24 February 2016
Published with compliments: FirstRand Group
The Minister of Finance, Mr Pravin Gordhan, offered a “simple message” today when confirming that South Africa “is strong enough, resilient enough and creative enough to manage and overcome our economic challenges”. The Minister also confirmed that there will be “further engagement through the Parliamentary budget process”, where FirstRand Group Tax actively participates on behalf of the Banking Association of South Africa (BASA).
We have attempted to capture some of the changes to South Africa’s tax legislation, which may be of importance to companies within the FirstRand Group. This is by no means a comprehensive summary of the Minister’s speech.
Please note that the corporate, personal income tax and VAT (refer below) rates remain unchanged.
Capital gains tax
The following increases become effective for years of assessment beginning on or after 1 March 2016:
Maximum effective CGT rate
The annual amount above which capital gains becomes taxable for individuals increases from R30 000 to R40 000.
Tax treatment of trusts
Government believes that certain trust funding mechanisms still enable the avoidance of estate duty and donations tax. In order to curb this avoidance, government proposes to ensure that assets transferred and loans granted to a trust are included in the estate of the founder at death and to categorise interest-free loans to trusts as donations.
Additionally, and further to the first interim report on Estate Duty by the Davis Tax Committee, the government will consider measures to limit the use of discretionary trusts for income-splitting and other tax benefits.
Avoidance schemes in respect of share disposals (share buy-backs)
Share buy-back transactions, where a target company buys-back the shares from a seller, whilst issuing new shares to a prospective buyer, could potentially be seen to avoid the normal tax consequences attendant on share disposals. In this regard, sellers generally receive proceeds in the form of exempt dividends or a return of capital, while the amount paid by the buyer generally qualifies as contributed tax capital of the target company. Such transactions may accordingly, in substance, constitute share sales that ought to be subject to normal tax. The wide-spread use of these types of arrangements will be reviewed to determine if additional countermeasures are required.
Securities lending and collateral arrangement provisions to be amended… slowly
In 2015, certain amendments were made to the “securities lending arrangement” definition and the “collateral arrangement” definition was introduced to cater for the outright transfer of collateral in limited circumstances.
While the dispensation provided for was welcomed, its application was very limited (including a 12 month limitation) and BASA made various submissions to National Treasury in this regard. Government has acknowledged that the 12 month limitation rule is too restrictive and has confirmed that a gradual approach will be adopted to address the concerns raised. Therefore, it is not clear whether all of the BASA submissions will be dealt with in the 2016 tax legislation amendments, but we will remain optimistic.
Subordination in the context of hybrid debt instruments
Section 8F of the Income Tax Act (the Act) deals with so-called “hybrid debt instruments”, which are essentially debt instruments which have equity-like features embedded in the terms of the arrangement. This includes, for example, where the repayment of the instrument is dependent on the financial condition of the borrower. The effect of section 8F is to re-characterise the interest payable in respect of the instrument as a dividend in specie for both the borrower and the lender. National Treasury has become aware of instruments which may in certain circumstances be regarded as hybrid debt instruments to the extent that the instruments are subject to a subordination agreement, which may result in the instrument becoming repayable only upon an improvement in the financial condition of the borrower. National Treasury proposes that a concession be made to exclude debt instruments subject to a subordination agreement from being regarded as hybrid debt instruments. What form this concession will take is not clear, however this will result in welcome relief to this unintended consequence.
Refinement of third-party-backed share provisions
Pre- 2012 legitimate transactions: In 2012, National Treasury introduced section 8EA of the Act as a way to curb avoidance concerns relating to preference share transactions that are guaranteed/secured by third-parties. The application thereof resulted in dividend yields being deemed to be income. The introduction of this section was applied retrospectively to dividend yields from transactions that were already in existence. The Minister has indicated that these rules may adversely affect certain legitimate transactions and as such will consider relaxing the rules in relation to transactions entered into prior to 2012.
