZ regime was preceded by the Industrial Development Zone (IDZ) programme which was introduced in South Africa in 1993 which was intended to promote new investment in the country by providing focused administrative support as well as some indirect tax benefits to enterprises that operated in designated industrial areas. The SEZ regime was introduced in terms of the Special Economic Zone Act,No.16 of 2014 (SEZ Act) but only came into operation on 9 February 2016. In order to provide further support to the SEZ regime, income tax benefits were introduced to the Act in 2013 for qualifying companies operating within the SEZ.

Currently, the income tax provisions for qualifying companies operating within an SEZ do not expressly make a provision for requirement new investments or an expansion of an existing company may qualify for income tax benefits. The 2019 Draft TLAB contains proposed changes to make provision for qualifying companies to only qualify for the income tax benefits if the companies are:

- Newly established businesses carrying on a new trade or a trade that was not carried on by a connected person; or

- Expansions of existing businesses of businesses originally operating within an IDZ or outside an IDZ where such expansions result in an increase in the gross income of a company that amounts to at least 100 percent of the gross income of that company before any expansion. The required gross income increment in the gross income of the company should be determined with reference to the highest gross income derived by that company during any of the three immediately preceding years of assessment

Aligning the provisions of SEZ with the overall objectives of the SEZ programme

Comment:

The proposed expansion requirements are very inflexible and do not look into other complexities which are faced by businesses in their growth and expansions evidence.

Response:

Accepted. In order to have a better indicative tool to assess whether an expansion benefits the fiscus, legislative changes will be proposed in the 2019 Draft TLAB to consider the number of new jobs that will be created on a net basis in order to determine if a qualifying company is eligible for the tax benefits will be considered as an initial requirement. Furthermore, companies will need to provide evidence of their projections and expected return growth in the medium term (i.e. three years) to further corroborate their claims of expected growth.

Comment:

Many businesses started their operations in 2013, when the SEZ tax incentives were first introduced into the Act. The test as to whether a taxpayer is carrying on a new business should look back to when the SEZ tax rules were first introduced in 2013. In addition, the test is very stringent as a new business is considered to be one that was never carried on by a connected person, whether in South Africa or worldwide.

Response:

Accepted. Legislative changes will be made in the 2019 Draft TLAB to change the effective date for the new business test to align it with the introduction of the SEZ tax incentives in the Act. In addition, a taxpayer will fail the new business test if it relates to a trade previously carried on in South Africa.


147

INCENTIVESAnti-avoidance measure

All on an all or nothing basis

A company is not wholly disqualified from claiming the income tax benefits for the SEZ regime

148

REVIEWING THE ALLOWABLE DEDUCTION FOR INVESTORS INVESTING IN A VENTURE CAPITAL COMPANY

Section 12J

147

148

Background

The Act contains rules dealing with the special tax incentive for the SEZ regime. Although the income tax rules for the SEZ regime were first introduced in the Act in 2013, they were only intended to take effect when the SEZ Act comes into operation. The SEZ Act only came into operation of 9 February 2016. Despite this delay in the promulgation of the SEZ Act, some companies had already established their businesses within the intended designated SEZs, even before the coming into effect of the provisions of the above-mentioned acts.

In 2015, changes were to the income tax rules for the SEZ regime to introduce the anti-profit shifting anti-avoidance measure that mitigates against the risk that profits of ordinary tax paying companies that do not operate within the designated and approved SEZs and are taxed at a company tax rate of 28 per cent may be artificially transferred to qualifying companies under the SEZ regime that are taxable at a lower rate of 15 per cent in instances that they are connected persons in relation to each other. In its operation, the anti-avoidance measure wholly disqualifies a qualifying company from claiming any of the SEZ income tax benefits (i.e. tax rate of 15 per cent and the accelerated building allowance or 10 per cent of the cost to the qualifying company) if more than 20 per cent of its deductible expenditure incurred or more than 20 per cent of its income arises from transactions with connected persons.

The above-mentioned anti-avoidance measure is important and necessary for South Africa to meet the international minimum standards set by the OECD Forum for Harmful Tax Practices and European Union Code of Conduct Group (Business Taxation).

Reasons for change

At issue is the fact that the above-mentioned anti-avoidance measures to the SEZ tax regime were introduced in 2015, after the introduction of the SEZ tax regime in 2013, after some companies had already established their businesses within the SEZs, but before the coming into effect of the SEZ regime in 2016.

It has come to Government’s attention that the current anti-avoidance measure that operates on an all-or-nothing basis may affect some legitimate business models or transactions that were entered into when some companies established their businesses within the SEZs, before the SEZ regime came into effect and before the introduction of these anti-avoidance measures. Their business models require them to transfer goods and products to sales companies that are often connected persons in relation to those SEZ qualifying companies. These sales companies then on-sell the goods to the customers both within the SADC region including South Africa.


Reviewing the SEZ anti profit and anti-avoidance measures

In 2015, changes were made to the income tax rules for the SEZ regime to introduce the anti-profit shifting anti-avoidance measure that prevent the risk of having profits of ordinary tax paying companies which are not operating within designated and approved SEZs (thus taxed at the normal corporate tax rate of 28 percent), to be artificially transferred to qualifying companies operating under the SEZ regime which are taxed at a lower rate of 15 percent. Such transfers are often made between companies which are connected persons to each other. This anti-avoidance measure wholly disqualifies a qualifying company from claiming any of the SEZ income tax benefits.

To address this concern of the total disqualification, proposed changes to the existing anti-avoidance measure to change the all-or-nothing approach were included in the Draft TLAB to

ensure that a company is not wholly disqualified from claiming the income tax benefits for the SEZ regime. In other words, to make a carve out such that income to the qualifying company in respect of transactions with any connected person in relation to that qualifying company which is below 20 percent threshold to enjoy the 15 percent preferential tax rate. Additionally, to make a provision for a qualifying company to be treated as carrying on a separate trade outside of the SEZs relating to the income with its connected person in as far as it exceeds the threshold and thus be subject to the normal corporate tax rate of 28 percent.

Reviewing the SEZ anti profit and anti-avoidance measures

Comment:

The currently proposed amendments are administratively burdensome and undermine the tax incentive as most business models make transfers with connected persons. It is submitted that domestic transfer pricing should rather be applicable.

Response:

Not Accepted. The proposed amendments with regard to the anti-avoidance measure contained in the 2019 Draft TLAB will be withdrawn and the current all-or-nothing rule will continue. In the interim, SARS will need to first determine their availability of adequate capacity to administer and audit domestic transfer pricing for the SEZ incentive. Should SARS indicate that the necessary capacity is available to conduct domestic transfer pricing and it is a focus area, legislative proposals in this regard will be made in the next legislative cycle.


149

INCENTIVESVenture Capital Company

Investors

VCC

Qualifying Companies

Invests

Invests

150

INCENTIVESVenture Capital Company

• Tax deduction in respect of investment in VCC shares is limited to – R5 million per annum per company

– R2,5 million per annum per person other than a company.

Effective date – 21 July 2019 and applies in respect of expenditure incurred by the taxpayer on or after that date.

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150

Background

The venture capital company (VCC) tax incentive regime was introduced in the Act in 2008. The main aim of the VCC tax incentive regime is to raise equity funding in support of the socio-economic development of small business which otherwise would not have had access to market funding due to either or both their size and inherent risk.

When the VCC tax incentive regime was introduced in 2008, the rules contained a very strict investor criterion. As a result, a natural person who invests in the VCC shares was eligible for a 100 per cent deduction of the amount invested, however, the deduction was limited to R750 000 per tax year. In turn, individual investors were also subject to a lifetime deduction limit of R2 250 000.

In 2011, changes were made in the VCC tax incentive regime in order to make it more attractive. General relaxation of requirements of the provisions of the VCC tax incentive regime was made so as to increase the intake in this regard. As a result, ceilings and prohibitions associated with investors seeking a deduction were completely removed. For example, the natural person limitation of deduction to R750 000 per tax year as well as the lifetime deduction limit of R2 250 000 was removed. This implied that all taxpayers, both natural persons and legal entities can now freely obtain a full deduction for investing in a VCC, without any monetary threshold limitation.

In order to get the VCC regime to gain more traction, in 2015, further changes were made in the tax legislation so as to broaden the scope of the VCC regime. As a result, the uptake of the VCC tax incentive regime has grown significantly over the past three years leading to a telling investment into the economy.

Reasons for change

The primary aim of the tax system is to generate sufficient revenue to support government’s funding priorities. By providing relief to taxpayers via targeted tax incentives like exemptions, deductions and credits, Government also encourages socio-economic development.

Over the past two years, Government has endeavored to end abuse within the VCC tax incentive regime by making changes in the provisions of the VCC Tax incentive regime aimed at re-emphasising an incentive for true venture capitalists that saw the same value-add in the VCC tax incentive regime as Government and not just as another method of finance especially of own projects.

Despite Government’s efforts to introduce these anti-avoidance measures, it has come to government’s attention that some taxpayers are still attempting to undermine the objectives and principles of the VCC tax incentive regime to benefit from excessive tax deductions. Based on administrative data on tax expenditure, the average expenditure per annum incurred by a new VCC shareholder to obtain VCC shares ranged between R1,3 million at its lowest to R2,1 million at its highest over the past 4 years.


151

EXEMPTION OF CERTIFIED EMISSION REDUCTIONS

Section 12K

152

INCENTIVESSection 12K

• Section 12K is repealed

Effective date – 1 June 2019

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152

In 2009, government introduced a tax exemption for income generated from the sale of certified emission reduction credits arising from projects developed under the Clean Development Mechanism (CDM) of the Kyoto Protocol. To avoid a double benefit scenario, where the same emissions reductions lead to both an income tax exemption under section 12K of the Act and a lower carbon tax liability for a taxpayer under the Carbon Tax Act, it is proposed that the tax exemption for certified emission reduction units is repealed to become effective from the date of introduction of the carbon tax.

Comment:

Some stakeholders acknowledged the potential for double dipping. Suggested that the exemption continues but is limited to those credits from projects that will not be used as off sets under the carbon tax

Response:

Not accepted.

–The carbon tax creates the economic incentives for the uptake of carbon offset projects in South Africa by helping to improve the financial viability of low carbon projects and making these projects more cost competitive with high carbon emitting initiatives. The offset allowance provides an additional incentive for taxpayers to invest in low carbon projects and to help reduce their tax liability. To date, since the introduction of the tax exemption for CERs, there has also been a limited uptake of CDM projects in South Africa with only 15 projects issued with carbon credits. In light of this, the primary instrument that will drive investments in carbon offset projects over the short, medium and long term will be the carbon tax.

