€¦ · Web viewExcise duties on alcoholic beverages will be increased in accordance with the policy decision to target a total tax burden (excise duties plus VAT) of 23%, 33%

Budget and Tax Update 2009

March to April 2009

ALL RIGHTS RESERVED COPYRIGHT

The views expressed in this document are not necessarily those of the Seta’s.

CONTENTS

PagePART 1 - BUDGET 20092009 BUDGET - TAX PROPOSALSHIGHLIGHTS 6INDIVIDUALS 6Tax tables 2009/10Tax tables 2008/09RebatesTax thresholdTax saving per annumInterest and taxable dividend exemptionMonthly monetary caps for tax-free medical scheme contributionsAnnual exclusion for capital gains or lossesAnnual exclusion in year of death for capital gains or lossesPrimary residence exclusion for capital gains or lossesTravel allowance: deemed expenditure tableSubsistence allowance: deemed expenditure daily limitsDaily amount for travel Outside the RepublicRETIREMENT BENIFITS 12Table for pre-retirement lump sumsTable for retirement and death lump sumsCORPORATE TAX RATES 13Normal tax (basic rate)Tax rates for qualifying small business corporationsPresumptive turnover tax for micro businessesSecondary tax on companies (STC)TRUSTS 14OTHER TAXES 14Estate dutyDonations taxCapital gains tax (CGT)Transfer dutySecurities Transfer TaxCOMMENTARY 15Introduction OverviewMain tax proposalsINDIVIDUALS 16Personal income tax reliefMedical scheme contributionsTravel allowanceStandard income tax on employeesProvisional tax for taxpayers 65 years and olderPrimary residence exclusionSAVINGS 18

Budget and Tax Update 2009 March to April 2009 1

PageTax-free interest, dividend income and capital gainsProvident funds, social security and retirement reformsPERSONAL AND EMPLOYMENT TAX ISSUES 18Employer contributions to retirement annuity fundsAdditional deduction for learnershipsPre-1998 retirement benefits for public servantsUnrealised gains on deathESTATE DUTY AMENDMENTS 19Portable R3.5 million deduction between spouses1-year usufructuary interest schemesTiming and recovery of additional assessmentsBUSINESS ISSUES 20Small business owners’ shelf companiesPermissible short-term insurance reservesLeasing lossesControlled foreign company CFC rulings reliefLiquidating of inactive entitiesSecurities lending arrangementsCompany law reformOil and gas companies conducting incidental tradesUnderwater telecommunication cablesTelecommunication license consolidationDepreciation of improvementsDIVIDEND REFORM PROCESS 21COLLECTIVE INVESTMENT SCHEME DISTRIBUTIONS 22MINERAL AND PETROLEUM ROYALTIES 22ENVIRONMENTAL FISCAL REFORM 22Incentives for cleaner productionPlastic bag levyTaxation of incandescent light bulbsEmission reduction creditsMotor vehicle ad valorem duties and emission taxesInternational air passenger departure taxFuel leviesRoad Accident Fund levyVALUE-ADDED TAX 24Voluntary registration thresholdFalse statement on VAT formsVAT registration verificationsVAT implications of reorganisationsTaxpayer relief from late payment interest chargesShare block schemesCUSTOMS AND EXCISE AMENDMENTS 25Customs and excise dutiesSingle procedure for customs dispute resolutionSimplification of warehouse policies and proceduresAdvance passenger informationCustoms transit procedures


PageBorder enforcement Duty-free VAT-exempt goods2010 FIFA World CupTAX ADMINISTRATION 26Income Tax Act rewrite – phase 1Tax administration modernisation agendaSection 88A settlement proceduresPayment of interest on allowance of objectionInterest on delayed PAYE payments by employersRoundingSPECIAL CIRCUMSTANCES 27Pre-existing cooperativesAgricultural trustsConverted section 21 companiesRecreational clubsSupporting public benefit organisationsFinancial Consumer Education FoundationFilm rebate subsidiesJudicial decisions in respect of trading stock and restraint of tradeMISCELLANEOUS AMENDMENTS 29Ratification of ministerial determination of Transfer Duty and Securities Transfer TaxTechnical corrections

PART 2 - TAX UPDATEDEVELOPMENTS OVER THE LAST YEAR 30Interpretation Notes issued or revised in 2008Regulations and government noticesTax judgmentsInterest rate changesUIF thresholdAMENDMENTS TO LEGISLATION 32INDIVIDUALS 32

Medical deduction RETIREMENT BENEFITS 33

Partnerships and the definition of ‘pension fund’Lump sums to dependants of a deceased fund memberPayment of benefits to dependants of a deceased member of a retirement annuity fundWithdrawals where a member emigratesPre-retirement withdrawals from retirement fundsMaintenance payments from a retirement fundAllocations to spouses upon divorceDefault preservation of withdrawal benefitsAnnuitisation of death benefitsPreservation fundsDefinition of ‘living annuity’Unclaimed benefit fundsTransfers from pension to provident funds

EMPLOYERS AND EMPLOYEES 41


PageExpatriate accommodationDeduction for repayable remunerationDeemed employeesAdditional learnership deduction for apprenticeshipsPayroll givingPersonal use of business cell-phones and computersBroad-based employee share schemesExecutive share schemesSITE re-determination

CORPORATE TAX 47Intra-group dividendsSTC Reforms

Conversion from STC to dividend taxRevised dividend definitionContributed tax capitalWithholding tax on dividends

Passive holding companiesCompany reorganisationsShare issue anomaliesIntellectual property arbitrageLiquidation distributions

SMALL BUSINESS 63Asset write-off electionMicro business turnover taxVenture capital company incentive

TAX INCENTIVES AND ALLOWANCES 74Residential building allowanceUrban development zone allowanceLow-cost residential unit loan account allowanceAllowance for expenditure on government business licencesStrategic industrial policy projectsPromotion of land conservation and biodiversitySundry amendments

CAPITAL GAINS TAX 85Vesting of an interest in a trust asset in a beneficiaryBase cost of an asset donated by a non-residentHolders of a participatory interest in a collective investment scheme in property (CISP)Vesting of a trust asset in an exempt institution

OTHER TAXPAYERS AND EXEMPTIONS 86Public benefit organisationsRecreational clubsBody corporatesAmalgamation of professional and amateur sporting bodies

ADMINISTRATIVE PROVISIONS 87Administrative penaltiesPublication of rulingsDue date for payment and returnsEmployers’ obligations


PageProvisional taxInterest on underpayment of taxOTHER TAXES 95VALUE-ADDED TAX 95

Thresholds – category D (farmers) and category E (very small businesses) Deregistration relief Industrial development zones (IDZs) Public-private partnerships Supply of the right to receive money under a rental agreement Land reform transactions Storage warehouses

TRANSFER DUTY ACT 99 Land redistributions

ESTATE DUTY 99 Retirement fund lump sum benefits Administrative process

REPEAL OF STAMP DUTIES ACT 100SECURITIES TRANSFER TAX 100

De minimis exemption


PART 1 – BUDGET 2009

2009 BUDGET TAX PROPOSALS

HIGHLIGHTS

Personal income tax relief for individuals amounting to R13.6 billion Delaying implementation of new mineral and petroleum royalties until 1 March 2010 A final set of amendments to support dividends tax reform Incentives for investments in energy-efficient technologies Implementation of the electricity levy announced in Budget 2008 Making certified emission reduction credits tax exempt or subject to capital gains tax, instead of normal

income tax Taxation of energy-intensive light bulbs Reforms to the motor vehicle ad valorem excise duties Increase in the road Accident Fund (RAF) and general fuel levies Tax-sharing arrangements with municipalities Increase in excise duties on alcoholic beverages and tobacco products An increase in the international air passenger departure tax Reviewing the tax treatment of travel (motor vehicles) allowance to improve the equity and

transparency of the tax system Amendments to the treatment of contributions to medical schemes

The notes that follow draw extensively from the SARS Budget Tax Proposals 2009/10 and Chapter 4 of the 2009 Budget Review published by National Treasury.

INDIVIDUALS

Tax tables 2009/10

Taxable incomeR

Rate of tax

0 - 132 000 18%132 001 - 210 000 23 760 + 25%210 001 - 290 000 43 260 + 30%290 001 - 410 000 67 260 + 35%410 001 - 525 000 109 260 + 38%525 001 - 152 960 + 40%

Tax tables 2008/9

Taxable incomeR

Rate of tax

0 - 122 000 18%122 001 - 195 000 21 960 + 25%195 001 - 270 000 40 210 + 30%270 001 - 380 000 62 710 + 35%380 001 - 490 000 101 210 + 38%490 001 - 143 010 + 40%


Rebates

2009/10R

2008/09R

Primary 9 756 8 280Secondary 5 400 5 040

Tax threshold

2009/10R

2008/09R

Below age 65 54 200 46 000Age 65 and over 84 200 74 000

The proposed changes to the tax tables and rebates eliminate the effects of inflation on income tax liabilities and result in a reduced tax liability for taxpayers at all income levels. These tax reductions are set out below:

Tax saving per annum

Taxable income Age below 65R

Age above 65R

R54 200 – R120 000 1 476 1 836R150 000 2 176 2 536R200 000 2 426 2 786R250 000 2 926 3 286R300 000 3 926 4 286R400 000 4 526 4 886R500 000 5 026 5 386R750 000 and above 5 526 5 886

Interest and taxable dividend exemption

2009/10R

2008/09R

Natural persons below age 65 21 000 19 000Age 65 and over 30 000 27 500

Of the above, the amount that can be applied to foreign interest and dividends

3 500 3 200

Monthly monetary caps for tax-free medical scheme contributions

2009/10R

2008/09R

First two beneficiaries 625 570Each additional beneficiary 380 345

Annual exclusion for capital gains or losses

2009/10R

2008/09R

Natural persons 17 500 16 000

Annual exclusion in year of death for capital gains or losses

2009/10R

2008/9R

Natural persons 120 000 120 000


Primary residence exclusion for capital gains or losses

2009/10R

2008/09R

Natural persons 1 500 000 1 500 000

Travel allowance: deemed expenditure table

Value of the vehicle Fixed cost (R)

Fuel cost (c/km)

Maintenance cost (c/km)

0 - 40 000 14 672 58.6 21.740 001 - 80 000 29 106 58.6 21.780 001 - 120 000 39 928 62.5 24.2120 001 - 160 000 50 749 68.6 28.0160 001 - 200 000 63 424 68.8 41.1200 001 - 240 000 76 041 81.5 46.4240 001 - 280 000 86 211 81.5 46.4280 001 - 320 000 96 260 85.7 49.4320 001 - 360 000 106 367 94.6 56.2360 001 - 400 000 116 012 110.3 75.2400 001 - 116 012 110.3 75.2

Subsistence Allowance: deemed expenditure daily limits

The following amounts will be deemed to have been actually expended by a recipient to whom an allowance or advance has been granted or paid –

2009/10R

2008/09R

Where the accommodation, to which that allowance or advance relates, is in the Republic and that allowance or advance is paid or granted to defray -Incidental costs only R80 per day R73 per dayThe cost of meals and incidental costs R260 per day R240 per day

Where the accommodation, to which that allowance or advance relates, is outside the Republic and that allowance or advance is paid or granted to defray the cost of meals and incidental costs, an amount per day determined in accordance with the following table for the country in which that accommodation is located -

Daily Amount for Travel Outside the Republic

2009(2008 US $215 all countries)

Country Currency AmountAlbania Euro 97Algeria Euro 136Angola US $ 191Antigua and Barbuda US $ 220Argentina US $ 75Armenia US $ 279


Country Currency AmountAustria Euro 108Australia Aus $ 175Azerbaijani US $ 145Bahamas US $ 191Bahrain B Dinars 36Bangladesh US $ 79Barbados US $ 202Belarus Euro 117Belgium Euro 124Belize US $ 152Benin Euro 89Bolivia US $ 53Bosnia-Herzegovina Euro 112Botswana Pula 799Brazil US $ 133Brunei Darussalam US $ 88Bulgaria Euro 89Burkina Faso Euro 100Burundi US $ 138Cambodia US $ 90Cameroon Euro 100Canada Can $ 156Cape Verde Islands Euro 88Central African Republic Euro 96Chad Euro 121Chile US $ 105Colombia US $ 94Comoros Euro 85Cook Islands NZ $ 391Cote D'Ivoire Euro 124Costa Rica US $ 62Croatia Euro 105Cuba Euro 107Cyprus Euro 116Czech Republic Euro 80Democratic Republic of Congo US $ 193Denmark Euro 185Djibouti US $ 99Dominican Republic US $ 99Ecuador US $ 92Egypt US $ 90El Salvador US $ 80Equatorial Guinea Euro 130Eritrea US $ 106Estonia Euro 91Ethiopia US $ 65Fiji US $ 100Finland Euro 140France Euro 149Gabon Euro 228Gambia Euro 110Georgia US $ 261Germany Euro 107Ghana Euro 110Greece Euro 114Grenada US $ 151


Country Currency AmountGuatemala US $ 85Guinea Euro 78Guinea Bissau Euro 59Guyana US $ 118Haiti US $ 109Honduras US $ 67Hong Kong HK $ 1 000Hungary Euro 80Iceland ISK 30 320India US $ 139Indonesia US $ 86Iran US $ 67Iraq US $ 125Ireland Euro 233Israel US $ 122Italy Euro 120Jamaica US $ 151Japan Yen 18 363Jordan US $ 128Kazakhstan US $ 103Kenya US 102Kiribati Aus $ 233Korea WON 145 574Kuwait US $ 152Kyrgyzstan US $ 196Laos US $ 100Latvia Euro 74Lebanon US $ 120Lesotho Rand 750Liberia US $ 97Libya US $ 111Lithuania Euro 154Macau HK $ 1 196Macedonia Euro 100Madagascar Euro 107Madeira Euro 290Malawi US $ 70Malaysia US $ 308Maldives US $ 202Mali Euro 101Malta Euro 132Marshall Islands US $ 255Mauritania Euro 178Mauritius US $ 215Mexico US $ 86Moldova US $ 165Mongolia US $ 69Montenegro Euro 109Morocco US $ 106Mozambique US $ 69Myanmar (Burma) US $ 74Namibia Rand 660Nauru Aus $ 278Nepal US $ 64Netherlands Euro 127New Zealand NZ $ 160Nicaragua US $ 65


Country Currency AmountNiger Euro 99Nigeria Euro 121Niue NZ $ 252Norway NOK 1 647Oman Rials Omani 55Pakistan US $ 53Palau US $ 252Panama US $ 108Papa New Guinea Kina 285Paraguay US $ 43People’s Republic of China US $ 157Peru US $ 111Philippines US $ 92Poland Euro 97Portugal Euro 113Qatar Qatar Riyals 523Republic of Congo Euro 149Reunion Euro 164Romania Euro 78Russia Euro 154Rwanda US $ 119Samoa Tala 243Sao Tome Euro 86Saudi Arabia Saudi Riyal 431Senegal Euro 150Serbia Euro 95Seychelles Euro 275Sierra Leone US $ 90Singapore Singapore $ 180Slovakia Euro 81Slovenia Euro 73Solomon Islands Sol Island $ 811Spain Euro 109Sri Lanka US $ 74St. Kitts & Nevis US $ 227St. Lucia US $ 215St. Vincent & The Grenadines US $ 187Sudan US $ 121Suriname US $ 107Swaziland Rand 411Sweden Sw Krona 843Switzerland S Franc 230Syria US $ 98Taiwan New Taiwan $ 3 628Tajikistan US $ 117Tanzania US $ 85Thailand Thai Baht 3 050Togo Euro 78Tonga Pa’anga 174Trinidad & Tobago US $ 213Tunisia Tunisian Dinar 108Turkey US $ 125Turkmenistan US $ 125Tuvalu Aus $ 339Uganda US $ 78Ukraine Euro 131United Arab Emirates Dirhams 410


Country Currency AmountUnited Kingdom B Pounds 107Uruguay US $ 91USA US $ 157Uzbekistan US $ 116Vanuatu US $ 131Venezuela US $ 117Vietnam US $ 88Yemen US $ 94Zambia US $ 119Zimbabwe US $ 264Other countries not listed US $ 215

RETIREMENT BENEFITS

Pre-retirement fund lump sums

Lump sum Rate of taxR 0 - R22 500 0%

R22 501 - R600 000 18% of taxable income exceeding R22 500R600 001 - R900 000 R103 950 + 27% of taxable income exceeding R600 000R900 001 - R184 050 + 36% of taxable income exceeding R900 000

Retirement and death lump sums

Taxable amount of the lump sum Rate of taxR 0 - R300 000 18%

R300 001 - R600 000 R54 000 + 27% of taxable income exceeding R300 000R600 001 - R135 000 + 36% of taxable income exceeding R600 000


CORPORATE TAX RATES

Years of assessment ending between 1 April and 31 March

Normal tax (basic rate) 2009/10 2008/09Non-mining companies 28% 28%Close corporations 28% 28%Employment companies 33% 33%Other companies 28% 28%Taxable income of a non-resident company 33% 33%

Tax rates for qualifying small business corporations

Years of assessment ending between 1 April 2009 and 31 March 2010Taxable income

RRate of tax

R0 - 54 200 0%

54 201 - 300 000 10% of the amount over R54 200300 000 - R24 580 + 28% of the amount over R300 000

Years of assessment ending between 1 April 2008 and 31 March 2009Taxable income

RRate of tax

R0 - 46 000 0%

46 001 - 300 000 10% of the amount over R46 000300 000 - R25 400 + 28% of the amount over R300 000

Presumptive turnover tax micro businesses

Years of assessment ending on 28 February 2010Taxable Turnover

RRate of tax

0 - 100 000 0%100 001 - 300 000 1% of the amount over R100 000300 001 - 500 000 R2 000 + 3% of the amount over R300 000500 001 - 750 000 R8 000 + 5% of the amount over R500 000750 001 - R20 500 + 7% of the amount over R750 000

Secondary tax on companies (STC)

Rate of STC on dividends declared - 17 March 1993 – 21 June 1994 15% 22 June 1994 – 13 March 1996 25% 14 March 1996 – 30 September 2007 12.5% On or after 01 October 2007 10%


Trusts

The tax rate on trusts (other than special trusts) remains unchanged at 40%.

OTHER TAXES

Estate duty

Rate of estate duty on the dutiable amount of an estate - Death prior to 14 March 1996 15% Death between 15 March 1996 and 30 September 2007 25% Death or after 01 October 2007 20%Primary abatement: R3 500 000 (2009: R3 500 000)

Donations tax

Payable at a flat rate on the value of property donated by a resident - Prior to 14 March 1996 15% Between 15 March 1996 and 30 September 2007 25% On or after 01 October 2007 20%Annual exemption for natural persons: R100 000 (2009: R100 000)

Capital gains tax (CGT)

The effective CGT rates are as follows:

Taxpayer InclusionRate (%)

StatutoryRate (%)

EffectiveRate (%)

Individuals 25 0 – 40 0 – 10

TrustsUnit - 28 -Special 25 18 – 40 4.5 – 10Other 50 40 20

CompaniesOrdinary 50 28 14Small business corporation 50 0 – 28 0 – 14Employment company 50 33 16.5Foreign company 50 33 16.5Closely held passive investment companies 50 40 20Small companies subject to turnover tax 0 0 0

Life assurersIndividual policyholders fund 25 30 7.5Company policyholders fund 50 28 14Untaxed policyholders fund - - -Corporate fund 50 28 14


Transfer duty

Transfer duty rates remain unchanged.

Transfer duty rates for individuals 2009Property value

RRate of tax

0 - 500 000 0%500 001 - 1 000 000 5%

1 000 001 - Upwards R25 000 + 8%In all other cases the rate is 8% of the consideration.

Securities Transfer Tax

From 1 July 2008, STT replaces stamp duties and uncertificated securities tax on marketable securities. STT is levied at a flat rate of 0,25% on the taxable amount on any transfer of a security (listed and unlisted securities).

COMMENTARY

Introduction

This year’s tax proposals are intended to meet the requirements of the fiscus while supporting consumer and business confidence in the context of a weakening economy. Significant adjustments have been made to personal income tax brackets, the primary rebate and some thresholds to adjust for the effects of higher inflation during 2008, and to provide real tax relief. Environmental initiatives that promote sustainable development, energy efficiency and investment in new technologies receive support. Industrial policy tax incentives announced last year will be implemented in 2009 and should encourage private-sector investment. The South African economy has entered a period of slower growth, and this is reflected in lower revenue growth, especially for VAT. Tax revenue for 2008/09 is projected to total R627.7 billion, R14.4 billion less than the budgeted R642.1 billion. Estimated gross tax revenue for 2009/10 is R659.3 billion, or 5 per cent higher than the revised estimate for 2008/09.

Overview

The 2009/10 tax proposals and revenue projections take cognisance of a significantly weaker economic environment. The global financial crisis, recession in most of the developed world, a dramatic decline in commodity prices and cooling domestic consumption expenditure have all contributed to a decline in aggregate demand and business confidence.

The economic slowdown is having a negative impact on tax revenues, with the revised estimated tax revenue for 2008/09 projected to be R14.4 billion lower than the budgeted R642.1 billion announced in February 2008. Falling domestic consumption resulted in lower-than-expected domestic output, lower VAT collections and the involuntary accumulation of inventory, which gave rise to higher VAT refunds.The 2009 tax proposals provide real tax relief to households. A combination of incentives and taxes is proposed to address environmental concerns, with a particular focus on energy efficiency, furthering another key objective of government. The South African Revenue Service (SARS) continues to improve its operational efficiency, and additional steps are proposed to support its modernisation agenda.


Main tax proposals

The main tax proposals include:

Personal income tax relief for individuals amounting to R13.6 billion Delaying implementation of new mineral and petroleum royalties until 1 March 2010 A final set of amendments to support dividends tax reform Incentives for investments in energy-efficient technologies Implementation of the electricity levy announced in Budget 2008 Making certified emission reduction credits tax exempt or subject to capital gains tax, instead of normal

income tax Taxation of energy-intensive light bulbs Reforms to the motor vehicle ad valorem excise duties Increases in the Road Accident Fund (RAF) and general fuel levies Tax-sharing arrangements with municipalities Increases in excise duties on alcoholic beverages and tobacco products An increase in the international air passenger departure tax Reviewing the tax treatment of travel (motor vehicle) allowances to improve the equity and transparency

of the tax system Amendments to the treatment of contributions to medical schemes.

INDIVIDUALS

Personal income tax relief

Over the past decade substantial tax relief has been provided to individuals. Real personal income tax relief was made possible by buoyant corporate income tax revenues as a result of an improved culture of compliance and higher corporate profits.

The 2009 Budget proposes personal income tax relief to individual taxpayers amounting to R13.6 billion. This will compensate taxpayers for wage inflation (‘bracket creep’). Taxpayers with an annual taxable income below R150 000 will receive 45% of the proposed relief; those with an annual taxable income between R150 001 and R250 000, 22%; those with an annual taxable income between R250 001 and R500 000, 21%; and those with an annual taxable income above R500 000, 12%.

Alongside corporate income tax and VAT, personal income tax is one of the three main tax instruments and provides the basis for the progressive structure of South Africa’s tax system. It is estimated that the 12.5% of registered individual taxpayers with an annual taxable income between R250 001 and R500 000 will account for 29% of personal income tax revenues, and the 5.5% of registered individual taxpayers with an annual taxable income above R500 000 will account for 38% of personal income tax revenues during 2009/10.

The primary rebate is increased to R9 756 a year for all individuals. The secondary rebate is increased to R5 400 a year for individuals age 65 and over.

The proposed tax schedule eliminates the effects of inflation on income tax liabilities and results in a reduced tax liability for taxpayers at all income levels.


Medical scheme contributions

From 1 March 2009, the monthly monetary caps for tax-deductible contributions to medical schemes will increase from R570 to R625 for each of the first two beneficiaries, and from R345 to R380 for each additional beneficiary.

Replacement of the medical scheme contribution deduction with a non-refundable tax credit is currently under consideration. To be broadly neutral in its overall impact, the tax credit would be set at about 30 per cent of the prevailing deduction. Where medical expenses in addition to contributions to schemes qualify as deductions, the credit would also be set at 30 per cent of allowable expenses. A consultation paper will be released during 2009 to allow for comment from interested parties, and to ensure that the change is consistent with broader health policy considerations. Implementation is proposed in two years’ time so that SARS, employers and payroll providers will have sufficient time to make the necessary administrative adjustments.

In preparation for this proposal medical scheme contributions will cease to qualify as tax-free fringe benefits. All contributions paid by an employer will be regarded as taxable and the employee will be permitted to claim a tax deduction (or a credit) for contributions up to the cap. The net tax effect of this step should be neutral for both employee and employer.

The monthly caps have given rise to some compliance and administrative difficulties for both employers and SARS. These will be investigated to determine whether a legislative intervention is required.

Tax deductibility of post-retirement medical contributions

Some companies provide a subsidy towards medical scheme contributions for employees after retirement. In general, contributions towards medical schemes on behalf of pensioners on a pay-as-you-go basis are deductible by the employer. Accounting practice now requires companies to reflect future obligations with respect to medical contributions for already retired employees as liabilities on their balance sheets. For this reason some companies prefer to settle these obligations as once-off payments directly to their retired employees. Other companies opt to make once-off contributions towards insurance-type products that will take over liability for some or all of the future medical expenses/contributions to a medical scheme on behalf of retirees.

To provide clarity on the deductibility of these once-off payments, it is proposed that such contributions be deductible immediately, not spread over a period of time. The precondition is that the company making such contributions must not derive any direct benefits from such payments, nor will a return of the funds to the employer or a redirection of the use of the funds be permitted.

Travel allowances

Claiming ‘deemed business kilometres’ as a travelling expense is one of the few remaining salary structuring methods used to reduce tax liability. More than 500 000 taxpayers annually claim this deduction. Excessive deductions that do not match actual business expenses distort household purchasing decisions and travelling choices.

It is proposed that the deemed business kilometre procedure be scrapped from 2010/11. Taxpayers who are required to use their personal vehicles for business purposes will still be able to keep a logbook to claim business travelling expenses. This reform will improve the overall equity and efficiency of the income tax system. The default practice of claiming private kilometres travelled as business travel cannot be justified from an equity perspective.

Standard income tax on employees

Given that the tax-free income threshold for taxpayers younger than 65 years is approaching R60 000, which is the current Standard Income Tax on Employees (SITE) ceiling, consideration is being given to discontinuing the SITE system by 2010/11. Two measures introduced by SARS in 2008 – pre-populated returns and the waiver of the annual filing requirement for taxpayers with single employers meeting certain requirements – would take the place of SITE.


Provisional tax for taxpayers 65 years and older

Individuals 65 years and older are exempt from provisional tax if they are not company directors and only receive employment income, interest, rental or dividends amounting to taxable income of up to R80 000. It is proposed that the threshold be increased to R120 000.

Primary residence exclusion

The capital gains tax regime contains several exclusions designed to reduce the tax burden for lower- and middle-income earners. One such exclusion is for an individual’s primary residence: a capital gain or loss of up to R1.5 million upon the disposal of such a residence is excluded from taxable capital gains.

To reduce the compliance burden and complexity associated with this measure, it is proposed that the exclusion be extended so that an alternative is available based on the gross sale proceeds of the residence. By basing the calculation on gross proceeds, the taxpayer would have a better understanding of how the exclusion applies on disposal, without resorting to complex capital gain calculations.

The capital gains tax exclusion will fully apply to the primary residence up to a gross value of R2 million. As a result, people selling their primary residence with a gross value below R2 million will not be liable for capital gains tax. For primary residences valued above this threshold the normal rules (including the current R1.5 million capital gain/loss exclusion) will apply.

SAVINGS

Tax-free interest, dividend income and capital gains

In line with government’s goal of encouraging greater national savings, it is proposed to increase the tax-free interest-income ceiling from R19 000 to R21 000 for persons below the age 65 and from R27 500 to R30 000 for persons aged 65 and above. It is also proposed to increase the tax-free income ceilings for foreign dividends and interest from R3 200 to R3 500, and the annual exclusion ceiling for capital gains and losses for individuals from R16 000 to R17 500.

Provident funds, social security and retirement reforms

The current debate on social security and retirement reforms has raised the need to examine whether provident funds should be phased into pension funds. This question is also relevant given the different tax treatment of contributions to pension and provident funds. One option would be to phase out provident funds as a prelude to broader social security reforms. This option will be explored with the relevant stakeholders during 2009.

PERSONAL AND EMPLOYMENT TAX ISSUES

Employer contributions to retirement annuity funds

If retirement annuity fund contributions are paid directly by the employer for the benefit of employees, the contributions are included in the gross income of the employees but are not deductible by the employees. It is proposed that these contributions should be deductible, subject to existing limits, so that they are placed on par with other retirement annuity fund contributions made directly by employees.

Additional deductions for learnerships

Employers obtain additional deductions for employees engaged in learnerships (i.e. a deduction in addition to the normal deduction for a salary expense) to encourage skills training. The legislation relating to these deductions, however, is overly complex due to the excessive number of variables. Under consideration is a


reduction of variables (without compromising the value of the incentive) so that the legislation can be simplified in terms of compliance and enforcement.

Pre-1998 retirement benefits for public servants

Lump-sum retirement benefits of public servants were tax free prior to 1998. The Income Tax Act was amended three years ago to protect the retrospective pre-1998 retirement benefits of non-statutory forces that were incorporated into the new defence force. There are, however, other public-sector employees who were previously denied such retirement benefits and, in terms of a Public Sector Bargaining Council agreement, such current and former employees’ retirement benefits will be partially restored. The restored retirement benefits that predate 1998 should also be treated as tax exempt. The Income Tax Act will be amended accordingly.

Unrealised gains on death

The tax system generally imposes tax on unrealised gains associated with the assets of the deceased upon date of death. Gains so taken into account should not be taxed again in the hands of an heir or legatee who acquires those assets. It has now emerged that certain assets technically fall outside this general relief, thereby giving rise to additional taxation. This unintended additional layer of tax will be removed.

ESTATE DUTY AMENDMENTS

Portable R3.5 million deduction between spouses

Under current law, both spouses are each entitled to an estate duty deduction of R3.5 million. In widely accepted estate planning, each spouse seeks to use the R3.5 million deduction by removing assets worth R3.5 million from the estate while keeping practical control of the assets for the benefit of the spouse via a trust mechanism. It is proposed that spouses be given flexibility in using their combined estate duty deductions without the artifice of the (often costly and complex) trust mechanism. Under this proposal, the surviving spouse’s (or spouses’) estate will benefit from the unused deduction of the deceased spouse automatically.

1-year usufructuary interest schemes

A commonly known one-year usufructuary scheme exists in the market that allegedly undermines the estate duty. This scheme involves the estate duty-free transfer of a life-time usufructuary interest to a spouse, with the children receiving the bare dominium. On the death of the spouse, the usufructuary interest is transferred with a one-year interest going to a person, after which the remaining rights transfer to the intended heirs. The scheme essentially relies on the misapplication of the 12 per cent per annum valuation presumption in the context of a one-year interest. This scheme will accordingly be closed.