Addressing circumvention of anti-avoidance measures: The Minister indicated that there have been several schemes that have been identified where transactions are structured in a manner that circumvent third-party anti-avoidance rules. One of these schemes relates to trust-holding mechanisms, where investors acquire rights in trusts and subscribe for preference shares through the trust. Measures will be considered to restrict the circumvention of these anti-avoidance rules.
Venture capital funding for small businesses
The venture capital company regime was introduced in 2008 with the aim of encouraging equity funders to invest in small businesses. However, certain provisions which apply to these venture capital companies have proven onerous and discouraged potential investors from taking up the incentives offered. Government will be exploring measures to mitigate this consequence.
Clarification on the application of asset-for-share transactions to natural persons
Section 42 of the Act provides tax roll-over relief for so called asset-for-share transactions. In the context of a disposal of an asset by a natural person, to qualify as an “asset-for-share transaction” there must be inter alia a disposal of an asset to a company (which is a resident) in exchange for the issue of equity shares in that company and that person “is a natural person who will be engaged on a full-time basis in the business of that company, or a controlled group company in relation to that company, of rendering a service”.
It is this last requirement of the asset-for-share transaction definition that has caused uncertainty in the context of transactions implemented by natural persons. For example, the following interpretations have been given to the abovementioned wording:
• That it only applies to circumstances where the natural person is effectively corporatizing his / her / their professional service firm (e.g. the incorporation of a firm of architects who were previously operating as a partnership) (the “Narrow Interpretation”). This view has often been supported on the basis that the wording specifically refers to the business “of rendering a service” and it was understood that the intention was for section 42 of the Act to apply to these limited arrangements.
• That the wording should be interpreted widely and apply in all circumstances when the natural person is engaged on a full time basis in the business of the acquiring company (the “Wide Interpretation”). This interpretation is often relied on in circumstances where companies implement corporate reorganisations which involve management / employees.
Government has announced that the qualifying conditions for these transfers were put in place to ensure that “only substantial and long-term transfers of assets for shares benefit from the exemption, and to support the incorporation of professional service firms”. It was thus indicated by National Treasury that because some taxpayers have indicated that the limits to the conditions are unclear, it is proposed that section 42 of the Act be amended to set them out more clearly.
It is not clear from the Annexure C proposal whether the legislation will be clarified in line with the Narrow or Wide Interpretation. However, given the reference to the fact that the intention of section 42 of the Act was to support the incorporation of professional service firms, it is anticipated that the Narrow Interpretation will be adopted. It is important to appreciate that the amendments proposed are for clarification purposes and thus does not change National Treasury or the South African Revenue Service’s (SARS) existing interpretation of these provisions.
Taxation of real estate investment trusts
Qualifying distribution rule: As recoupments, such as building allowances previously claimed, are included in the definition of “gross income” in section in 1 of the Act, they will affect the 75 per cent rental-income analysis required to determine if a distribution constitutes a “qualifying distribution” applicable to real estate investment trusts (REITs). It is proposed that the provisions relating to the “qualifying distribution” rule in section 25BB of the Act be reviewed to remove this anomaly.
Interaction between REITs and section 9C: The current provisions of section 9C of the Act are unsuitable for REITs. In this regard, it is noted that dividends received from REITs are taxable, whilst expenditure incurred to produce these taxable dividends will effectively not be deductible if one takes account of the provisions of section 9C(5) of the Act. To resolve this anomaly, it is proposed that a provision be added to the Act that section 9C(5) does not apply to shares in REITs.
Urban Development Zones
In terms of section 13quat of the Act, deductions are allowed in respect of the erection or improvement of buildings in urban development zones. The aim of the incentive is to promote urban renewal since it stimulates investment in the construction and renovation of commercial and low-cost residential buildings in the inner city. It is proposed that the Urban Development Zone tax incentive be made available to more municipalities, to further assist the many inner cities that remain derelict, subject to the application of a set of strict criteria and an adjudication process.