–Maintaining the tax exemption for CERs could create further distortions in the market where credits from CDM projects qualify for preferential tax treatment compared to credits generated under the GS and VCS. The repeal of the tax exemption will ensure a more equitable tax regime where offsets generated under the different carbon standards will be subject to similar tax treatment.


153

DEDUCTION IN RESPECT OF ENERGY EFFICIENCY SAVINGS

Section 12L

154

INCENTIVEEnergy efficiency savings

• Date extended from 1 January 2020 to 1 January 2023

Effective date – 1 January 2020

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154

In 2013, Government introduced the energy efficiency savings tax incentive to encourage investments in energy efficiency measures to help reduce emissions of greenhouse gases, address climate change, and promote efficient energy use. To date, the incentive has helped to promote significant investments in energy intensive sectors such as mining as well manufacturing amounting to about R 3 billion in total. During stakeholder consultations on the carbon tax, there were views that the energy efficiency savings tax incentive should be extended beyond 2020 to ensure that there is long term policy certainty on revenue recycling commitments made under the carbon tax. It was therefore proposed to extend the duration of the incentive to be aligned with the first phase of the carbon tax, ending 31 December 2022.

Comment:

There was broad support by stakeholders for the extension of the duration of the incentive. Some stakeholders were of the view that the incentive should be extended beyond 2022.

Response:

Noted.

As part of the holistic review of the Section 12L incentive, government will consider the overall design, administration and economic feasibility of the incentive.


155

UPDATING THE EMPLOYMENT TAX INCENTIVES (ETI) TO ALIGN WITH THE NATIONAL MINIMUM WAGE

Section 4 of the Employment Tax Incentive Act, No 26 of 2013 “the ETI Act”

156

INCENTIVEMinimum Wage

The higher of the national minimum wage orthe other wage regulating measures is theapplicable minimum wage as contemplated inthe NMW Act.

Effective date – 1 August 2019

The minimum wage of R2 000 per month available inthe ETI Act remain in place for categories of workersor companies that may be exempt from the nationalminimum wage.

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156

Background

The Employment Tax Incentive (ETI) programme was introduced in January 2014 to promote employment, particularly of young workers. After its initial 3 years and based on a process of review and consultation with NEDLAC the programme was extended for a further two years. In light of the need to support youth employment, as indicated in the State of the Nation Address (SONA) delivered on 15 February 2018, and following further consultations with NEDLAC, the programme was further extended to 28 February 2029.

The programme aims to reduce the cost of hiring young people between the ages of 18 and 29 (also referred to as qualifying employees) through a cost sharing mechanism with Government, while leaving the wages received by the qualifying employees unaffected. The ETI Act affords employers who are registered for PAYE and hire qualifying employees the ability to decrease their PAYE liability. The amount by which the employer’s PAYE liability can be reduced by is prescribed by a formula and is calculated based on the wages paid to the qualifying employees. The monthly wages used in applying the formula are categorised as follows:

a. Wages of R2 000 or less;

b. Wages of between R2 001 and R4 000; and

c. Wages of between R4 001 and R6 500.

Reasons for change

During 2018 significant amendments were promulgated to implement the National Minimum Wage. The National Minimum Wage Act, No. 9 of 2018 (“the NMW Act”) introduced a national minimum wage of R20 per hour or R3 500 per month. To ensure that Government policies are aligned, some of the provisions relating to wages available in the NMW Act should also be reflected in the category of wages contemplated in the ETI Act.


157

CLARIFYING THE INTERACTION BETWEEN THE EMPLOYMENT TAX INCENTIVE AND THE SEZ PROVISIONS

Sections 1 in respect of the definition of “special economic zone” and 6 of the ETI Act

158

INCENTIVEEmployment tax incentive and SEZ provisions

• The definition of the “special economiczone” in the ETI Act were amended to alignit with the definition contained in the Act.

• For a company to claim the ETI incentivewithout any age limit, the company should bea “qualifying company” as contemplated inthe Act for purposes of claiming the incometax incentives under the SEZ regime.

Effective date – 1 March 2020

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Background

Both the Act and ETI Act contain special tax dispensation for SEZ regime. The Act SEZ tax rules make provision for qualifying companies that operate within an SEZ to be taxed at a reduced corporate tax rate of 15 per cent instead of the current 28 per cent that is generally applicable to other companies. Furthermore, these companies qualify to claim for accelerated allowances, amounting to 10 per cent of the cost of the building each year over a period of 10 years, on buildings and improvements to buildings owned by them.

On the other hand, the ETI Act makes provision for employers operating within an SEZ to qualify for the ETI. The ETI was introduced by Government as a mechanism to support employment growth in South Africa with a particular focus on the employment of the youth. The ETI tax incentive can only be claimed by any employer in respect of a qualifying employee if that employee is 18 years old and not more than 29 years old. However, if the employer operates through a business located within an SEZ, that employer can claim the ETI in respect of its employee that renders services to that employer with an SEZ without any regard to the age of that employee

Reasons for change

In order to benefit from the income tax incentives contained in the Act, a company carrying on a business within the SEZ area must meet certain requirements to ensure that the SEZ incentives are claimed by acceptable manufacturing businesses (i.e. businesses that are not involved in the disqualified trades listed in the Act or listed by the Minister of Finance by notice in a Government Gazette. In terms of the Act, for a company to be a qualifying company a company must be a company that –

a. is tax resident in South Africa

b. operates within a designated SEZ area

c. carry on business through a fixed place of business situated within a designated SEZ area

d. derives 90 per cent or more of its income from the carrying on of a business or rendering of services within one or more SEZs; and

e. is not carrying on a disqualified trade listed in the Act and in terms of the Government Gazette.

In contrast, the ETI Act does not clearly provide a specified criterion for employer companies operating within an SEZ that want to claim the ETI without having the age limit as a restriction. As a result, the ETI Act currently makes provision for all employers operating within an SEZ to claim the ETI in respect of all their employees without any regard for the age limit. Failure by the ETI Act to have a limitation that only allows this extended incentive to only qualifying companies has the potential of resulting in non-qualifying companies and, even more worrying, non-manufacturing companies (such as logistics and warehousing entities) claiming the ETI in respect of all their employees.


159

INTERNATIONAL TAX

160

REVIEWING THE COMPARABLE TAX EXEMPTION

Section 9D(2A) further proviso (i)(aa) and (ii)

159

160

161

INTERNATIONAL TAXComparable Tax Exemption

The comparable tax exemption threshold were reduced to 67.5 per cent from the current percentage of 75 per cent

Effective date – 1 January 2020 and applicable in respect of YOA ending on or after that date.

162

ADDRESSING CIRCUMVENTION OF CONTROLLED FOREIGN COMPANY ANTI-DIVERSIONARY RULES

Section 9D(9A) of the Act

161

162

Background

The South African controlled foreign company rules contain an exemption known as a comparable tax exemption. This exemption makes provision for CFCs operating in foreign countries where tax payable in that foreign country is at least 75 per cent of what would have been payable in South Africa, had the South African tax rules applied, to exclude the foreign business income from the net income calculation of the CFC. The main aim of this exemption is to reduce the compliance burden of South African multinationals from being taxed on foreign business profits and thereafter claiming credit against South African income tax.

In addition, the comparable -tax exemption seeks to protect the South African tax base whilst providing the need for South African multinational entities to be competitive offshore by disregarding all tainted, passive and diversionary controlled foreign company income if little or no South African tax is payable.

Reasons for change

In the context of the global trend towards lower corporate tax rates, in 2018, the Minister announced in the Budget Review the intention to review the comparable tax exemption in order to determine whether an amendment is warranted. Based on the above-mentioned statement, a review was conducted, and it came to light that the current 75 per cent threshold is no longer comparable. As a result, providing little or no assistance to cater for South African CFCs in the current world order.


163

INTERNATIONAL TAXCFC anti-diversionary rules

• In order to prevent the circumvention of the CFC anti-diversionary rules, the anti-diversionary rules were extended to include both direct and indirect transactions between: – the South African connected person and an independent

non-resident customer for the export of goods; – an independent non-resident supplier and the South

African connected person for the import of goods; and – the controlled foreign company and the South African

connected person for the rendering of services.

Effective date – 1 January 2020 and applicable in respect of YOA ending on or after that date.

164

REVIEWING THE DEFINITION OF PERMANENT ESTABLISHMENT

Section 1: Definition of “permanent establishment”

163

164

Background

The Act contains anti-avoidance provisions in section 9D aimed at taxing South African residents on the net income of a controlled foreign company (CFC). In order to strike a balance between protecting the South African tax base and the need for South African multinational entities to be competitive, the South African CFC rules contains various exemptions. That said, CFC income which is generally regarded as tainted income, for example, passive income and diversionary income does not qualify for any of the CFC exemptions.

Currently, the South African CFC rules contain three sets of anti-diversionary rules in 9D(9A) of the Act, namely, CFC inbound sales, CFC outbound sales and CFC connected person services. These CFC anti-diversionary rules are aimed at ensuring that CFC activities are not being used to shift taxable income offshore through transfer mispricing.

Reasons for change

It has come to Government’s attention the current CFC anti-diversionary rules do not adequately address multi-layered structures that fragment the current diversionary transaction link for tax. Certain multinational enterprises are circumventing CFC anti diversionary rules by diverting profits to members of the group that are subject to tax at a lower rate and are not subject to the specific anti-diversionary rules. This is achieved by the imposition of additional CFCs in the supply chain between the South Africa resident connected person and the independent non-resident supplier or customer.


165

INTERNATIONAL TAXPermanent establishment

• The proposed amendment to the definition of “permanent establishment” in section 1 of the Act was WITHDRAWN.

Proposed amendment withdrawn from 2019 TLAB.

166

CLARIFICATION OF THE QUALIFYING CRITERIA FOR DOMESTIC TREASURY MANAGEMENT COMPANY

Section 1 of the Act - definition of “Domestic Treasury Management Company”

165

166

On 7 June 2017, South Africa signed the Multi lateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). In line with preserving the sovereignties countries, signatories of the MLI have the right to make a list of their reservations and notifications which will be known as the MLI position of that country. South Africa took the MLI position not to expand the definition of permanent establishment (PE). As a consequence, a misalignment ensued between the South African’s tax treaties still using the narrow definition of PE and the Income Tax Act definition using the expanded definition. In order to address this misalignment, it is proposed that changes be made in the Income Tax Act to align the definition of PE with the SAMLI position.