Timing and recovery of additional assessments

Estates with a value exceeding the R3.5 million deduction threshold are issued their initial estate duty assessments (or deemed assessments) when the assets of the estate are distributable. SARS can also raise additional assessments within the following five years (and in some cases beyond). Enforcement after closure of the estate, however, is problematic as a practical matter because the executor no longer has control over the assets. It is therefore proposed that the current five-year rule for additional assessment and recovery be reconsidered so as to reach finality upon the closure of the estate (to the extent possible) while protecting the fiscus against fraud, misrepresentation and non-disclosure.


BUSINESS ISSUES

Small business owners’ shelf companies

If a shareholder owns multiple companies, these companies may not access small business corporation relief or the turnover tax for micro businesses. The purpose of this prohibition is to prevent shareholders from dividing a single large business into multiple small businesses so as to artificially obtain undue tax benefits for each of these divided parts. Unfortunately, this exclusion has the unintended effect of denying relief for small business owners who place their businesses in purchased shelf companies. To remedy this situation, the exclusion against multiple company ownership should not apply in respect of companies that have never been more than a shell.

Permissible short-term insurance reserves

Taxpayers engaged in domestic short-term insurance operations can only deduct their reserves if these reserves are regulated by the Financial Services Board as a condition for engaging in the short-term insurance business. The law needs to be clarified to ensure that reserves relating to offshore short-term insurance operations are eligible for potential deductions only if subject to substantially similar regulation and evaluation by SARS.

Leasing losses

Leasing losses from financial (i.e. non-operating) leases or leasing losses of a bank or financier can only be used against leasing income. A technical anomaly has arisen that prevents these leasing losses from being used against corresponding recoupments from the disposal of assets giving rise to these leasing losses. No reason exists for preventing the application of these losses in these circumstances, and this anomaly will accordingly be removed.

Controlled foreign company (CFC) rulings relief

CFCs generate net income that is imputed to their South African resident shareholders (thereby being subject to South African tax) to the extent these CFCs have tainted income (e.g. passive income and income likely to be diverted offshore for tax avoidance reasons). Because the objective nature of the tainted CFC income characterisation sometimes creates tax where no tax avoidance exists, Section 9D(10) was added to provide relief if SARS provides a ruling that the transaction does not represent an erosion of the tax base. However, this relief measure is proving difficult to administer because the issues raised are typically of a policy nature as opposed to administrative interpretation. It is accordingly proposed that the rulings exemption be re-examined along with the creation of additional objective exemptions where circumstances so warrant.

Liquidating inactive entities

Various pressures exist to liquidate entities with inactive real estate (e.g. vacant land and residential property). To alleviate these pressures, it is proposed that rollover relief be provided to facilitate these liquidations for a transitional period.

Securities lending arrangements

Securities lending has features of both loans and disposals. The tax law generally treats these loans as disposals, with limited relief for 12 months for certain arrangements. It has now been discovered that certain securities lending arrangements seek to be treated as loans for certain purposes and as a loss of ownership for others, generating artificial losses. While this treatment is suspect under current law, it may be necessary to clarify the law so that all forms of securities lending fall under either loan or disposal treatment (not a mix of both).


Company law reform

A revised Companies Act was introduced in 2008 that will become effective as of 1 January 2010. The impact of this new legislation on income tax is under review. Corresponding tax changes will generally be initiated in 2010 once the full ramifications of the revised act are fully accounted for, with urgent matters initiated in 2009.

Oil and gas companies conducting incidental trades

Two years ago, government enacted an income tax incentive to encourage domestic oil and gas exploration and production. To qualify for this relief, it was intended that companies must be engaged solely in oil exploration and production, with other sources of income coming solely from passive sources. On review, it has been determined that the legislation was too restrictive because typical oil and gas operations entail incidental business activities. It is accordingly proposed that the oil and gas incentive regime be liberalised in this respect. However, the law also needs to be clarified to ensure that the incentive does not permit the deduction of oil and gas exploration expenditure outside the Republic.

Underwater telecommunication cables

Telephone lines and cables are currently eligible for a 5 per cent depreciation write-off over 20 years. The telecommunications industry is now seeking to lay underwater cables for voice and data communications off the African coast. It is accordingly proposed that these underwater cables be given the same 5% write-off as land-based telephone lines and cables. An issue under examination is the extent to which this write-off should be available for different forms of utilisation (e.g. joint ownership versus an indefeasible right of use).

Telecommunication license consolidation

The telecommunications industry operates under a variety of licenses (e.g. 2G and 3G, frequency and internet provider). The Independent Communications Authority of South Africa is planning to require consolidation of these related licenses into a single telecommunications license per company to simplify administration. It is proposed that these regulatory consolidations be legislatively treated as a tax-free rollover event (to the extent the consolidation would otherwise give rise to capital gains taxation).

Depreciation of improvements

As a theoretical matter, improvements should be treated on par with underlying initial investments for purposes of tax depreciation. If an initial “new and unused” investment can be depreciated over 20 years, “new and unused” improvements for a similar investment should similarly be depreciable over 20 years (even if the underlying investment is not “new and unused”). While this principle exists in certain circumstances, the law needs to be clarified to ensure that this principle uniformly applies for all depreciable items.

DIVIDEND REFORM PROCESS

The basic legislative framework for the introduction of the dividend tax, which replaces the secondary tax on companies, was enacted in 2008. The dividend tax will come into effect once the treaty ratification processes are completed. All the applicable treaties have already been renegotiated, and it is likely that this tax at shareholder level will be implemented during the second half of 2010.

Under the dividend tax regime, local individual taxpayers are taxed at 10 per cent; domestic retirement funds, public benefit organisations and domestic companies are exempt; and foreign persons are eligible for tax-treaty benefits (i.e. a potential reduction to a 5 per cent rate). The tax also provides for transitional credits, so that tax paid under the secondary tax on companies can be used to offset the dividend tax. The new tax also contains a mechanism under which the paying company (or paying intermediary) withholds the tax.

Further legislative amendments during 2009 will provide for the completion of the dividend tax reform. The remaining items mostly relate to anti-avoidance concerns (such as preventing companies from converting taxable sales to tax-free dividends) and to foreign dividends.


COLLECTIVE INVESTMENT SCHEME DISTRIBUTIONS

Under current law, a collective investment scheme (CIS) in shares is treated as a company whose distributions are treated as a special form of dividend. The CIS dividend is generally exempt, like other dividends, unless that dividend is distributed out of ordinary revenue (e.g. distributed out of interest and income from trading). In all cases, the CIS distribution retains its character as a dividend.

It is proposed that distributions by these schemes should generally follow a flowthrough principle. If a CIS distributes dividends received, this should be viewed as dividend distribution; if it distributes interest received it should be viewed as an interest distribution. This approach will eliminate certain unintended anomalies. Currently, a CIS distribution results in less-favourable tax treatment for some investors.

MINERAL AND PETROLEUM ROYALTIES

The Mineral and Petroleum Resources Royalty Act (2008) was scheduled to be implemented from 1 May 2009. It is proposed to postpone implementation until 1 March 2010, resulting in gross savings of about R1.8 billion in 2009/10 for mining companies. It is hoped that this relief will contribute to constructive dialogue between government, the mining houses and labour, resulting in practical initiatives to mitigate the impact of expected retrenchments in the sector.

ENVIRONMENTAL FISCAL REFORM

Climate change requires both global and domestic policy responses. Internationally, government is playing an important role in the post-2012 Kyoto Protocol negotiation process.

At the domestic level, environmental challenges likely to be aggravated by economic growth if natural resources are not adequately managed include excessive greenhouse gas emissions, large-scale release of local pollutants that result in poor air quality, inappropriate land use that leads to land degradation and biodiversity loss, deteriorating water quality and increasing levels of solid waste generation. While everyone feels the effects of environmental degradation, the impact of such deterioration on poor communities, particularly those sited near industrial areas, is often severe.

In recent years, the role of market-based instruments has gained prominence in addressing environmental concerns. Such instruments, which include taxes, charges and tradable permits, use the price mechanism to deter environmentally detrimental activity and encourage improved environmental management practices. Appropriate domestic policy intervention will be required to ensure that mitigation and adaptation measures to address climate change are implemented.

Incentives for cleaner production

A number of environmental statutes and regulations require the private sector to eliminate inefficiencies in the use of energy, water and raw materials. To complement these measures, market-based instruments are playing a greater role. Incentives for energy-efficient investments have been explored. Current legislation provides for a three year 50:30:20 per cent accelerated depreciation allowance for investments in renewable energy and biofuels production.

It is proposed that investments by companies in energy-efficient equipment should qualify for an additional allowance of up to 15 per cent on condition that there is documentary proof of the resulting energy efficiencies (after a two- or three-year period), certified by the Energy Efficiency Agency.


Plastic bag levy

The levy on plastic shopping bags was introduced at 3 cents per bag in 2004/05. Together with the agreement between government and the retail sector to charge for such bags, this levy has helped to reduce waste. It is proposed to increase the levy to 4 cents per bag from 1 April 2009.

Taxation of incandescent light bulbs

The introduction of an environmental levy on incandescent (filament) light bulbs to promote energy efficiency and reduce electricity demand is proposed. Energy-saving light bulbs last longer, require five times less electricity and result in lower greenhouse gas emissions. It is recommended that an environmental levy of about R3 per bulb (between 1 cent and 3 cents per watt) be levied on incandescent light bulbs at the manufacturing level and on imports from 1 October 2009.

Emission reduction credits

South Africa’s greenhouse gas emissions rank in the top twenty in the world, contribute 1.8% to global emissions and are responsible for 42 per cent of Africa’s emissions. The clean development mechanism established in terms of the Kyoto Protocol allows for certified emission reductions (CERs) to be issued to recognise progress in reducing the release of greenhouse gases into the atmosphere. There is, however, uncertainty with regard to the income tax reatment of CERs, which may be one reason for the slow take-up of clean development mechanism projects in South Africa. It is proposed that income derived from the disposal of primary CERs be tax–exempt or subject to capital gains tax instead of normal income tax. Secondary CERs are to be classified as trading stock and taxed accordingly.

Motor vehicle ad valorem excise duties and emission taxes

Policy measures to address the environmental and social costs associated with the transport sector, such as reforms to vehicle and fuel taxation, seek to promote fuel efficiency, limit the rapid growth of the number of vehicles on the roads and encourage the use of public transport.

Improved fuel efficiency is important in curbing the growth in greenhouse gas emissions. It is recommended that the existing ad valorem excise duties on motor vehicles be adjusted to incorporate CO2 emissions as an environmental criterion from 1 March 2010.

The current ‘luxury’ ad valorem excise duties on new motor vehicle sales (passenger cars and light commercial vehicles) are based solely on price. At present, the following formula applies:

A. The tax rate (per cent) is equal to 0.00003 x (retail price less 20%) less 0.75.B. The tax base, which equals the recommended retail selling price less 28%.

Imported new vehicles (passenger cars and light commercial vehicles) are subject to roughly similar formulas to ensure a similar tax incidence.

It is proposed to reduce the ‘luxury’ ad valorem excise duty rate on the sale of new motor vehicles while introducing an additional tax (also ad valorem) component to take into account CO2 emissions. The revised “luxury” component of the ad valorem excise duty will be as follows:

A. The tax rate (X) (per cent) is equal to 0.00002 x (retail price less 20%) - 1.0.B. The tax base, which equals the retail price less 28% (the same as the current formula although the

28% might be reviewed).

It is also proposed that the CO2 emissions g/km tax rate for new vehicles be calculated as follows:

Tax rate (Y) (%) is equal to CO2 emissions (g/km) / 15.0 - 8.0.Tax rate (Y) (%) is equal to 0% in the case of negative values. The total ad valorem tax rate will equal X +Y.

The tax bases for the emission component will be the same as for the ‘luxury’ component. The calculation for the ‘luxury’ ad valorem tax rate component on imported vehicles will be adjusted.

The proposed rate structure will become effective from 1 March 2010.


International air passenger departure tax

The international air passenger departure tax, which stands at R120 per passenger on flights to international destinations and R60 on flights to Southern African Customs Union member states, was last raised in 2005/06. It is proposed to increase these amounts to R150 and R80 respectively from 1 October 2009.

Fuel levies

General fuel levyGiven the importance of maintaining a strong price signal to limit fuel consumption, road congestion and environmental impact, it is proposed to increase the general fuel levy. In addition, noting the increasing use of diesel in passenger vehicles, government intends to equalise the general fuel levy on diesel and petrol over time. It is proposed to increase the general fuel levy on petrol and diesel by 23 and 24 cents per litre respectively from 1 April 2009. The diesel fuel levy refund relief for the primary sector remains unchanged in percentage terms and its monetary value will be adjusted accordingly.

Tax-sharing arrangements with metropolitan municipalitiesAs part of continuing efforts to find a viable basket of tax instruments to replace the Regional Services Council (RSC) and Joint Services Board (JSB) levies that were abolished several years ago, it is proposed that from 2009/10, 23 per cent of the revenues from the general fuel levy be earmarked for metropolitan (Category A) municipalities. Distribution of this revenue among various metropolitan municipalities, to be phased in over four years, will eventually be based on fuel sales in each metro. Consideration will be given to ensuring that municipalities use such funds to boost budgets for roads and transportation infrastructure.

Road Accident Fund levy

It is proposed to increase the RAF levy by 17.5 cents/litre, from 46.5 c/l to 64.0 c/l from 1 April 2009. It is hoped that these adjustments and recent reforms to the legislation governing the RAF will strengthen the Fund’s financial position and effectiveness.

VALUE-ADDED TAX

Voluntary registration threshold

The VAT refund mechanism is an integral part of the VAT system but remains a major risk area. One important measure implemented in 1999 was to deny businesses with an annual taxable supply turnover below R20 000 the ability to register as VAT vendors. It is proposed to increase this threshold to R50 000 from 1 March 2010. It is unlikely that a viable business requiring VAT registration will have turnover below this level.

False statements on VAT forms

It is proposed that false statements on any VAT form submitted to SARS, not just returns, be considered an offence. This will serve as a deterrent to those who seek to register for VAT without being eligible to do so.

VAT registration verification

As an additional measure to combat VAT fraud, the introduction of enabling provisions to permit the use of biometric measures to verify the identity of applicants for VAT registration is proposed.

VAT implications of reorganisations

Following the enactment of reorganization rollover relief for income tax in 2001/02, reorganisation relief provisions were enacted for VAT in 2005. However, interpretational issues have arisen regarding changes in use and input credits (e.g. commissions and legal fees). Many of these reorganization problems appear to have their roots in the transfer of assets involving mixed supplies (e.g. banks, insurers and transport


companies having both taxable and tax-exempt supplies). To remedy these concerns, an interpretation note will be issued clarifying these matters (with possible legislation if required).

Taxpayer relief from late payment interest charges

Taxpayers are required by law to pay interest on late payments or excessive refunds. SARS has the discretionary power to grant full or limited relief for interest due on late payments if: (i) there is no loss to the state, or (ii) there is no financial benefit for the taxpayer. The choice of which of these grounds should be used often complicates the application of this relief provision. It is proposed that clarification be provided to eliminate the potential for inconsistent application.

Share block schemes

Shares of a share block scheme represent a special form of interest in underlying real estate. Under current law, the transfer of these shares can trigger transfer duty, VAT or neither. The law will be clarified so at least one form of indirect tax applies.

CUSTOMS AND EXCISE AMENDMENTS

Customs and excise duties

Tobacco productsExcise duties on tobacco products will be increased in accordance with the policy decision to target a total excise burden (excise duties plus VAT) of 52% for all categories of tobacco products. The proposed increases for the various tobacco products vary between 5.5% and 13%.

Alcoholic beveragesExcise duties on alcoholic beverages will be increased in accordance with the policy decision to target a total tax burden (excise duties plus VAT) of 23%, 33% and 43% on wine products, malt beer and spirits respectively. No increase in the excise duty on traditional beer is proposed. The proposed increases for the various alcoholic beverages vary between 7.6% and 14.7%.

Changes in specific excise dutiesIt is proposed that the customs and excise duties in Section A of Part 2 of Schedule 1 of the Customs and Excise Act, No. 91 of 1964, be amended with effect from 11 February 2009.

Single procedure for customs dispute resolution

Amendments will be considered to align the remission and mitigation provisions within the customs dispute resolution procedure in order to ensure that a single procedure is followed. Further amendments may also be considered based on the outcome of a recently completed internal review of the dispute resolution procedure and its application.

Simplification of warehouse policies and procedures

A facility to allow for the periodic clearance of goods exported from licensed warehouses is required to assist with the administration of, among others, ship stores.

Advance passenger information

The Customs and Excise Act was recently amended to provide for the compulsory electronic communication of advance passenger information and the protection of personal information contained therein. It is anticipated that further consequential amendments may be necessary following implementation.

Customs transit procedures

Amendments to the Customs and Excise Act will be considered for improved provision for interruptions in transit (for example, as a result of re-packing, tallying, sorting, cleaning, inspecting and sealing the goods,


carrying out activities directed at preserving the condition of the goods, as well as the consolidation of shipments).

Border enforcement

In order to further support the Customs Border Control Unit (CBCU) in successfully carrying out its mandate, amendments to the Customs and Excise Act will be considered relating to, inter alia, the powers of officers to patrol and carry out surveillance, the powers of officers to question and search persons, equipment and facilities used for the detection of illicit goods concealed on a person and to provide for equipment used by the unit.

Duty-free VAT-exempt goods

Goods that are free of customs duty can currently not be cleared under any item to Schedule 4 to the Customs and Excise Act relating to a rebate of customs duty. Amendments to the relevant acts will be considered to enable duty-free VAT-exempt goods to be cleared.

2010 FIFA World Cup

Provision has already been made for special tax matters relating to the 2010 FIFA World Cup (including the 2009 Confederations Cup). Other procedural or administrative matters contained in the Customs and Excise Act may, however, require amendment as a result of the tournament or for its duration. Suitable amendments will be considered as required.

TAX ADMINISTRATION

Income Tax Act rewrite – phase 1

Government’s commitment to retirement reform and the creation of a broader social security safety net will comprise a number of reforms, some of which have been already implemented. To continue making progress while key policy issues are still under discussion, it is proposed that the employment income tax base be simplified.

At issue initially is the development of a uniform definition of employment income to be applied across all tax instruments. This would be important for social security and private pensions, and provide alignment with Unemployment Insurance Fund (UIF) contributions and the skills development levy. It would help to reduce compliance costs for employers and support efforts by SARS to modernise taxation of salaried taxpayers.

To enhance the process of simplification, proposed revisions to the employment income tax base will represent the first step towards rewriting the Income Tax Act (1962). It is intended that a discussion document and draft legislation will be released for comment by the end of 2010.

Tax administration modernisation agenda

A set of incremental changes is proposed to underpin the SARS modernisation agenda. These measures will allow for continued progress in the reform of personal income tax collection and lay the groundwork for a future social security tax. The changes are:

The introduction of enabling provisions to require employer reconciliations of employees’ tax more frequently than once a year, together with the extension of the reconciliations to skills development levies and UIF contributions.

Reinstatement of employers’ obligation to obtain and maintain certain employee data (originally known as the IRP2 and done away with in 1995), and to report this data as required.

Permitting SARS to provide employees’ tax reference numbers and certain other non-financial data to their employers.

Requiring other third-party data providers to include taxpayer reference numbers – which will be available in many cases due to requirements of the Financial Intelligence Centre Act (2001) – with the information they provide.


Alignment of estimated assessment, interest and additional tax provisions across personal income tax, the skills development levy and UIF contributions.

Key customs modernisation measures were introduced in 2008 and supporting amendments are anticipated in 2009. Measures under consideration in accounting for SARS’ administered revenue include:

Moving to a single taxpayer account across different tax types. Use of a single interest rate on underpayments and overpayments. Charging compound interest instead of simple interest. A revised payment allocation rule that generally sets payments off against the oldest outstanding debt.

SARS is assessing the potential for a single taxpayer registration process across multiple taxes, as well as the automatic registration of employees. This would improve customer service and operational efficiency, using technology and third-party information to authenticate data, and reduce the need for supporting documents.

Section 88A settlement procedures

When the Section 88A settlement procedures were introduced into legislation in 2003, the underlying assumption was that the settlement of disputes would only commence after the relevant assessment. Operational uncertainty now exists as to whether settlements may be concluded prior to assessments. It is therefore proposed that section 88A be clarified to ensure that settlement procedures are limited to post-assessment.

Payment of interest on allowance of an objection

The Income Tax and VAT Acts do not require SARS to pay interest on the overpayment of tax when a taxpayer is required to pay a disputed amount while the amount is subject to objection – with the objection subsequently being allowed. This non-payment of interest is arguably contrary to one of the core principles on which the constitutionality of the “pay now argue later” principle is based. In order to address these concerns, it is proposed that the Income Tax and VAT Acts be amended to: (i) clarify that payment is not suspended due to objection, (ii) formalise the circumstances where payment will be required despite objection, and (iii) provide for interest where a payment made pending consideration of an objection is refunded.

Interest on delayed PAYE payments by employers

If employers fail to withhold and pay over to SARS employees’ tax, SARS can enforce payment of this tax amount as a “penalty”. Current legislative treatment of this failure to pay employee taxes as a “penalty” is theoretically incorrect and has the unintended impact of preventing SARS from charging interest for the delayed payment. Interest charges will be imposed accordingly.

Rounding

To further simplify the income tax return process, the rounding off of employees’ tax, provisional tax, foreign tax credits and tax calculated to the nearest rand is proposed.

SPECIAL CIRCUMSTANCES

Pre-existing cooperatives

South Africa has three main forms of cooperatives: those engaged in agriculture, consumer purchase “buy-aids” and small retail banking cooperatives. In 2005, the Department of Trade and Industry sought to revise and expand the role of cooperatives through new legislation, which will only become fully effective in 2010. In view of this legislation, the tax law will be reviewed to determine whether legislation is required to preserve tax benefits that existed under prior law, with necessary amendments being made accordingly.


Agricultural trusts

Agricultural boards under the indirect auspices of the Department of Agriculture have long been exempt as indirectly controlled government parastatals. Many years ago, these boards were converted into trusts pursuant to a legislative mandate that narrowed their authority, while the Department of Agriculture continued to retain control over certain trustee positions, trustee rules amendments and certain cash-flows (e.g. levies). The purpose of these trusts is to promote South African agriculture in the areas of research, training, support for land reform and in other areas. Despite their conversion into trusts, the underlying activities should largely retain their exemption, with possible legislative amendments required to achieve this objective.

Converted section 21 companies

Section 21 non-profit companies may be eligible for tax relief if formed or incorporated as a Section 21 company. However, this relief is technically not available for the same entity if that entity begins as a for-profit company and subsequently converts to a Section 21 company. This anomaly will be removed.

Recreational clubs

Tax relief for clubs was changed in 2006 from complete exemption to a system of exempting specified activities. All clubs created from 1 April 2007 fall under this new system, with pre-existing clubs being required to apply for the partial exemption system by the close of 31 March 2009. It is proposed that the application deadline for pre-existing clubs be moved to 30 September 2010 due to compliance difficulties. Other technical anomalies associated with the revised taxation of clubs will also be remedied.

Supporting public benefit organisations

Some public benefit organisations enjoy exemption while others enjoy both exemption and the ability to receive deductible donations. Under current law, however, some supporting public benefit organizations (i.e. those designed to provide support to other public benefit organisations) cannot obtain deductible donations even if dedicated solely to public benefit organisations that enjoy deductible donation status. The deductible donation status of supporting public benefit organisations will be considered to the extent that it does not give rise to avoidance.

Financial Consumer Education Foundation

In 2007, it was announced that the Financial Consumer Education Foundation (formed under the auspices of the Financial Services Board) would be eligible for tax-deductible donations. It was initially believed that this result could be achieved via interpretation, but it has now been determined that legislation will be required.

Film rebate subsidies

The DTI provides rebates for a portion of the costs incurred for producing a South African-located film. The Income Tax Act also contains an explicit exemption for parties receiving or accruing these DTI rebates, but this exemption fails to account for the practical structures used to receive the rebate. Film producers typically wish to assign these rebates to their investor-owners as part of their funding arrangements but find that this funding mechanism undermines the tax exemption. It is accordingly envisioned that the tax exemption be extended so that the rebate can be assigned to investor-owners without triggering additional tax. On a related note, the current film scheme anti-avoidance rules may need expansion in view of a new set of film schemes currently in the market.

Judicial decisions in respect of trading stock and restraint of trade

Two recent court decisions may require legislative intervention to preserve the status quo. In the first decision, the Tax Court held that mining stockpiles could not be considered to be trading stock. While this decision will be appealed, it may be necessary to amend the Income Tax Act with immediate effect to prevent other taxpayers engaged in mining from taking this position while the appeal is under way. In the second decision, the Supreme Court of Appeal overturned a decision by the Tax Court that multiple restraints of trade paid by a company to the same individual were in the nature of a salary substitute and therefore taxable in the individual’s hands after the first payment. While an amendment was passed in 2000 making restraints of trade fully taxable, a further legislative intervention may be required to round out this amendment.


MISCELLANEOUS AMENDMENTS

Ratification of ministerial determination of Transfer Duty and Securities Transfer Tax Ratification of ministerial determined transfer duty and securities transfer tax rate and exemption changes: Rate reductions (and new exemptions) for the transfer duty and the securities transfer tax should normally take effect on 1 March of that year or shortly after the Budget Speech. The law allows the change to apply from these dates until the close of a six-month period following ministerial announcement, thereby allowing enough time for consideration by Parliament. In view of certain envisaged changes to the tax legislative process, it is proposed that the six-month period be extended to 12 months in line with similar rules in existence for customs and excise.

Technical corrections

In addition to the miscellaneous amendments above, the 2009 legislation will contain various technical corrections. These technical corrections will address non-revenue impact items, such as typing and grammatical errors, incorrect or misleading headings or definitions, misplaced cross-references, differences between the two texts of the legislation, obsolete provisions (e.g. updating the tax acts in the light of other non-tax legislative changes), incorporation of regulation into law and problems relating to effective dates. These technical corrections may also occasionally include changes to legislation clearly at odds with legislative intent as well as obvious ambiguities and omissions, especially in respect of legislation introduced in 2008. All technical corrections described herein are not intended as a change in policy.

Items of small note relate to the specific inclusion of rates and thresholds stemming from the 2008 legislation (such as the rates for the turnover tax for micro businesses) as well as some final refinements relating to retirement (especially divorce). Other technical changes are envisioned stemming from the Mineral and Petroleum Resources Royalty Act as well as the Diamond Export Levy Act. Both tax instruments are being implemented with some changes requested to account for unanticipated circumstances. The Diamond Export Levy Act amendments largely relate to administration (e.g. registration), and the Mineral and Petroleum Resources Royalty Act amendments relate to technical aspects.

All tax proposals will be published in draft legislation and will be refined following a consultation process.


PART 2 – TAX UPDATE

These notes cover tax developments over the last year, including SARS’ documentation and regulations released during 2008 and amendments promulgated during 2008 and early 2009. The list is not exhaustive.

DEVELOPMENTS OVER THE LAST YEAR

Interpretation Notes issued or revised during 2008

Issue date No. Subject9 December 08 22 (Issue 2) Transfer Duty: Exemption: Public Benefit Organisations and

Statutory Bodies28 July 2008 46 Income Tax: Amalgamation of amateur and professional

sporting bodies2 July 2008 45 Deduction of security expenditure31 March 08 41(Issue 2) Application of VAT to the Gambling Industry9 January 08 17 (Issue 2) Employees’ tax: independent contractors 8 January 08 14 (Issue 2) Allowances, advances and reimbursements

19 February 08 9 (Issue 2) Small business corporations

Regulations and government notices

Commencement dates: Date on which section 15(1) Taxation Laws Second Amendment Act, No 4 of 2008 shall come into

operation (Administrative penalty in respect of non-compliance) (GG 31763 – 31 December 2008) Fixing of date on which sections 5(1) (repeal of s 76A) and 6(1) (insertion of Part IIIB: reportable

arrangements) of the Revenue Laws Second Amendment Act (21/2006) shall come into operation (GG No 30941 – 1 April 2008)

Regulations: Regulations issued under section 75B Income Tax Act, 1962, prescribing administrative penalties

in respect of non-compliance (GG 31764 – 31 December 2008)

Notices: Income Tax 2008: Notice to furnish returns for the 2008 year of assessment (GG 31528 – 22

October 2008) Income Tax Act (58/1962): Appointment and re-appointment of chairpersons to the Tax Board for

the hearing of income tax appeals (GG 31381 - 29 August 2008) Income Tax Act: Determination of interest rate for purposes of paragraph (a) of the definition of

"official rate"(GG 31381 - 29 August 2008) Taxation Laws Second Amendment Act (4/2008): Determination of a date upon which section

22(1)(b) of the Taxation Laws Second Amendment Act, 2008 (employers’ obligations and penalty) shall come to operation (GG 31381 - 29 August 2008)

Determination of public benefit activities for purposes of section 30 of the Income Tax Act, 1962 (GG 31180 - 4 July 2008)

Fixing of rate per kilometre in respect of motor vehicles for the purposes of section 8(1)(b)(ii) and (iii) of the Income Tax Act, 1962: (GG 30796 – 22 February 2008 )

Determination of the daily allowance in respect of meals and incidental costs for the purposes of section 8(1) of the Income Tax Act, 1962: (GG 30795 – 22 February 2008)

Determination of interest rate for purposes of paragraph (a) of the definition of “official rate of interest” in paragraph 1 of the Seventh Schedule to Income Tax Act, 1962: (GG 30794 – 22 February 2008)


http://www.sars.gov.za/home.asp?pid=3498#Determinationofinterestrateforpurposesofparagraphaofthedefinition_oftheSeventhScheduletoIncomeTaxAct1962GG30794%E2%80%9322February2008.pdf



http://www.sars.gov.za/home.asp?pid=3498#Determinationofthedailyallowanceinrespectofmealsandincidentalcostsforthepurposesofsection81oftheIncomeTaxAct1962GG30795%E2%80%9322February2008.pdf

http://www.sars.gov.za/home.asp?pid=3498#Determinationofthedailyallowanceinrespectofmealsandincidentalcostsforthepurposesofsection81oftheIncomeTaxAct1962GG30795%E2%80%9322February2008.pdf

http://www.sars.gov.za/home.asp?pid=3498#GG30796.pdf

http://www.sars.gov.za/home.asp?pid=3498#GG30796.pdf

http://www.sars.gov.za/Tools/Documents/DocumentDownload.asp?FileID=14193













http://www.sars.gov.za/home.asp?pid=3498#Fixingofdateonwhichsections51and61oftheRevenueLawsSecondAmendmentAct212006shallcomeintooperationGGNo30941%E2%80%931April2008.pdf





Tax judgments

SCA Ernst Bester Trust v CSARS (Income Tax Act, 1962 – sales of sand – capital or revenue; section 22

– trading stock deduction – when allowed – SARS practice)

High Court CSARS v Wooltru Property Holdings (Pty) Ltd: A395/07 (7 August 2008) (Section 8(4)(a) of the

Income Tax Act) CSARS v Bobat (Tax avoidance) Volkswagen of South Africa (Pty) Ltd v CSARS (TPD) (STC) Bos v CSARS (TPD) (Income and capital: compensation payment) Metropolitan Life Ltd v CSARS (CPD) (VAT: Imported services)

Tax Court Tax Court Case No 12399 (December 2008) (Capital Gains Tax: Par 12(5) of the Eighth Schedule to the Income Tax Act)

Tax Court Case No 12236 (31 October 2008) (Section 64B(5)(c) of the Income Tax Act: Secondary Tax on Companies)

Tax Court Case No VAT 616 (August 2008) (Section 73(1) of the Value-Added Tax Act)

Tax Court: Case No 11345 (4 July 2008) (Deduction of interest from income in terms of section 11(a) of the Income Tax Act)

TC Case No 12244 (21 January 2008) (Whether the awarding of points by the Appellant to its employees which allowed them to utilise holiday resorts free of charge constituted a fringe benefit or not – paragraph (i) of the definition of “gross income” in section 1 of the Income Tax Act, 1962)

Interest rate changes

Date of change Prescribed interest rate payable to

SARS

Prescribed interest rate payable by

SARS

Official interest rate for fringe benefits purposes

01.11.2006 11% 7% 9% (changed 01.09.06)01.03.2007 12% 8% 10%01.09.2007 11%01.11.2007 13% 9% 01.03.2008 14% 10% 12%01.07.2008 15% 11%01.09.2008 13%

UIF threshold

The maximum amount of remuneration on which UIF is payable was increased to R12 478 per month with effect from 1 February 2008.


http://www.sars.gov.za/home.asp?pid=6721#%23









AMENDMENTS TO THE LEGISLATION

Following the trend over the last few years, numerous amendments were made to the various taxing Acts during the course of 2008. There were two batches of amendments during the year:

1. The Taxation Laws Amendment Act No. 3 of 2008, promulgated 22 July 2008 (Gazette 31267) and the Taxation Laws Second Amendment Act No. 4 of 2008, promulgated on 3 July 2008 (Gazette 31208), which amended the –1.1. Income Tax Act,1962;1.2. Customs and Excise Act, 1964;1.3. Value-Added Tax Act, 1991;1.4. Collective Investment Schemes Control Act, 2002;1.5. Revenue Laws Amendment Act, 2006;1.6. Diamond Export Levy Act, 2007;1.7. Securities Transfer Tax Act, 2007; and1.8. Revenue Laws Amendment Act, 2006.

2. The Revenue Laws Amendment Act No. 60 of 2008, promulgated 8 January 2009 (Gazette 31781) and Revenue Laws Second Amendment Act No. 61 of 2008, promulgated 8 January 2009 (Gazette 31782), which amended the –

2.1. Transfer Duty Act, 1949;2.2. Estate Duty Act, 1955;2.3. Pension Funds Act, 1956;2.4. Income Tax Act, 1962; 2.5. Customs and Excise Act, 1964; 2.6. Stamp Duties Act, 1968; 2.7. Value-Added Tax Act, 1991; 2.8. Restitution of Land Rights Act, 1994;2.9. Revenue Laws Amendment Act, 2006; 2.10. Taxation Laws Amendment Act, 2007; 2.11. Securities Transfer Tax Act, 2007; 2.12. Revenue Laws Amendment Act, 2007; and 2.13. Taxation Laws Amendment Act, 2008.

These amendments are explained below. Extensive use has been made of the Explanatory Memoranda on the Taxation Laws Amendment Bill, 2008 and the Revenue Laws Amendment Bill, 2008, respectively, in the preparation of these notes.

INDIVIDUALS

Medical deduction

Individuals may deduct certain qualifying medical-related expenses from their taxable income. The extent to which these expenses are deductible is determined by the age of the taxpayer and whether the taxpayer or a member of his/her immediate family is a ‘handicapped person’. In the case of the latter, all qualifying expenses of the family are tax deductible.

Furthermore, one of the types of qualifying medical expenses is expenditure relating to a physical disability, but there has been uncertainty regarding which types of expenses will qualify under this category.

The term ‘handicapped person’ has been replaced with the term ‘person with a disability’. ‘Disability’ means a person with a ‘moderate to severe limitation of (his) ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment if –

the limitation has lasted or has a prognosis of lasting for more than a year; and is diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by SARS.


In order to provide more certainty on the tax treatment of expenses relating to a person’s impairment or disability, the type of tax deductible expenses will be clarified by way of a list prescribed by SARS. This list will be drafted (and reviewed regularly) in consultation with organisations representing the disabled fraternity.

Amendment to the Income Tax Act: Section 18

Effective from 1 March 2009 and applies in respect of years of assessment commencing on or after that date.

RETIREMENT BENEFITS

Partnerships and the definition of ‘pension fund’

The definition of ‘pension fund’ only allowed for a partner of a partnership to join the pension fund of that partnership if the partner was previously an employee of the partnership.

The definition of ‘pension fund’ has been amended to allow all partners to join a partnership’s pension fund irrespective of whether such partners were previously employed by the partnership.

Lump sums to dependants of a deceased fund member

Dependants of a deceased fund member may elect to receive the full benefit in the form of a lump sum. However, the Income Tax Act stipulated that this election could not be made more than six months after the death of the member. The payment of these benefits and the protection of dependants are governed by the Pension Funds Act.

In many instances, trustees of a pension fund could not find all the dependants within six months of the death of the member, and these dependants are therefore precluded from electing to receive a lump sum.

The requirement for dependants of a deceased fund member to make an election within six months after the death of that member has been removed, thereby allowing such election to be made at any time after the death of the member.

Payment of benefits to dependants of a deceased member of a retirement annuity fund

In terms of the previous provisions, upon the death of a member of a retirement annuity fund, benefits from that retirement annuity fund may only be paid to that member’s dependants.

A problem arose where the deceased member had no dependants as the Act did not allow for a lump sum to be paid into the deceased member’s estate. This resulted in the money being ‘trapped’ in the fund and the heirs not receiving any benefit.

The Act has been amended to allow benefits to be paid into the estate of a deceased member in the absence of dependants.

Withdrawals where a member emigrates

Members of a retirement annuity fund may not withdraw their funds prior to retirement except where the value is very small. Where members of a retirement annuity fund emigrate before retirement, they were unable to withdraw their funds until such time as they retire (which may be many years into the future).

The Act has been amended to allow members who emigrate from South Africa before they retire to withdraw their funds prior to retirement, provided they pay the full tax on the benefit.


Pre-retirement withdrawals from retirement funds

Members of pension and provident funds may withdraw from a fund before they die or reach retirement age. This may occur, for example, if an employee, who is a member of his/her employer’s pension fund, resigns from that employment and, as a result, has to withdraw from the employer’s pension fund. Furthermore, withdrawal benefits may be paid to members of pension, provident or retirement annuity funds if such a fund is wound up.

Any benefits paid to a member when s/he withdraws from a fund are taxable apart from -

benefits transferred from a pension fund to another pension fund or to a retirement annuity fund; benefits transferred from a provident fund to another pension fund, provident fund or retirement annuity

fund; benefits transferred from a retirement annuity fund to another retirement annuity fund; and a de minimus exemption which, until 28 February 2009, equalled the amount of any lump sum benefit

paid by the fund, limited to the higher of:o R1 800; oro contributions to the fund that did not previously qualify for a tax deduction (for example, all

provident fund contributions and the portion of pension fund contributions that exceeded 7,5% of the person’s pensionable salary) plus any tax-free amounts transferred from a public sector pension fund.

The remaining taxable portion of the lump sum is (until 28 February 2009) taxed according to an averaging formula, which is based on the person’s highest average annual tax rate for the tax year in which the retirement lump sum is payable or the previous tax year.

The taxable amount of a withdrawal benefit is subject to PAYE, which must be withheld by the retirement fund before the lump sum is paid out.

The 2008 amendment

The R1 800 tax-free amount has not been adjusted since 1984. Furthermore, it was considered that the averaging formula is unduly complex and is dependant upon information which the retirement fund or retirement fund member cannot easily access or determine at the time of the withdrawal.

The 2008 amendment increases the amount of the de minimus exemption. In spite of this increase, the overall objection is to discourage withdrawals before formal retirement age and encourage fund members to keep their savings within the retirement system until they reach retirement age.

The de minimus exemption for pre-retirement withdrawals has therefore been increased to R22 500 for lump sums withdrawn on or after 1 March 2009. The amount of R22 500 was set at 7.5% of the R300 000 once-per-lifetime exemption for retirement and death lump sum benefits. This interconnection between the R22 500 exemption for withdrawal benefits and the R300 000 exemption for retirement and death benefits carries through in that the R300 000 is reduced by any part of the R22 500 that is utilised by a fund member before they retire.

From 1 March 2009, the averaging formula is no longer used to determine the tax payable on pre-retirement withdrawal benefits. The taxable amount of such lump sums is now taxed according to a special table, at rates ranging from 18% to 36%. The table is reproduced below:

Lump sum: pre-retirement Tax liability0 - R22 500 0%R22 501 - R600 000 18%R600 001 - R900 000 R103 950 plus 27% above R600 000R900 001 - R184 950 plus 36% above R900 000


As with the tax on retirement and death lump-sum benefits, there is no interconnection between this tax calculation and the normal tax calculation for other taxable income of the individual concerned. Therefore, for example, the primary and secondary rebates cannot be set off against the tax payable on the lump sum benefit. Furthermore, the lump sum benefit does not affect the determination of limits on deductions such as those for retirement annuity fund contributions (15% of taxable income derived other than from retirement funding employment income and any retirement fund lump sums) and donations to PBOs (10% of taxable income excluding retirement fund lump sums).

Pre-retirement withdrawal lump sums are taxed on a cumulative basis (i.e. subsequent withdrawal lump sums are added and taxed at higher marginal rates). This new regime reduces hardship for early withdrawals of retirement savings without creating an undue arbitrage opportunity (an incentive for withdrawing immediately before retirement).

Example:

Tsepo resigns from his employer and withdraws from pension fund A on 1 April 2009. His withdrawal benefit is equal to R300 000.

The tax payable on the withdrawal benefit is determined as follows:

Tax per tables on R22 500 = NilTax per tables on R277 500 (R300 000 less R22 500) @ 18% = R49 950Total tax payable R49 950

Assume that Tsepo joins the pension fund of his new employer and he subsequently withdraws from that fund on 1 July 2015. His withdrawal benefit from the fund is equal to R400 000.

The tax payable on the 2015 withdrawal benefit is determined taking into account the cumulative withdrawal benefits accruing to him since 1 March 2009, i.e:

Tax per tables on R22 500 = NilTax per tables on R577 500 (R600 000 less R22 500) @ 18% = R103 950Tax per tables on R100 000 (R700 000 less R600 000) @ 27% = 27 000Total tax payable R130 950Less: tax payable on 2009 lump sum (49 950)Tax payable on 2015 lump sum R81 000

Amendments to sections of the Income Tax Act: Section 1 (‘retirement-funding employment’ definition) Section 5(10) (averaging formula) Section 6(1) (tax rates) Section 11(n)(aa)(A) (RAF deduction) Section 18A(1)(c) (donations deduction) Section 20(1) (assessed loss) Section 23I(i) (no deduction of expenditure) Paragraph (b) of Formula B in paragraph 1 of the Second Schedule Paragraph 6(b) of the Second Schedule Repeal of paragraph 7 of the Second Schedule Paragraph 11B of the Fourth Schedule (excluded from ‘net remuneration’)

Effective for lump sums withdrawn on or after 1 March 2009.


Maintenance payments from a retirement fund

Section 7(11) was amended during 2007 to deem payments by retirement funds in terms of maintenance orders for the maintenance of a child as contemplated in section 15(1) of the Maintenance Act, 1998 to accrue to the member. This section has been reworded to refer to recurring payments made by retirement funds in terms of all maintenance orders. The definition of “lump sum benefit” in paragraph 1 of the Second Schedule has also been amended to specifically exclude these recurring payments from being taxed in terms of this Schedule. Therefore, these recurring payments are taxed as normal income in the hands of the member (and exempt in the hands of the former spouse).

Amendments to sections of the Income Tax Act: Section 7(11) Section 10(1)(u)(i) and (ii) Definition of ‘lump sum benefit’ in paragraph 1 of the Second Schedule

Effective from the commencement of years of assessment ending on or after 1 January 2009.

Allocations to spouses upon divorce

Under pre-existing rules in the Divorce Act and Pension Funds Act, the amount awarded to a non-member ex-spouse upon divorce could not be paid to the ex-spouse prior to the member’s exit from the fund. The fund administrator was only required to make an endorsement in the records of the fund so that a part of the pension benefit should eventually be paid to the non-member upon the subsequent member’s exit (or retirement) from that fund.

Due to legislative changes in 2007, a retirement fund interest is now deemed to be part of a fund member’s estate for purposes of divorce (i.e. the “clean break” principle). Therefore, the member’s interest can now be immediately divided and the fund administrator can make a payment order to the non-member’s former spouse prior to the member exiting or retiring from the fund. The non-member can receive this award in cash or have the award transferred to his or her own retirement fund.

The income tax rules relating to the division of retirement fund savings needed to be realigned in light of these changes to the Divorce Act and Pension Funds Act. The 2008 amendment follows the “clean break” principle and ensures that any withdrawals in the form of an award to a former spouse are taxed in the hands of the former spouse. This amendment is effective for lump sums accrued on or after 1 March 2009. No tax is imposed if the former spouse’s award is momentarily withdrawn and immediately reinvested in a new retirement savings vehicle.

The date of accrual is linked to the timing of the divorce order as is described below (one set of accrual rules applies for divorce orders granted on or after 13 September 2007 and another set of accrual rules applies for divorce orders granted before 13 September 2007).

1. Divorce orders granted on or after 13 September 2007

The date of accrual for divorce orders granted on or after 13 September 2007 is determined by focusing on the date that the amount stated in the divorce order needs to be deducted from the member’s minimum individual reserve in terms of the Pension Funds Act. If this deduction from the minimum reserve occurs on or after 1 March 2009, the new “clean-break” principles apply as described below. If this deduction from the minimum reserve occurs before 1 March 2009, the old rules apply (i.e. the member remains subject to tax on amounts eventually received by the non-member former spouse).

To the extent that the new “clean break” principles apply, the non-member’s former spouse has a choice. The former spouse may completely withdraw retirement fund amounts from retirement savings and be subject to tax. Alternatively, the non-member may transfer the former spouse’s retirement fund amounts to a separate retirement fund without triggering any tax. In the case of the latter, no further tax will apply to amounts subsequently withdrawn from the separate retirement fund to the extent those amounts were previously taxed under the pre-existing “accrual” principles.


2. Divorce orders granted before 13 September 2007

The date of accrual for divorce orders granted before 13 September 2007 is determined by focusing on the date that the former spouse chooses to completely withdraw the retirement fund amounts or to have these amounts transferred to the former spouse’s retirement fund. If the former spouse fails to make an explicit choice, the date of accrual is the date that the fund has to pay the non-member in terms of the Pension Funds Act.

In respect of all divorce orders granted before 13 September 2007, the tax liability for all of these payments remains that of the member (not of the former spouse). However, depending on the date of accrual, the rate of tax will either fall under -(i) the pre-existing regime (highest average rate of tax of the current or previous tax year) if the

accrual date occurs prior to 1 March 2009, or (ii) the stand-alone withdrawal tax table if the accrual date occurs on or after 1 March 2009.

Amendments to sections of the Income Tax Act: Paragraph (b) of the proviso to the definition of ‘pension preservation fund’ in section 1 Paragraph (b) of the proviso to the definition of ‘provident preservation fund’ in section 1 Section 10(1)(u)(i) and (ii) Paragraph (d)(iA) of Formula B in paragraph 1 of the Second Schedule Deletion of paragraph 2(b)(i) of the Second Schedule Paragraph 2(b)(iA) and (ii) of the Second Schedule Paragraph 2B of the Second Schedule Paragraph 4(4) of the Second Schedule Paragraph 6(a) & (aA) of the Second Schedule

Default preservation of withdrawal benefits

In terms of the definitions of “pension fund” and “provident fund” in section 1 of the Income Tax Act, membership of the fund is dependent upon an employer/employee relationship. If a member ceases to be employed by an employer, an exit event is normally triggered (in terms of the fund rules), in that the individual can no longer be a member of the fund as s/he is not an employee. A withdrawal benefit normally becomes payable (accrues) within 6 months after the termination of the employer/employee relationship. Tax is automatically levied upon this accrual irrespective of whether the amount is paid to the member (or subsequently transferred directly to another retirement fund vehicle).

The 2008 amendment postpones the accrual event on the withdrawal benefit until the member actually chooses to receive the payment in cash. In essence, the switch is from a default accrual system to a default cash system. Amounts that are transferred to another suitable retirement fund vehicle will not be taxed.

Amendments to sections of the Income Tax Act: Paragraph 4(1) of the Second Schedule

Effective from 1 March 2009.

Annuitisation of death benefits

On the death of a member of a retirement fund, benefits become payable by the fund to the deceased’s dependants or nominees. Section 37C of the Pension Funds Act, 1956 requires the fund trustees to pay these benefits directly to the dependant/s, nominee or guardian/caregiver of the deceased, but where this is not possible, for example, where the dependants/nominees are minors or persons with a legal disability, the benefits may be paid to a beneficiary fund or an umbrella trust, subject to certain criteria.

From a tax point of view, lump sum benefits that become payable by a retirement fund upon the death of a member are deemed to accrue to the member immediately prior to death. This benefit is accordingly taxed in the deceased’s hands as a retirement lump sum. If annuities are payable by the retirement fund upon death (in lieu of or in addition to a lump sum), the annuity is instead taxed in the hands of the beneficiaries.

In some instances, the beneficiaries prefer to receive annuities rather than a lump sum so that funds are available over the longer-term. Annuities will be taxed in the hands of the beneficiaries.


However, if the retirement fund rules only provide for a lump sum, tax will be required on the lump sum irrespective of the decision by the beneficiaries to reinvest the funds in an annuity.

The 2008 amendment provides that no retirement benefit is deemed to accrue to the member immediately prior to his death to the extent that the lump sum is used to purchase or provide an annuity (including a living annuity). This tax relief will apply irrespective of the fund rules.

Furthermore, no lump sum is deemed to have accrued (and no tax liability therefore arises) where –

a lump sum death benefit is paid to a beneficiary fund* as defined in section 1 of the Pension Funds Act, 1956; or

unclaimed benefits are paid to a pension preservation fund or provident preservation fund.

* A beneficiary fund is a new type of savings vehicle, introduced from 1 January 2009, which must be registered under the Pension Funds Act, 1956. Before the introduction of ‘beneficiary funds’, death benefits in a retirement fund with minor beneficiaries were often paid to umbrella trusts (vesting trusts). These benefits were taxed in the hands of the deceased upon transfer to the trust and any subsequent growth was taxed in the hands of the minor beneficiaries. ‘Beneficiary funds’ will be regarded as pension funds under the Pension Funds Act and regulated as such. A registered ‘beneficiary fund’ will be exempt from tax under the Income Tax Act. Although transfers into beneficiary funds will not be taxed, these funds may receive amounts that have previously been taxed (for example, when amounts were transferred to an umbrella trust and later to a beneficiary fund). It is proposed that tax relief be provided to prevent double taxation of previously taxed amounts. Hence, registered beneficiary funds containing amounts that were previously subject to tax will not be taxed again when these funds make subsequent payouts.

Amendments to sections of the Income Tax Act: Paragraph (eC) of the definition of ‘gross income’ in section 1: effective from the commencement of

years of assessment ending on or after 1 January 2009 Paragraph 3 of the Second Schedule: effective from -

o 1 January 2009, with regard to transfers to beneficiary funds and unclaimed benefits; ando 1 March 2009 with regard to the option to be taxed on an annuity instead of a lump sum.

Preservation funds

‘Preservation funds’ were previously registered with SARS as either pension funds or provident funds, both of which were governed by RF1/98. Consequently, the membership eligibility, transfer, withdrawal and other related requirements are closely linked to the approval requirements of occupational pension and provident funds.

A member of a pension fund or provident fund whose employment is terminated, and who wishes to preserve his or her retirement savings within a tax-free retirement vehicle, faces a number of difficulties. Firstly, there is a limited choice of preservation funds. Secondly, there are certain difficulties related to transferability between preservation funds (i.e. once transferred, the savings are in many cases effectively ‘trapped’ in the preservation fund).

Two new definitions (‘pension preservation fund’ and ‘provident preservation fund’) have been introduced to separately recognise preservation funds, without any regard to an employer-employee relationship. The two main differences between ‘pension preservation funds’ and ‘provident preservation funds’ are the following:

Pension preservation funds may only receive amounts transferred from pension funds (and other pension preservation funds) and provident preservation funds may only receive amounts transferred from provident funds (and other provident preservation funds); and

Pension preservation funds contain the same retirement compulsory annuity provision as a pension fund.


The definitions effectively untie a preservation fund from the employer-employee relationship that is a requirement for the approval of an occupational pension or provident fund. As a result, the definitions allow more flexibility and choice for persons who wish to preserve their retirement savings within a tax-free retirement vehicle. The definitions allow an employee to choose his or her own pension or provident preservation fund upon termination of employment.

Transfers between the preservation funds of the same type will also be possible and no person will be trapped in any preservation fund.

In addition, the definitions allow for membership and transfer of benefits of divorcees, who previously had a limited choice of retirement vehicles in which to house their divorce settlements payable from pension or provident funds of former spouses.

In terms of the proposal, preservation funds can also be established to house ‘unclaimed benefits’ (e.g. where no benefit has been paid to a member or his dependants within 24 months of the benefit becoming due).

Transfers to preservation funds will be tax-free (paragraph 6 of the Second Schedule) and growth within these funds will also be tax-free (section 10(1)(d)(i) of the Income Tax Act). Payments from these funds will be subject to tax calculated on the same basis as similar payments from pension, provident and retirement annuity funds.

In terms of further amendments to these definitions in the Revenue Laws Amendment Act, 2008, certain deeming rules were introduced to clarify concern around the conversion from ‘old generation funds’ to ‘new generation funds’. ‘Old generation funds’ will lose their status as a pension fund or provident fund on the date that the fund submits its rules to SARS in order to request approval as a ‘new generation funds’ (i.e. as a pension preservation fund or provident preservation fund). At the same time, these funds will be deemed to be ‘new generation funds’ from the same date. In essence, actual approval will not be immediately required for conversion –only the submission of an application. It is important to note that this deeming provision only applies to ‘old generation funds’ that convert to ‘new generation funds’. Wholly new funds (not previously registered with SARS) must wait for SARS’ approval before operating as a pension preservation fund or as a provident preservation fund.

Amendments to the Income Tax Act: Section 1: definition of ‘pension fund’ Section 1: definition of ‘preservation fund’


Definition of ‘living annuity’

Members of pension funds, pension preservation funds and retirement annuity funds are compelled to take a minimum of two-thirds of their fund value upon retirement in the form of an annuity. Certain aspects of living annuities in the retirement context are defined in SARS Retirement Fund Note 1/96. The Long-Term Insurance Act also captures certain aspects of a living annuity in the definition of a ‘linked policy’.

Although the term ‘annuity’ is generally well understood to include a ‘living annuity’, paragraph (a) of the definition of ‘gross income’ in section 1 does not specifically refer to a ‘living annuity’. The term ‘living annuity’ is also not defined in the Income Tax Act.

To put it beyond doubt that a ‘living annuity’ is regarded as an annuity in terms of the Income Tax Act, paragraph (a) of the definition of ‘gross income’ in section 1 of the Income Tax Act has been amended to include a ‘living annuity’; furthermore a definition of ‘living annuity’ has been inserted in section 1 of the Income Tax Act. Accordingly, certain references to the term ‘annuity’ or ‘annuities’ now specifically include living annuities. The defining characteristics of living annuities in the retirement context (as set out in SARS Retirement Fund Note 1/96 and in the definition of ‘linked policy’ in the Long- Term Insurance Act) have been incorporated in the proposed new definition of ‘living annuity’.

The practice notes governing draw down limits will be replaced by methods or formulae to be prescribed by the Minister by regulation.


Assets invested in a living annuity may be paid out as a lump sum if the value at any stage falls below the amount prescribed by the Minister (small annuities).

Amendments to the Income Tax Act: Section 1: definition of ‘living annuity’


Unclaimed benefit funds

‘Unclaimed benefit’ is defined in the Pension Funds Act, 1956 as:

(a) ‘any benefit, other than a benefit referred to in paragraphs (b) and (c), not paid by a fund to a member, former member or beneficiary within 24 months of the date on which it, in terms of the rules of the fund, became legally due and payable; or

(b) in relation to a benefit payable as a pension or annuity, any benefit which has not been paid by a fund to a member, former member or beneficiary within 24 months of –

(i) the expiry date of any guarantee period for pension payments provided for in the rules of the fund; or

(ii) the date on which any instalment legally due and payable in terms of the rules of the fund became unpaid; or

(c) in relation to a benefit payable to a former member who cannot be traced in accordance with section 15B(5)(e) of this Act, any benefit that has become legally due and payable to a former member in terms of an approved surplus apportionment scheme not paid to that former member within 24 months of the date on which it became legally due and payable,

excluding –

(aa) a benefit due to be transferred to another fund on amalgamation or otherwise in terms of this Act; or (bb) a death benefit payable to a beneficiary in terms of section 37C of this Act not paid within 12 months

from the date of the death of the member or such longer period as reasonably justifiable by the board of the fund.’

As indicated in this definition, benefits payable by a retirement fund will effectively become ‘unclaimed’ after 24 months from the date of the exit event. This 24-month rule is one of the reasons why the accrual date of withdrawal benefits has been postponed until a full withdrawal occurs (see Default preservation of withdrawal benefits). The accrual date of death benefits has similarly been postponed if the death benefits are annuitised (see Annuitisation of death benefits).

After the 24-month waiting period, the Financial Services Board requires that these unclaimed benefits be transferred to a separate fund called the Unclaimed Benefit Funds (UBF). A UBF must be registered with the FSB as a pension fund and must register with SARS as either as a pension preservation fund or a provident preservation fund.

The UBF will receive both unclaimed benefits that have already been taxed (benefits that accrued to members when the exit event occurred prior to 1 March 2009) as well as unclaimed benefits that will not be taxed (i.e. benefits when the accrual event occurs on or after 1 March 2009).

In terms of the 2008 amendment, amounts paid by a UBF as a retirement or (pre-retirement) withdrawal lump sum will be tax-free to the extent that these amounts have previously been taxed (i.e. either when transferred into the UBF or when growing in the form of receiving income or in the form of appreciation).

Example

Mary was a member of pension fund A. Mary’s employment was terminated on 30 September 2004, but the fund was never informed of this termination. Mary’s after-tax benefit in the retirement fund was R100 000 at that time. This R100 000 amount was reinvested by the fund, yielding investment income (after tax) of R20 000. In 2009, an amount of R120 000 was transferred into the UBF. In 2010, the UBF located Mary and she requested that the full benefit held by the UBF be paid to her. The value in the fund at that stage was R130 000.


The UBF will have to apply for a tax directive on the R130 000. However, of this amount, R120 000 will be tax-free (i.e. the R100 000 amount taxed shortly after termination and the other R20 000 of taxed investment income).

Amendments to the Income Tax Act: Paragraph (v) of proviso to paragraph 3 of the Second Schedule: Effective from 1 January 2009 Paragraph (i)(bb)(D) of the proviso to paragraph 6 of the Second Schedule: Effective from 1 March 2009

and applies to lump sum benefits withdrawn on or after that date.

Transfers from pension to provident funds

Employer contributions to either a pension or provident fund are tax deductible for the employer. Only member contributions to pension funds are tax deductible for employees because employee access to the fund portion upon retirement is limited to one-third of the full fund value. Pension and provident funds are approved by SARS on condition that a lump sum benefit may become available to a member upon (i) resignation, (ii) retirement, or (iii) death. All three events trigger an accrual under the Second Schedule to the Income Tax Act. Whether the accrual is taxable is a function of the deductions that are determined under that Schedule. No deduction is available if members elect to have their fund interest in a pension fund transferred to a provident fund. This lack of a deduction essentially means that pension-to-provident transfers should be fully taxable.

According to a recent judicial decision, no accrual takes place when a member’s fund interest is transferred from a pension to a provident fund in terms of Section 14 of the Pension Funds Act. Because no accrual exists, the Second Schedule allegedly does not apply (so that no tax is payable). This view is contrary to the policy rationale for the tax treatment of employee contributions to pension funds versus provident funds. If this view were allowed to prevail, fund members could effectively obtain a tax deduction for indirect employee contributions to provident funds. Consequently, the 2008 amendment makes in clear that transfers from a pension to a provident fund accrue to the member and create a lump sum withdrawal benefit in the hands of the member. The amount transferred should be regarded as an after-tax contribution to the provident fund (with no subsequent tax being required when withdrawn from the provident fund).

Amendments to the Income Tax Act: Paragraph (1)(d) of the Second Schedule Paragraph (2)(b) of the Second Schedule Paragraph (i)(bb)(C) of the proviso to paragraph (6) of the Second Schedule


EMPLOYERS AND EMPLOYEES

Expatriate accommodation

The Income Tax Act was amended in 2007 to grant a one-year tax-free period for accommodation provided to expatriate employees by employers with effect from 1 March 2008. Employer-provided accommodation was tax-free during the expatriate’s first year of stay in South Africa. Thereafter the full rental value is taxed in the hands of the employee.

The exemption for residential accommodation provided by an employer to an expatriate has been extended up to two years. The tax-free period commences on the date of arrival of the employee in the Republic for the purpose of performing the duties of his or her employment.

The exemption does not apply however if the person was in South Africa for a period of 90 days in the tax year prior to the year in which that person arrives in South Africa to perform the duties of employment.

A monthly monetary cap of R25 000 has been placed on the value of the tax-free accommodation. To the extent that the value of the employer-provided accommodation exceeds the cap multiplied by the number of months the benefit is granted, the excess will be taxable in the hands of the employee.

A separate short-term stay exemption has been introduced: Employer-provided accommodation will be tax-free if the employee is present in South Africa for a period of less than 90 days during the relevant tax year. There is no monetary cap on this tax-free accommodation.


Deduction for repayable remuneration

Many employers make payments to employees that are subject to resolutive conditions, all of which are fully taxable (and subject to the withholding of PAYE). Examples of these payments include retention bonuses and maternity leave payments. On occasion, employees are forced to return the sums initially paid (e.g. failure to remain with the employer as required or return to work after maternity leave).

While the initial payment to the employee is fully taxable as explained above, employees do not obtain any tax deductions for sums repaid. This denial of deductions exists because section 23(m) of the Income Tax Act limits the types of expenses that an employee may deduct. This overall result violates basic tax principles because the employee is being taxed even though no net enrichment arises.