Comment:

It is not clear why this amendment is necessary. Before the MLI, Before the MLI, the definition of “permanent establishment” in section 1 of the Act was, in any event, never aligned with the definitions of that term contained in SouthAfrica’s DTAs. Consequently, there has always been (and will always be) a “misalignment”. Critically, from a policy perspective, we do not see the rationale for attempting to align what is essentially a domestic law source provision with a DTA concept. SA’s reservation out of the MLI simply establishes our “two-way” DTA position. The definition in section 1 focuses solely on inbound activities by non-residents. One would have expected SA to cast the net slightly wider (as the post-2018 definition does) to catch inbound foreign investors in our domestic source rules, before giving them the opportunity to benefit from the potentially narrower DTA provisions

Response:

Noted. The proposed amendment to the definition of permanent establishment will be withdrawn from the 2019 Draft TLAB.


167

INTERNATIONAL TAX Domestic Treasury Management Company

The requirement that a domestic treasurymanagement company be incorporated ordeemed to be incorporated in South Africawere re-instated in the Act in respect of newcompanies that are registered with SARB forthe first time on or after 1 January 2019.

168

INTERNATIONAL TAX Domestic Treasury Management Company

Effective date – 1 January 2019 and applicable in respect of YOA commencing on or after that date.

A domestic treasury management companywere incorporated or deemed to beincorporated in South Africa does not apply tothose companies that were alreadyincorporated or deemed to be incorporatedoffshore if registered with SARB before 1January 2019.

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168

Background

In 2013, Government introduced the DTMC regime. The main objective of this regime was to encourage listed South African multinational companies which are registered with the Financial Surveillance Department (FSD) of the South African Reserve Bank (SARB) to relocate their treasury operations to South Africa. Consequently, changes were made in the Act to insert the definition of DTMC with effect from years of assessment commencing on or after 27 February 2013.

The Act definition provided that a DTMC must be a company that is:

a. incorporated or deemed to be incorporated in South Africa;

b. that has its place of effective management in South Africa; and

c. that is not subject to exchange control restrictions by virtue of being registered with the financial surveillance department of the SARB.

In 2018, changes were made in the Act to remove the requirement that a DTMC be incorporated or deemed to be incorporated in South Africa, due to the fact that this requirement was burdensome for companies that were incorporated offshore but had their place of effective management in South Africa or wanted to move their place of effective management to South Africa.

Reasons for change

Currently, there is misalignment between the definition of DTMC in the Act and in SARB Circular 5/2013. Although amendments were made in the Act in 2018 to delete the requirement that the DTMC must be incorporated or deemed to be incorporated in South Africa, however, no corresponding changes were made in SARB Circular 5/2013.

169

REVIEWING OF THE “AFFECTED TRANSACTION” DEFINITION IN THE ARM’S LENGTH TRANSFER PRICING RULES

Section 31 of the Act definition of “affected transaction”

170

INTERNATIONAL TAX“Affected transaction”

• The scope of the transfer pricing ruleswere extended to also includetransactions between persons that are notconnected persons, but that are“associated enterprises” as described inArticle 9(1) of the MTC on Income and onCapital of the OECD

Effective date – 1 January 2020 and applicable in respect of YOA commencing on or after that date.

169

170

Background

In 1995, the transfer pricing rules were introduced in the Act. Over the years, changes were made to the South African transfer pricing rules to be in line with international standard. The main aim of the transfer pricing provisions in section 31 of the Act is to prevent a reduction in South African taxable income as a result of mispricing or incorrect characterisation of transactions. As a general matter, a taxpayer is required to adjust its taxable income to reflect arm's length amounts if it enters into transactions with a “connected person” as defined in section 1 of the Act, on terms or conditions that are not at arm's length, derives a tax benefit from such terms and conditions and the connected person is tax resident outside South Africa. South Africa like most countries has adopted the OECD and UN “arm’s length principle” as a benchmark for income tax purposes.

Reasons for change

Both the OECD and UN use the concept of “associated enterprises” when applying the arm’s length principle, which is the internationally recognised tax standard for allocating profits resulting from transactions between associated enterprises. The concept of “associated enterprises” is described in the Commentary on Article 9 of the OECD MTC as parent and subsidiary companies and companies under common control.

The wording of Article 9(1) of both the OECD and UN MTC is as follows:

“Where:

a. an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

b. the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”

On the other hand, South Africa still uses the concept of “connected persons” when applying the arm’s length principle. The fact that South Africa does not have or use the concept of associated enterprises when applying the arm’s length principle presents a challenge in application of the transfer pricing rules in respect of transactions between “associated enterprises” that are not regarded connected persons.


171

INTERNATIONAL TAX“Associated Enterprise”

The concept of “associated enterprises” isdescribed in the Commentary on Article 9 ofthe OECD MTC as parent and subsidiarycompanies and companies under commoncontrol.

172

INTERNATIONAL TAXComparability exemption

Comparitability exemption in section31(6)(b)(iii) has also been reduced from75% to 67.5%.

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172

The wording of Article 9(1) of both the OECD and UN MTC is as follows:

“Where:

a) An enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

b) The same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”


The Act contains transfer pricing rules aimed at preventing a reduction in the South African taxable income as a result of mispricing or incorrect characterisation of transaction. This is done through the application of the arm’s length principle on transactions entered between “connected parties”. The “affected transaction” definition relating to the arms length transfer pricing rules in the Act only apply to connected persons as defined. The application of these rules to connected persons only has the unintended consequence that the transfer pricing rules in respect of transactions between “associated enterprises” are not captured. On the other hand, in both the OECD and the UNMTC,“ affected transaction” applies to associated enterprises and not only to connected persons. In order to address this anomaly, it is proposed that “affected transaction” definition which relates to the arm’s length principle should be aligned with the OECD and UNMTC.

Comment:

The proposed amendment to import the concept of “associated enterprises” into the Act is inappropriate. For example, in the context of the OECDMTC, the term is not defined and is deliberately vague and broadly described to avoid the restricting or overriding domestic law definitions that trigger the application of transfer pricing rules. Therefore, the description of the term “associated enterprise” in the OECDMTC is certainly not intended to represent a standard benchmark definition. Its incorporation into domestic law will create significant uncertainty as to when the transfer pricing rules are applicable. Furthermore, the new definition would require further definitions, elaborations and clarifications of participation, control, management and enterprise.

Response:

Noted. SARS will further provide guidance on the interpretation of the term “associated enterprise”. In order to give SARS and taxpayers more time to consider the interpretation of the term “associated enterprise”, it is proposed that the effective date of this provision be postponed by a year from 1 January 2020 to 1 January 2021.


173

CLARIFICATION OF THE INTERACTION OF CAPITAL GAINS TAX AND FOREIGN EXCHANGE TRANSACTION RULES

Section 24I and paragraph 43 of the Eighth Schedule to the Act

174

INTERNATIONAL TAXForeign exchange rules and CGT

• The rules for companies and trading trustsin paragraph 43 of the Eighth Schedule tothe Act were amended by inserting a newproviso to provide an appropriatemechanism for eliminating doubletaxation.

Effective date – On promulgation of the Act

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Background

In general, the tax treatment of effects of changes in foreign currency falls under two main provisions, namely section 24I of the Act and paragraph 43 of the Eighth Schedule to the Act. Section 24I of the Act generally recognises foreign exchange gains and losses on an annual basis irrespective of whether the gains or losses are realised.

On the other hand, paragraph 43 of the Eighth Schedule to the Act has two sets of capital gain or loss currency rules that are available when disposing of assets. The first set of capital gains tax rules relates to the method for calculating capital gains and losses for natural persons and non-trading trusts that dispose of an asset in foreign currency after having acquired that asset in the same foreign currency. Therefore, natural persons and non-trading trusts determine the capital gain or loss in the relevant foreign currency followed by a translation to local currency, e.g. Rand.

In turn, the second set of capital gains tax rules for companies and trading trusts, acquiring or disposing of an asset in foreign currency, requires that both proceeds and the base cost be translated to local currency, e.g. Rand. In short, the capital gain or loss is determined in local currency after translating the base cost and proceeds to local currency using either spot rates or average rates.

Reasons for change

The current rules in paragraph 43(6A) of the Eighth Schedule excludes the application of the second set of capital gains tax rules mentioned above to companies and trading trusts in order to avoid duplication of the currency gains and losses arising under section 24I. In particular, paragraph 43(6A) of the Eighth Schedule to the Act excludes foreign debt which includes foreign bonds that can give rise to a capital gain or capital loss. In general, this exclusion is applicable to the disposal of debt and related derivative instruments such as forward exchange contracts and foreign currency option contracts.

Based on the above, it can be argued that once a company and trading trust are excluded from the application of paragraph 43(1A), that company or trading trust must determine a capital gain or loss under general rules taking into account sections 24I and 25D of the Act. As a result, paragraph 43 of the Eighth Schedule does not apply.

In addition, it is unclear how the foreign currency gain and loss provisions interact with capital gains provisions as section 24I of the Act determines exchange gains and losses over the lifetime of an exchange item while paragraph 35(3)(a) eliminates amounts from proceeds on disposal of an asset.


175

INTERNATIONAL TAXForeign exchange rules and CGT

Example• Company B acquired a foreign bond as long-term

investments during its first year of assessment for X$100 when the exchange rate was X$1:R1.

• At the end of the first year of assessment the exchange rate was X$1:R1,40 and at the end of year 2 X$1:R2.

• On the last day of year 2 Company B disposed of the bond for an amount accrued of X$120.

176

INTERNATIONAL TAXForeign exchange rules and CGTSection 24I applied to the foreign bond that is an exchange item

End of first year of assessment X$100 x R1,40 140

Less: Date of acquisition X$100 x R1 (100)

Income exclusion 40

Date of disposal at the end of second year of assessment X$100 x R 2

200

Less: Beginning of second year of assessment X$100 x R1,40

(140)

Income inclusion 60

175

176

177

INTERNATIONAL TAXForeign exchange rules and CGTSection 25D

Amount received or accrued X$120 x R2 (Para 35 read with s 25D(1))

240

Less: Arguable reduction of amounts included in income under s 24I

(100)

Proceeds (Para 35) 140

Less: Base cost X$100 x R 1 (para 20(1)(a) read with s 25D(1))

(100)

Capital gain 40

178

Value Added Tax

177

178

179

CLARIFYING FINANCIAL SERVICES TO INCLUDE THE TRANSFER OF OWNERSHIP OF REINSURANCE RELATING TO LONG-TERM REINSURANCE POLICIES

Section 2(1)(i) of the Value Added Tax Act No. 89 of 1991 (“the VAT Act”)

180

VALUE ADDED TAXFinancial Services

In order to provide clarity as to the VATtreatment of the transfer of ownership ofreinsurance relating to long-term insuranceto another reinsurer, changes were made tosection 2(1)(i) of the VAT Act to specificallyinclude these as activities falling withinfinancial services.