The 2008 amendment introduces a special deduction for amounts that have to be refunded, even if the refund is incurred by a personal services provider. Refunds of restraint of trade payments will also be allowed under this deduction. To the extent that an employee does not have sufficient taxable income to deduct the full amount of the repaid benefit, an assessed loss will be created and carried forward to the following tax year.

Amendments to sections of the Income Tax Act: Section 11(nA) and (nB) Sections 23(k) and 23(m)(iiA)


Deemed employees

Personal service companies, personal service trusts and labour brokers without an IRP30 exemption certificate were referred to as ‘deemed employees’ as payments to these entities are subject to the withholding of employees’ tax. It is now considered that there is unnecessary overlap between the various definitions and the 2008 amendment therefore combines ‘personal service companies’ and ‘personal service trusts’ into one entity, referred to as a ‘personal service provider’.

It is also considered that the deemed employee rules are not necessary for labour broker companies and the need for these entities to obtain the exemption certificates from the South African Revenue Service (SARS) is burdensome from both an enforcement and compliance point of view. Therefore, the definition of ‘labour broker’ has been amended to include only labour brokers that are natural persons. In light of this amendment, it is no longer necessary for employees’ tax to be withheld from payments made to labour broker companies (as they are not ‘labour brokers’ as defined) and these companies no longer require the IRP30 exemption certificate.

As a result of these amendments, the term ‘employment company’ is no longer necessary and has been deleted.

Amendments to sections of the Income Tax Act: Section 11(cA)(iii) and (iv) Section 12E(4)(a)(iv) Section 23(k) Definitions in paragraph 1 of the Fourth Schedule Paragraph 2(1A) of the Fourth Schedule Paragraph 11 of the Fourth Schedule

Effective from 1 March 2009 and applies in respect of any year of assessment commencing on or after that date.

Additional learnership deduction for apprenticeships

In order to encourage job creation and skills development, the Income Tax Act provides employers with an additional tax allowance (over and above the normal tax deduction for salary) in respect of certain learnerships. This additional deduction applies in respect of (1) learnership agreements that are registered with a SETA and (2) contracts of apprenticeship registered with the Department of Labour.


The learnership allowance is granted when an employee enters into a learnership and again when the employee completes the learnership.

A problem with the allowance arises with certain apprenticeships where a single learnership contract extends over a number of years as opposed to multiple annual or short-term contracts over the same period. An employer with short-term contracts will derive more benefit from the allowance than an employer with longer-term contracts. Yet, in some cases, the Manpower Training Act, 1981 (Act No. 56 of 1981) specifically requires the minimum period for these apprenticeships to extend beyond a year (i.e. a period of 12 months).

To correct this anomaly, the 2008 amendment provides relief for apprenticeships registered in terms of the Manpower Act if the minimum period exceeds 12 months. The proposal essentially seeks to treat these multi-year learnerships/apprenticeships as if they were roughly equivalent to a series of annual learnerships. The proposal applies in respect of learnerships involving all persons that are referred to in the allowance (pre-existing employees, new employees and employees with disabilities).The first year of the apprenticeship provides the same additional deduction as any other learnership. However, the year of completion generates a multi-year set of additional deductions based on two allowances for each year that the apprenticeship was in existence.

Where no formal examination is completed before the completion of the apprenticeship, the additional deductions will only be claimed upon completion of the apprenticeship. This amount will be equal to the amount of the allowance multiplied by 2 for each year required to complete the learnership as per the initial agreement times, less the allowance claimed when the agreement was entered into.

Example

An employee, Joe, entered into a four year apprenticeship agreement with employer X. Employer X agrees to pay Joe R25 000 per year, fixed for the four years.

Year 1: Employer X can claim a learnership allowance of R25 000. Years 2 and 3: No additional allowance may be claimed. Year 4: Assuming that Joe has successfully completed the apprenticeship, employer X can claim a learnership allowance of R175 000 [R25 000 x 2 x 4 = R200 000 less R25 000 (the amount claimed in year 1)].

The amendment also adds certain reporting requirements, which are aimed at enabling the monitoring of the overall progress of the additional deduction for learnerships. Under these reporting requirements, the companies must report to the various SETAs (sector education training authority under the SkillsDevelopment Act, 1998), and the SETAs must aggregate this information for the National Treasury. This aggregate information will be used to determine the viability of this initiative over the long-term.

Amendment to the Income Tax Act: Section 12H


Payroll giving

Some employers operate payroll giving programs that allow their employees to make regular donations to public benefit organisations (PBOs) through the payroll system (i.e. by directly subtracting donations from salaries and wages). Employees may claim deductions for donations made to PBOs qualifying under section 18A of the Act but they can only claim these deductions when submitting their annual tax return. The 2008 amendment allows for a more immediate cash benefit through a reduction in the employees’ tax deducted from salaries and wages.

Employers may take these payroll donations into account in determining the employees’ tax to be withheld from the employees’ remuneration. For purposes of determining the employees’ tax, this deductible section 18A amount is subject to a ceiling of 5% of the employee’s remuneration after taking into account –


pension fund contributions allowed as deductions under section 11(k); retirement annuity fund contributions allowed as deductions under section 11(n) certain premiums paid on income protection policies; certain contributions to medical aid schemes.

Example

Nathan earns a gross salary of R20 000 per month. Each month he contributes 7,5% of his salary to a pension fund, R300 to a retirement annuity fund, R350 to a income protection policy and R2 500 to a medical aid scheme (of which he is the only member in his family). He donates R500 to CHOC (a charity for children suffering with cancer).

The amount of the donation that Nathan’s employer may take into account in determining his employees’ tax is determined as follows:

Salary R20 000Less: Pension fund contributions (7,5% of R20 000) (1 500) RAF contributions (300) Income protection policy premiums (350) Medical aid – limited to monthly cap of R625 (from 1/3/09) (625)Balance of remuneration before s 18A deduction R17 225S 18A deduction limited to 5% of R17 225 = 861Balance of remuneration on which employees’ tax is calculated R16 364

Although the actual limit on the section 18A deduction if 10% of taxable income, this 5% ceiling is imposed because an employer will not be aware of other aspects of the employee’s overall tax situation. The 5% ceiling decreases the likelihood that the section 18A deduction could lead to a short-fall on the annual tax return.

Employers will be required to obtain section 18A receipts for the donations made from the applicable section 18A entity. The employer must therefore keep the section 18A certificate and will issue the employee with an IRP 5 reflecting the total of donations processed through the payroll during the year. Employees will be able to rely on their IRP 5 tax certificates to substantiate their deductible donations for purposes of their annual tax return.

Amendments to sections of the Income Tax Act: Section 18A(2)(b) Paragraph 2(4)(f) of the Fourth Schedule

Effective from 1 March 2009 and applies in respect of years of assessment commencing on or after that date.

Personal use of business cell-phones and computers

The private use of employer-provided cellular phones and laptops by employees is generally a taxable fringe benefit in terms of the Seventh Schedule to the Income Tax Act. Similarly, the private use portion of telephone line rentals and call charges paid for by an employer is taxable in the hands of the employee.

However, a practical problem arises in determining the value of this private use.


The 2008 amendment provides that no taxable value arises on the private use of certain assets where those assets are provided by an employer to an employee mainly for business use. These assets consist of all telephone or computer equipment, including:

Modems on fixed lines of all kinds (dialup, ADSL, datalines) Removable storage of all kinds - memory sticks, disks Printers Office-related software (MSOffice, operating systems, development tools, management tools, etc.)

The same principles will apply to the “private use” of employer-provided or employer-subsidised communication services (such as telephone line rentals and subscriptions for internet access).

Amendments to sections of the Income Tax Act:Paragraph 6 of the Seventh ScheduleParagraph 10 of the Seventh Schedule


Broad-based employee share schemes

Broad-based employee share schemes were introduced into the Income Tax Act with effect from 26 October 2004. In terms of this scheme, an employer may grant or issue shares to employees without a taxable fringe benefit being created in the hands of the employee. This grant is effectively tax-free in the hands of the employee if the scheme meets a number of stringent criteria. There is also a benefit to the employer in the form of a deduction equal to the market value of the shares awarded, subject to a limit of R3 000 per year.

The problem encountered by potential users of this type of scheme has been that the terms of the incentive were overly restrictive. The main concern was that the R9 000 ceiling was way too low given market conditions (e.g. the administrative burden of the scheme outweighs any benefit of the incentive). Other concerns also existed, such as the required participation of 90% of all full-time employees, apart from those who previously participated in another share scheme.

The 2008 amendment therefore relaxes some of these criteria.

1. Monetary CapThe tax-free ceiling has been raised from R9 000 over a three-year period to R50 000 ceiling over five years. The matching employer deduction has also been raised to the same level that allows for R10 000 per annum over five years. This five-year time horizon matches existing broad-based employee share schemes, especially those aligned with the charter codes.

2. Participation percentage thresholdThe 90% employee share participation requirement has been lowered to 80%. The lower percentage was introduced for a variety of reasons, including the desire on the part of employers to exclude certain non-performing employees (as well as higher-end employees not utilising section 8C schemes). Other concerns existed about difficulties in margins for error, especially if a prolonged time lapse exists between the classification exercise and the actually granting of shares.

3. Expansion of permissible employee share restrictionsUnder current law, employers are permitted to impose only limited restrictions on the tax-preferential shares granted. For instance, while employers can retain a right to reacquire the granted shares from the employee, the reacquisition must be at market value as at the date of the employer’s reacquisition. This restriction has now been relaxed in relation to employee misconduct or poor performance. Under these conditions, the employer can reacquire the shares from these employees at the lower of –

(i) market value as of the date of the initial grant; or(ii) market value as of date of reacquisition by the employer.

In other words, the employer can deny employees engaged in misconduct or poor performance from obtaining any benefit of share appreciation arising after the date of grant.


Example

On 5 January 2009, Yusuf is granted 2 500 Holdco shares by way of section 8B at a cost of R0.5 per share (the minimum required payment in terms of Companies Act). The shares are trading at R2 on the date of grant, and Yusuf is restricted from selling these shares for a period of 5 years from date of grant. Assume the Holdco shares have a value of R3 per share as of 10 August 2009.

As a general matter, section 8B only allows the employer to reacquire the shares at their value on date of reacquisition (i.e. at R3 if reacquired on 10 August 2009). However, if the employer is reacquiring shares from a non-performer, the employer can reacquire the shares at the lower of the market value on the date of the initial grant (i.e. of R2) or the market reacquisition value (i.e. R3). In this case, the reacquisition from a non-performer on 10 August 2009 can occur at R2 per share.

4. Group of companiesUnder current law, the equity shares granted must consist of shares in the employer or any company forming part of the same ‘group of companies’ as the employer. The ‘group of companies’ definition has been replaced with the term ‘associated institution’ as defined in the Seventh Schedule. This change realigns the share scheme with other fringe benefit schemes (which are mainly addressed in the Seventh Schedule).

Amendments to the Income Tax Act: Section 8B(2) and (3) Section 11(lA)

Effective from 21 February 2008 and applies in respect of qualifying equity shares granted on or after that date. The amendment replacing the ‘group of companies’ definition with the term ‘associated institution’ is effective from 21 October 2008 and applies in respect of qualifying equity shares granted on or after that date.

Executive share schemes

Section 8C of the Income Tax Act seeks to ensure that shares granted under executive share schemes will give rise to full tax when restrictions on the shares are lifted.

A new generation of executive share schemes that seek to avoid section 8C on artificial technical grounds has emerged. Some of these schemes involve trusts in which the executive obtains a right to the value of the shares held in trust without any right to acquire the underlying shares. Other schemes do not contain any restrictions on the employer shares themselves but impose other financial penalties on the employee for violating employer restrictions on the employer shares.

The 2008 amendments address these ‘new generation schemes’ with two specific provisions.

1. Closure of new generation of share schemesThe ambit of section 8C is extended by widening the scope of the term ‘equity instrument’. The new definition includes ‘any contractual right or obligation the value of which is determined directly or indirectly with reference’ to the underlying share. Hence, section 8C now applies to an interest in a trust even if the employee has a right solely to the value of the shares in the trust (without any direct right in the shares themselves). The definition of ‘restricted equity instrument’ has also been expanded. Restrictions no longer just cover rights of forfeiture or acquisition at a price other than market value. The revised definition now also includes any other financial penalty for not complying with the employer’s terms for issuing the shares.

2. Capital distributionsCapital distributions normally give rise to capital gains tax (taxed as a part disposal), but will be taxed as ordinary revenue where they arise on restricted equity instruments held by employees. These capital distributions will be taxed as if the amounts arose from any other disposal of restricted equity instruments. An amendment to the Eighth Schedule ensures that the same amount is not taxed again as a capital gain.

Amendments to the Income Tax Act: Section 8C(1A) and (7) Paragraph 35(3) of the Eighth Schedule


Effective from 21 October 2008 and applies to any equity instrument acquired by a taxpayer, or any capital distribution received by or accrued to a taxpayer, on or after that date.

SITE redetermination

If a SITE taxpayer earns remuneration for a part year, the monthly withholding tax (SITE) is calculated as if he or she worked a full year (i.e. based on a 12-month working period ). SITE is, in most instances, a final withholding tax and the taxpayer would therefore not be able to claim a refund for the excess tax withheld. The amendment allows a SITE-taxpayer to have their final tax liability calculated based on the period they worked and they will be able to claim the excess tax withheld as a refund when they file their tax return.

Example

Mr P worked for 4 months and earned a salary of R5 000 per month. SITE of R210 was deducted (calculated on an annual salary of R60 000). Mr P's salary for the year amounts to R20 000 and he should therefore not pay any tax. Mr P will now be able to claim the R840 of SITE that was withheld from his salary as a refund when he files a tax return.

Amendments to the Income Tax Act: Paragraph 11B(4) of the Fourth Schedule

Effective from 1 January 2008.

CORPORATE TAX

Intra-group dividends

In terms of section 64C, certain amounts distributed to a shareholder, or a connected person to the shareholder, are deemed to be a dividend and thus subject to STC. Currently, an exemption applies if the shareholder forms part of the same group of companies as the company deemed to declare the dividend and if the shareholder has taken the dividend into account when determining its profits. The 2008 amendment provides that the exemption will apply - In the case of a distribution to the shareholder, if the shareholder and the company are part of the same

group of companies; or In the case of a distribution to the connected person, if the company, the shareholder and the connected

person form part of the same group of companies.In addition, the amendment provides that for the exemption to apply to either type of distribution, the dividend must be taken into account as profit by the shareholder or connected person.

Example

Company H holds all the shares of Company S1, and 70 per cent of the shares in Company S2. Company S2 is indebted to Company S1 for R100. Company S1 cancels the debt.

In terms of section 64C, the cancellation of the debt due by Company S2 to Company S1 is a deemed dividend of R100 by Company S1 to Company H. However, this deemed dividend will (to the extent the other requirements of the exemption are fulfilled) be exempt from STC as Company S1, Company S2 and Company H form part of the same group of companies.

STC reforms

Conversion from STC to a dividend tax

STC is a tax that is levied on the net amount of dividends declared by a company. The ‘net amount’ is the excess of dividends declared less dividends accrued to that company during the dividend cycle. Consequently, the STC liability falls on the company distributing the dividend (as opposed to the shareholder receiving the dividend). In February 2007, the Minister of Finance announced a two-phase approach to STC reform:


The first phase entailed the reduction of the STC rate to 10%, as well as a revision of the tax base (i.e. the definition of ‘dividend’ in section 1 of the Income Tax Act) on which the STC relies. The initial elements of this phase were put into effect by the Revenue Laws Amendment Act, 2007, effective from 1 October 2007.

The second phase entails the wholesale replacement of the STC with a new tax on dividends, to be levied at a shareholder level.

The reasons for moving from STC to a withholding tax on dividends are as follows:

1. Shift from a company-level tax to a shareholder-level tax Internationally, company dividends are generally taxed at the shareholder level (as opposed to company level). This difference from STC gives rise to collateral problems, some of which are that:

Because the STC must be subtracted from the accounting profits of a South African company, South African companies are at a disadvantage to their international counterparts who do not bear any adverse accounting profit reduction when paying dividends.

Since the STC is levied at company-level, tax treaty limits on Dividends Tax rates generally have no effect (unless the relevant treaty makes specific provision for STC).

Foreign investors are generally unfamiliar with STC and its mechanics, thereby causing uncertainty. All of these arguments mean that the STC may be unnecessarily raising the cost of equity financing.

2. Expand the tax baseProblems exist with the tax base upon which the STC relies. More specifically, the definition of ‘dividend’ in section 1 of the Income Tax Act draws its meaning from the term ‘profits’ (i.e. a dividend expressly or implicitly requires a reduction in profits), but the term ‘profits’ itself is never expressly defined in the Income Tax Act. It is understood that the term ‘profits’ draws its meaning from company law (and accounting) principles but this mix of (often complex) accounting, company law and tax concepts has complicated the tax system.

The new tax on dividends will, in line with international norms, be levied at shareholder level. The tax will apply only in respect of dividends declared by South African resident companies, and will be levied at a rate of 10%.

Although the party entitled to the benefit of the dividend (the beneficial owner of the shares) will be the party ultimately liable for the tax, the tax will be collected by way of a withholding regime (see the notes on Withholding tax on dividends)

The dividends tax will be imposed on the date when the dividend is paid by the company, which is the date when the dividend accrues to the shareholder. This concept of payment or accrual differs from that of dividend declaration. For instance, in a listed share context, a shareholder’s accrual of dividends generally falls sometime after a dividend is declared.

Beneficial owners will be exempt from the Dividends Tax if they are:

a South African resident company; a pension, provident or other similar benefit fund; a sphere of the South African government (i.e. national, provincial and local); an exempt South African public entity; an approved PBO; an environmental rehabilitation trust (as contemplated in section 37A); or a shareholder in a registered “micro business” as defined in the Sixth Schedule (this exemption applies

to dividends up to R200 000 in a year of assessment: see the notes on Micro business turnover tax below).

The above list of exemptions is much broader than the exemptions currently existing for STC. For instance, dividends paid to pension and provident fund are now exempt, thereby providing a further stimulus for retirement savings. More notably, all dividends paid from one resident company to another are now exempt without regard to whether those companies are within the same group of companies. This company-to-company exemption represents a pure classical model of dividends tax (with the underlying amount giving rise to the dividend being taxed only once dividends fully leave the company context).


Example 1

Marcus owns all the shares of Company 1; Company 1 owns all the shares of Company 2; and Company 2 owns all the shares of Company 3. Company 3 pays a R20 000 dividend to Company 2, Company 2 pays a R20 000 dividend to Company 1; and Company 1 pays a R20 000 dividend to Individual.

The dividends tax only applies once the R20 000 of dividends are paid to Marcus. The previous dividends are exempt.

Example 2

Company X is a listed company on the Johannesburg Stock Exchange with 1 million ordinary shares in issue. Of this amount, 600 000 ordinary shares are held by natural persons who are residents; 300 000 ordinary shares are held by pension funds and 100 000 ordinary shares are held by resident companies. Company X pays a dividend of R5 per share.

Only the dividends paid to the resident natural persons are subject to the dividends tax. The dividends paid to pension funds and resident companies are exempt.

Tax treaty relief potentially applies now that dividends are taxed at a shareholder-level. This change has greatest practical significance in cases where a foreign resident has a minimum 10% – 25% interest in the shareholding of the domestic company paying the dividend. In these cases, the dividends tax rate should fall to 5% (based on the tax treaty renegotiation proposed).

STC credits

In addition to the relief for exempt entities, an exemption will exist for dividends previously subject to STC to ensure that profits previously subject to STC are not taxed again. This is achieved by allowing the set-off of STC credits against dividends declared under the new dividends tax regime.


Marcus

Company 2

Company 1

Company 3

R20 000

R20 000

R20 000

For purposes of administrative convenience, STC credits will be exhausted first (i.e. a company will not be entitled to decide whether it is declaring a dividend out of STC credits). Moreover, dividends eligible for STC credits will be allocated pro rata amongst all shareholders within the same class entitled to the dividends, irrespective of whether those shareholders are exempt from the Dividends Tax.

Example 3

Company X has two shareholders (a pension fund and an individual) that each hold 50% of its shares. Company X has R400 of STC credits (i.e. Company X has received R400 of dividends previously subject to STC). Company X distributes a dividend of R600 to its shareholders.

Of the R600 dividend, the dividends tax does not apply to the first R400 by virtue of the existing STC credits. Of the remaining R200, R100 is allocated to each shareholder. This means that R100 of the dividend (i.e. that is paid to pension fund) will be exempt from the dividends tax and the other R100 (i.e. that is paid to the individual) will be taxed at 10%. STC credits will work themselves up through a chain of South African resident companies. These credits will also be pro-rated amongst each class of shareholder (as they move through the chain).

Example 4

Company X has two resident shareholders (Company Y and an individual) that each hold 50% of its shares. Company X has R400 of STC credits (i.e. has received R400 of dividends previously subject to STC). Company X distributes a total of R600 to both of its shareholders by way of a dividend.

Of the R600 dividend, the dividends tax does not apply to the first R400 by virtue of the existing STC credits. Of the remaining R200, R100 is allocated to each shareholder (meaning that the R100 paid to Company Y is exempt and the other R100 paid to the individual is subject to the dividends tax). The R400 of STC credits is similarly split with Company Y receiving R200 of STC credits (thereby providing additional relief when Company Y pays dividends).

The STC credit regime under the new dividends tax will be dependent on the company paying a dividend providing reporting information to the payee. The company will be required to determine the percentage of the dividend that will be exempt by virtue of STC credits and this percentage will need to be reported and relied upon through the chain. Failure to transmit this report to the payee will result in the denial of STC credits for the shareholder with the STC credits still being reduced. This report will need to be transmitted by the date of payment of the dividend. All STC credits will terminate on the fifth anniversary from the date that the Dividends Tax becomes effective.

Transitional arrangements

Dividends declared before the date that the new dividends tax becomes effective will be exempt from the dividends tax if paid after that effective date. These dividends will be subject to STC and not the dividends tax (despite the fact that they are paid after the effective date). This transitional rule will only have practical application within the first year after the effective date.

Amendments to the Income Tax Act: Sections 64D, 64E, 64F, 64I and 64J

Effective from a date to be determined by the Minister by notice in the Gazette. This date is expected to be sometime in 2010.

Revised dividend definition

A new definition of ‘dividend’ will inserted into the Act when the new dividends tax is introduced. This new definition includes as a dividend any amount transferred by a company to a shareholder in relation to a share. An amount transferred would include ‘any transfer’. Consequently, all operating and liquidating distributions and all amounts paid in redemption, cancellation or otherwise in exchange for shares surrendered (e.g. through buybacks) will be regarded as a dividend. The amount distributed can consist of money as well as the market value of every other form of property (i.e. dividends in specie). The definition contains two exclusions:


1. Dividends do not include amounts resulting in a reduction of contributed tax capital (see below).2. Dividends do not include situations where a company distributes its own shares. The distribution of a

company’s own shares is not within the dividend definition on the basis that these distributions do not result in an outflow of overall value from the company (all underlying assets remain with the company).

The new rules above apply only to domestic dividends. The concept of foreign dividends remains under review and is still to be clarified. The new definition of ‘foreign dividend’ is therefore an interim measure and merely preserves the pre-existing dividend regime for foreign dividends. The rules for foreign dividends will be reviewed before the dividends tax regime comes into effect.

Contributed tax capital

The contributed tax capital (CTC) of a company is a notional amount derived from the value of any contribution made to a company as consideration for the issue of its shares. CTC will be reduced by any amount that is allocated by the company in a subsequent transfer back to one or more shareholders. As a general rule, the CTC of a company is based on amounts received by or accrued to a company as consideration for the issue of shares by the company.

For instance, if an individual contributes an asset worth R100 to a widely held company in an initial offering, R100 is added to CTC.

Applying basic principles, an amount received by or accrued to a company as consideration for the issue of shares would not only include cash or the value of an asset received by or accrued to the company. CTC would also include the value of services provided by a person to the company as consideration for a share issue or the cancellation of a loan account owed by the company as consideration for a share issue. As a transitional measure, the share capital and share premium of a company on the effective date of the new dividends tax regime will generally operate as the ‘starting’ CTC. However, amounts of share capital and share premium that would have constituted a dividend had they been distributed immediately before the effective date of the new Dividends Tax regime are excluded from the starting CTC (in other words, ‘starting’ CTC does not include tainted share capital or share premium).

In order for a transfer from a company to a shareholder to constitute a reduction of CTC (and accordingly fall outside the ‘dividend’ definition), the definition of CTC requires that the company determine in writing that the transfer constitutes a transfer of CTC. Without this written determination (which could, for example, take the form of a company resolution), no reduction of CTC can occur (and the amount transferred would constitute a dividend subject to the dividends tax). In effect, the rules amount to a unilateral company election. In order for this written determination to be valid, this determination must be made by the date of the transfer by the company to the shareholders. If a company has several classes of shares, CTC must be maintained separately on a per class basis. Therefore, CTC created by virtue of an ordinary share issue cannot be allocated or reallocated to preference shares. Similarly, distributions in respect of preference shares cannot be used to reduce the CTC associated with ordinary shares. As is the position under current law, if a company makes a distribution out of CTC in respect of a given class of shares, the CTC distributed will be allocated pro rata to the shareholders of that class.

Example 5

Company X has two ordinary shareholders (A and B) and one preferred shareholder (C). A holds 25% of the ordinary shares, and B holds the other 75% of the ordinary shares. Company X has CTC of R150 in respect of its preference shares and R380 in respect of its ordinary shares. As part of a written company resolution when making a R200 distribution to its ordinary shareholders, Company X decides to allocate R60 of the ordinary share CTC to shareholders A and B.

The amount of CTC that is transferred to shareholders A and B will be calculated as follows:

CTC transferred to A = 25% x 60 = R15 CTC transferred to B = 75% x 60 = R45

Hence, shareholder A receives a dividend of R35 (R50 total distribution less the R15 CTC). Shareholder B receives a dividend of R105 (R150 total distribution less the R45 CTC).


The dividend portion of the distributions is subject to the dividends tax, and the CTC portions are viewed as capital distributions that are subject to capital gains tax.

The company reorganisations rules of sections 41 to 47 potentially require special adjustments for the CTC calculation (similar to other rules such as base cost, cost price, allowances, etc). More specifically, special CTC rules apply in the case of asset-for-share transactions under section 42, amalgamations under section 44 and unbundlings under section 46.

For example, section 42 asset-for-share rollover transactions give rise to special CTC calculations in two sets of circumstances. Firstly, these special CTC rules apply if the person disposing of the asset holds 20 per cent or more of the equity shares and voting rights of the company at the close of the day on which the asset is disposed of. Secondly, the rules will apply if the person disposing of the asset is a natural person who will be engaged on a full time basis in the business of the company of rendering a service. These rules apply regardless of whether the asset disposed of constitutes a capital asset or trading stock. In both circumstances, the amount of CTC will be the “tax cost” of the asset, irrespective of its market value.

Example 6

Individual X contributes an asset and receives shares in company Y in exchange, in terms of a section 42 asset-for-share transaction. At the close of the transaction, individual X holds 30% of the shares in Company Y. The base cost of the asset in the hands of individual X is R10 immediately before the transaction. The market value of the asset is R100.

The amount of CTC that is contributed to Company Y is equal to the base cost of the asset (i.e. R10) and not its market value (i.e. R100). The CTC rules essentially mimic the other section 42 base cost, cost and cost price rules. Hence, in the case of a section 42 rollover to a listed company where the transferor fails to hold the 20% threshold, the resulting CTC from a capital asset contribution is market value (not rollover base cost).

Amendments to the Income Tax Act: Section 1 definitions of ‘contributed tax capital’, ‘dividend’ and ‘foreign dividend’ definitions Section 42(3A) Section 44(4A) Section 46(3A)

Effective from the date that the dividends tax is introduced, which is expected to be in 2010.

Withholding tax on dividends

The new dividend tax shifts the liability for the tax on dividends from the company to the shareholders. The collection of the tax will however, be achieved through a withholding tax system. The dividend tax will be withheld by the company paying the dividend, or its representative, and paid to SARS on behalf of the shareholder. This withholding mechanism becomes complicated in that the company paying the dividend and withholding the correct amount of dividend tax must have an awareness of the shareholder’s tax situation, particularly with regard to the type of shareholder entity and any exemptions and treaty relief that may apply, in order to determine the appropriate tax obligation.

The new withholding tax regime envisions two general sets of withholding obligations. As a starting point, the company paying the dividend has the primary responsibility to withhold and pay over the dividend tax. However, this obligation may be shifted to an intermediary, who may be in a far better position to determine the shareholder’s tax situation, especially in the case of uncertificated shares of a listed company.

Withholding by the company (section 64G)

a. Standard obligation

Under the dividends tax regime, any resident company that declares and pays a dividend will be required to withhold (i.e. hold back 10% of the dividend and pay that amount to SARS). This obligation arises when the dividend accrues to a shareholder. However, this standard obligation to withhold is subject to exemptions and tax treaty adjustments.


b. Exemptions and tax treaty relief

Generally, the existence of a withholding exemption for a company payer depends on whether the share giving rise to the dividend is a certificated share (held in paper form) or an uncertificated share (held in electronic form). In the case of uncertificated shares, the rules relating to withholding are more relaxed for company payers than those applicable in the certificated environment. This difference exists because most of the beneficial shareholder information in an uncertificated environment is known by regulated intermediaries (as opposed to the company payer).

(i) Certificated shares

Exemptions:A company making a dividend payment in respect of certificated shares must not withhold the dividends tax in two sets of circumstances:

1. If payment is made to a beneficial shareholder that has submitted a written declaration that the beneficial owner is exempt from the dividends tax.

2. If payment is made to a company within the same ‘group of companies’ as defined in section 41 (i.e. a dividend within a domestic group).

Treaty relief:A company payer must also reduce the amount of dividends tax owed upon receipt of a declaration that the beneficial shareholder is entitled to a reduction of tax by virtue of a tax treaty. Declarations must be received in a timely manner so that the paying company has the administrative capability of exempting or reducing the otherwise existing withholding obligation. This date is set by the company. The declaration must also include an undertaking by the beneficial shareholder of promptly notifying the company of any cessation of beneficial ownership. Once submitted, declarations last for all dividends going forward until one of the earliest of three events occur:

(1) the beneficial owner notifies the company that beneficial ownership has ceased, (2) the share register changes in respect of the underlying share, or (3) three years from the initial submission of the declaration. The three year limit ensures that

companies regularly review their records.

The obligation to reduce the withholding tax upon receipt of a proper declaration is not optional for the company payer. The company payer must reduce the level of withholding tax according to the declaration. Appropriate reliance on a declaration form also fully relieves the company payer from any liability to SARS as regards that withholding tax.

(ii) Uncertificated shares

A company paying a dividend in respect of an uncertificated share will be exempt from withholding per se. This exemption exists because payments in respect of uncertificated shares are always made to regulated intermediaries (such as a central securities depository participant (STRATE)). These regulated intermediaries almost universally have better access to shareholder information in the case of uncertificated shares.