Effective date – 1 April 2020

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Background

Section 2(1)(i) of the VAT Act deems specific activities including the provision or transfer of ownership of a long-term insurance policy or the provision of reinsurance in respect of such policy as financial services. In turn, section 12(1)(a) of the VAT Act makes provision for the exemption of financial services. This implies that the actual provision of reinsurance in respect of a long-term insurance policy is an exempt financial service.

Reasons for change

At issue is the fact that the provisions of the VAT Act do not specifically address the VAT treatment of the transfers of ownership of reinsurance relating to long-term insurance to another reinsurer, due to the fact that such transfer is not specifically included under activities regarded as financial services in section 2(1)(i) of the VAT Act. In addition, there are conflicting views as to whether the transfer of ownership of reinsurance relating to long-term insurance to another reinsurer is exempt or not. There is a view that since the underlying policy is exempt and the reinsurance of the underlying policy is exempt, then surely it was not the intention of the legislature to omit these transactions from being specifically included under activities regarded as financial services in section 2(1)(i) of the VAT Act.


181

REFINING THE VAT CORPORATE REORGANISATION RULES

Section 8(25) of the VAT Act

182

VALUE ADDED TAXVAT Corporate Reorganisation Rules

• VAT relief is available to group companies in instances where a fixed property is transferred in terms of corporate reorganisations as envisaged in section 42 or 45 of the Income Tax Act, dealing with “Asset-for-share transactions” and “Intra-group transactions”, provided that specific requirements are met. – the relief ito section 8(25) is limited to the supply is of

fixed property and the supplier and the recipient have agreed in writing that, immediately after the supply, the supplier will lease the fixed property from the recipient


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Background

The VAT Act contains rules in section 8(25) that provide for VAT relief by treating the supplier and the recipient of goods or services as the same during corporate reorganisation transactions, between companies that form part of the same group of companies, provided certain requirements are met. This provision is similar to the corporate reorganisation provisions available in the Income Tax Act, which are aimed at providing tax neutral transfer of assets during corporate reorganisations, between companies that form part of the same group of companies.

However, section 8(25) of the VAT Act further provides that if the corporate reorganisation transactions take place in terms of section 42 or 45 of the Act, the VAT relief is only available if the transfer relates to the transfer of an enterprise, or part of an enterprise capable of separate operation, as a going concern.

Reasons for change

Currently, the relief provided in terms of section 8(25) does not apply to corporate reorganisation transactions where the only asset transferred will be fixed property that will be leased back to the supplier once transfer of the property is completed. The supply is not capable of operating separately and the property itself is currently not an income-earning property. This creates adverse cash flow for the group of companies with regards to the input tax credits of the recipient and the output tax liability of the supplier.


183

REVIEWING SECTION 72 OF THE VAT ACT

Section 72 of the VAT Act

184

VALUE ADDED TAXSection 72

In view of the fact that the provisions of theVAT Act are in itself mandatory, in order toaddress the above-mentioned anomaly,changes were made in section 72 of the VATAct to align the provisions of this sectionwith the spirit of the other provisions of theVAT Act.

Effective date – 21 July 2019

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Background

When VAT was introduced in South Africa in 1991, the VAT Act contained provisions in section 72 that provides the Commissioner with the discretionary powers to make arrangements or decisions as to the manner in which the provisions of the VAT Act shall be applied or the calculation or payment of tax or the application of any rate of zero per cent or any exemption from tax provided for in terms of the VAT Act, provided that the Commissioner is satisfied that as a consequence of the manner in which any vendor or class of vendors conducts his, her or their business, trade or occupation, difficulties, anomalies or incongruities have arisen or may arise in regard to the application of the VAT Act. The arrangement or decision by the Commissioner as provided under section 72 of the Act must have the effect of assisting the vendor to overcome the difficulty, anomaly or incongruity without having the effect of substantially reducing or increasing the taxpayer’s ultimate liability for VAT.

Reasons for change

In 1996, the Constitution of the Republic of South Africa (“Constitution”) came into effect. The introduction of the Constitution in 1996 came after the introduction of the VAT Act in 1991. Over the past years, challenges arose regarding the application of the mandatory wording of the other provisions of the VAT Act versus the discretionary wording of the provisions of section 72 of the VAT Act.


185


• An arrangement or decision made in respect of an application made before 21 July 2019 that ceases to be effective on or before 31 December 2021, may be reconfirmed by the Commissioner on application by the vendor in whose favourthe arrangement or decision was made:

186


• Provided that—– the effective period of the reconfirmed arrangement or decision

may not extend beyond 31 December 2021;– for purposes of the application to reconfirm such arrangement or

decision, the wording of section 72, prior to the amendment shall apply;

– the application to reconfirm such arrangement or decision must be received by the Commissioner no later than two months prior to the expiry date of such decision or, in exceptional circumstances, such other date acceptable to the Commissioner; and

• ceases to be effective after 31 December 2021 or that does not specify an effective period, shall cease to be effective on 31 December 2021.

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186

Section 72 of the VAT Act permits the Commissioner the discretion to make arrangements and decisions to overcome difficulties, anomalies or incongruities that taxpayers may face in applying any provision of the VAT Act. These difficulties, anomalies or incongruities would have arisen as a result of the manner in which a vendor or class of vendors conducts his, her or their business, trade or occupation. Over the past years, challenges arose regarding the application of the mandatory wording of the other provisions of the VAT Act versus the discretionary wording of the provisions of section 72 of the VAT Act. The proposed amendment in the 2019 Draft TLAB seeks to clarify and amend the section so as to align section 72 with the policy intent of the other VAT provisions.

Comment:

Clarity is required on how the proposed amendments will impact on current rulings, including whether vendors can apply for an extension of current rulings.

Response:

Accepted. Transitional rules will be implemented to deal with current rulings, including applications for extensions of current rulings.

Comment:

The proposed amendment states that the decision of the Commissioner may not be contrary to the construct and policy of the VAT Act as a whole or of any specific provision of the Act. The policy as it relates to the various provisions of the Act is generally unknown, save for the published SARS documents which are (for the most part) general in nature.

Response:

Not Accepted. The policy intent may be determined by the reference to overall scheme of the Act and to secondary aids to interpretation, such Budget Speeches, Budget Reviews and the Explanatory Memoranda that are published with legislative amendments. SARS also publishes various guidelines, Interpretation Notes and rulings


187


• An arrangement or decision made ito section 72 of the VAT Act, 1991, which constituted a binding general ruling and ceases to be effective on or after 21 July 2019 or does not specify an effective period, shall cease to be effective on 31 December 2021.

• The amendment is deemed not to be a subsequent change in law for purposes of section 85 of the TAA, in respect of an arrangement or decision referred to in subsection (3) or (4).

188

REFINING THE VAT TREATMENT OF FOREIGN DONOR FUNDED PROJECTS

Section 1(1) definition of “enterprise”, “foreign donor funded project”, “person”, new definition of “implementing agency”, sections 8(5B) and 50(1) of the VAT Act

187

188

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VALUE ADDED TAXForeign donor funded projects

• Definition of “foreign donor funded project” in section 1(1) of the VAT Act was extended to clarify what will qualify as a FDFP for VAT purposes.

• The new definition makes reference to approval by the Minister of Finance.

190


• The definition of “enterprise” was amended to include the activities of an implementing agency in respect of the FDFP rather than the activities of the FDFP.

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190

Background

In 2006, changes were made in tax legislation to make provision for the tax treatment of foreign donor funded projects in terms of the Official Development Assistance Agreement (ODAA). ODAA is an international agreement in terms of section 231(3) of the Constitution of the Republic of South Africa. ODAA’s involve support from foreign institutions in the form of grants/funding, technical assistance, provision of assets, etc.

The VAT Act provides that if the project meets the requirements of the definition of “Foreign Donor Funded Project” (“FDFP”) in section 1(1) of the VAT Act, the project is a person as defined and is deemed to have made a zero-rated supply to the foreign donor in terms of section 11(2)(q) of the VAT Act. Accordingly, the project will be required to register for VAT with the South African Revenue Service (SARS) and thereafter claim all VAT incurred on expenses as input tax, thereby ensuring that the funds are not utilised to pay any VAT.

In order to implement the foreign donor funded project in South Africa in terms of the ODAA, a further project agreement flowing from the ODAA may be entered into, which specifically relates to a particular project. This project agreement may appoint a specific government department as being responsible for the implementation of the particular project. In turn, the above-mentioned government department may facilitate the implementation of the project by entering into another agreement with another entity, called the “implementing agency”, thereby sub-contracting the particular project to another “implementing agency” or “subcontractor”. Further, the subcontractor may further subcontract parts of the particular project to other vendors. There are also instances where the foreign donor contracts directly with various implementing parties in relation to various parts of the project.

Reasons for change

The above-mentioned scenarios have created confusion regarding who must register the project as a foreign donor funded project for VAT as required in terms of the VAT Act, who is entitled to the input tax claims and who is the actual implementing agency. In view of the fact that the implementing agency is required to facilitate the project and report on the progress of the project as well as ensuring that the funds are used for only the specified project and not to pay taxes or any other unrelated costs, consequently, the implementing agency is the one required to register the foreign donor funded project for VAT purposes and the registered foreign donor funded project is entitled to claim the input tax credits on expenses incurred in relation to the project. However, in instances where the foreign donor has contracted directly with various implementing parties, there may be more than one implementing agency and hence more than one FDFP that is entitled to register for VAT purposes in relation to one main project.

There is further confusion on what requirements need to be met before a project may be registered for VAT with SARS as a FDFP. The current definition in the VAT Act creates uncertainty and does not cater for all the policy requirements that need to be met before SARS will register a project as such. As a result, registrations of foreign donor funded projects for VAT purposes are often delayed due to the need for SARS to constantly seek clarity from National Treasury.