Withholding by intermediaries (section 64H)

After determining the withholding obligation of the company payer, the second question exists as to whether an alternate obligation exists for an intermediary (i.e. parties that make dividend payments that were declared by another person after having received those payments from the company or another intermediary). To the extent an intermediary exists, the general rule is that an intermediary is required to withhold the full 10% unless a specific exemption exists (or tax treaty relief applies). These exemptions and relief mechanisms again depend on whether the dividend is paid in respect of a certificated or an uncertificated share. In addition, no intermediary has any withholding obligation if another party has already paid the tax (e.g. the company or the beneficial shareholder). It should further be noted that two types of intermediaries exist: regulated and unregulated intermediaries. A regulated intermediary is subject to one or more regulatory regimes associated with uncertificated shares (e.g. the Securities Services Act). Any registered shareholder lacking a beneficial interest in the underlying share can qualify as an unregulated intermediary (e.g. nominees).


(i) Certificated shares

The exemptions and treaty relief mechanisms for the payment by an intermediary in respect of certificated shares roughly follow the same paradigm as a payment by a company payer. An intermediary (regulated or unregulated) making payment in respect of certificated shares must not withhold if payment is made to a beneficial shareholder that has submitted a written declaration of exemption. An intermediary payer must also reduce the amount of dividends tax owed upon receipt of a declaration by a beneficial shareholder claiming tax treaty benefits. Declarations must be received in a timely manner so that the intermediary has the administrative capability of exempting or reducing the otherwise existing withholding obligation. This date is set by the intermediary. The declaration must also include an undertaking by the beneficial shareholder promptly notifying the intermediary of any cessation of beneficial ownership.

Once submitted, declarations last for all dividends going forward until -

1. the beneficial owner notifies the intermediary that beneficial ownership has ceased, 2. the share register changes in respect of the underlying share, or 3. three years from the initial submission of the declaration. The three year limit ensures that

intermediaries regularly review their records.

As with company payers, the obligation to reduce the withholding tax for a proper declaration is not optional. The intermediary must reduce the level of withholding as declared. Proper reliance on a declaration form also fully relieves the intermediary from liability in respect of SARS.

(ii) Uncertificated shares

The rules for intermediaries pertaining to certificated shares are roughly the same as those for uncertificated shares. Exemptions and treaty reliefs again exist by way of declaration. In addition, a further exemption automatic exists if the intermediary makes payment to a regulated intermediary (who then assumes the intermediary withholding obligation).

Payment and recovery of the dividends tax (section 64K)

As discussed above, the dividends tax (or withholding) liability can attach to the beneficial owner, the company payer, or an intermediary, all of whom will be jointly and severally liable until the liability is discharged. This discharge will take place if any one of these parties makes payment of the dividends tax (i.e. the party making payment relieves the other parties of the liability to SARS). If liability for payment of the dividends tax arises (either on the part of the beneficial owner, a company payer or an intermediary), the tax must be paid over to SARS on or before the last day of the month following the month during which the dividend is paid by the company declaring the dividend (e.g. a dividend declaration on 20 July means that the payment due date falls on 31 August). As a practical matter, the company payer or intermediary will operate as the first point of call for the tax as a result of their withholding obligations.

Refund of tax (sections 64L and 64K(2))

Special rules are required to ensure that beneficial owners can obtain a tax refund if the dividends tax has been over-withheld. As a general matter (as discussed above), a company payer or intermediary must not withhold or must reduce the tax charge upon receipt of a timely declaration from the beneficial owner. Special refund procedures are however required if this declaration is not timely or properly submitted. In these circumstances, the refund rules depend on timing as follows:

1. Company refund process: If a declaration by the beneficial owner is submitted within one year after payment of the dividend otherwise eligible for exemption or relief, the company payer (or intermediary) must refund the dividends tax to the beneficial owner. However, this refund is required only if the company payer (or intermediary) makes further dividend withholding payments within one year from the initial dividend at issue. In these cases, the company payer (or regulated intermediary) refunds the over-withheld amount to the beneficial owner and thereby reduces its next dividend tax payment to SARS.

2. SARS refund process: If a refund is not made within one year (e.g. because no further dividend payments were made), the beneficial owner may obtain a refund from SARS.


3. Three-year time limit: No amount may be refunded after three years from the date on when the dividends tax is withheld.

Example

Company X is a listed company with 1 million uncertificated shares. Company Y holds 100 Company X shares through a regulated intermediary. Company X pays a dividend of R5 per share. Assume all parties are residents (and therefore Company Y is exempt from the dividends tax).

Result: Company X is exempt per se from withholding by virtue of the facts that the shares involved are uncertificated shares. The regulated intermediary is not obligated to withholding if Company Y submits its declaration in a timely fashion. In the absence of the declaration from Company Y, the regulated intermediary must withhold and pay over to SARS an amount of R50 (R500 x 10%). If the declaration is received late but within one year from payment of the dividend, the regulated intermediary must pay the R50 back to Company Y out of tax withholding funds otherwise payable to SARS in relation to the next dividend payment to be made by the regulated intermediary (as long as the regulated intermediary makes a dividend payment within the required one-year period). If no refund occurs beyond the one year date, Company Y can make a claim for refund directly from the SARS (as long as the refund is claimed within three years from the date on which the dividends tax was withheld).

Amendments to the Income Tax Act: Sections 64D, 64G, 64H, 64K and 64L

Effective from the date that the dividends tax is introduced, which is expected to be sometime in 2010.

Passive holding companies

Once the new withholding tax on dividends is introduced and the liability for tax on dividends shifts to the shareholders, we will no longer refer to an effective company tax rate of 34,55%; instead the company tax rate will simply be 28% as the STC component will fall away. With the maximum marginal tax rate of individuals at 40%, the gap between the individual tax rate and the company tax rate is wider than it has been for many years. The concern of tax authorities is that this gap is wide enough to entice high-income earning individuals to enter into arbitrage transactions to reduce their tax liabilities. Specifically, individuals might be tempted to enter into transactions that divert income from their own hands, where it would be taxed at 40%, to a company or close corporation where it would be taxed at the lower rate of 28%. Of more concern is the fact that the new withholding tax on dividends will not generally apply when a company declares a dividend to another company. Therefore, an individual may arrange to hold shares through an investment company. That way, the investment company would receive dividends from the underlying investments free of the withholding tax and that income could remain in the company tax-free for an indefinite period of time. The withholding tax would only be charged when the company eventually distributes its reserves to the shareholders.

In order to prevent this arbitrage opportunity from being exploited, a new concept, called a “passive holding company” (PHC) will be introduced into our tax law when the transition to the dividend withholding tax takes place. This is expected to be late in 2009 or early in 2010.

The impact of the new legislation is that a PHC will be taxed separately at rates varying from 10% to 40%, depending on its income mix.

What is a passive holding company?

Bearing in mind the reasons for introducing the concept of a PHC, it is understandable that a PHC is essentially an investment company (or a company earning investment income) that is closely-held. Some reprieve has been given in that property investments will not cause a company to be a PHC: the focus of attention is on companies holding cash and investments in shares.

The definition of a PHC in section 9E of the Income Tax Act considers two aspects:

1. The income mix; and2. the shareholding of a company.


A PHC is defined as a company where -

1. the passive income (specifically defined: see below) of the company for the year of assessment exceeds 80% of its gross income; and

2. five or fewer individuals that are resident in the Republic, together with their connected persons, at any time during the year directly or indirectly hold more than 50% of the shares in the company.

Note that both requirements 1 and 2 must be met in order for a company to be a PHC.

The following companies are however, excluded from the definition of a PHC and these companies can therefore never be PHCs:

(a) a listed company;(b) a member of the same group of companies as defined in section 41 as a listed company;(c) a bank as defined in section 1 of the Banks Act, 1990 (Act No. 94 of 1990), or a person carrying on a

trade in respect of money-lending;(d) an authorised user as defined in section 1 of the Securities Services Act, 2004;(e) a long-term insurer as defined in section 1 of the Long-Term Insurance Act, 1998;(f) a short-term insurer as defined in section 1 of the Short-Term Insurance Act, 1998;(g) a collective investment scheme in securities (as contemplated in paragraph (e)(i) of the definition of

‘company’ in section 1);(h) an approved public benefit organisation;(i) an approved recreational club;(j) a foreign company as defined in section 9D; and(k) a venture capital company as defined in section 12J.

A key term in the definition of a PHC is ‘passive income, which means the portion of the company’s gross income for a year of assessment that is derived from financial instruments. In other words, passive income, for the purposes of the definition of a PHC includes only interest and dividends.

‘Gross income’ also has a special definition for this purpose. It means ‘gross income’ as defined in section 1 but excluding –

(a) any royalties; and(b) any dividend received by or accrued to a company if that company holds at least 20% of the total equity

share capital and voting rights in the company declaring the dividend.

Example 1

An individual indirectly holds 100% of the shares in Company B. Therefore, more than 50% of company A (directly) and company B (indirectly) is held by five or less individuals and the shareholding requirement is met for both companies. This alone does not make the company a PHC however; the next step in the enquiry would be to consider the income mix of the company.


Individual

Company A

Company B

Example 2

Each individual (assume they are not connected persons) owns 33,3% of the shares in company X. More than 50% of company X is held by five or less individuals and therefore, the shareholding requirement is met. This alone does not make the company a PHC however; the next step in the enquiry would be to consider the income mix of the company.

Example 3

Assume the facts as set out in Example 2, i.e. company X is owned equally by three unconnected individuals. The company earns the following income during the year:

Dividends from a company in which it holds 10% of the shares R500Interest from cash investments R200Trading income R300Capital gain from the sale of land R1 000Total R2 000

Passive income:Dividends from a company in which it holds 10% of the shares R500Interest from cash investments R200

R700 Gross income:

Dividends from a company in which it holds 10% of the shares R500Interest from cash investments R200Trading income R300

R1 000 Note: “Gross income” as defined in section 1 excludes capital gains.

Dividends are included in gross income in this instance as company X owns less than 20% in the underlying company.

Result: Passive income comprises 70% of gross income (R700/R1 000 x 100).As Company X’s passive income does not comprise more than 80% of its gross income, it is not a passive holding company. Company X will therefore be taxed as a normal company.

When measuring whether a company’s passive income exceeds 80% of its gross income, the gross income includes not only the gross income of the company itself but also, the active trading income of other companies within the same “group of companies” as defined in section 41. This is illustrated in the following example;

Example 4

Assume the facts as set out in example 1 i.e. Company A is wholly owned by an individual and company A owns all the shares of company B.Company A has gross income of R200 of which R190 constitutes passive income. Company B has gross income of R1 000, of which R300 is passive income.


Individual A

Company X

Individual B

Individual C

Result: Passive income of company A = R190

Gross income of company A = R200Gross income (excluding passive income) of company B = R700Therefore, gross income of the group = R900

The passive income of Company A amounts to only 21% of the gross income of the group (R190/R900 x 100). Therefore Company A is not a passive holding company.

Is company B a passive holding company?Passive income of company B = R300

Gross income of company B = R1 000Gross income (excluding passive income) of company A = R10Therefore, gross income of the group = R1 010

The passive income of Company B amounts to only 30% of the gross income of the group (R300/R1 010 x 100). Therefore Company B is not a passive holding company.

Example 5

Assume the facts as set out in Example 2, i.e. company X is owned equally by three unconnected individuals. The company earns the following income during the year:

Dividends from a company in which it holds 20% of the shares R500Interest from cash investments R450Trading income R 50Capital gain from the sale of land R1 000Total R2 000

Passive income = Interest from cash investments R450

Gross income:Interest from cash investments R450Trading income R 50

R500

Note: Dividends are excluded from gross income (and, therefore, passive income) because company X owns 20% of the shares in the underlying company.

Result: Passive income comprises 90% of gross income (R450/R500 x 100).As Company X’s passive income exceeds 80% of its gross income, it is a passive holding company.

How is a passive holding company taxed?

The taxable income of a PHC and dividends received by or accrued to a PHC will be taxed in the PHC at rates to be fixed annually by Parliament. These rates will be fixed for the first time in the 2009 Budget speech. It is expected that the dividend income of PHCs will be taxed at the WTD rate (10%) and the other taxable income (for example from trading, interest, rentals and royalties) will be taxed at a rate equal to the maximum marginal tax rate for individuals (currently 40%). (The Explanatory Memorandum on the Revenue Laws Amendment Act, 2008 stated that capital gains fall outside the PHC regime but the legislation to achieve this still has to be introduced.)

Dividends received by or accruing to a PHB will not be subject to the WTD.

Dividends paid by a PHC will also not be subject to the WTD if the income out of which the dividends are declared has already been taxed in the PHC, either at 10% on the dividend income or 40% on other taxable income. The WTD will apply to any dividends declared by the PHC to the extent that they exceed the previously-taxed dividends and taxable income. This WTD exemption will apply on a “first-in-first-out” basis.


Example 6

Assume that company Z, wholly owned by an individual, earns interest of R350, dividends of R550 (no WTD applied) and active taxable income of R100 in the 2012 year of assessment.As passive income (R900) comprises 90% of the company’s gross income (R1 000) and there is only one individual shareholder, company Z is a PHC. The dividends (R550) are taxed at 10% and the other income (R450) is taxed at 40% for the 2012 year. If the company declares a dividend of R600 at the end of the year, the dividend will be exempt from WTD as the income from which the dividend is paid has been taxed at the statutory rates applicable to a PHC.

Example 7

Assume the same facts as in Example 6. In 2013, company Z’s only taxable income is R200 from trading operations. The company is not a PHC for this year as it has no passive income. Its trading taxable income will be taxed at the normal company tax rate (28%). Assume that the company pays a R500 dividend at the end of the year. This dividend is funded as follows: retained income from the 2012 year R400 (R1 000 less the 2012 dividend of R600); and after-tax income for the 2013 year R144 (R200 – 28% or R56 tax), of which R100 has been use to pay the dividend.

Result: The R500 dividend paid at the end of 2013 is exempt from WTD to the extent to which it is paid out of income that was taxed at the statutory rates applicable to a PHC. The amount that is exempt from the WTD is calculated as:

Cumulative dividend income taxed at 10% plus cumulative taxable income taxed at 40% less previous dividends declared by a PHC.

The WTD exemption applies even though company Z is no longer a passive holding company at the time the dividend is paid (i.e. the WTD exemption applies to “any” company). Of the R500 dividend paid, R400 is therefore exempt from WTD (cumulative dividend income of R550 and cumulative taxable income of R450 less previous dividends declared of R600). The WTD will therefore apply to R100 of the dividend (total cumulative dividends of R1 100 less the cumulative R1 000 of income taxed in a PHC). The WTD on the dividend is therefore 10% of R100 = R10 and the balance of R490 is paid to the shareholder.

The main objective of the passive holding company regime is to counter the trapping of dividends and passive ordinary revenue in company solution. Active income is not a concern because strong non-tax business reasons exist for keeping businesses in limited liability form. Real estate (even though potentially passive) is also not of concern for the same reasons. The higher rate of capital gains tax for companies (the effective 14% rate versus the effective marginal 10% rate for individuals) also more than offsets any ordinary rate rental arbitrage advantage from real estate.

Amendments to the Income Tax Act: Section 9E

Effective from the date that the dividends tax is introduced, which is expected to be sometime in 2010.

Company reorganisations

Numerous amendments have been made to the company rorganisation provisions in Part III of the Income Tax Act. As this part of the legislation deals with aspects that are complex and specialised, they will not be discussed in these notes.


Share issue anomalies

In terms of section 24B(1), if shares are issued by a company in exchange for an asset, the company is deemed to have incurred expenditure equal to the market value of that asset at the time of its acquisition by the company. In addition, the person disposing of the asset is deemed to have disposed of the asset for consideration equal to the asset’s market value. Section 24B(2) is an anti-avoidance rule that prevents the artificial creation of base cost if a company acquires shares or debt instruments issued ‘directly or indirectly’ in exchange for its shares or those of a connected person. In terms of this rule, the company is deemed not to have incurred any expenditure in respect of the acquisition. Consequently, a zero base cost (or cost price) will be triggered if Company A issues shares to Company B in exchange for shares issued by Company B. A similar zero base cost (or cost price) rule exists when shares are issued in exchange for the issue of debt.

Three amendments have been made to section 24B to correct previous anomalies and deficiencies:

1. Consideration without an exchange

Section 24B(1) previously only applied if shares were issued by a company in exchange for an asset. The section did not apply if consideration was given by a person for shares in circumstances where there was no exchange between the company issuing the shares and the person providing the consideration. This problem may be illustrated by the following example:

Example

Company X is indebted to Individual Y in an amount of R1 000. Individual Z wishes to acquire shares in Company X. Company X issues 1 000 shares to Individual Z. As consideration for the issue of shares in Company X, Individual Z settles the debt owed by Company X to Individual Y by transferring cash of R1 000 to Y.

Since Company X did not acquire an asset from Individual Z, section 24B did not apply to the issue of the shares by Company X to Individual Z. Individual Z did, however, provide consideration for the shares, and consideration was received by Company X (by discharging the liability owed to Individual Y).

In order to address the lack of a technical exchange as illustrated above, the words ‘in exchange for’ in section 24B(1) have been replaced with the words ‘as consideration for’.

2. Market value mismatch

Section 24B(1) arguably did not require that the value of the shares issued must equal the market value of the asset exchanged for those shares. However, the disposal amount and the acquisition amount were deemed to equal the market value of the asset at the time of acquisition. This deeming rule had the potential to create opportunities for avoidance, as is illustrated by the following example:

Example

Taxpayer A owns an asset that has a market value of R100 000. Taxpayer A forms a trust, and contributes R100 to that trust. Company B is formed and issues 100 000 shares (comprising 100 per cent of its issued share capital) to the trust at par in exchange for the R100 cash contributed to the trust by Taxpayer A (assume that the par value of each share is R1). Taxpayer A then transfers the asset to Company B (via the trust) in exchange for the issue of 100 shares (at par) in Company B.

Result. The total value of the shares in Company B is R100 100. The base cost of the asset for Company B is deemed to be R100 000. However, the asset-for share exchange is mismatched (an asset of R100 000 is exchanged for shares with a market value of R100).

In order to address this potential for avoidance, the expenditure that is deemed to have been incurred by the company issuing shares has been limited to the lesser of:

(i) the market value of the asset, or (ii) the market value of the shares issued as consideration for the acquisition of the asset.


3. Cross-issues

A third problem with section 24B relates to the interpretation of sections 24B(2) and 24B(3). It had been incorrectly argued by taxpayers that where Company A issues shares for cash from Company B and Company B issues shares for cash from Company B (i.e. an issue for cash followed by another issue for cash), this would not necessarily trigger a zero base cost since there is no ‘indirect’ issue of shares for shares. The two transactions were simply viewed as separate transactions. Similar arguments have been raised in respect of section 24B(3), which also uses the term ‘indirect’.

In order to address the above problem, sections 24B(2) and 24B(3) have been amended by replacing the words ‘directly or indirectly in exchange for’ with the words ‘by reason of or in consequence of’, which has broader scope. An 18-month limit apply has also been introduced as an objective measure of limiting the application of the revised rule.

Amendments to the Income Tax Act: Section 24B(1)

Effective from 21 October 2008 and applies in respect of shares or debt instruments acquired or issued on or after that date.

Intellectual property arbitrage

Section 23I was introduced into the Income Tax Act in 2007 (but only effective from 1 January 2009) in order to eliminate the deduction for royalty payments to foreign residents if the royalty stemmed from intellectual property initially devised in South Africa. Section 23I, as originally introduced, was however overly broad in some respects and overly narrow in others. The section has been amended to more effectively achieve the goal of providing an objective rule that targets situations that are most likely to raise avoidance concerns without undermining foreign investment in South African research and development.

The operation of the modified provisions of section 23I is illustrated in the following practical examples:

a. Development of intellectual property (IP) by an end user or a connected person (see paragraph (a) of the “tainted intellectual property” definition)

The examples below illustrate the straight-forward application of section 23I. The basic rules are designed to target situations where the end-user (or a connected person) was the previous owner of the IP.

Example 1

SA Developer develops and sells IP to a foreign person (FP). SA Developer then licenses the IP from FP. SA Developer uses the IP in the production of income, and does not sublicense the IP (i.e. SA Developer is an ‘end user’ as defined in section 23I(1)). As consideration for the use of the IP by SA Developer, SA Developer makes royalty payments to FP.

The royalty payments received by FP do not constitute ‘income’ in his hands. Section 23I(2) therefore denies SA Developer deductions in respect of the royalty payments. (The result would be the same where a connected person in relation to SA Developer licensed the IP from FP.)

Example 2

The facts are the same as Example 1, except that Foreign Person (FP) licenses SA Developer via an SA Intermediary Licensee (who is a taxable person). In other words, SA Developer will pay royalties to the SA Intermediary Licensee, and the SA Intermediary Licensee will make corresponding royalty payments to FP.

SA Developer (the end user) will be entitled to a deduction in respect of the royalty payments made to SA Intermediary Licensee. However, section 23I(2) will deny the SA Intermediary Licensee a deduction in respect of the corresponding royalty payments made to FP.

b. Licensing arrangements involving Controlled foreign companies (“CFCs”) (section 23I(2))


Section 23I addresses arbitrage resulting from the payment of royalties to a CFC by disallowing the deduction of royalties paid to a CFC to the extent that the net income of the CFC attributable to royalties is not included in the income of residents.

Example

SA Developer develops and sells IP to CFC (with the CFC being wholly owned by South African residents unconnected to SA Developer). SA Developer then licenses the IP from CFC. SA Developer uses the IP in the production of income, and does not sublicense the IP (i.e. SA Developer is an ‘end user’ as defined in section 23I(1)). As consideration for the use of the IP by SA Developer, SA Developer makes royalty payments to CFC.

Section 23I will deny any deduction for the royalty payments made to the CFC, except to the extent the royalties generate deemed income for the South African residents.

c. Licensing arrangements associated with the acquisition of a business as a going concern (paragraph (c) of the “tainted intellectual property” definition)

One key aspect of the revised intellectual property anti-arbitrage provision is the rules designed to prevent the stripping of IP as part of a business takeover. Of concern are foreign taxpayers that acquire South African business with the stripping of longstanding IP as this permanently deprives the South African tax base of those longstanding royalty earnings. More specifically, if:

(i) a taxable person previously owned IP and used the IP in carrying on its business; and (ii) the current end user of the IP acquired that business as a going concern, any tax arbitrage

generated through associated royalty payments (or payments in terms of associated contractual obligations/derivatives) will be denied in terms of section 23I.

Section 23I will therefore impact various arrangements whereby foreign multinationals acquired South African businesses through the sale of assets. It must be noted that no connection between any of the parties is required in order for these provisions of section 23I to apply.

Example

SA OpCo (not connected to any other party) sells IP to SwissCo and the rest of the business (in which that IP was used) as a going concern to SA NewCo. SwissCo then licenses the IP to SA NewCo. SA NewCo makes royalty payments to SwissCo as consideration for the use of the IP. (Note: the arrows in the above diagram indicate the direction of the flow of cash).

SA NewCo will be denied a deduction of the royalties paid to SwissCo. Successors in title of SA NewCo (i.e. any taxable person that acquires the business of SA NewCo as a going concern) will similarly fall within the scope of section 23I.

d. Bare dominium transactions (paragraph (b) of the “tainted intellectual property” definition)

These rules apply to bare dominium intellectual property schemes (i.e. where the royalty interest is separated from the bare dominium). More specifically, these rules apply if:

(i) a taxable person owns IP (i.e. is the registered proprietor/legal owner of the IP); and (ii) the IP is used by a taxable end-user, any tax arbitrage generated through the payment of

associated royalties or derivatives/contractual obligations will be denied as a result of the application of section 23I.

Once again, a connected party relationship between the parties involved is not required.

IP is developed in SA in terms of R&D arrangements (paragraph (d) of “tainted intellectual property”)

Concerns have been expressed that an overly broad anti-avoidance provision in the context of R&D arrangements may dissuade foreign companies from using South African subsidiaries as IP developers. With this in mind, the scope of section 23I has been narrowly tailored in this context. Consequently, section 23I will only apply to IP developed by South African entities in terms of an R&D arrangement if -


(i) the IP is developed by the end user or a connected person; (ii) the R&D activities are performed in SA; and(iii) the end-user (together with any taxable connected person) either directly or indirectly holds at

least 20 per cent of the participation rights (or exercises at least 20 per cent of the voting rights) in the non-taxable licensor. SA NewCo SA OpCo (not connected to any other person)

Example

SA OpCo forms a foreign IP company (‘FIPCo’). SA Opco holds 30% of the shares FIPCo. FIPCo engages SA R&D Co (which is a connected person in relation to SA OpCo) to conduct various R&D activities in SA. The R&D is fully funded by FIPCo and the IP is assigned to FIPCo. FIPCo licenses the resultant IP to SA OpCo.

SA Opco will be denied deductions in respect of royalties paid to FIPCo.

Note on apportionment

If a taxpayer concludes a license in respect of various items of IP, the royalty payable for the bundle of IP must be apportioned between the various portions of IP. Each royalty component must be analysed to determine whether that component is denied deduction in terms of section 23I. Similar principles to a transfer pricing determination would apply in this instance.

Amendments to the Income Tax Act Section 23I

Effective from 1 January 2009 and applies in respect of any expenditure incurred on or after that date.

Liquidation distributions

The STC exemption for distributions of pre-1 October 2001 capital profits and pre-1 March 1993 revenue profits in the course of or in anticipation of liquidation was removed in the Revenue Laws Amendment Act, 2007. This removal was effective from 1 January 2009. The amendment was widely publicised and drove many companies to declare liquidation dividends before 31 December 2008.

The Revenue Laws Amendment Bill, 2008 (in s 131) repeals the 2007 amendment, also with effect from 1 January 2009. This means that, for the time being, the STC treatment of liquidation dividends (dividends declared in the course of liquidation, winding-up, deregistration or final termination of the corporate existence of a company) goes back to its original form.

Therefore, any portion of a liquidation dividend that comprises –

profits derived during any year of assessment which ended not later than 31 March 1993 (other than profits arising from the revaluation of trading stock);

capital profits relating to the period prior to 1 October 2001; and profits derived before the company became a residentare exempt from STC.

It is likely that this STC exemption will continue until the new withholding tax on dividends is implemented.

SMALL BUSINESS

Asset write-off election

A small business corporation may write off the cost of manufacturing assets in full in the first year of use and non-manufacturing assets over a period of 3 years (on a 50:30:20 basis). Some of the assets which qualify for this three-year write-off period are assets which would otherwise qualify for a full immediate write-off under section 11(e) of the Income Tax Act. The proposed amendment allows a small business corporation to choose between the deduction allowable in terms of section 12E or the deduction available in terms of section 11(e).


Amendment to the Income Tax Act Section 12E


Micro business turnover tax

Small businesses have the potential to grow the economy, generate jobs and reduce poverty. Research, however, indicates that they face many obstacles, including relatively high tax compliance costs as a percentage of turnover. This is due to the generally high fixed costs associated with systemsnecessary to comply with the requirements of the tax system. Research has shown that, on average (in 2007), South African accountants and tax practitioners charge their small business clients R7 030 per annum to ensure that tax returns (for four key taxes – income tax, provisional tax, value-added tax and employees’ tax) are prepared, completed and submitted as required by SARS. As a percentage of turnover, tax compliance costs range between 2.2% for businesses with a turnover of up to R300 000 and 0.1% for businesses with a turnover around R14 million. Tax compliance costs therefore tend to be regressive, especially for businesses with a turnover under R1 million. In addition, it costs small businesses an average of R36 343 for a range of related services including accounting services.

The reality is that many small businesses are outside the income tax net either because they generate small profits or because they are overwhelmed by the tax system. Many were also historically marginalised. The small business amnesty was introduced in 2006 to encourage informal and other small businesses with a turnover of less than R10 million per annum to enter the tax system and regularise their tax affairs. In addition, SARS and National Treasury agreed to explore various options to reduce the tax compliance burden, especially for micro businesses, and to streamline the tax system for such businesses. An elective presumptive turnover tax system has therefore been implemented for micro businesses with a turnover up to R1 million per annum. The turnover tax will effectively replace income tax, CGT, STC, and VAT for registered micro businesses. Payroll taxes such as PAYE and UIF are unaffected as they are taxes generally borne by employees and collected by employers on behalf of the state.

Structural Design

The presumptive turnover tax (‘turnover tax’) is a stand-alone tax and does not form part of the normal calculations for determining income tax payable by a taxpayer on his or her taxable income. Receipts of a micro business forming part of the turnover tax system are therefore exempt for normal tax purposes.

An important feature of the presumptive tax regime is that the tax liability imposed is aligned with the tax liability under the current income tax regime, but on a simplified base with reduced compliance requirements. However, the tax burden on micro businesses at the higher-end of the turnover range (R750 000 to R1 million) is increased in order to encourage them, as they grow, to maintain sufficient accounting records to migrate to the normal income tax regime. Special consideration was given so as not to artificially or inadvertently encourage micro businesses to remain trapped in the turnover tax system, but to grow and migrate into the standard tax system. As a packaged approach, the compulsory VAT registration threshold will be increased to coincide with the turnover tax threshold of R1 million. Businesses that choose to voluntarily register for VAT, despite having a turnover of R1 million or less, will not be permitted to register for the turnover tax.

Who is eligible to register as a micro business?

The provisions of the new Sixth Schedule to the Income Tax Act will apply to both incorporated (i.e. companies, close corporations and co-operatives) and unincorporated businesses (i.e. natural persons who trade as sole proprietors and partnerships). Where the ‘qualifying turnover’ of such a micro business does not exceed the amount of R1 million in any year of assessment, it may elect to be taxed under the turnover tax system.

‘Qualifying turnover’ means the total amount received (i.e. cash receipts) from carrying on business activities, excluding –

amounts of a capital nature (e.g. proceeds from the sale of a capital asset such as a motor vehicle); and government grants that are exempt from normal tax in terms of section 10(1)(y), 10(1)(zA), 10(1)(zG) or

10(1)(zH).


The main reason for excluding these receipts is to prevent amounts, which would not normally form part of the trading income (i.e. turnover) of a micro business, from being taken into account in determining the R1 million threshold. For example, a micro business that generates a turnover of less than R1 million per annum will not be disqualified purely because it disposes of one rather large business asset during a year of assessment (although large amounts generated from the disposal of capital assets will make a business ineligible for the new system, as is discussed later).

An anti-avoidance rule to guard against income splitting by a micro business has been incorporated into the legislation. This will cater for circumstances where the micro business breaks up into smaller business components or sub-components to ensure that each business component remains within the R1 million threshold. The rule is designed to prevent the micro business from claiming that each component is a legitimate business of, for example, various family members when in reality these components are merely being managed by one or a few of the family members. In such instances the turnover of the connected person’s business activities will also be included in the turnover of the micro business for purposes of determining the R1 million threshold.

2. What businesses are specifically disqualified as a micro business?

The following factors will cause a business to be ineligible for the turnover tax system:

a. Interests in other companies

A person that holds shares or has any interest in the equity of another private company or close corporation, other than permitted investments, may not register as a micro business. The reason given for this is that the specific relief to be afforded under the turnover tax system is aimed at the micro start-up type of business. Multiple shareholdings indicate more complex legal structures belonging to more sophisticated taxpayers and hence have been excluded for purposes of this system. This exclusion is also an anti-avoidance measure to guard against income splitting where a business is conducted by more than one entity with the same shareholder in order to ensure that each business component remains within the R1 million threshold.

The list of permitted investments is as follows:

Interests in listed companies Interests in collective investment schemes Interests in body corporates and share block companies Less than 5% interest in social or consumer co-operatives Less than 5% interest in a co-operative burial society or primary savings co-operative bank Interests in friendly societies Interests in venture capital companies

b. Investment income

A person does not qualify as a micro business if more than 10% of his/its total receipts or accruals of the micro business consists of ‘investment income’ as defined in section 12E of the Income Tax Act.

‘Investment income’ includes income in the form of dividends, royalties, rental from immovable property, annuities, interest and proceeds derived from investment or trading in financial instruments (including futures and options), marketable securities or immovable property

The intended relief in terms of the turnover tax system is mainly aimed at benefiting micro businesses that actively engage in entrepreneurial business activities, thereby stimulating the economy and creating employment. A typical micro business will usually not have substantial capital from which it can generate passive investment income.


c. Personal service providers

A person that is a ‘personal service provider’ or a ‘labour broker’ (without an IRP 30 exemption certificate) as defined in the Fourth Schedule (see notes on DEEMED EMPLOYEES) at any time during a year of assessment is not eligible to be taxed as a micro business for that year. These entities have been targeted in specific anti-avoidance measures and it is therefore not the intention for them to obtain any benefits from the turnover tax system.

d. Professional services providers

As an anti-avoidance measure to protect the employment income tax base, a person that renders a ‘professional service’ during a year of assessment is not eligible to be taxed as a micro business for that year. The rationale is that such services are generally rendered by more sophisticated, high income earning taxpayers, with profit margins that are significantly higher than those assumed in the design of the turnover tax.

‘Professional service’ means any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services, sport, surveying, translation, valuation or veterinary science.

e. Capital receipts

Any person who receives more than R1,5 million in total during the current and previous two years of assessment from the disposal of -

immovable property, to the extent that it was used for business purposes; or any other capital asset used mainly for business purposes

is not eligible to be taxed as a micro business for the current year of assessment.

The reason for this exclusion is that micro businesses are not subject to income tax, which includes CGT (a specific CGT exemption is granted, which is discussed later). Furthermore, these businesses are not expected to have substantial capital assets.

f. Year end

To be eligible for the turnover tax system, a company or close corporation must have a financial year ending on the last day of February each year.

g. Company shareholders

For a company or close corporation to be eligible for the turnover tax system, all of the shareholders, throughout the year of assessment, must be natural persons (or the estate of a deceased or insolvent person).

Furthermore, none of the shareholders may at any stage during the year of assessment hold shares or have an interest in any other company apart from the permitted investments listed above.The rationale for this exclusion is that a micro business will typically find itself within a complex legal structure or multi-level corporate structure that requires the expertise of professional legal, accounting and tax services. Furthermore, these sophisticated legal structures are not considered to be typical of simple truly small, start-up types of businesses that are targeted for assistance in the simplified tax dispensation. This exclusion is also an anti-avoidance measure to guard against income splitting where a business is conducted by more than one entity with the same shareholder in order to ensure that each business component remains within the R1 million threshold.

h. Charities and clubs

Non-profit organisations that are registered with SARS as public benefit organisations in terms of section 30 or approved ‘recreational clubs’ in terms of section 30A of the Income Tax Act may not register as micro businesses and may therefore not be taxed under the turnover tax system.


i. Partnerships

A partnership will not qualify for the turnover tax system if any of the partners are persons other than individuals. Furthermore, for a partnership to be eligible for the turnover tax, none of the partners may be partners in any other partnership during the year of assessment. In measuring whether the ‘qualifying turnover’ threshold has been reached, the turnover for the partnership as a whole must be taken into account.

j. VAT vendors

The turnover tax system will not apply where the micro business is a registered VAT vendor. Where the turnover of a micro business exceeds or is likely to exceed the VAT threshold, or the businesses voluntarily registers as a vendor, that micro business must be taxed under the formal VAT and income tax systems. These micro businesses are not be allowed to register for VAT and at the same time remain within the turnover tax regime. The formal VAT system requires a high standard of record-keeping and thus a micro business should be in a position to comply with normal income tax requirements. (see notes on VAT: Deregistration relief).

Special rules relating to partnerships

Partnerships will be taxed on a flow-through basis in that the turnover of the partnership will be taxed in the hands of each partner based on the profit sharing ratio or the partnership agreement. However, as mentioned above, the collective turnover of the partnership is taken into account in measuring the ‘qualifying turnover’ of the partnership. Hence the total turnover of a partnership for the year of assessment must not exceed R1 million for each individual partner to qualify for the turnover tax.

How is the tax calculated?

a. Taxable turnover

The tax is levied on ‘taxable turnover’, which means all amounts, not of a capital nature, received by the business (i.e. cash receipts) during the year of assessment from conducting business activities in the Republic, with specific inclusions and exclusions.

(i) Specific inclusions in taxable turnover 50% of all capital receipts from the disposal of

o immovable property, to the extent that it was used for business purposes; ando any other capital asset used mainly for business purposes.(See discussion on Capital Gains Tax below.)

In the case of a company, close corporation or cooperative, all investment income received, other than dividends (i.e. interest, royalties, rental and annuities are included). Dividends will be included at a later date. The reason for excluding dividends until a later date is that dividends are currently exempt from income tax, but will be subject to a dividend withholding tax at a later stage. Since the withholding tax will not apply to dividends paid to companies and the simplified tax regime will exempt shareholders in micro businesses from the withholding tax, dividends will be taxed as part of the turnover of a micro business once the transition to the withholding tax system takes place.

Certain income tax allowances that were granted in the previous year of assessment and which would have been added back to taxable income in the following year of assessment in the current income tax system e.g. the allowance for doubtful debts. Any such add-back of previous allowances will first be applied against any balance of assessed loss in the business.

(ii) Specific exclusions from taxable turnover Investment income (dividends, interest, royalties, rental and annuities) received by individuals (sole

traders and partners in a qualifying partnership). This income will be taxed in the hands of the individual recipients under the normal income tax provisions. This is done to cater for the common law principle that businesses operated by natural persons are not distinct or separate legal entities from the natural person who own them. It will also allow for the exempt allowances that are currently granted to natural persons with regard to interest and dividend income.

Government grants that are exempt from income tax in terms of section 10(1)(y), 10(1)(zA), 10(1)(zG) or 10(1)(zH).


Any amount that was subject to income tax in the hands of the business when it accrued, in a year of assessment prior to it registering for the turnover tax.

Salary income, excluding a notional salary payment made by a sole proprietor to himself or herself, will be taxed in terms of current personal income tax system.

Turnover tax table

The turnover tax will be determined with reference to the following table:

Turnover Rate of tax

R 0 - R 100,000 0% R 100,001 - R 300,000 1% of turnover exceeding R 100,000R 300,001 - R 500,000 R 2,000 + 3% of turnover exceeding R 300,000R 500,001 - R 750,000 R 8,000 + 5% of turnover exceeding R 500,000R 750,001 - R 1,000,000 R 20,500 + 7% of turnover exceeding R 750,000

Example

A micro business has taxable turnover of R600 000 for the year of assessment.

The tax is determined as:

Tax on R500 000 = R8 000Tax on R100 000 @ 5% = R5 000Total tax liability = R13 000

Administration

a. Year of assessment

A year of assessment will run from 1 March to the last day of February of the following year. The first year of assessment will run from 1 March 2009 to 28 February 2010.

b. Registration

As participation in the turnover tax regime is elective, a qualifying micro business may elect to register as a micro business. This registration must be done with SARS -

before the beginning of the year of assessment or such later date during that year of assessment as SARS may prescribe by notice in the Gazette; or

where a business has commenced during the year, within two months from the date of commencement.

c. Deregistration

A registered micro business can deregister in two ways:

Voluntary deregistration, i.e. where that micro business elects to deregister. Unless it closes down, a micro business may only elect to deregister as a micro business after three years of being part of the turnover tax regime. This election must be made before the start of, or within two months from the end of a year of assessment and the deregistration will apply for the whole year of assessment. For example, if a business, having been on the turnover tax system for three years, elects to deregister on 1 February 2012 or even 1 April 2012, it will cease to be a micro business with effect from 1 March 2012.

Compulsory deregistration occurs where a micro business no longer qualifies as a micro business in terms of the provisions of the Sixth Schedule. A micro business must notify SARS within 21 days of becoming ineligible for the turnover tax. For example, where the qualifying turnover of that micro business from carrying on business exceeds the R1 million threshold and the micro business cannot demonstrate that this will be a small and temporary event. In the event of a compulsory deregistration of a micro business, that micro business will move back into the normal income tax regime with immediate effect i.e. from the first day of the month following the month in which the business is disqualified from


the turnover tax. It will therefore be assessed for two periods in the year of assessment – one in the turnover tax system and the other in the current income tax system. The business will also have to register for VAT where its turnover exceeds, or is likely to exceed in the next twelve months, the R1 million per annum threshold.

If the micro business is deregistered from the turnover tax, be it voluntary or compulsory, that micro business may not re-enter the turnover tax system for a period of three years from being so deregistered. This is shorter than the five-year period proposed in the 2008 Budget Speech but matches the minimum period the micro business must remain in the turnover tax system.

d. Payment of turnover tax

A micro business must make two interim (provisional) tax payments during the year and any balance of tax owing must be settled on assessment.

The first interim payment must be based on an estimate of the ‘taxable turnover’ of the micro business for the year of assessment and amounts to 50% of the turnover tax payable on the estimate. This estimate must not be less than the taxable turnover for the previous year of assessment unless SARS accepts the lower estimate. The payment must be submitted to SARS within six months from the beginning of the year of assessment (i.e. by the last business day in August). Interest at the prescribed rate (currently 15%) will be charged on any unpaid amount from the first day after payment is due until the amount is paid or the end of the year of assessment, whichever happens first.

The second interim payment will also be based on an estimate of the taxable turnover for the year of assessment and a calculation of the turnover tax payable on the estimate. The payment, equal to the full amount of turnover tax payable on the estimate, less the first interim payment, must be submitted to SARS before the end of the year of assessment (i.e. by the last business day in February). Where the amount due is not paid by the last day of the year of assessment, interest at the prescribed rate is payable from the day following that last day (i.e. from 1 March) to the earlier of the date on which the shortfall is received and the due date of the assessment for that year of assessment.

Where the estimate of the taxable turnover for the second interim payment is less than 80% of the actual taxable turnover for the year of assessment, additional tax, equal to 20% of the difference between the tax payable on 80% of the actual taxable turnover for the year of assessment and the tax payable on that estimate, will be charged. The additional tax may be waived where SARS is satisfied that the micro business’ estimate was not deliberately or negligently understated and was seriously made based on the information available. Any decision by SARS in this regard is subject to objection and appeal.

SARS may estimate the interim payments that are due by a micro business where the micro business fails to make a payment that is due or where SARS is not satisfied with the amount of the interim payment that was made.

An annual (final) tax return with the actual amount of taxable turnover for the year of assessment must be submitted to SARS by the due date that will be set by SARS for that year. A further payment will be necessary where the assessed turnover tax on the actual taxable turnover for the year of assessment exceeds the interim payments that were made.

Where a registered micro business fails to submit the annual tax return or where SARS is not satisfied with the return submitted, SARS may estimate the taxable turnover for the year of assessment and issue an assessment for the turnover tax due on the estimate, less the interim payments received.e. Record-keeping

A registered micro business must retain a record of –

amounts received during a year of assessment; dividends declared during a year of assessment; each asset at the end of a year of assessment with a cost price of more than R10 000; and each liability at the end of a year of assessment exceeding R10 000.


Capital Gains Tax

A micro business that registers for the turnover tax will be exempted from capital gains tax provided that the receipts from the sale of assets used in the business do not exceed R1,5 million over a 3 year period (the current and two previous years).

Instead of being taxed under the capital gains tax rules, the qualifying micro business must add include in taxable turnover, 50% of –

receipts from the sale of immovable property to the extent that it was used for business purposes; and receipts from the sale of assets used mainly in the business.

Example

A micro business has taxable turnover of R600 000 before taking into account any receipts from the sale of capital assets. The business sells a property, which it occupied 20% for business purposes, for R2 million and movable assets, which it used mainly for business purposes, for R300 000.

The taxable turnover of the micro business is determined as:

Taxable turnover from business activities = R600 000 Receipts from sale of capital assets

Immovable property: R2 million x 20% = R400 000Movable assets = R300 000

Taxable turnover = R 1300 000

Tax per the table:Tax on R750 000 = R20 500Excess of R550 000 (R1 300 000 – 750 000) @ 7% = R38 500Total tax payable for the year = R59 000

Note that the fact that the taxable turnover of the business exceeds R1 million for the year does not make it ineligible for the turnover tax. The threshold is R1 million of ‘qualifying turnover’ which (as explained above) excludes the receipts from the sale of capital assets. Therefore, the ‘qualifying turnover’ of the micro business is R600 000, which remains below the R1 million threshold.

The proceeds from the sale of the capital assets also do not exceed the threshold of R1,5 million over three years as this R1,5 million is determined with reference to –

20% of the receipts from the sale of the immovable property (being the extent that it was used for business purposes), that is, R400 000; and

100% of the receipts from the sale of the movable assets (as they were used mainly in the business), that is R300 000,

in other words, a total of R700 000, which is less than the R1,5 million threshold.

Secondary Tax on Companies (STC)

If the qualifying small business is a cooperative, close corporation or company, it is exempt from STC (and, later, the dividend withholding tax), to the extent that the dividend distribution does not exceed R200 000 per year. Where the dividend distribution exceeds R200 000 in a year, the excess will be subject to STC at the normal rate of 10%.

Amendments to the Income Tax Act Section 48 through 48C Section 64B(18) and (19) Sixth Schedule

Effective from 1 March 2009 and applies in respect of any year of assessment commencing on or after that date.

Venture capital company incentive


Access to equity finance by small and medium-sized businesses and junior mining exploration companies is one of the main challenges to the growth of this sector of the economy. Setting aside tax consequences, equity (as opposed to debt financing) offers some key advantages for small businesses. Equity finance allows for small businesses to weather downturns. Equity also allows small business to use excess cash for reinvestment rather than being forced to use that cash to pay interest. Investments in equity are capital in nature and this type of expenditure therefore does not qualify for tax deduction.

The new venture capital company (VCC) allowance seeks to assist small and medium-sized businesses and junior mining exploration companies in accessing equity finance by providing a tax incentive for investors in such enterprises through VCCs. In essence, an investor in the shares in a VCC is granted a tax deduction for the amount of his investment.

The allowance may be depicted as follows:

VCC(FAIS Compliant)

Investor:Indiv / Listed

QualifyingSME

100% deduction

10% - R5m gross assets80% - R10m gross assets10% - any asset c lass

Individual – R750 000 pa deduction limitListed – No limit; subject to 10% shareholding limit in the VCC

The VCC allowance

a. Individual investors

An individual who invests in the shares of a VCC is eligible for a 100% deduction of the amount invested, limited to R750 000 per year of assessment and a life-time limit of R 2 250 000.Example

An individual invests R1 million in a VCC on 1 January 2010.

He may deduct R750 000 in the determination of his taxable income for the year of assessment ending 28 February 2010. The remaining amount of R250 000 may be deducted in the following year of assessment.

Although secondary trading in VCC shares is allowed, the deduction is only available for contributions to the VCC in exchange for newly issued VCC shares.


The deduction is recouped if an individual disposes of the VCC shares to the extent of the initial VCC investment (under the general recoupment provision in section 8(4)). The limit on the deduction will be replenished to the extent to which the section 8(4) recoupment is triggered on the sale of the VCC shares. Hence, if an individual investor makes a R2 250 000 investment in VCCs over three years and subsequently recoups R1 million of a VCC investment in later years, the investor can obtain a R1 million deduction for a future VCC investment.

In all other respects, standard income tax and CGT rules apply in respect of VCC shares.

b. Corporate investors

Listed companies (and their group subsidiaries) are eligible for a 100% deduction without regard to any monetary limit. However, these entities (and their controlled group subsidiaries) do not receive any deductions for share investments that push their holdings above a 10% equity share interest in a VCC.

Unlisted entities (companies and trusts) are not generally eligible for the VCC allowance. However, an exception exists for listed companies and their controlled group subsidiaries when providing consideration to a VCC for newly issued equity shares in a VCC.

c. The VCC

The VCC must be approved by SARS (see below). The deduction is only available to investors (individuals and listed companies) who are in possession of a VCC investor certificate (i.e. certifying that SARS has approved the company as a VCC).

The VCC itself is a fully taxable entity. No special dividend or other tax rules apply.

VCC approval requirements

As a general matter, the VCC must satisfy all requirements on the date of approval and everyday thereafter. However, many of the requirements are given a 36-month waiting period to allow for companies to reach the intended target.

a. Preliminary entry requirements

The VCC must be a resident company that is unlisted or a junior mining company. It must not be a controlled group subsidiary in terms of the definition of ‘connected person’ in section 1 of the Income Tax Act (a company held more than 50% by the holding company). The VCC must be a taxpayer in good standing.

b. Minimum aggregate asset requirements The VCC must have minimum gross assets of at least R30 million. However, if a VCC invests in one or more junior mining or exploration companies as part of its qualifying portfolio, the VCC must have minimum gross asset share investments of R150 million. This higher minimum threshold reflects the fact that junior mining companies (including those engaged in high risk exploration) have much higher minimum asset requirements than that for other forms of start-up businesses.

c. Gross income requirements

The gross income of the VCC must generally be derived from financial instruments or from services rendered to qualifying (small business) companies. This financial instrument income automatically includes dividends, capital gains tax, and trading stock gains from equity share investments of small business percentage companies as described below.

Income other than the investment income and managements fees as described above may not comprise 10% of the total gross income of the VCC. This 10% cut-off must be reached no later than 36 months from the date on which the company applies for VCC approval.


d. VCC investment limitations

The VCC’s investment portfolio must satisfy the following allocations in respect of VCC expenditure:

At least 10% of the VCC’s expenditure to acquire assets held by the VCC will be for qualifying shares in small qualifying companies holding assets with a market value of no more than R5 million immediately after the VCC investment.

At least 80% of the VCC’s expenditure to acquire assets held by the VCC will be for qualifying shares in small-medium qualifying companies holding assets with a market value of no more than R10 million immediately after the VCC investment. (This 80% includes the expenditure to acquire assets in small companies.) Junior mining companies with total gross assets of up to R100 million will also qualify for this category of investment.

No more than 15% of the VCC’s expenditure to acquire assets may be invested in the qualifying shares of any one qualifying company. This is to ensure that the VCC maintains a reasonable portfolio of investments.

‘Qualifying share’ means an equity share issued to a VCC by a qualifying company. Equity shares will be disqualified to the extent that the VCC has a right (or option) to redeem or dispose of these shares to any person at a value other than market value at the time of redemption or disposal. The purpose of this test is to ensure that the VCC is not merely making explicit or disguised loans.

A VCC, together with its connected persons, may not hold a controlling interest (alone or together with connected persons) in a qualifying (small business) investee company. This is to ensure that the VCC acts as a financier (‘angel investor’) to various independent small businesses, not as a controlling owner.

‘Qualifying company’ means a company that is a resident, unlisted company which is not a controlled group subsidiary. (A junior mining exploration company may be listed on the AltX.) This company must be a taxpayer in good standing. The company (or a group member) must conduct a trade within 18 months (or within 36 months in the case of junior mining companies) of the investment by the VCC. All investment proceeds must be invested in deductible expenses that are part of a group trade or in an asset used to produce income for the trade (not to liquidate investee company debts). All of these investments must occur within the same 18 or 36 months. An investee company is however, disqualified from receiving any VCC investment if it mainly engages in any of the following:

Dealing or renting of immoveable property, except in the trade of a hotel keeper (including bed and breakfast establishments).

Financial service activities such as banking, insurance, money-lending and hire-purchase financing. Provision of professional services such as legal, tax advisory, broking, management consulting, auditing,

accounting and other related activities. Operating casinos or other gambling related activities including any other games of chance. Manufacturing, buying or selling liquor, tobacco products or arms or ammunitions. Trading as a franchisee, and Conducting a business mainly outside the Republic.

In addition, not more than 20% of the gross income of the investee company may be derived from investment income.

An investee company can qualify for the junior mining company category as long as that company (and all group companies) is not engaged in any other trade besides mining exploration or production.

e. Penalties

Failure to satisfy the VCC portfolio requirements can trigger the withdrawal of VCC status on a going forward basis. This withdrawal triggers ordinary revenue for the VCC equal to 125% of the expenditure incurred by investors to acquire VCC shares.

Sunset clause

The VCC regime is subject to a 12 year sunset clause to ensure that the effectiveness of the VCC regime, like other incentives, is subject to a comprehensive evaluation.


Amendments to the Income Tax Act Section 9C(2A) Section 9E(1)(paragraph (k) of the “excluded company” definition) Section 12J

Effective from 1 July 2009.

TAX INCENTIVES AND ALLOWANCES

Residential building allowance

The Income Tax Act provided for allowances in respect of residential buildings (sections 11(t) and 13ter) but these allowances were not sufficiently generous to incentivise private-sector spending on housing. The section 11(t) and 13ter allowances have therefore been replaced by a new package of incentives. Key to these incentives are the terms ‘residential unit’ and ‘low-cost residential unit’.

‘Residential unit’ means a building or self-contained apartment mainly used for residential accommodation. The definition specifically excludes buildings or apartments used in carrying on a trade as a hotel keeper.

‘Low-cost residential unit’ means a stand-alone unit or apartment located within the Republic. For an apartment to qualify as a ‘low-cost residential unit’, the cost must not exceed R250 000 and the owner must not charge a monthly rental in excess of 1% of that cost. For a stand-alone unit to qualify as a ‘low-cost residential unit’, the cost (excluding land and bulk infrastructure) must not exceed R200 000 and the owner must not charge a monthly rental in excess of 1% of that cost (plus the proportionate cost of the land and bulk infrastructure). The monthly rental charge can be increased (at the option of the owner) by up to 10% per year.

Example

In 2011, Business X constructs a residential apartment building and the cost of each apartment is R250 000. Business X rents these apartments to various families.

In order to qualify for the residential building allowance, X must charge a monthly rental that does not exceed:

R2 500 in the 2011 year of assessment (1% of R250 000). R2 750 in the 2012 year of assessment (1% of R250 000 plus 10%). R3 025 in the 2013 year of assessment (1% of (R275 000 plus 10%) plus 10%).

Business X need not increase the rental every year. For instance, Business X could maintain the rent at R2 500 until 2013 and then increase the rent up to R3 025.

The allowance is based on 5% of the cost of the residential unit, with an additional 5% for low-cost residential units. The allowance is granted only for new and unused residential units (and new and unused improvements thereto). In addition –

(i) The unit or improvement must be used by the taxpayer solely for the purposes of a trade carried by that taxpayer within South Africa; and

(ii) the taxpayer must own at least five residential units within South Africa, for use in a trade carried on by that taxpayer.

The usual anti-avoidance rules have been incorporated into this allowance. For instance, the cost of a residential unit (or an improvement thereto) is deemed to be the lesser of –

(i) the actual cost thereof to the taxpayer or, (ii) if that residential unit has been acquired by the taxpayer under an arm’s length transaction on

the date of purchase of that unit or an improvement thereto, the direct cost which a person would have incurred in erecting or constructing the unit or improvement.


The purpose of this rule is to prevent taxpayers from disguising finance costs as depreciable costs. The allowance is not available in respect of the cost of a residential unit (or an improvement thereto) that has been disposed of in any previous year of assessment. Any deduction allowed in terms of this section or any other section of this Act must not in the aggregate exceed the cost of the asset. Moreover, this allowance does not apply if another provision applies (e.g. section 13quat).

The allowance does not apply to new and unused low cost residential units (or improvements thereto) for occupation by employees of a taxpayer who carries on a trade of mining. This form of depreciation is dealt with under section 36 as mining capital expenditure.

Amendments to the Income Tax Act: Section 1 (definitions of ‘low cost residential unit’ and ‘residential unit’) Section 11(t) Section 13ter Section 13sex Section 36(d)(11) (paragraphs (d) through (f) of the definition of ‘capital expenditure’) Paragraph 12 of the First Schedule

Effective from 21 October 2008 and applies in respect of any residential unit or improvement thereto acquired, or the erection of which commences, on or after that date.

Urban development zone allowance

The section 13quat (‘UDZ incentive’) provides for an accelerated depreciation allowance for new and unused buildings (and improvements) situated in areas in need for urban renewal. The UDZ incentive was originally available only until 31 March 2009. In light of the success of the allowance, it has been extended for a further five years until 2014 and the scope of the allowance has also been extended.

Type of expenditure Old Allowance New AllowanceNew and unused buildings 20% of the cost of the

building in year 1, and 5% per year over the next 16 years

20% of the cost of the building in year 1 and 8% for the next 10 years.For low-cost residential units located in a UDZ there is an additional allowance of 5% per year. Thus, the allowance will be: 25% in the year 1; 13% per year for the next 5

years; and 10% in the 7th year

Improvements 20% per year over five years

20% per year over five yearsImprovements to low-cost residential units: 25% per year over four years

The allowance is reduced to 55% of the amount that would otherwise be claimed where new and unused buildings are acquired from a developer. Where new and unused improvements are acquired from a developer, the allowance is reduced to 30% of the amount that would otherwise be granted. This rule applies to part acquisitions relating to all buildings (residential, commercial, mining residential and urban development zone buildings). More specifically, where a taxpayer purchases a building or residential unit that represents only part of a building without erecting or constructing that unit, the cost of that part of building or residential unit is deemed to equal only 55% of the purchase price of that building or unit. Where a taxpayer purchases a part of a building or residential unit improved by a developer, the cost to the taxpayer of that improved part is deemed to equal only 30% of the purchase price of that part.

As part of the enhancement of the allowance, designated municipalities will be allowed to request an extension of the UDZ demarcated areas, provided that the other requirements under section 13quat are satisfied. The requirement to produce a certificate of occupancy has been eliminated (leaving only the location certificate). The certificate of occupancy was often problematic in the case of improvements because this certificate was often not otherwise required by municipalities.

Amendments to the Income Tax Act:


Section 13quat(2), (3)(a), (3A), (3B), (5)(c) and deletion of paragraph 2(e) and (7)(d)(iii))

Effective from 21 October 2008 and applies in respect of any residential unit or improvement thereto acquired, or the erection of which commences, on or after that date.

Low-cost residential unit loan account allowance

Employers are increasingly moving away from leasing low-cost employer owned residential units to employees and moving towards selling residential units to employees on a preferential basis. This shift is preferable to employers because the letting of residential units often represents an inconvenient deviation from the employer’s core business activities. This shift is also preferable to employees because they obtain the freedom and security of property ownership. The 2008 amendment grants tax relief to employers in these circumstances. The relief is in the form of a 10% allowance, where the employer sells a low-cost residential unit (as defined in section 1: see notes on Residential building allowance) to an employee at cost, with the selling price financed by way of an interest-free loan account from the employer.

The requirements for the allowance are as follows:

A low-cost unit must be sold to an employee (or an employee of an associated institution as defined in the Seventh Schedule).

The disposal amount must not exceed the employer’s actual cost of that low-cost residential unit. The disposal must be on loan account by the employer. The loan account in respect of the disposal must not bear interest. The only condition that may be imposed under the disposal by the employer is that the employee may be

required to transfer the low-cost residential unit back to the employer:(i) Upon termination of employment, or (ii) Upon a consistent failure (for a minimum period of three months) by the employee to repay an

amount owing to the employer in respect of the disposal. In these circumstances, the employer can reacquire the low-cost residential unit for an amount that at least equals actual cost (other than borrowing or finance costs) of the unit to the employee. No other rights of reacquisition are permitted.

Example

An employer sells a low cost residential unit to Julius, an employee, for R200 000 on an interest free loan account. The sale is subject to a condition that Julius must sell the low-cost residential unit to his employer if he leaves that employment within a period of 5 years. Julius repays R20 000 in year 1, R10 000 in year 2 and R10 000 in year 3. In year 4, Julius resigns.

If the employer wishes to exercise any rights of reacquisition, the employer must purchase the low-cost residential unit from Julius for an amount equal to at least R40 000 (i.e. the actual cost of the low cost residential unit to Julius to date) .

The allowance

The employer may deduct an amount equal to 10% of the amount owing by the employee at the end of the employer’s year of assessment. The deduction lasts for a maximum of 10 years (and only as long as the loan arrangement between the employee and employer lasts). This deduction seeks to compensate the employer for the interest-free nature of the loan. The 10% rate matches the 10% allowance for low-cost residential housing owned by employers, thereby placing the two systems roughly on par.

Example 1:

Employer sells a low cost residential unit to Nthabiseng for R150 000. Of this amount, R100 000 is financed by way of an interest-free loan account from the employer; the remaining R50 000 amount is paid upfront by Nthabiseng in cash. Nthabiseng is not required to repay any of portion of the loan until after four years.The employer’s allowance is 10% of the outstanding balance on the loan at the end of each year, i.e.:


Year 1: R100 000 x 10% = R10 000Year 2: R100 000 x 10% = R10 000Year 3: R100 000 x 10% = R10 000

All repayments of the loan account trigger a potential recoupment. The amount recouped by the employer equals the lesser of:

(i) The amount repaid; or (ii) The amount allowed as a deduction in terms of this provision in the current or previous taxable year.

If the amount repaid exceeds the current and prior year deductions, the excess amount repaid is deemed to arise in a later year (thereby triggering a recoupment in that later year).

Example 2:

In Year 1, an employer sells a low cost residential unit to Xabiso for R200 000, financed by way of an interest-free loan account from the employer. Xabiso repays R30 000 in Year 2, R25 000 in Year 3 and no repayment in Year 4.

The employer’s allowance is 10% of the outstanding balance on the loan at the end of each year, i.e.:

Year 1: R200 000 x 10% = R20 000Year 2: R170 000 x 10% = R17 000Year 3: R145 000 x 10% = R14 500Year 4: R145 000 x 10% = R14 500

In year 2, the employer is deemed to have recouped an amount of R30 000. The recoupment is determined as an amount equal to the lesser of the amount repaid to date (R30 000) and the total amount allowed as a deduction in the current and previous years (R37 000). The net effect on the employer’s taxable income is an add-back of R13 000 (an allowance of R17 000 offset by a recoupment of R30 000).