An Official Development Assistance Agreement (ODAA) is an international agreement that is binding on the Republic in terms of section 231(3) of the Constitution of the Republic of SouthAfrica. ODAA’s involve support from foreign institutions in the form of grants/funding, technical assistance, provision of assets for a specific project, etc. ODAA’s, if they meet certain requirements of the VAT Act, may be registered (as a “foreign donor funded project”) for VAT in order to reclaim any VAT incurred on expenditure, thereby ensuring that the funds provided are not used to pay taxes in SouthAfrica. The requirements of the VAT Act are not very clear on what the policy position is regarding the requirements that must be met to be registered as a “foreign donor funded project” for VAT purposes. The proposed amendments in the 2019 Draft Bill will provide clarity on what these requirements are.

Comment:

The proposed amendments are not clear as to the impact of the proposed amendments on existing projects. Further, clarity is required regarding the process to be followed to register the project as a foreign donor-funded project.

Response:

Accepted. A guideline will be issued by SARS providing clarity on the process to be followed. With regard to the impact on current projects, changes will be made in the 2019 Draft TLAB to provide that the proposed amendments will only be applicable to those projects that apply for registration on or after the 01 April 2020.

Comment:

The proposed amendment states that each project must be registered separately for VAT. This is cumbersome. It is proposed that where one entity manages many such projects, the entity been titled to register all the various projects under one VAT registration number.

Response:

Not Accepted. Each project has its own terms and conditions, its own implementation plan, its own funding requirements, end date, etc. For these reasons, each project will be required to be registered separately in order to remain separately identifiable. Further, the VAT system does not permit a vendor to be issued with more than one VAT registration number, unless it is registering different branches. By including this proposed amendment to section 50(1), it is proposed that each project be registered as a branch of the vendor that is the “implementing agency” of the various projects.


191


• The “implementing agency” where defined – to refer to the government of the Republic, – any institution or body established and appointed

by a foreign government as contemplated in section 10(1)(bA)(ii) of the Income Tax Act

– to perform its functions in terms of the ODAA or– any person who has entered into a contract with

either of these parties to implement, operate, administer or manage a FDFP.

192


Further, in order to ensure that theimplementing agency ring-fences the activitiesrelating to the FDFP, section 50(1) wereamended to require the project to be registeredas a separate entity from the other enterpriseactivities of the implementing agency.


191

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193

Tax Administration Amendments

194

S 18A OF THE INCOME TAX ACT

193

194

195

TAX ADMINISTRATIONS 18A of Income Tax Act

The amendment correct an oversight andalign the wording to make reference to bothan accounting authority under the PFMA andan accounting officer under the LocalGovernment: MFMA.

196

S 49E OF THE INCOME TAX ACT

195

196

Section 18A(2C) provides that the Accounting Authority contemplated in the Public Finance Management Act for the department which issued any receipts in terms of section 18A(2), must on an annual basis submit an audit certificate to the Commissioner confirming that all donations received or accrued in the year in respect of which receipts were so issued were utilised in the manner contemplated in section 18A(2A).

A department contemplated in section 18A(1)(c) includes the national, provincial or local sphere of government. The Public Finance Management Act, 1999, however, applies only to the national and provincial sphere of government. The Local Government: Municipal Financial Management Act, 2003, is applicable to the local sphere of government. The Local Government: Municipal Finance Management Act requires a municipality to have an accounting officer who must be accountable under that Act.

The fact that section 18A(2C) does not contain a reference to an accounting officer under the Local Government: Municipal Finance Management Act, appears to be an oversight, since sections 18A(5B) and (7) both refer to an accounting authority under the Public Finance Management Act and an accounting officer under the Local Government: Municipal Finance Management Act. The proposed amendment aims to correct this oversight and align the wording of section 18A(2C) with sections 18A(5B) and (7).

Extracted from the Memorandum on the objects of the tax administration laws amendment bill, 2019.

197

TAX ADMINISTRATIONS 49E of Income Tax Act

• Where more than one payment is made to the same foreign person within a period of two years from the date of the first payment, the written undertaking need only be submitted once, namely before the first payment to that foreign person, provided the conditions affecting the rate at which the royalty tax or withholding tax on interest is paid do not change and the payment of the royalty or interest is still made to or for the benefit of that foreign person.

• However, a declaration and written undertaking under this section will no longer be valid after a period of 5 years.

198

TAX ADMINISTRATION ACTSection 49E

• The new requirements with regard to thewritten undertaking have also beenextended to royalties or interest paymentsthat are exempt from royalty tax orwithholding tax on interest.

• As such declaration in writing will be validfor 5 years

197

198

Section 49E(3) of the Income Tax Act requires a foreign person to or for the benefit of whom a royalty payment is made, to submit to the local person making the payment, a declaration to permit a reduced rate of tax to be applied as a result of the application of an agreement for the avoidance of double taxation. An example would be the case of a beneficial owner of a royalty payment who is a resident in the United States of America, where the Double Tax Agreement between the United States and South Africa provides for a lower withholding tax rate than that prescribed in the Act.

It was submitted that this requirement creates an administrative burden for local persons that enter into multiple transactions with a single foreign person during the year. This would then mean that a declaration would have to be obtained by the local person from the same foreign person with regard to each and every transaction entered into.

The same issue was raised with regards to withholding tax on interest where local persons that have foreign investors need to obtain a declaration in terms of section 50E(3) where a reduced rate of tax has been applied as a result of the application of an agreement for the avoidance of double taxation.

Extracted from 2019 Tax Administration Laws Amendment Bill

199

S 50E OF THE INCOME TAX ACT

200

TAX ADMINISTRATIONS 50E, 64 FA, 64G of Income Tax Act

• An exception to the five year validity has been createdfor certain scenario’s.

• No time limitation will be imposed on the validityof the declarations and undertakings in theseinstances.– Section 50E – Bank or financial institutions is subject to

legislation with regard to the foreign person to whichpayment is to be made.

– Section 64FA – The exception will also apply to dividendstax by companies declaring and paying dividends in termsof this section

199

200

See the note on section 49E above. However, an exception to the five year validity limitation has been created for banks and other financial institutions involved in the payment of interest, where that bank or financial institution is subject to the Financial Intelligence Centre (FIC) legislation, Foreign Account Tax Compliance Act (FATCA) or the Common Reporting Standard (CRS) regulations with regard to the foreign person to or for the benefit of which the payment is to be made and takes account of these provisions in monitoring the continued validity of the declarations, i.e. the content of the declarations is monitored under or subject to the anti-money laundering, ‘‘know your client’’, FATCA or CRS requirements. In these instances, no time limitation will be imposed on the validity of the declarations and undertakings.


201

TAX ADMINISTRATIONS 50E, 64 FA, 64G of Income Tax Act

– Section 64G – The exception will also apply todividends tax by companies declaring and payingdividends in terms of this section

– Section 64H – The exception will also apply todividends tax by regulated intermediaries in termsof this section

• The requirement to submit a declaration and writtenundertaking has been removed insofar tax freeinvestments are concerned.

202

S 64FA OF THE INCOME TAX ACT

201

202

Currently, in order to ensure that dividends tax is not withheld from dividends declared on shares held as a tax free investment in terms of section 12T of the Income Tax Act, the regulated intermediary through which the investments are held will need to be provided with the required declaration and written undertaking as contemplated in section 64H. Failing this, dividends tax will have to be withheld and the investor would need to seek a refund of the dividends tax from the regulated intermediary once the required declaration and written undertaking has been provided. The proposed amendment aims to remove this requirement insofar as tax free investments are concerned.


203

TAX ADMINISTRATIONS 64FA of Income Tax Act

The exception to the time limitation on thevalidity of the declarations and undertakings,as proposed in section 50E(4), will alsoapply to dividends tax by companiesdeclaring and paying dividends ito thissection.

204

PARAGRAPH 14 OF THE 4TH

SCHEDULE

203

204

See the note on section 49E above. The proposed amendment aims to align the wording of section 64FA with the proposed amendments to section 49E and 50E. The exception to the time limitation on the validity of the declarations and undertakings, as proposed in section 50E(4), will also apply to dividends tax by companies declaring and paying dividends in terms of this section.

205

TAX ADMINISTRATIONParagraph 14 of 4th Schedule

The amendment aims to clarify that thepenalty in terms of this paragraph may alsobe imposed where an employer submits areturn that is not in the prescribed formand manner i.e. an incomplete return.


206

PARAGRAPH 19 OF 4TH

SCHEDULE

205

206

207

TAX ADMINISTRATION ACTParagraph 19 of the fourth schedule

The purpose of the amendment is toexempt the executor from having to submitan estimate of provisional tax on behalf ofthe deceased person in respect of the periodup to date of death.

This amendment has no impact on thedeceased person’s obligation to make a firstperiod estimate where he or she is still alive on31 August.

208

SECTION 41B OF THE VAT ACT

207

208

The last day of the year of assessment of a natural person in the year of his or her death is the date of death.

At present there is no exemption from the payment of provisional tax by a natural person in respect of the period ending on the date of death, which can result in the imposition of underestimation penalties under paragraph 20 of the Fourth Schedule.

In that regard, paragraph 19(6) of the Fourth Schedule provides that a person that fails to submit an estimate of provisional tax within four months of the end of the second period is deemed to have submitted an estimate of nil.

As a result, a deceased person may be subject to the underestimation penalty in paragraph 20 of the Fourth Schedule on assessment if no estimate was submitted by the executor within the four-month period. In order to have this penalty remitted under paragraph 20(2C) of the Fourth Schedule, the executor would have to lodge an objection.


209

TAX ADMINISTRATION ACTSection 41B of the VAT Act

Rulings ito Section 41B are not subject tothe prescribed fee as set out in Section79(6) and Section 81(1)(b) of the TAA.

210

LEGAL PROCEEDINGS INVOLVING COMMISSIONER

TAA Act: Amendment of section 11

209

210

The proposed amendment corrects the numbering of the section and aims to clarify that rulings in terms of section 41B of the Value-Added Tax Act, are not subject to the prescribed fee (i.e. the application fee and the cost recovery fee) as set out in section 79(6) and section 81(1)(b) of the Tax Administration Act, 2011.

Extracted from the Memorandum on the objects of the tax administration laws amendment bill, 2019.

211

TAX ADMINISTRATION ACTLegal proceedings involving commissioner

The amendment increases the current oneweek period to 10 business days in orderto afford SARS sufficient time to investigatethe matter to see if it can be resolvedwithout resorting to litigation, unless acompetent court directs otherwise, forexample in the case of urgency.

212

ORIGINAL ASSESSMENTSTAA Act: Amendment of section 91

211

212

A one-week notice period has proven to be impractical in practice to give effect to the rationale for the notice, i.e. to enable SARS an opportunity to investigate the matter further and to decide how to resolve the dispute, for example by exploring a dispute resolution process, thereby avoiding litigation at the public’s expense. The proposed amendment increases the current one-week period to 10 business days in order to afford SARS sufficient time to investigate the matter to see if it can be resolved without resorting to litigation, unless a competent court directs otherwise, for example in the case of urgency.

In comparison, for example, section 5(2) of the Institution of Legal Proceedings Against Certain Organs of State Act, 2002, provides that no process referred to in section 5(1) of the Act may be served, as contemplated in that subsection, before the expiry of a period of 60 days after the notice, where applicable, has been served on the organ of state in terms of section 3(2)(a).


213

TAX ADMINISTRATION ACTOriginal assessments

The amendment aims to clarify when SARSmay make an assessment based on anestimate under this provision i.e. if no returnis submitted or where no return is required,the taxpayer fails to pay the tax requiredunder a tax Act.

214

FINALITY OF ASSESSMENT OR DECISION


213

214

215

TAX ADMINISTRATION ACTFinality of assessment or decision

The amendment clarify that an assessmentor decision is final if an appeal has beenfiled and is withdrawn.

216

REFUNDS SUBJECT TO SET-OFF AND DEFERRAL

Amendment of section 191 of TAA

215

216

217

TAX ADMINISTRATION ACTRefunds subject to set-off

• The amendment clarify that SARS may set-off refunds against the outstanding tax debtof the taxpayer as well as amountsoutstanding in terms of customs andexcise legislation, even if there is nooutstanding tax debt. In such instances thefull amount is then utilised towards customsand excise debt.

218

NON-COMPLIANCE SUBJECT TO PENALTY

Amendment of section 210

217

218

The set-off of refunds against amounts outstanding in terms of customs and excise legislation is not a new principle. The principle applied prior to the enactment of the Tax Administration Act, 2011, where amounts refundable in terms of the Income Tax Act, 1962 (section 102(3)) as well as the Value-added Tax Act, 1991 (section 44(6)), could be set off against customs and excise debt. Section 76C of the Customs and Excise Act, 1964, similarly permits the set-off of customs and excise refunds against any outstanding tax debt.

Extract from the Tax Administration Bill 2019; Objects of Bill

219

TAX ADMINISTRATION ACT Mandatory Disclosure Rules

• It has emerged internationally that offshorestructures and arrangements are beingdesigned in an attempt to circumventfinancial account reporting under the OECD’sCommon Reporting Standard (“CRS”).

• The standard is used for the exchange offinancial account information betweencountries.

220


• Subject to the approval of the Minister, theOECD’s model Mandatory Disclosure Rules are tobe implemented in South Africa in proposed newCRS regulations.

• These will be issued in respect of the OECDStandard for Exchange of Financial AccountInformation in Tax Matters under section 257 readwith paragraph (a) of the definition of “internationaltax standard” in section 1 of the Act.

219

220

221


The Mandatory Disclosure Rules will requirecertain persons to report structures andarrangements, and the proposed amendmentof section 210 aims to enforce this reportingobligation by means of similar penalties tothose currently in force for non-compliance withthe reportable arrangement scheme under theAct.

222

UNDERSTATEMENT PENALTY PERCENTAGE TABLE


221

222

Mandatory non-disclosure penalties

(Main references: Sections 210 and 212; clauses 37 and 38 of the Draft Bill)

To ensure that structures and arrangements designed to circumvent the internationally agreed CRS are brought to SARS’ attention, it is proposed that the Minister be empowered to include the OECD’s model mandatory disclosure rules in a revised set of CRS regulations and that failure to comply with the rules be subject to similar penalties to those that exist for non-compliance with the existing reportable arrangement legislation in the Act.

Comment:

It is not clear how the introduction of a penalty for non-disclosure under the mandatory disclosure rules will address the concern set out in the Memorandum of Objects, which seemingly relates to structures and arrangements that are designed to circumvent such disclosure requirements. If a structure is successful at doing so by falling outside of the requirements, then a penalty cannot apply. The purpose of the proposed penalty must be clarified.

Response:

Comment misplaced. The mandatory disclosure rules, as set out in the draft CRS Regulations made available for public comment in May 2019, deal with attempts to circumvent CRS reporting.

Comment:

It is not clear whether the penalty will apply separately in relation to each account that is not reported or whether it will apply in aggregate for each reporting period. The legislation should clearly stipulate on what basis the penalty is proposed to be levied.

Response:

Noted. The penalty is triggered where there is a failure to report the arrangement or structure and is not account based.

Comment:

The title of section 212 refers to “Reportable arrangement and mandatory disclosure penalty”. The proposed amendment to section 212(1)(b) reads as follows “…..who fails to disclose the information required to be disclosed under the regulations.” As there is a difference between the terms “mandatory and “required” it is proposed that the term “required” be deleted and the subsection be amended to read as follows: “….who fails to disclose mandatory information under the regulations”.

Response:

Not accepted. The term “mandatory disclosure” is used for consistency with international model legislation. The information is required to be disclosed under the regulations (rather than being optional), which is a formulation used throughout the Tax Administration Act, 2011.

Comment:

The regulations issued under section 257 should refer to the ‘static’ definition of “intermediary” i.e. as defined at a given date, in order to avoid problems similar to those that necessitated the proposed change to the definition of “permanent establishment” in Clause 2(1)(i) of the Taxation Laws Amendment Bill, 2019.

Response:

Comment misplaced. A full definition of intermediary is provided in the draft CRS Regulations made available for public comment in May 2019.

Extracted from the 2019 Draft Response Document on the 2019 Draft Tax Bills

223

TAX ADMINISTRATION ACTUnderstatement penalty percentage table

The proposed amendment is a technical correction to effect clarity.

– made full disclosure to SARS of the arrangement.

224

CRIMINAL OFFENCES RELATING TO NON-COMPLIANCE WITH TAX ACTS


223

224

Remission of understatement penalty upon full disclosure or arrangement to SARS

(Main reference: Section 223; clause 39 of the Draft Bill)

The proposed amendment is a technical correction to effect clarity regarding the levying of the understatement penalty where a taxpayer has made full disclosure or an arrangement with SARS.

Comment: It is not clear what is meant by “made full disclosure”. This could be interpreted to mean all the information that is required to be provided to SARS has been provided or it could mean that all information related to the arrangement has been provided to SARS, whether there is a requirement (or a mechanism) to do so or not. It is submitted that it is the former which should apply.

225

TAX ADMINISTRATION ACTCriminal offences relating to non-compliance with tax Acts

The amendment clarifies that a person, whowillfully and without just cause issues to SARSan erroneous, incomplete or false documentrequired to be issued under a tax Act, is subjectto a criminal sanction under section 235.

226

TAX COMPLIANCE STATUSTAA Act: Amendment of section 256

225

226

227

TAX ADMINISTRATION ACTTax compliance status

• The amendments update the provisions relating to ataxpayer’s tax compliance status to take account ofrecent system developments that speed up theprocess.

• It furthermore enables the Commissioner to, by publicnotice, insert a de minimis for the amount ofoutstanding tax debt that will contribute to a taxpayer’stax compliance status as being indicated as non-compliant.

• It also provides for the Commissioner to allow a graceperiod before a taxpayer’s tax compliance status isindicated as non-compliant to third parties.

228

Other Tax Developments

227

228

The proposed amendments update the provisions relating to a taxpayer’s tax compliance status to take account of recent system developments that speed up the process. It furthermore enables the Commissioner to, by public notice, insert a de minimis for the amount of outstanding tax debt that will contribute to a taxpayer’s tax compliance status as being indicated as non-compliant.

Comment:

The wording of section 256(2) appears to exclude the possibility of a taxpayer applying for a TCC him/herself. Section 256 should clearly distinguish and/or clarify what the procedures and implications are, for both a taxpayer and a taxpayer’s client applying for a taxpayer’s tax compliance status, should they be different.

Response:

Comment misplaced. A taxpayer always has access to his or her tax compliance status through the eFiling platform. The section regulates third party access to this information.

Comment:

A distinction should be made in the subsection between the provision of access to a taxpayer’s compliance status and the actual confirmation (determination) of the taxpayer’s compliance status as they are two distinct processes. The 21 business days appears excessive if it relates merely to third party access to a taxpayer’s tax compliance status–and not to the actual confirmation of the tax compliance status as is alluded to in the latter part of the subsection. Providing access to a taxpayer’s tax compliance status should be instantaneous once the status has been confirmed(determined).

Response:

Not accepted. The 21 day period refers to the time period SARS requires to verify or confirm internally whether or not there are circumstances that may preclude SARS providing the taxpayer with the ability to grant third party access to the taxpayer’s tax compliance status.

Comment:

It is requested that consideration be given to exclude tax debts subject to a request for suspension in terms of section 164(2). Pending a decision from a senior SARS official to suspend payment, after such a request has been made, a taxpayer’s tax compliance status should not be adversely affected for the period commencing on the day that SARS receives such a request and ending 10 business days after notice of SARS’ decision to the taxpayer.

Response:

Accepted. The proposed amendment will be reworded to include the period for which SARS may not proceed with collection steps undersection 164(6).


229

CARBON TAXSouth African

230

South African Carbon TaxBackground and current status

The carbon tax was:• Announced in 2010• 2012 budget speech announced that it will be introduced in

2013/2014• Finally promulgated in 23 May 2019 – Act 15 of 2019

Tax will be payable on direct emissions from 1 June 2019. The tax is unique in that it:• Has several relief mechanisms• •allows emitters to offset taxable emissions by using offsets.