In Year 3, the employer is deemed to have recouped an amount of R 21 500. This is determined as an amount equal to the lesser of the amount repaid to date (R55 000) and the total amount allowed as a deduction in the current and previous years (R51 500), i.e. R51 500 less the recoupment raised in year 2 of R30 000, leaving R21 500. The net effect on the employer’s taxable income is an add-back of R7 000 (an allowance of R14 500 offset by a recoupment of R21 500).

By the end of year 3, the employee has repaid a total of R55 000 but only R51 500 has been recouped. The remaining R3 500 is rolled over to the next year and recouped in year 4.

In Year 4, the employer is entitled to an allowance of R14 500 and is deemed to have recouped an amount of R3 500 (the remaining recoupment from last year). The net effect on taxable income is therefore a deduction of R11 000.

Amendments to the Income Tax Act: Section 13sept

Effective from 21 October 2008 and applies in respect of any unit disposed of on or after that date.

Allowance for expenditure on government business licences

Businesses often require government licenses in order to conduct specified business activities (such as telecommunications, gambling and mining). These businesses may be required to make monetary outlays to acquire these licenses. These acquisition outlays may involve direct payments to the Government or outlays towards social expenditure for certain categories of the community.

Prior to the 2008 amendment, the Income tax Act did not provide for any specific deduction or depreciation allowance for expenditure incurred by a taxpayer to acquire this type of license. The license acquisition fee is not deductible because this fee constitutes capital expenditure despite its business nature. Thus, contrary to the accounting treatment (in terms of which the acquisition cost of the license is written off over the economic life), no income tax relief existed for this economic loss.


The 2008 amendment makes provision for a deduction of expenditure incurred by a taxpayer to acquire a license necessary for the carrying on of a trade. The license may be one required by national government, provincial administration, municipality or by a regulatory entity governed by the Public Finance Management Act, 1999 (‘PFMA entities’). Obtaining the license must be a pre-condition for the taxpayer to conduct a trade.

Normally, payments made pursuant to general BEE Charter requirements to facilitate procurement would not qualify because these requirements are not a pre-requisite for conducting a trade (but these requirements would be eligible for relief in the case of mining because mining cannot be conducted without satisfying the Charter scorecard).

The deduction is limited to taxpayers who carry on the trade of mining, the provision of gambling facilities, the provision of telecommunication services and the exploration, production or distribution of petroleum since these are the primary sectors in which licenses of this kind are required. The license fee may be paid in cash or in kind. The license fee payable can be for any purpose required by government in terms of the license (including social expenditure towards certain categories of the community). This provision does not cover the cost of maintaining a license (e.g. annual license fees). Generally, expenditure incurred in order to maintain a license may be deducted under section 11(a). The proposed deduction for license acquisition fees will generally allowed proportionately over the number of years for which the taxpayer has a right to the license. However, the deductions cannot be spread over more than 30 years. Thus, the deduction allowed in terms of this section in any one year of assessment is the amount of the expenditure divided by the lesser of:

(i) The remaining number of years the taxpayer is entitled to the use of that license, or (ii) 30 years.

Example

Company X is required to obtain a license to operate a cellular network communications business from the Department of Communications. The license is acquired in year 1 and covers a period of 20 years from that date. Company X incurs expenditure of R3 million in Year 1 and R2 million in Year 2.

Company X will be allowed a deduction of R150 000 per annum in year 1 (R3 million/20). Company X is allowed an additional deduction of R105 263.16 per annum for the R2 million incurred in year 2 (R2 million/19).

Amendments to the Income Tax Act: Section 11(gD) Section 36(11) (paragraph (e) of the definition of ‘capital expenditure’)

Effective from 1 January 2008 and applies in respect of years of assessment ending on or after that date.

Strategic industrial policy projects

A strategic incentive allowance (in section 12G) previously existed for projects that have significant benefits for the South African economy. This incentive was aimed at encouraging investment in strategic industrial projects by granting an additional investment allowance for industrial assets used for these projects. R3 billion was allocated over a four-year period for this purpose. This amount has been exhausted and no new projects are being approved in terms of section 12G. However, a number of projects are still in operation and utilising the benefits of the 12G incentive.

A new incentive for the manufacturing sector has been introduced in 2008. The main objectives of the National Industrial Policy Framework are to diversify South Africa’s industrial output, support a knowledge-based economy and to nurture labour intensive industries. Increased productivity in the South African manufacturing sector would require transformation of current production processes and methods to attain cost reductions and greater efficiency in the use of resources. This incentive programme aims to assist this transformation by supporting investment in manufacturing assets that will improve the productivity of the South African manufacturing sector. Concurrent and complimentary to that, support is given to training personnel to improve labour productivity and the skills profile of the labour force. To this end, the Minister of Finance has made available R5.6 billion over 5 years for incentives in aid of industrial policy objectives (this


amount translates into R20 billion of additional deductions). The new incentive will be fully available for new projects as well as expansions or upgrades of existing projects.

General overviewThe incentive is aimed at benefiting projects in the manufacturing sector with certain exclusions. The incentive takes the form of an immediate additional allowance for an industrial policy project as determined according to the type (greenfield or brownfield) and status (qualifying or preferred). The incentive programme is designed for greenfield investments (i.e. new industrial projects that utilise only new and unused manufacturing assets) as well as brownfield investments (i.e. expansions or upgrades of existing industrial projects). The new incentive offers support for both capital investment and training. Thus, firms or projects benefit from the incentive only if they invest in improved production equipment and contribute towards the labour market. Qualification for the incentive will be based on regulatory criteria reviewed by an adjudication committee constituted in terms of section 12I.

Entry criteria

For a project to qualify for this incentive (i.e. to qualify as an ‘industrial project’), it must be solely or mainly for the manufacture of products, goods, articles or other things as classified under ‘Major Division 3: Manufacturing’ in the recent Standard Industrial Classification Code issued by Statistics South Africa (SSA) (or that the adjudication committee is of the view that will be so classified).

Projects that manufacture alcoholic and tobacco products, arms and ammunition and certain bio-fuels are disqualified from this incentive.

If classified as an ‘industrial project’ as outlined above, the Minister of Trade and Industry (based on the recommendations of the adjudication committee) must also be satisfied that all of the following minimum criteria exist:

(i) The project must satisfy a minimum asset threshold (see below).(ii) The project must not constitute an industrial participation project or receive any specified concurrent

industrial incentives provided by any national sphere of Government (both these issues will be determined by regulation).

(iii) The project cannot be divided into subparts so as to receive multiple incentives under this provision for a single integrated project (see below).

(iv) The project must satisfy a minimum standard of skills development and cleaner production, including energy efficiency, criteria (as determined by regulation).

(v) The company and group members are taxpayers of good standing (i.e. their tax affairs are in good order).

(vi) At least 50% of the manufacturing assets to be utilised must be brought into use within four years from the date of approval.

The minimum asset threshold for greenfield projects is R200 million, which will be based on the cost of new and unused manufacturing assets.

The minimum asset threshold for brownfield projects is that the cost of existing manufacturing assets must be increased by the higher of:

25% of the cost of the pre-existing assets (but no more than R200 million), or R30 million.

The purpose of these thresholds is to ensure that the projects that benefit from this incentive will provide a substantial benefit for the economy. Also as discussed above, the incentive is further designed to prevent the splitting up of single projects into multiple projects that are integrally related within a single company (or with a group of companies).

Scoring criteria

The bulk of the qualifying criteria will be determined by regulations. These criteria are not only important for as a sub-minimum for project approval, but also for determining whether a project will have preferred or merely qualifying status. The status of a project will be determined by a point scoring system. The regulatory criteria will entail a combination of the following:


Upgrading an industry within South Africa (via innovative process and cleaner production technology, including improved energy efficiency).

Providing general business linkages within South Africa. Acquiring goods and services from small, medium and micro enterprises. Creating direct employment within South Africa. Providing skills development in South Africa. In the case of a Greenfield project, falling within an Industrial Development Zone.

The extent to which the project will meet these criteria in aggregate will also determine whether the project has preferred or qualifying status.

Project cut-off mark

The total amount of the allowable deductions in terms of this incentive is R20 billion. As a result no approval will be granted where the potential additional investment allowance in respect of an industrial project will in aggregate for all project exceed R20 billion. Furthermore only applications received by no later than 21 December 2014 will be considered.

Capital incentive

a. Basic rulesThe incentive will be available for new and unused manufacturing buildings, plant and machinery acquired, contracted for or brought into use for the first time by the applicable company within four years from the date of project approval. Buildings, plant and machinery acquired or contracted for before the approval date will not be eligible for the incentive (because an incentive in this instance would represent a deadweight loss). Furthermore, manufacturing assets must be used in South Africa and qualify for a deduction in terms of section 12C(1)(a), 13 or 13quat. In determining the additional allowance as described below, the cost of the asset is limited to the market value or the acquisition value. This limit ensures that taxpayers do not claim financing as cost for this additional allowance calculation. If project assets are disposed of, the recoupment rules will mirror those of section 12G (see section 8(4)(n)).

b. Preferred statusProjects with preferred status will receive an additional investment allowance equal to 55% of the cost of the manufacturing asset in the first year that the asset is brought into use. The amount of the allowance will be capped at R900 million per project for Greenfield projects and R550 million per projectfor Brownfield projects.

c. Qualifying statusProjects with qualifying status will receive an additional investment allowance equal to 35% of the cost of the manufacturing asset in the first year that the asset is brought into use. The amount of the allowance will be capped at R550 million per project for Greenfield projects and R350 million per projectfor Brownfield projects.

Example

A taxpayer whose Greenfield project qualifies for preferred status purchases machinery for R300m. The machinery qualifies for section 12C depreciation.

In the year that the machinery is brought into use, a section 12C deduction of R120 million (R300 million x 40%) will be allowed. In addition, a section 12I deduction of R165m (R300 million x 55%) will be allowed. In each of the following 3 years, further section 12C deductions of R60 million (R300 million x 20%) per year will be allowed.

Training incentive programme

a. Basic rulesAn additional training allowance will be available for training provided by the employer to employees. In determining the cost of training for purposes of this additional allowance, the rules are design to ensure that taxpayers can only deduct the genuine costs of training (as opposed to normal salary expenses disguised as training). Three types of training are envisaged:


(i) Wholly external.(ii) Internal training, and (iii) Training from connected persons.

The additional training allowance will cover all costs (personnel plus materials) that are charged by wholly external (i.e. contracted) parties providing training to employees engaged in an industrial policy project. A more limited allowance will be available for internal training. In this regard, the employees providing the training must specifically and exclusively be dedicated to providing training for the additional allowance to apply. An additional allowance is also allowed for the cost of training materials. If the training is provided by connected persons, a similar limited deduction follows. In this instance, the allowable deduction will be limited to the portion of the charge that is attributable to employees of the connected person providing the training (plus the cost of training materials).

b. Preferred statusFor entities with preferred status, the actual training expenses as a tax allowance will be capped at R36 000 per employee over a period of 6 years. An entity will be allowed an overall maximum deduction of R30 million in any six-year period.

c. Qualifying statusFor entities with qualifying status, the actual training expenses as a tax allowance will be capped at R36 000 per employee over a period of 6 years. An entity will be allowed an overall maximum deduction of R20 million in any 6-year period.

Inflationary increase for unused losses

It has been acknowledged that the investors without an existing tax base will generally not be able to use the additional allowance immediately because large-scale capital projects may take several years to bring into operation. As a result, inflation would erode the value of the capital portion of the incentive if this portion is not adjusted. More specifically, excess deductions (i.e. assessed losses) are of little value if they cannot be used until several years later. In order to offset this concern, the assessed loss rule contains an inflationary adjustment. Once an asset is brought into use, any unused deductions (i.e. assessed losses) stemming from the capital portion of the incentive will contain an automatic inflation. This inflationary adjustment will exist for a maximum period of four years. This adjustment will be made by using the standard SARS prescribed rate of interest. As indicated, the inflationary adjustment will only apply to capital expenditure losses that arise from the application of this section. This adjustment does not apply to losses arising from the training programmes.

Administrative issues

a. Extension of certain periods Upon recommendation by the adjudication committee, the Minister of Trade and Industry may extend certain periods by one year. The periods for which this one-year extension may be granted are:

The four-year period during which the manufacturing asset should be brought into use in terms of subsection 2.

The four-year period during which an inflationary increase may be applied to the balance of assessed loss in terms of subsection 6(b)

b. The adjudication committee An adjudication committee will be created whose functions will include evaluating applications and making recommendations to the Minister of Trade and Industry for the purposes of approval of projects and monitoring of projects. This committee will consist of officials employed by the Department of Trade and Industry, National Treasury and SARS.


c. Withdrawal of approvalThe Minister of Trade and Industry may withdraw project approval if a company ceases to comply with the qualifying criteria, fails to submit the required progress report or determines that the approval was granted based on fraudulent information, misrepresentation or non-disclosure of material facts. For instance, the Minister of Trade and Industry may withdraw project approval prior to the expiry of the four years if the Minister is of the opinion that the taxpayer will not be able to bring at least 50% of the manufacturing assets into use within four years from the approval date. The Commissioner for the SARS would accordingly disallow any deductions granted under this incentive if the approval is withdrawn.

Amendments to the Income Tax Act: Section 8(4)(n) Section 12I


Promotion of land conservation and biodiversity

In an effort to preserve nature and the environment, government (through the Department of Environmental Affairs and Tourism (DEAT)) has created a regime for entering into bilateral agreements with private landowners to conserve and maintain particular areas of land for the public good. The National Environmental Management: Protected Areas Act, 2003 and the National Environmental Management: Biodiversity Management Act, 2004, are laws for determining the geographic areas of land and biological systems to be protected or conserved. Private landowner entry into any of these agreements is wholly voluntary. The National Environmental Management: Protected Areas Act, 2003 provides for at least three sets of possible conservation areas, namely, National Parks, Nature Reserves and Protected Environments. The National Environmental Management: Biodiversity Management Act, 2004 provides a list of critical species that must be conserved and seeks to protect the habitats of these critical species. The prescribed activities within a declared area and the detailing of expenses are stated in a management plan. Management plans are published in the Government Gazette and are subject to review every five years.

Prior to the 2008 amendments, only expenditure incurred in the production of income on this land was allowed as a deduction. There was no scope for landowners to claim tax relief for -

Maintenance: In entering into these agreements, the landowner agrees to maintain and conserve land for the public good. The landowner (and perhaps other taxpayers utilising the land) incurs maintenance expenses and performs activities that would have otherwise have required government intervention.

Loss of Land Use Rights: The landowner’s right of use of the land may be restricted by (and limited to) stipulations in the agreement. For example, the landowner cannot use the land to construct a building or conduct a business. By entering into such agreements, the landowner loses these valuable rights.

The 2008 amendment creates a mechanism for deducting environmental maintenance rehabilitation and management expenses. The proposed amendment also allows for the deduction of the loss of land use rights associated with formal conservation agreements in limited circumstances.

Deduction of conservation and maintenance expenses in terms of Biodiversity Agreements

Land conservation and maintenance expenses incurred in terms of a section 44 Biodiversity Management Act can potentially be treated as expenditure incurred in the production of income and for purposes of trade. This treatment effectively allows the taxpayer at issue to treat the cost as a deductible expense under section 11(a) as long as the expenditure is not of a capital nature. Deductions under these provisions arise if two conditions exist:

(i) The management agreement must last for a minimum five-year period. (ii) The taxpayer must utilise the land or other land in the immediate proximity (e.g. adjacent,

across the road) for the production of income and for purposes of trade. Any deduction of expenses permitted under this rule will be limited to income derived by the taxpayer from the land (or land in the immediate proximity). Excess expenditure is carried forward to the following year (and deemed to be incurred in that year).


Deduction of conservation and maintenance expenses in terms of Protected Area Agreements

Land conservation and maintenance expenses incurred in terms of sections 20, 23 or 28 Protected Areas Act (declared national parks, nature reserves and protected environments) are treated as a deemed section 18A deductible donations. This deemed deductible donation is conditioned on the underlying agreement lasting a minimum of 30 years.

Conservation and maintenance recoupment for breach

Taxpayers that contravene their biodiversity management and protected areas agreements are subject to recoupment. This recoupment equals deductions previously allowed under this section to the extent those deductions arose within five years before the contravention.

Special rules in the case of land declared as a national park or nature reserve for 99 years

Land declared as a national park or nature reserve with a 99-year title deed endorsed agreement in terms of sections 20, 23 or 28 of the Protected Areas Act is treated as a deemed section 18A tax deductible donation. This tax deductible amount is equal to 10% of the lesser of the cost or the market value of the land with the deduction applying in the first taxable year of declaration and in each of nine successive years. In addition, the land qualifies for the corresponding capital gains tax exemption in terms of paragraph 62 of the Eighth Schedule.

National park or nature reserve: circumstances in which a taxpayer retains partial use of the land

Taxpayers retaining partial right of use in land declared as a national park or nature reserve with a 99 year title deed qualify for only a partial deemed section 18A tax deductible donation in respect of that land. The deemed tax deductible amount is again initially equal to 10 per cent of the lesser of the cost or the market value of the land. However, this 10 per cent amount must then be multiplied by the ratio of market value of the declared land reduced by the right of use as that amount bears to the market value of the declared land as if that declared land had been donated full (i.e. without regard to the right of use). Stated in a more formulaic way: the deemed donation equals:10% x lesser of cost or market value declared x [market value of land declared market value of land declared + market value of land rights retained].

Example:

Santie enters into an agreement to have land declared as a national park. The cost to Santie of the land declared is R3 million with the total market value at the time of the agreement equalling R12 million. As part of the agreement, Santie retains some commercial rights of use with respect to two-thirds of the property. These commercial rights are valued at R7 million. The market value of the declared land equals R5 million (R12 million minus R7 million)

For each of 10 years, the tax-deductible donation is equal to – 10% x 3 000 000 x 5 000 000/ 12 000 000 = R125 000.

National park or nature reserve recoupment breach

Taxpayers that contravene their 99 year declaration of land as a national park or nature reserve are subject to recoupment. This recoupment equals all deductions previously allowed under this section that have occurred within five years before the contravention.

Farming conservation and maintenance expenses

In order to cater for conservation and maintenance expenses in terms of the Biodiversity Agreements, the list of expenses allowable for deduction for farming purposes is amended to include expenses incurred for alien and evasive vegetation. Similar to non-farm trade expenses, land conservation and maintenance expenses incurred in terms of a section 44 Biodiversity Management Act are treated as expenditure incurred in the carrying on of farming operations if two conditions exist. Under the first condition, the management agreement must last for a minimum period of 5 years. Under the second condition, the taxpayer must utilise the land or other land in the immediate proximity (e.g. adjacent, across the road) for carrying on of farming operations. The above treatment effectively allows the applicable taxpayer to treat the cost as a deductible


expense under paragraph 12(1A) of the First Schedule. Any deduction of expenses permitted under this rule will be limited to income derived by the taxpayer from farming activities (just like any other farming expenses of a capital nature under paragraph 12). Again, as with non-farming trade expenses of this kind, there is a five year breach rule. Taxpayers that contravene their biodiversity management agreement are subject to recoupment. This recoupment equals all deductions previously allowed under this section within five years before the contravention.Amendments to the Income Tax Act: Section 37C Paragraph 12(1)(a), (1A) and (1D) of the First Schedule


Sundry amendments

Deletion of sections 11(p) and (q)These sections have been rendered obsolete by the introduction of section 11D and they have therefore been deleted with effect from the commencement of years of assessment ending on or after 1 January 2009.

Section 11D Whilst section 11D allowance for research and development expenditure provides for a deduction of 150% of so much of any expenditure incurred by a taxpayer directly in respect research and development expenditure, it did not explicitly provide for a deduction by the developer itself. As it was always intended that the developer should be so entitled, this oversight has now been rectified.

Sections 12C, 12D, 12DA, 12F, 37BThese amendments are consequential upon the introduction of the Micro Business Turnover Tax (see notes on Micro Business Turnover Tax above) and cater for the situation where a taxpayer subject to income tax elects to be taxed under the presumptive tax regime and is again subject to income tax in a later tax year. Any deduction which could have been allowed under the respective allowance during a year when the taxpayer used the asset whilst registered as a micro business is deemed to have been allowed during the year as if the trading income had been subject to normal tax. This means that these deemed allowances will be taken into account for purposes of determining any recoupment, scrapping allowance or capital gain or loss when the asset is eventually sold.

Section 12E The definition of “small business corporation” allows shareholders or members to hold an interest in a venture capital company by adding VCCs to the list of permitted investments.

Section 40C Previously, two slightly different sets of rules existed when a company issued shares for no consideration (e.g. a share dividend) – one for shares held as trading stock and the other for shares held on capital account. A comparable set of trading stock rules existed when options (for shares) were issued for no consideration. The amendment combines the two sets of rules. Under the combined rule, where shares are issued for no consideration (or share options are issued for no consideration), the expenditure incurred for those shares is deemed to be nil. Hence, the holders of these shares (or options) have no cost price or base cost in the shares (or options) held.


CAPITAL GAINS TAX

Vesting of an interest in a trust asset in a beneficiary

Previously, a disposal was triggered in the hands of a beneficiary of a trust when that beneficiary acquired an asset from the trust in respect of which that beneficiary had a pre-existing vested right. This follows from paragraph 13(1)(d) which stipulated that the time of disposal in respect of the vesting of an asset was the date of vesting. When a beneficiary receives the actual asset there is a further disposal in the form of an exchange of a vested right for a real right in the asset, and the time of that disposal is the date when the change of ownership occurs (paragraph 13(1)(a)(ix)). This treatment was inconsistent with the treatment of other assets when delivery is deferred. In such cases, paragraph 13(1)(a)(ii) ensures that the exchange of personal and real rights is backdated to the date of the agreement, thereby ensuring that the disposal is tax neutral. The tax neutrality flows from the fact that the base cost of the vested (personal) right is equal to the market value of the real right received (proceeds), resulting in no capital gain or loss when the rights are exchanged. A similar approach is now applied to the acquisition of an asset by a beneficiary to the extent that the beneficiary had a vested right in the asset.

Amendment to the Income Tax Act Paragraph 13(1)(a)(iiA) of the Eighth Schedule Deletion of paragraph 13(1)(d) of the Eighth Schedule


Base cost of an asset donated by a non-resident

A new paragraph has been inserted to establish a base cost for assets acquired from a non-resident by donation or for expenditure not measurable in money or for a non-arm’s length price when the non-resident is a connected person in relation to the resident acquirer.

Amendment to the Income Tax Act Paragraph 20(1)(h)(vi) of the Eighth Schedule


Holders of a participatory interest in a collective investment scheme in property (CISP)

Paragraph 67A(3) was amended in 2007 to mirror the part-disposal rules under paragraph 76. A new paragraph 67AB was introduced at the same time with the aim of triggering a part-disposal when a holder of a participatory interest in a CISP received a distribution of a capital nature from a CISP. This was intended to be the equivalent of paragraph 76A. It has since emerged that there are a number of shortcomings and omissions in paragraphs 67A and 67AB, and these have now been corrected.

For example, paragraph 67A had the unintended effect of limiting proceeds to the amount of a pre-1 October 2007 distribution of capital from a CISP but was silent on the treatment of any actual proceeds on disposal of a participatory interest, and any distributions of a capital nature on or after 1 October 2007. Paragraph 67AB did not contain a negative base cost rule when the weighted average method is used. To resolve these problems, a distribution of capital from a CISP is now treated in the same way as a capital distribution in respect of a share under paragraphs 76, 76A and 77.

Amendments to the Income Tax Act Paragraph 67A of the Eighth Schedule Paragraph 67AB of the Eighth Schedule

Effective from 1 October 2007.

Vesting of a trust asset in an exempt institution

Attributions to the government, a provincial administration, organisation, person or recreational club contemplated in paragraphs 62(a) to (e) are now excluded from paragraphs 80(1) and (2). The effect is that the capital gain will remain in the trust, which will be entitled to disregard the capital gain or capital loss on the donation under paragraph 62.


Amendments to the Income Tax Act Paragraph 80 of the Eighth Schedule


OTHER TAXPAYERS AND EXEMPTIONS

Public benefit organisations

Expanding the list of approved public benefit activities

As a general rule, donations made by a taxpayer represent expenditure of a private and philanthropic nature. Donations are not deductible unless the PBO receiving the donation is approved under the special requirements for section 18A. This special tax dispensation is only available for PBOs conducting certain categories of approved public benefit activities.

Multilateral humanitarian organisations such as the United Nations specialised agencies are exempt from South African tax; however, donations made to these agencies were previously not tax deductible in terms of section 18A as these agencies were not registered in South Africa as a local PBO.

In view of the fact that it might be impractical for the United Nations agencies to register as local PBO’s, the 2008 amendment creates a mechanism so that donations to these agencies can qualify for tax deductible donation status. Under the amendment, donations made to United Nations Specialised Agencies (set out in Schedule 4 of Diplomatic Immunities and Privileges Act, 2001) will qualify for section 18A tax deductible donation status if two conditions exist:

(i) The agency must conduct within South Africa any public benefit activity stipulated in Part II of the Ninth Schedule or any other activity determined by the Minister by notice in the Government Gazette.

(ii) The agency must furnish SARS with a written undertaking that the agency will comply with the section 18A requirements (including the waiver of diplomatic immunity if the agency contravenes this section).

Amendments to the Income Tax Act: Section 18A(1)(bA), (2) and (5)


De minimus exemption

Trading income of a PBO is exempt up to the greater of 5% of total receipts and accruals or R100 000. The fixed amount has been increased to R150 000 for years of assessment commencing on or after 1 March 2009.

Recreational clubs

Requirements for approval as a “recreational club” in terms of section 30A of the Income Tax Act

The 2008 amendment requires a recreational club to have at least three unconnected persons who accept fiduciary responsibility for the club. No single person may have the ability or authority to directly or indirectly control the decision making powers of the club. The amendment is in line with the requirements applicable to approved public benefit organisations.

De minimus exemption

Club trading income is does not qualify for one of the specific deductions is exempt up to the greater of 5% of total receipts and accruals or R50 000. The fixed amount has been increased to R100 000 for years of assessment commencing on or after 1 March 2009.


Body corporates

Non-levy income of a body corporate that qualifies for the tax exemption under section 10(1)(e) is exempt up to R50 000. This amendment applies from the commencement of years of assessment ending on or after 1 January 2009.

Amalgamation of professional and amateur sporting bodies

Some national sporting organizations previously split their professional and amateur arms into separate entities so that the amateur arm would enjoy public benefit organisation (PBO) status. This, however, resulted in the professional arms’ sponsorship income being taxed, whilst the expenses incurred by the amateur arms in developing and promoting amateur sport to serve as a feeder for future fans and professional players could not be deducted.

A 2007 amendment provided for special rules to assist with the re-integration of the separate entities by providing relief for amalgamation transactions between the professional and amateur arms. The rules allow the professional arm to dispose of all its assets to the amateur arm on a tax neutral basis. The professional arm will then cease to exist. The unified entity will be a taxable entity as it no longer complies with the requirements of section 10(1)(cN).

The relief is available for a limited window-period of two years between 1 January 2008 and 31 December 2009.

A special deduction was introduced in section 11E, which allows the unified entity to deduct from its income all expenditure (not of a capital nature) incurred by it on the development and promotion of qualifying amateur sport falling under the same code of sport as the professional sport it carries on. Payments to other entities for the development and promotion of amateur sport will not qualify for the special deduction.

This provision was further enhanced in 2008 to address unintended limitations in the 2007 amendments. The relief was limited to amalgamation transactions in terms of which the entity housing the amateur arm acquired all the assets of the professional arm, after which the professional arm ceased to exist as a separate entity. Some organisations wished to use the entity housing their professional arm to absorb the assets of the amateur arms. The 2008 amendment extends the rollover relief to such transactions. The extended relief will also remain available until 31 December 2009.

ADMINISTRATIVE PROVISIONS

Administrative penalties

A new provision allows for the imposition by the Commissioner of administrative penalties in respect of non-compliance with any procedural or administrative action or duty imposed or requested in terms of the Income Tax Act. The Commissioner must ensure that the penalties are imposed impartially, consistently and proportionately to the seriousness of the non-compliance. The regulations must prescribe –

the administrative penalties that the Commissioner may impose; the procedures to be followed by the Commissioner in imposing an administrative penalty; what procedures are available to any person in respect of whom an administrative penalty has been

imposed to obtain any relief thereof; under what circumstances the Commissioner may remit any administrative penalty imposed (and, as far

as possible, this must be limited to exceptional circumstances); and any ancillary or incidental administrative or procedural matter which it is necessary to prescribe in order

to achieve an effective administrative penalty regime.

In prescribing the administrative penalties, the Minister may have regard to one or more of the following:

The nature and seriousness of the non-compliance. The period of non-compliance. The incidence of any recurrence or repeat thereof.

The final regulations, which were published on 31 December 2008 and became effective from 1 January 2009 are reproduced below:


GOVERNMENT NOTICE SOUTH AFRICAN REVENUE SERVICE

No. 1404 31 December 2008

REGULATIONS ISSUED UNDER SECTION 75B OF THE INCOME TAX ACT 58 OF 1962, PRESCRIBING ADMINISTRATIVE PENALTIES IN RESPECT OF NON-COMPLIANCE

By virtue of section 75B of the Income Tax Act, 1962, I, Trevor Andrew Manuel, Minister of Finance, hereby prescribe in the Schedule hereto:

(i) the administrative penalties the Commissioner may impose; (ii) the procedures to be followed by the Commissioner in imposing a penalty; (iii) the procedures to obtain relief available to a person in respect of whom a penalty has been imposed; (iv) under what circumstances the Commissioner may remit a penalty imposed; and (v) ancillary or incidental matters necessary to achieve an effective penalty regime. T. A. MANUEL MINISTER OF FINANCE

SCHEDULE

INDEX Part I - General

1. Definitions 2. Purpose

Part II - Fixed Amount Penalty

3. Basis for fixed amount penalty imposition 4. Non-compliance subject to fixed amount penalty 5. Fixed Amount Penalty Table

Part III - Percentage Based Penalty

6. Percentage Based Penalty for non-compliance

Part IV – Procedures

7. Procedures for imposing penalty 8. Procedure to request remittance

Part V – Remedies

9. Remittance of penalty for failure to register 10. Remittance of penalty for nominal of first incidence of non-compliance 11. Remittance of penalty in exceptional circumstances 12. Penalty incorrectly assessed 13. Objection and appeal

Part VI – Incidental and ancillary matters

14. Application of the regulations 15. Effective Date

Part I - General

1 Definitions


For purposes of these regulations, unless the context otherwise indicates, a word or expression to which a meaning has been assigned in the Income Tax Act, 1962, has the meaning so assigned, and –

‘administrative penalty’ or ‘penalty’ means a penalty imposed by the Commissioner in accordance with these regulations; ‘Commissioner’ means the Commissioner for the South African Revenue Service; ‘first incidence’ means an incidence of non-compliance by a person where no penalty assessment under these regulations was issued during the preceeding 36 months, whether involving an incidence of non-compliance of the same or a different kind, and for purposes of this definition a penalty assessment that was fully remitted under paragraph 11 must be disregarded; ‘official publication’ means a binding public ruling, interpretation note, practice note or media release issued by the Office of the Commissioner; ‘penalty assessment’ means an assessment in respect of;(i) a penalty only; or(ii) tax and a penalty which are assessed at the same time; ‘preceding year’ means the year of assessment immediately prior to the year of assessment during which a penalty is assessed; ‘remittance request’ means a request for remittance of a penalty submitted in accordance with paragraph 8; and 'the Act' means the Income Tax Act, 1962 (Act No. 58 of 1962).