Builds on greenhouse gas reporting regulations–• Regulation 275 National Environmental Management: Air Quality

Act (39/2004): National Greenhouse Gas Emission Reporting Regulations

229

230

231

SARS INTERPRETATION NOTES –REFER TO – REFER TO SARSWEBSITE

https://www.sars.gov.za/Legal/Interpretation-Rulings/Interpretation-Notes/Pages/default.aspx

232

SARS PUBLISHED BINDING RULINGS – REFER TO SARSWEBSITE

https://www.sars.gov.za/Legal/Interpretation-Rulings/Published-Binding-Rulings/Pages/default.aspx

231

232

233

Court Cases

234

TAX COURT

233

234

235

COURT CASESTax Court

Date of Delivery

Case Number

Applicable Legislation

Keywords

28 June 2019

IT 14434/2019

Income Tax Act, 1962

Income tax; section 13quin; building allowance; whether the Appellant was entitled to a building allowance in the tax year claimed

12 June 2019

IT 14287 Income Tax Act, 1962

Income tax; whether the Appellant is liable for tax in terms of section 64 of the Income Tax Act

17 April 2019

IT 24510 Income Tax Act, 1962

Income tax; whether revenue from the sale of gift cards constitute gross income

236


Date of Delivery

Case Number


Keywords

27 February 2019

13868 Income Tax Act, 1962

Income tax; lease; whether the Appellant was entitled to a postponement and condonation for filing its appeal

31 January 2019


Income tax; whether the taxpayer was entitled to be a PBO and be allowed a tax exemption in terms of section 10(1)

20 December 2018


Income tax; lease; whether a lease premium is of a capital or revenue nature

235

236

237


Date of Delivery

Case Number


Keywords

13 December 2018

14426 Employment Tax Incentive Act, 2013Labour Relations Act, 1995

Employment tax incentive ; whether the Appellant was entitled to an employment tax incentive deduction

5 December 2018

VAT 1558

Value-Added Tax Act, 1991

Value-added tax; promotional products; adverting and promotional products; whether the Appellant was liable for VAT in terms of section 8(15) on certain promotional products for advertising and promotional services

238


Date of Delivery

Case Number


Keywords

1 November 2018


Income tax; section 24C; loyalty programme; whether the Appellant was entitled to a section 24C allowance in respect of a loyalty programme it administered

237

238

239

INCOME TAX: WHETHER REVENUE FROM THE SALE OF GIFT CARDS CONSTITUTE GROSS INCOME

IT 24510

240

COURT CASESThe facts

The taxpayer carries on business as a highstreet retailer of clothing, comestibles andgeneral merchandise.

As part of the facilities offered to itscustomers, it “sells” gift cards.

These can be redeemed for goods at any ofthe taxpayer’s stores.

239

240

241


• It is the company’s practice at the end of each month to transfer amounts received in respect of gift cards into a separate bank account, and to appropriate from that bank account the amount representing the value of goods acquired on redemption of gift cards and the unredeemed value of any gift cards (which are valid for a period of three years) that have expired during the month.

242


For income tax purposes, the taxpayer had,prior to the YOA in dispute, declared theamounts received for the issue of gift cards asgross income and claimed an allowance forfuture expenditure representing the estimatedcost of goods that it would be obliged to supplyto the holders of the cards on presentation forredemption.

241

242

243


• However, following the promulgation of the Consumer Protection Act, it reconsidered the treatment of its receipts in respect of gift cards.– Section 63 of the CPA provides that ‘any

consideration paid to a supplier in exchange for a prepaid certificate, card, credit voucher or similar device … is the property of the bearer of that … device to the extent that the supplier has not redeemed it in exchange for goods or services ...’

244


– Section 65 of the CPA provides that the suppliermust not treat the consideration as its propertyand requires that the supplier ‘in the handling,safeguarding and utilisation of that property, mustexercise the degree of care, diligence and skillthat can reasonably be expected of a personresponsible for managing any property belongingto another person …’

243

244

245


• In its 2013 return of income the taxpayer excluded theamount standing to the credit of the separate account,asserting that the amounts had not yet accrued to itfrom “gross income”.

• SARS conducted an audit of the return and issued anadditional assessment, which included as income theamount standing to the credit of the separate account,against which it allowed a deduction in respect offuture expenditure, which was consistent with the filingpositions adopted by the taxpayer in earlier years.

246


• After the taxpayer’s objection against theadditional assessment was disallowed, anappeal was lodged, and the matterproceeded for hearing in the Tax Court.

245

246

247

COURT CASESThe issue

‘The question in this appeal from the additionalassessment by the Commissioner of the taxpayer’staxable income in the 2013 fiscal year is whether therevenue from the “sale” of the taxpayer’s gift cardsduring that year constituted part of its “gross income”for the purposes of the Income Tax Act as soon as itwas received by the taxpayer (as contended by theCommissioner), or would become such only when thecard was redeemed, or having not been redeemed,expired (as contended by the taxpayer).’

248

COURT CASESThe arguments

• For SARS, it was argued that thetransactions by which gift cards were issuedwere a sale (which Binns-Ward J understoodto mean a cash sale).

• That is, that the card was ‘sold’ to thepurchaser and the consideration should betreated as cash sale revenue, which accruedon issue of the card.

247

248

249


• The secondary argument advanced by counsel for SARS was that:– ‘… the taxpayer’s receipts in respect of the “sale” of gift

cards were indistinguishable from any other receipts taken at its tills when merchandise was sold, and that the revenue was available for use in the taxpayer’s operations if it chose.

– She argued that it was therefore of no significance that an amount equal to the sum of the gift token receipts was subsequently sequestered in a separate specially identified banking account.’

250


• For the taxpayer, the primary argumentwas that, irrespective of the CPA, theamounts were not received by thetaxpayer for its own benefit, but for thebenefit of the holder of the gift card andthat they only became entitled to theamounts when the card was redeemed oron its expiry.

249

250

251


• The taxpayer’s second argument wasthat the provisions of section 63 and 65 ofthe CPA, coupled with its treatment of thereceipts in conformity with the statute,characterised the receipts as amountsreceived on behalf of or for the benefit ofthe cardholder and not as beneficialreceipts of the taxpayer.

252

COURT CASESThe judgement

• The court rejected the first level of the argument.• It found that the argument was based on the

notion that the moneys were received and,pending the redemption or expiry of the cards,somehow held “in trust” for the benefit of thecardholders.

• The court held that the mere segregation of thereceipts in respect of unredeemed gift cards in aseparate banking account identified for thatpurpose did not mean that the taxpayer did nothold the money for itself and for its own benefit.

251

252

253


• The taxpayer might have seen itself as some sortof trustee but there was no evidence that it hadbound itself in a legally effective manner to holdthe receipts in a fiduciary capacity. It did not matterwhere the taxpayer kept it, or how it accounted forit in its books. It could have spent it or saved it asit wished – for its own benefit.

• The court found, accordingly, that the taxpayerwas correct to have included its receipts inrespect of unredeemed gift cards in its accountingfor its gross income in the period before thecommencement of the CPA.

254

COURT CASESThe judgement• However, the position changed after the introduction of the

CPA.• According to the court, the question that then arose was

whether the taxpayer’s method of dealing with the gift cardreceipts in apparent compliance with the requirements of theCPA entailed that it received the proceeds for itself, or for thegift card bearers.

• The court held that the CPA required it to take and hold thereceipts for the card bearers, and to refrain from applyingthem as if they were its own property, and its method ofdealing with the receipts was directed to doing just that.

• The CPA forbade the taxpayer from receiving the moneystaken in for gift cards for itself until the cards were redeemed.

253

254

255


• Accordingly, the gift card receipts were“received” by the taxpayer, not foritself, but to be held for the card bearer.

256


• The court held, accordingly, that thereceipts on account of gift cards werecorrectly not included in the taxpayer’s“gross income” and that the relevantassessments should be set aside.

255

256

257

COURT CASESThe judgement• The counsel for the Commissioner raised an interesting

argument, namely, that the CPA was introduced to protect consumers’ rights, and not to change the incidence of tax. In that regard, the court held as follows:– If the manner in which the CPA protects consumers entails the

deferral of beneficial receipt of revenue by suppliers as a matter of fact, then the knock-on effect on the determination of the suppliers’ taxable income is only to be expected. Were it otherwise, the necessary implication would be that suppliers fall to be taxed on income they have not yet received, and which has not yet accrued to them. The CPA does not express any such intention. And any such effect would be at odds with the scheme of the [ITA]. A conflict between the two sets of legislation arises only if it is construed in the manner contended for by the Commissioner. It does not arise on the approach contended for by the taxpayer’s counsel.

258


• The court accordingly dismissed thatargument.

• Essentially, the court found that theCommissioner cannot apply fiscal laws ina vacuum; he must determine the incidenceof tax in the real world, and in light of all therelevant facts and circumstances, includingcommon law or legislation that requirestaxpayers to act in a certain manner.

257

258

259

HIGH COURT

260

COURT CASESHigh Court

Date of Delivery

Case Number


Keywords

15 August 2019New!

Acti-Chem SA (Pty) Ltd Customs & Excise

Act, 1964Customs & Excise; Rebate item 306.07 of Schedule 3; section 75; rule 75; Whether the rebate claimed by the appallent is warranted

259

260

261

SUPREME COURT OF APPEAL

262

COURT CASESSupreme Court of Appeal

Date of Delivery

Case Number


Keywords

27 September2019New!

Atlas Copco South Africa (Pty) Ltd


Income tax; valuation of stock at year end in terms of section 22(1)(a) of the Income Tax Act 58 of 1962.

6 September2019

BMW South Africa (Pty) Ltd

Also see media summary


Payment by employer to tax consultants to render assistance to expatriate employees – whether a taxable "benefit or advantage" as contemplated in the definition of "gross income" in section 1 of the Income Tax Act 58 of 1962 read with section 2(e) or (h) of the Seventh Schedule.

261

262

263


Date of Delivery

Case Number


Keywords

22 March 2019

Benhaus Mining (Proprietary) Limited


A company that excavates ground and digs up mineral-bearing ore for a fee on delivery to another entity that processes the ore, undertakes mining operations within the meaning of section 1 and 15(a) of the Income Tax Act 58 of 1962. It is thus entitled to claim deductions of the full amount of capital expenditure on mining equipment in the tax year in which it is incurred, in terms of section 36(7C) of the Act.

264


Date of Delivery

Case Number


Keywords

26 February 2019

Purlish Holdings (Proprietary) Limited

Tax Administration Act, 2011

Appeal against imposition of understatement penalties; the appellant’s conduct fell within the category listed in items (a) to (d) of the definition of "understatement" in section 221 of the Tax Administration Act; SARS suffered prejudice; no bona fide or inadvertent error; the imposition of penalties was justified; the increase of understatement penalties by the Tax Court incompetent and set aside.

263

264

265


Date of Delivery

Case Number


Keywords

3 December 2018

Big G Restaurants (Pty) Ltd


Income Tax Act 58 of 1962; income tax; section 24C; whether income of taxpayer in years of assessment received or accrued in terms of franchise agreement; used to finance future expenditure incurred by taxpayer in the performance of obligations under that agreement; income and obligations must originate from the same contract.

266


Date of Delivery

Case Number


Keywords

20 November 2018

Milnerton Estates Ltd


Income Tax; purchase price of erven in a township sold by developer; sales occurring in one tax year and all suspensive conditions fulfilled in that year; transfer registered and purchase price received in following year; whether purchase price deemed to have accrued in year that sale agreements concluded; section 24(1) of Income Tax Act 58 of 1962; stare decisis .

265

266

267


Date of Delivery

Case Number


Keywords

9 November 2018

Sasol Oil (Pty) Ltd


Income tax; contracts for the sale of crude oil by one entity within the Sasol Group, to another, and the back to back sale of the same oil to yet another entity in the group, were not simulated in order to avoid a liability to pay tax, nor were they entered into solely for the purpose of avoiding the payment of tax for the purpose of section 103(1) of the Income Tax Act 58 of 1962.

268

INCOME TAX: VALUATION OF STOCK AT YEAR END

Atlas Copco South Africa (Pty) Ltd

267

268

269

COURT CASESThe Facts

• Atlas Copco South Africa (Pty) Ltd, thetaxpayer, is part of a multinational groupheadquartered in Sweden.

• It imports machinery and equipment for usein the mining and related industries inSouth Africa.

270


• The group applied an accounting policy towrite down stock not sold within 12 monthsby 50% and by a further 50% if not sold in24 months.

• This same policy was applied by thetaxpayer to determine the value of stockfor tax purposes.

269

270

271


• SARS disallowed this adjustment on the basis that the value of closing stock, for tax purposes, can only be reduced by: (s 22(1)(a)) – “such amount as the Commissioner may think just

and reasonable as representing the amount by which the value of such trading stock … has been diminished by reason of damage, deterioration, change of fashion, decrease in the market value or for any other reason satisfactory to the Commissioner”

272


• The Tax Court described the legal dispute as being whetherthe NRV, if lower than the cost of the trading stock, may andshould be accepted to represent the value of closing stock fortax purposes.

• It ruled in favour of the taxpayer and concluded that the useof NRV to determine the value of closing stock was anappropriate method that yielded a sensible and business-like result.

• The SCA held that, similarly to the VWSA case, the Tax Courterred in its views that NRV provided an appropriate valuationof closing stock for tax purposes. The focus of the enquirytherefore shifted to the basis used to determine the quantumof the diminution in the value of the stock.

271

272

273


• Ponnan JA noted that it was difficult todiscern the taxpayer’s basis for thediminution of value.

• He suggested that this was due to the factthat the taxpayer deviated from its initialreliance on the group policy applied todetermined NRV, which had been largelynegated by the judgment in the VWSA casein the SCA.

274


• The court considered the method andsupporting evidence used by the taxpayerto determine the diminution in the value of6 stock categories.

• It concluded in each instance that thetaxpayer failed to demonstrate adiminution in the value of the closingstock.

273

274

275


• Instead, the bases for such write-downswere described as unmotivatedguesstimates, to be based on anaggressive accounting write-down policyrather than a true reflection of the factualposition and, in the case of demo stock, toreflect the auditor’s inability to locate thestock rather than a diminution in value ofthe stock.

276

COURT CASESThe takeaway

• If the value of closing stock, as taken into account for taxpurposes, is reduced below its cost, the taxpayer should beable to provide evidence of the decrease in the marketvalue of the stock.

• Mere reliance on an accounting policy is not sufficientgrounds to reduce the value taken into account for taxpurposes.

• Wallis JA, at paragraph 46 of the judgment in the VWSA case,stated that the fiscus is concerned with the value of tradingstock as a whole.

• This statement could be interpreted that section 22(1)(a)should to be applied to a taxpayer’s overall stock position.Paragraph 22 of the judgment in the Atlas Copco case wouldhowever suggest that it is appropriate to apply section22(1)(a) to each category of stock item, rather than its overallstock position.

275

276

277

INCOME TAX: PAYMENT BY EMPLOYER TO TAX CONSULTANTS TO RENDER ASSISTANCE TO EXPATRIATE EMPLOYEES.

BMW South Africa (Pty) Ltd

278


• BMW South Africa (Pty) Ltd (‘BMW SA’) is a memberof an international group;

• Group employees are assigned from other companieswithin the BMW group to undertake employment withBMW SA from time to time;

• The BMW group has a tax equalisation programmewhich ensures that the employees will receive thesame take-home pay as they would have received ifthey had not been assigned to another jurisdiction fora temporary period;

277

278

279


• In order to manage the equalisation, it is imperativethat the tax liability in South Africa should beaccurately established, and, to this end, BMW SA andthe relevant employer in the country of residenceengaged professional tax consultants to prepare therelevant tax calculations that form the basis of anyequalisation payment or adjustment;

• The contract under which the employee undertook toperform the services in a foreign jurisdiction stated thatprofessional consultants would prepare the income taxsubmissions of the employee in both the home andhost country;

280


• In South Africa, three consultant firms wereengaged and, at the expense of BMW SA,were required to register the employees astaxpayers, collect the relevant information forthe preparation of any return from therelevant employees, prepare and file allreturns on behalf of the employees and dealwith any compliance-related issues arisingout of the returns submitted.

279

280

281


• In the course of an audit of BMW SA’sPAYE returns, SARS formed the opinionthat the services of the tax consultantswere a taxable fringe benefit enjoyed bythe employees and assessed BMW SA toadditional employee’s tax, penalties andinterest.

282


• In raising the assessments, SARS placed reliance on paragraph (i) of the definition of ‘gross income’ in section 1 of the Income Tax Act (‘the Act’), which includes in taxable income:– ‘the cash equivalent, as determined under the

provisions of the Seventh Schedule, of the value during the year of assessment of any benefit or advantage granted in respect of employment or to the holder of any office, being a taxable benefit as defined in the said Schedule …’

281

282

283


• In turn, the Seventh Schedule to the Act, in paragraph 2(e), deems a taxable benefit to have been granted to an employee if, as a benefit or advantage of or by virtue of employment:– ‘any service … has at the expense of the employer been

rendered to the employee (whether by the employer or by some other person), where that service has been utilized by the employee for his or her private or domestic purposes and no consideration has been given by the employee to the employer in respect of that service …’

284

COURT CASES The facts

• After its objection to the assessments hadbeen disallowed, BMW SA appealed to theTax Court, which had found in favour of theCommissioner.

• On further appeal to the High Court, thedecision of the Tax Court was upheld.

• BMW SA then appealed to the SCA.

283

284

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COURT CASESThe argument

• The arguments advanced by BMW SA addressed twofundamental bases:– The tax consultants were contractually bound to provide

the services to BMW SA so that it could manage theremuneration of its employees under the tax equalisationprogramme, and the services were rendered to theemployer and not to the employee;

– The tax equalisation programme was intended to ensurethat the employees gained no benefit or advantage fromthe geographic location, so no benefit or advantageaccrued to the employees.

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• The judgment, delivered by Navsa JA, dealt first with the submission that the tax consultancy services were for the benefit of the employer and not the employee.

• At paragraph [21], the application of paragraph (i) of the definition of ‘gross income’ in section 1 of the Act was identified as the taxing provision:– ‘It is correct that the benefit or advantage contemplated in

the definition of ‘gross income’ in s 1(i) of the Act must have been granted in respect of employment or to the holder of any office.’

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COURT CASESThe judgement• In examining whether the services were granted in

respect of employment, Navsa JA found, at paragraph[24]:– ‘The services rendered by the firms to expatriate

employees … were to ensure that the latter met theirobligations to SARS. It is undisputed that the amount …constitutes payments by BMWSA for the services renderedto the expatriate employees... That payment was made interms of the contract of employment. These were servicesthat the expatriate employees would otherwise have had topay for personally. The ineluctable conclusion is that theservices provided are a benefit or advantage ascontemplated by s 1 of the Act, read with paragraph 2(e) ofthe Seventh Schedule.’

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• BMW SA’s argument that the fact that the services were rendered to assist and protect the employer indicated that they were not a benefit of employment was dealt with in paragraph [25] of the judgment:– ‘There will be instances in which benefits or advantages

contemplated within s 1(i) read with the Seventh Schedule have some residual or marginal advantage for an employer. The primary question, however, is whether an advantage or benefit was granted by an employer to an employee and whether it was for the latter’s private or domestic purposes. In the present case, as stated above, the compelling conclusion is that the services were correctly valued and utilised for the employees’ private or domestic purposes as contemplated by s 1 of the Act read with para 2(e) of the Seventh Schedule.’

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• As to the argument that the question of benefit could not arise because the purpose of the tax equalisation programme was to eliminate any benefit from the foreign services contract, Navsa JA endorsed the opinion of the Tax Court that the question of the professional services was a private issue between the company and the employees, and rejected the argument advanced by BMW SA at paragraph [26]: ‘… – [T]he confirmation of the assessment will not lead to the

expatriate employees being worse off in terms of their employment with BMWSA. In terms of their tax equalisation policy, they will have to bear the additional tax burden on behalf of the expatriate employees. BMWSA’s policy and terms of employment cannot dictate the application of the provisions of the Act.’

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Judgment was accordingly given in favourof the Commissioner and the assessmentswere confirmed

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COURT CASESThe take away

• The matter here turned primarily on thecontractual arrangements between theemployee and employer on the one hand andthe employer and consultants on the otherhand. The contracts provided a clear road mapthat linked the services to the employee ratherthan to the employer. As a result, the benefit to theemployer was considered residual or marginal andultimately was disregarded as irrelevant.

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• The decision can however be criticized on the basisthat the court decided to take an objective approachinstead of looking at the facts subjectively. It can beargued that the main purpose of the arrangementsbetween BMW SA and the tax consultants was tobenefit BMW SA as the employer. In terms of theBMW group’s tax equalisation programme, BMW SAwill bear the additional tax costs of the expatriateemployees. It is therefore possible that thearrangements primarily benefited BMW SA and thatthey merely resulted in an ancillary benefit to theemployees. The court, to a substantial degree, ignoredthe benefit to BMW SA.

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• Furthermore, it is possible, if the contract hadrequired that the tax consultants advise BMWSA of the amounts of tax to be withheld fromthe remuneration of the employees, and toevaluate the employees’ tax assessments toconfirm the amounts of any refunds due tothe employees, that the outcome may havebeen different.

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• Parties to an arrangement should identifyand carefully consider the possible taximplications for the persons affected.

• The old adage that the devil lies in thedetail is well illustrated in this decision.

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Thank you

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SAICA ANNUAL TAX BILL UPDATE...5 ABOUT THE PRESENTER Wessel Smit • B.Compt (Hons) HDip Tax MCom...

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