2 Purpose

The purpose of these Regulations is to ensure -

(a) the widest possible compliance with the provisions of the Act and the effective administration of the tax system; and

(b) that any penalty is imposed impartially, consistently and proportionately to the seriousness of the of the non compliance.

Part II - Fixed Amount Penalty

3 Basis for fixed amount penalty imposition

If the Commissioner is satisfied that the factual basis for any non-compliance by a person described in paragraph 4 exists, excluding the non-compliance described in paragraph 6, the Commissioner may impose the appropriate penalty in accordance with the Table in paragraph 5.

4 Non-compliance subject to fixed amount penalty

Non-compliance for purposes of paragraph 3 is -

(a) failure to register as a taxpayer or otherwise register as and when required under the Act; (b) failure to inform the Commissioner of a change of address or other details as and when required under

the Act; (c) failure by a company to appoint a public officer, appoint a place for service or delivery of notices and

documents, keep the office of public officer filled, maintain a place for the service or delivery of notices, or to notify the Commissioner of any change of public officer or of the place for the service or delivery of notices as and when required under the Act

(d) failure to submit a return or other related documents or information as and when required under the Act; (e) failure to furnish, produce or make available information, documents or things as and when required

under the Act; (f) failure to reply to or answer a question put to a person as and when required under the Act; (g) failure to attend or give evidence as and when required under the Act; (h) failure by an employer to notify SARS of a change of address or the fact of having ceased to be an

employer as and when required under the Act; (i) failure by an employer to submit a monthly declaration of employees’ tax as and when required under

the Act; (j) failure by an employer to provide details of an employee;


(k) failure to deliver an employees’ tax certificate to one or more employee or former employee as and when required under the Act;

(l) delivery by an employer of an employees’ tax certificate in contravention of the requirement that the employer must first render and employees’ tax return as and when required under the Act;

(m) failure by a provisional taxpayer, who is liable for the payment of normal tax in respect of an amount of taxable income derived by the provisional taxpayer during a year of assessment, to submit an estimate of taxable income as and when required under the Act; or

(n) any other non-compliance with an obligation imposed under the Act, other than those penalised under section 80S, paragraph 5(5) of the Fourth Schedule or paragraph 17(4) of the Seventh Schedule to the Act.

5 Fixed Amount Penalty Table

For purposes of the non-compliance described in paragraph 4, the Commissioner may impose a penalty in accordance with the following Table -

Table A: Fixed Amount Penalty

1Item

2Assessed loss or taxable income for preceding year

3Penalty

(i) Assessed loss R250(ii) R0 – R250 000 R250(iii) R250 001 – R500 000 R500(iv) R500 001 – R1 000 000 R1 000(v) R1 000 001 – R5 000 000 R2 000(vi) R5 000 001 – R10 000 000 R4 000(vii) R10 000 001 – R50 000 000 R8 000(viii) Above R50 000 000 R16 000

(2) The amount of the penalty in column 3 will increase automatically by the same amount for each month, or part thereof, that the person fails to remedy the non-compliance within 30 days after -

(a) the date of the delivery of the penalty assessment, where SARS is in possession of the current address of the person and is able to deliver the assessment, but limited to 35 months after the date of delivery;

(b) the date of the non-compliance where SARS is not in possession of the current address of the person and is unable to deliver the penalty assessment, but limited to 47 months after the date of non-compliance.

(3) The following persons, except those falling under item (viii) of the Table or those that did not trade during the year of assessment, are treated as falling under item (vii) of the Table:

(a) a company listed on a recognised stock exchange as described in paragraph 1 of the Eighth Schedule to the Act;

(b) a company whose gross receipts or accruals for the preceding year exceeds R500 million; or (c) a company that forms part of a group of companies as defined in section 1 of the Act which group

includes a company described in item (a) or (b).

(4) The Commissioner may, except in the case of persons described in items (a) to (c) of subparagraph (3), where the taxable income of the relevant person for the preceding year is unknown or that person was not a taxpayer in that year -

(a) impose a penalty in accordance with item (ii) of column 1 of the Table; or (b) estimate the amount of taxable income of the relevant person for the preceding year based on available

information and impose a penalty in accordance with the applicable item in column 1 of the Table.


(5) Where, upon determining the actual taxable income of the person in respect of whom a penalty was imposed in terms of subparagraph (4), it appears that such person falls within another item in column 1 of the Table, the penalty must be adjusted in accordance with the applicable item in column 1.

Part III - Percentage Based Penalty

6 Percentage based penalty for non-compliance

If the Commissioner is satisfied that the factual basis for any non-compliance described in subparagraph (a), (b), or (c) exists, the Commissioner may, in addition to any other penalty, interest or charge for which the person may be liable under these regulations or the Act, impose a penalty equal to ten percent of the:

(a) amount of employees’ tax that an employer fails to pay as and when required under the Act; (b) total amount of employees’ tax deducted or withheld, or that should have been deducted or withheld, by

an employer from the remuneration of its employees, where the employer fails to submit an employees’ tax return as and when required under the Act; or

(c) amount of provisional tax that a provisional taxpayer fails to pay as and when required under the Act.

Part IV – Procedures

7 Procedures for imposing penalty

(1) A penalty imposed under paragraph 5 or 6 is imposed by way of a penalty assessment, and where a penalty assessment is made, the Commissioner must give notice of the assessment in the format as he or she may decide to the person, including the following:

(a) the non-compliance in respect of which the penalty is assessed and its duration; (b) the amount of the penalty assessed; (c) the due date for paying the penalty; (d) the automatic increase of the penalty; and (e) a summary of procedures for requesting remittance of the penalty.

(2) A penalty is due upon assessment and must be paid on or before the due date stated in the notice of the penalty assessment.

(3) To the extent not otherwise provided for in these regulations, procedures for assessment, objection, appeal, payment, and recovery of tax, and other provisions of a procedural nature relating to tax, apply with the necessary changes to penalties assessed under these regulations.

8 Procedure for requesting remittance

(1) A person who is aggrieved by a penalty assessment may, on or before the due date for payment in the penalty assessment, in such form or manner (including electronically) as may be prescribed by the Commissioner, request the Commissioner to remit the penalty in accordance with Part V.

(2) The remittance request must include -

(a) a description of the circumstances which prevented the person from complying with the relevant obligation under the Act in respect of which the penalty has been imposed; and

(b) the supporting documents and information as may be required by the Commissioner in the prescribed form.

(3) During the period commencing on the day that the Commissioner receives the remittance request, and ending 30 days after notice has been given of the Commissioner’s decision, no collection steps relating to the penalty amount may be taken unless the Commissioner has a reasonable belief that there is -

(a) a risk of dissipation of assets by the person concerned; or

(b) fraud involved in the origin of the non-compliance or the grounds for remittance.


(4) The Commissioner may extend the period described in subparagraph (1) where the Commissioner is satisfied that -

(a) the non-compliance in issue is an incidence of non-compliance described in paragraph 10 or 11, and that reasonable circumstances exist for the late receipt of the remittance request; or

(b) a circumstance described in paragraph 12(2) rendered the person incapable of submitting a timely request.

Part V – Remedies

9 Remittance of penalty for failure to register

Where a penalty is imposed on a person for a failure to register or to notify the Commissioner of a change of address as and when required under the Act, the Commissioner may remit the penalty in whole or in part if -

(a) the failure to – (i) register was discovered because the person approached SARS voluntarily; or (ii) notify SARS of a change of address was remedied by the person before SARS became aware of

the changed address: and(b) the person has filed all tax returns required by the Commissioner under the Act.

10 Remittance of penalty for nominal or first incidence of non-compliance

Where a penalty has been imposed in respect of -

(a) a first incidence of non-compliance described in paragraph 4 or 6;(b) an incidence of non-compliance described in paragraph 4 where the duration of the non-compliance is

less than 7 days; or(c) an incidence of non-compliance described in paragraph 6 involving an amount of less than R2 000 or

where the duration of the non-compliance is less than 7 days,

the Commissioner may, in respect of a penalty imposed under paragraph 5 or 6, remit the penalty, or a portion thereof where appropriate, where the Commissioner is satisfied that -

(i) reasonable circumstances for the non-compliance exist; and (ii) the non-compliance in issue has been remedied.

11 Remittance of penalty in exceptional circumstances

(1) The Commissioner must, upon receipt of a remittance request, remit the penalty or where applicable a portion thereof, if the Commissioner is satisfied that one or more of the circumstances described in subparagraph (2) rendered the person on whom the penalty was imposed incapable of complying with the relevant obligation under the Act.

(2) The circumstances referred to in subparagraph (1), excluding a circumstance caused by the person applying for the remittance with the sole or main intent to obtain remittance under this paragraph, are limited to the following—

(a) a natural or human-made disaster; (b) a civil disturbance or disruption in services; (c) a serious illness or accident; (d) serious emotional or mental distress; (e) any of the following acts by the South African Revenue Service:

(i) a capturing error; (ii) a processing delay; (iii) provision of incorrect information in an official publication issued by SARS; (iv) delay in providing information to any person; or (v) failure by SARS to provide sufficient time for an adequate response to a request for information

by SARS; or


(f) serious financial hardship, such as:

(i) in the case of an individual, lack of basic living requirements; (ii) in the case of a business, an immediate danger that the continuity of business operations and

the continued employment of its employees are jeopardized; or

(g) any other circumstance of analogous seriousness.

12 Penalty incorrectly assessed

If the Commissioner is satisfied that a penalty was not assessed in accordance with these regulations, the Commissioner may, within three years of the penalty assessment, issue an altered assessment accordingly.

13 Objection and appeal

(1) The following decisions by the Commissioner are subject to objection and appeal—

(a) a penalty assessment where the objection relates to a factual dispute; or (b) a decision by the Commissioner not to remit a penalty in whole or in part.

(2) Where the Commissioner disallows an objection against a decision described in subparagraph (1), a person may lodge an appeal against the disallowance of the objection.

Part VI – Incidental and ancillary matters

14 Application of the regulations

(1) These regulations apply to non-compliance -

(a) on or after the date these regulations come into effect; or (b) resulting from a continuous failure by a person to comply with an obligation that existed on the date

these regulations came into effect, in which case the date on which the non-compliance occurred will be regarded as a date 90 days after these regulations came into effect, or such longer period as the Commissioner may prescribe in the Gazette.

(2) In determining the duration of non-compliance for purposes of paragraph 5(2), non-compliance taking place before these regulations came into effect will not be taken into account.

15 Effective Date

These regulations will come into effect -

(a) except for paragraph 6, on 1 January 2009; and (b) in respect of paragraph 6, upon the date on which the relevant sections of the Revenue Laws Second

Amendment Act, 2008, will come into operation.

Amendment to the Income Tax Act: Section 75B

Effective from a date to be determined by the President by proclamation in the Gazette. This date was subsequently notified as 31 December 2008 (GN 62 in Gazette 31763 dated 31 December 2008).

Publication of rulings

SARS is obliged to publish binding private rulings and binding class rulings. The 2008 amendment provides that the Commissioner is not obliged to publish such a ruling where it is the same as a ruling that has already been published.

Amendment to the Income Tax Act: Section 76O


Due date for payment and returns

Where the date for the submission of a return or the payment of tax, penalties or interest is the last day of the financial year of the government, the proposed amendment allows the Minister to prescribe any other date for submission of such return and payment. The date so prescribed by the Minister may not fall on a day more than two business days prior to the last day of that year.

If this is implemented at the end of March 2008, it will bring the due date forward from 31 March 2009 to Friday 27 March 2009.

Amendment to the Income Tax Act: Section 89sept

Employers’ obligations

Estimated assessmentsThe 2008 amendment provides for two additional grounds for the issuing of an estimated assessment by the Commissioner for employees’ tax due by the employer. In terms of the amendment, such estimated assessments may be issued where the employer failed to furnish a return as required in terms of paragraph 14(1) or where the employer has furnished a return but the Commissioner is not satisfied with the return.

Amendment to the Income Tax Act: Paragraph 12 of the Fourth Schedule

Employees’ tax certificatesNo employees’ tax certificates as contemplated in paragraph 13(2)(a) or (c) of the Fourth Schedule (i.e. where the employee has remained in that employment or where the employer has ceased to be an employer) may be delivered by the employer until such time as the IRP 501 reconciliation has been rendered to the Commissioner.

Amendment to the Income Tax Act: Paragraph 14(5) of the Fourth Schedule

PenaltiesIf an employer fails to render the IRP 501 reconciliation within the prescribed period, that employer shall be required to pay a penalty equal to 10% of the total amount of employees’ tax deducted or withheld from the remuneration of employees during the year. SARS may remit this penalty if they are satisfied that the circumstances warrant it.

Amendment to the Income Tax Act: Paragraph 14(6) of the Fourth Schedule

Provisional tax

The second provisional tax payment is payable on the last day of the tax year and is based on an estimate of taxable income for the year. In many cases, this estimate was taken from the taxable income reflected on the last assessment (referred to as the ‘basic amount’). Taxpayers using an estimate lower than the basic amount faced the risk of stiff penalties if their estimate turned out to be too low. The basic amount ha therefore provided taxpayers with a safeguard in that, as long as they used this amount to calculate their second provisional tax payments, they would generally not be charged penalties for underpayment.

The use of the basic amount for the second provisional payment has now been removed. From 1 March 2009 onwards, all provisional taxpayers will have to base their second provisional payments on their own estimate of taxable income for the year. If this estimate is less that 80% of the taxpayer’s final taxable income, a 20% penalty will be charged on the difference between the tax paid on the taxpayer’s estimate and the tax that should have been paid (on 80% of the actual taxable income for the year). This effective date of this amendment was set at 1 January 2009 but SARS exercised an administrative discretion and delayed the implementation until 1 March 2009.


Interest on underpayment of tax

Interest on the late payment of income tax in respect of taxpayers that are not provisional taxpayers is currently charged only subsequent to the taxpayer’s assessment. The current interest dispensation also does not allow for the payment of interest where a taxpayer has overpaid employees’ tax during the tax year. The amendment to section 89quat seeks to charge interest where the total taxes paid by a taxpayer as at a particular date (typically 30 September each year in the case of individuals) in respect of his or her taxable income is insufficient and to make provision for the payment of interest to a taxpayer who has overpaid tax during the year.

This result has been achieved by amending section 89quat so that it applies to all taxpayers.

Amendment to the Income Tax Act: Section 89quat

Effective from a date to be announced by the Minister by notice in the Gazette.

OTHER TAXES

VALUE-ADDED TAX

Thresholds – category D (farmers) and category E (very small businesses)

These thresholds were increased from R1,2 million per year to R1,5 million per year with effect from 1 March 2008.

Deregistration relief

The threshold for compulsory VAT registration increased from R300 000 to R1 million on 1 March 2009.

Surveys amongst small businesses identify VAT as the most burdensome tax product to comply with. This is because it is transaction-based and requires diligent record-keeping. With the increase in the compulsory VAT registration threshold to R1 million it is expected that many small businesses may use of this opportunity to reduce their compliance obligations by deregistering as vendors.

The normal rule is that whenever a vendor deregisters from the VAT system, he is required to pay VAT (exit VAT) on the value of the assets held before deregistering, apart from those assets on which the deduction of input tax was or would have been denied (e.g. motor cars). The vendor is deemed to have supplied these assets for a consideration equal to the lower of their original cost (including VAT) or current market value. The supply is deemed to take place immediately before the vendor deregisters and the VAT is therefore payable with the VAT payable in respect of his last tax period.

Example

A small business wishes to deregister as a vendor on 1 March 2009. It has assets on hand with an original cost of R200 000 (plus VAT of R28 000 that was previously claimed as an input tax credit) and a current market value of R300 000 (including VAT).

The exit tax payable on deregistration is determined as –

R228 000 (being the lower of R228 000 and R300 000) x 14/114 = R28 000.

Two types of relief have been given to small businesses that deregister as a result of the increase in the threshold;

For any small business deregistering by no later than 30 June 2009 for the sole reason that the threshold has increased to R1 million, the exit tax payable may be paid in six equal monthly instalments; and


For small businesses that deregister from the VAT system in order to register for the turnover tax (see notes on TURNOVER TAX FOR MICRO BUSINESSES above), further relief will be granted to that vendor by way of a deduction up to R100 000 of the value of the assets held by that vendor prior to such deregistration. This equates to an approximate reduction of up to R12 281 in the exit VAT that will be payable.

Example

Assume the facts as set out above, but the vendor concerned is deregistering in order to register as a micro business.

The exit tax payable on deregistration is determined as –

R228 000 (being the lower of R228 000 and R300 000) less R100 000 = R128 000 x 14/114 = R15 719.This amount can be paid in six instalments of R2 619,83 each.

Application to deregister is made on the VAT 123 form. If SARS is satisfied with the vendor’s application, SARS must, on application by the vendor, cancel the vendor’s registration with effect from the last day of the tax period during which the application is made. SARS will not deregister a vendor unless all outstanding liabilities or obligations (such as for submission of previous VAT returns) incurred under the VAT Act have been settled.

Industrial development zones (IDZs)

If movable goods are temporarily removed from a customs controlled area (CCA) and are not returned within 30 days of their removal (or within a period approved by the controller), a supply is deemed to occur for VAT purposes. The consideration for the supply is the open market value of those goods and the vendor is required to account for output tax on the supply.

This deemed supply rule inadvertently gave rise to a double VAT charge in two situations:

(i) When goods were supplied (e.g. sold) before their required return; and (ii) When goods were returned late followed by a supply (e.g. sale).

The 2008 amendment remedies this situation as it provides that the deemed supply rule will not apply if goods temporarily removed from a CCA are supplied by the vendor during the interim period. If goods are returned late without an interim supply, the deemed supply rule remains. The vendor (as a CCAE or IDZ operator) is entitled to an input tax deduction against the subsequent supply, based on the tax fraction of the lesser of:

(i) the open market value, or (ii) the output tax accounted for in terms of the deemed supply rule.

Example 1

A vendor (i.e. a CCA enterprise) removes computer equipment, used in the course of making taxable supplies, from the CCAE to a supplier located in South Africa. The removal occurs in order to have the equipment repaired. The South African supplier instead purchases the equipment within the 30-day removal period (the proceeds are then used by the vendor as an offset against another computer equipment purchase from the supplier). Assume that the computer equipment is actually supplied for R10 000 (but has an open market value of R11 000 on the last day of the period envisaged in section 8(24) (the deemed supply rule).

The vendor charges output tax on the supply of the goods under the basic rule of section 7(1) (a). As a result of the proposed amendment, section 8(24) no longer applies to those goods (despite the failure to return those goods within the required period).


Example 2

A vendor (i.e. a CCA Enterprise) removes telephone equipment, used in the course of making taxable supplies, from the CCAE to a supplier located in South Africa. The removal occurs in order to have the equipment repaired. The repairs take longer than expected and the goods are returned after the required section 8(24) period (30 days in this instance). The vendor then sells the equipment a few months later to another supplier. Assume that the telephone equipment has an open market value of R1 000 on the last day of the period envisaged in section 8(24) and a market value of R 1 400 on the day that it is returned to the CCAE. The actual sale price for the equipment is R1 600.

In terms of section 8(24) (the deemed supply rule), the consideration for the deemed supply is R1 000. The vendor has to account for output tax of R122.80. The vendor now qualifies for relief of R122.80 (14/114 x R1 000 which is the lower of the open market value or the consideration). This amount acts as an offset against the VAT output otherwise due on the actual sale.

Amendments to the Value-Added Tax Act: Section 8(24) proviso Section 16(3)(n)


Public-private partnerships

A Public-private partnership (PPP) falls within the definition of a ‘designated entity’. All payments made by any public authority or municipality to a designated entity were subject to VAT if the payments were in respect of a taxable supply made by that designated entity. The legislation improperly assumed that the nature of the PPP was a special purpose entity when in fact a PPP is an agreement that may or may not result in a special purpose entity.

The 2008 amendment subjects all payments made to a PPP by any public authority or municipality to a VAT charge of 14% irrespective of whether the PPP agreement results in a special purpose entity. Ring-fencing is also provided to ensure that the only the party’s activities in respect of the PPP agreement fall into the ambit of a designated entity. As a result, any payments made by a public authority or municipality to or on behalf of that designated entity’s ring fenced activities will be subject to VAT at the standard rate.

Amendments to the Value-Added Tax Act:Paragraph (iii) of the definition of ‘designated entity’ in section 1


Supply of right to receive money under a rental agreement

The supply of financial services is exempt from VAT. The transfer of ownership of a debt security, inter alia, is an example of financial services that enjoy the exemption. The definition of a debt security includes an interest in or right to be paid money owing by any person. If a debt security is in relation to a rental agreement, the transfer of ownership of the debt security is no longer exempt but is subject to VAT at 14%. This charge is in light of the anti-avoidance provision of section 2(4)(b), which excludes from the ambit of financial services the transfer of any interest in or right to be paid money owing by any person under a rental agreement.

Certain schemes were contrived to abuse the provisions of section 2(4)(b). The following observation regarding VAT and bare dominium structures was made in Annexure C of the 2007 Budget Review:

“It was mentioned in last year’s Budget that certain taxpayers were entering into bare dominium structures designed to disguise actual financial services as rental payments, thereby misusing the statutory exception to the financial services definition. As a result input credits are claimed even though no subsequent taxable supplies are made. The investigation has now been completed and the VAT implications will be clarified by legislative amendment.”


A typical supply of the right to receive money under a rental agreement [section 2(4)(b)] can be explained as follows:Step 1: The lessor and lessee enter into a 20 year rental agreement with rent being payable on a monthly basis. (In this example the rental amount payable for the first month is R11 400, including VAT).Step 2: The lessor cedes the right to its income under the rental agreement. Excluded from the cession are the obligations of the lessor in terms of the rental agreement, and therefore the obligation to make the property available to the lessee remains with the lessor. Step 3: The financier pays to the lessor the present value of the aggregate rental amounts (excluding VAT) payable in terms of the rental agreement.Step 4: The lessee pays the financier the rental amounts in terms of the rental agreement. These rentals amounts are inclusive of VAT at 14 per cent. Under a different structure, the lessee would pay the VAT exclusive rental amount to the financier and the VAT component to the lessor.

The VAT implications of the transactions are as follows:

Pre-cession: The lessor declares VAT on the monthly rentals (i.e. R1 400), and the lessee claims input tax on the rental paid (R1 400).

Post-cession: The lessor must charge VAT on the supply of the right to receive money under a rental agreement to the financier. The VAT implications for the lessor and the lessee are the same as above. (It should be noted that the lessor, and not the financier, is legally responsible for making the property available to the lessee; only the right to receive the income was supplied to the financier and not the obligations attaching itself to the rental agreement). The VAT levied on the supply made to the financier (i.e. of the right to receive the income under the rental agreement) is not subject to input tax in the hands of the financier. This result follows because the financier did not incur the input tax to make taxable supplies – the transaction is a pure financing/lending arrangement. It is understood that some financiers argued that the incurred input tax was deductible as the role of the lessor was subrogated to that of the financier.

The 2008 amendment deletes section 2(4)(b). Henceforth, the transfer of a right to receive money (i.e. a debt security) in terms of a rental agreement will be exempt from VAT.

Amendment to the Value-Added Tax Act: Deletion of section 2(4)(b)

Effective from 21 October 2008 and applies in respect of agreements entered into on or after that date.

Land reform transactions

The VAT Act did not contain any provisions aimed at providing relief to land reform transactions. As a result, normal VAT principles applied, adding to the government’s acquisition cost. In terms of a now-defunct ruling issued by SARS, land reform transactions were zero rated for VAT purposes on the basis that such transactions constituted transfer payments.

The land reform programme consists of two components: restitution and redistribution programmes.

Land restitution envisages the restitution of rights in land to persons or communities dispossessed of these rights as a result of past racial discriminatory laws or practices.

Land redistribution envisages:

(i) The designation of certain land.(ii) Regulation of the subdivision of land (and the settlement of persons thereon), and (iii) Provision for the rendering of financial assistance for the acquisition of land and for the securing of

tenure rights.

Key transactions that occur within the land reform programme can be summarised as follows: Government purchases land from the seller (who may or may not be a vendor) and pays for the

purchase wholly from designated funds. The land is then designated for certain beneficiaries. The beneficiary purchases the land from a seller (who may or may not be a vendor) and pays for a

portion of the purchase price. Government pays the purchase price of the other portion of the land from designated funds.


In the first scenario, government transfers the land to the beneficiaries after a period of time, normally ranging from one to three years. Some of the beneficiaries may or may not be vendors that carry on a VAT enterprise. If government purchases land from VAT registered vendors, the VAT paid by government was an added cost (as government is not a VAT vendor). If the seller is not VAT registered, no Transfer Duty was leviable on these acquisitions by the government (as government is exempt from the Transfer Duty). However, the Transfer Duty may represent an added cost when Government transfers the land to an ultimate beneficiary.

In terms of the 2008 amendment, all land supplied as part of the land reform regime and paid for by government is zero rated for VAT purposes if the seller is a VAT vendor. An exemption from Transfer Duty is also provided for if land is transferred by government to land reform beneficiaries. However, beneficiaries will be prohibited from claiming a notional input tax on the land (if these beneficiaries are VAT vendors). As a collateral matter, it is proposed to zero rate the quantum of the grant or advance contributed by government if government and the beneficiary contributed to the purchase price of the land.

Amendment to the Value-Added Tax Act: Paragraphs (b)(iv) and (b)(v) of the definition of ‘second-hand goods’ in section 1 Sections 11(1)(s) and (t)

The amendment will come into operation on a date to be determined by the Minister of Finance by notice in the Gazette and applies to fixed property acquired on or after that date.

Storage warehouses

If imported goods were entered for storage in a licensed Customs and Excise storage warehouse and had not been entered for home consumption, any supply of those goods (before they were entered for home consumption) was zero rated.

Foreigners who store and supply goods in a licensed Customs and Excise storage warehouse fall within the ambit of an enterprise and are liable to register for VAT upon compliance with section 23 of the VAT Act. The reason for allowing the zero rating of goods imported and entered into a storage warehouse was to unlock input tax that was borne by the vendor. It become apparent, however, that certain foreign businesses preferred not to register for VAT.

The supply of goods imported and entered for storage in a licensed Customs and Excise storage warehouse (provided that it has not been entered for home consumption) is no longer zero rated but instead is exempt from VAT. If the person storing and supplying goods in a licensed Customs and Excise storage warehouse elects to register as a vendor, the supplies made by that person in the licensed Customs and Excise storage warehouse are zero rated in terms of section 11(1)(u) of the VAT Act.

Amendment to the Value-Added Tax Act: Section 12(k) Proviso (ii) to section 13(1)


TRANSFER DUTY ACT

Land redistributions

As noted above (see notes on VALUE-ADDED TAX: Land Reform Transactions) a Transfer Duty has also provided for if land is transferred by government to land reform beneficiaries.

ESTATE DUTY

Retirement fund lump sum benefits

Estate duty was previously levied on lump sum benefits payable in terms of a pension benefit on the basis that the benefit was deemed to be part of the deceased’s estate. Pension annuities are exempt from Estate Duty.


Most people rely on a pension benefit to address the potential financial problems of the surviving spouse and dependant children upon the death of the family’s income provider. It is not in line with government’s social objectives to penalise the beneficiaries by reducing the value of the benefit, especially if the family’s overall economic circumstances have declined. Accordingly, an exemption has now been granted for any lump sum benefit from a retirement fund (i.e. pension fund, pension preservation fund, provident fund, provident preservation fund and retirement annuity fund). In addition to the proposed exclusion from ‘deemed property’, retirement lump sums will be specifically excluded from the actual estate, to ensure that certain forms of retirement lump sums do not inadvertently remain within the Estate Duty net. This change is in line with Government’s efforts to promote long-term retirement savings.

Amendment to the Estate Duty Act: Section 3(2)(i) and the deletion of 3(a)bis

Effective from 1 January 2009 and applies in respect of the estate of any person dying on or after that date.

Administrative process

A five year cut-off date has been inserted for purposes of the additional assessment under section 9A of the Estate Duty Act, 1955. The amendment therefore effectively creates a deemed assessment date based on the provisions of the Administration of Estates Act, 1965. In addition, the amendment creates simplified administrative rules for situations in which additional property is found after the estate is wound up.

Amendment to the Estate Duty Act: Section 9

Effective from 1 January 2009.

REPEAL OF THE STAMP DUTIES ACT

The ambit of the Stamp Duties Act, 1968 has been steadily eroded over the last number of years in accordance with modern trends. Currently, the Stamp Duties Act imposes a 0.25% duty on rent payable in terms of lease agreements and Stamp Duties are imposed only on lease agreements of fixed property with periods in excess of 5 years.

Given the limited scope of the Stamp Duties Act, the actual cost of the tax administration and compliance outweighs the benefits of the tax. Moreover, as a matter of theory, the tax is at odds with other aspects of the South African tax system. South Africa has generally avoided an approach that allows two sets of indirect taxes to be imposed on a single transaction. For instance, in the case of immovable property, either Transfer Duty or Value-Added Tax applies (not both). However, under current law, both the stamp duties and the value-added tax can apply to a single commercial real estate leasing transaction.

In view of the above, the Stamp Duty Act will be repealed with effect from 1 April 2009. Notwithstanding the repeal, the provisions of the Stamp Duties Act will continue to apply to all obligations arising from transactions executed prior to the date of repeal.

SECURITIES TRANSFER TAX

De minimis exemption

The Securities Transfer Tax (STT) applies to any transfer of securities regardless of whether the securities exist in certificated (paper) or uncertificated (electronic) form. The transfer charge per share is 0.25% of the purchase price.

Since the introduction of STT on 1 July 2008, a number of complaints have been received from taxpayers having to pay STT of less than R1 on the transfer of securities. In these instances, the administration and compliance costs associated with the charge exceed any potential tax amount due.


A de minimis exemption has therefore been introduced for payments of small amounts of STT. The exemption is linked to the amount of tax (of less than R100) that, in the absence of this exemption, would have been payable to SARS by an unlisted company or the intermediary of a listed company in respect of all the transfers of securities during a month. The proposed de minimis threshold is measured over a monthly period because a ‘per transaction’ threshold would result in a significant reduction of the tax base and could easily be subject to avoidance (i.e. the breaking up of a single transaction into smaller parts so as to effectively multiply the potential application of the de minimis exemption).

Amendment to the Securities Transfer Tax Act: Section 8(1)

Effective from 1 January 2009 and applies in respect of the transfer of a security on or after that date.