Learnership and employment tax incentives
In 2002, the learnership tax incentive was introduced which aimed to encourage education and work-based training. Subsequently, in 2014, the employment tax incentive was introduced, to promote the employment of young workers. However, both of these incentives will expire towards the end of 2016. In order to assess the need for such incentives going forward, SARS has made data on the employment tax incentive available and a review is under way. It is envisaged that results from the review of both incentives will be published and presented to Parliament by the third quarter of 2016. However, if there are delays in completing these reviews, government may consider extending the incentives by one year.
Increasing the incentive for employers to provide bursaries
In order to support skills development, government proposes to increase the fringe benefit tax exemption thresholds for bursaries provided to employees or their relatives. The income eligibility threshold for employees to access the relief will be increased from R250 000 to R400 000. The value of qualifying bursaries will be increased from R10 000 to R15 000 for National Qualifications Framework levels 1 to 4, and from R30 000 to R40 000 for levels 5 to 10.
Research & Development (R&D) Tax incentive
Given the challenges faced by businesses in trying to access the R&D Tax incentive, the Minister of Science and Technology established a task team to investigate the challenges with this incentive. The work should be completed by April 2016, after which proposals will be considered to enhance this incentive.
Transitional tax issues resulting from regulation of hedge funds
The budget proposed that the tax relief sections (assets-for-share s42 and amalgamations s44) contained in the Act be extended to include the hedge fund industry’s transition to the new regulated Collective Investment Scheme Hedge Fund regime.
Solvency assessment and management framework (“SAM”) for long-term insurers
The Insurance Bill, which gives effect to the Financial Services Board’s SAM framework, is likely to come into operation in 2017. As a result, and as agreed with industry members, Parliament has proposed that the changes to align the tax valuation method for long-term insurers with SAM be further considered in 2016.
Tax administration – Extension of objection and condonation periods
The current period for lodging an objection under the Tax Administration Act (TAA) is 30 business days from the date of assessment. This has been shown to be too short in practice, particularly in complex matters, resulting in a large number of applications for condonation. It is therefore proposed that a longer period for lodging an objection and condonation be considered. Amendments to the dispute resolution rules will also be required to give effect to this proposal, which could result in a change to the rules for failing to comply within the prescribed time periods.
Tax administration – Understatement penalty provisions
Non-compliance with the Act, in so far as where taxpayers under pay tax, is subject to penalties in terms of section 210 and section 223 of the TAA. In terms of section 223, the penalty system is determined based on the nature of the underpayment and extends to punitive measures where the underpayment resulted from say, gross negligence or general anti-avoidance (intentional tax evasion). Amendments will be considered to enhance clarity with regard to general anti-avoidance matters.
Transfer pricing and BEPS
In order to protect the South African tax base, government confirmed its commitment to act aggressively against the evasion of tax through transfer pricing abuses, misuse of tax treaties and illegal money flows.
In order to curb potential worldwide tax avoidance, the OECD global standard for automatic exchange of financial information is coming into effect from 2017, where tax authorities will be exchanging financial information. Individuals and firms that hold assets and income offshore which have not been disclosed to the South African Revenue Service will be caught by this regime. In response to requests by affected parties who wish to regularise their affairs, National Treasury, SARS and the Reserve Bank are proposing to relax the voluntary disclosure rules for six months, from 1 October 2016, to allow non-compliant individuals and firms to disclose assets held and income earned offshore.
Foreign hybrid debt instruments
National Treasury has identified certain transactions involving hybrid debt instruments which potentially erode the South African tax base. This occurs in instances where a foreign resident taxpayer issues a debt instrument to a South African lender, the effect of which is to re-characterise the interest as a dividend in specie in the hands of the South Africa lender. In these circumstances, the South Africa lender would treat the dividend as exempt from normal tax in South Africa, while the offshore non-resident may be entitled to a tax deduction in respect of the interest incurred on the instrument. This results in a mismatch in treatment between two jurisdictions. National Treasury will implement measures to counter these transactions, which measures are effective as at 24 February 2016.
Withdrawal of the proposed withholding tax on service fees
The withholding tax on service fees was first announced in the 2013 Budget Speech and was to be effective from 1 March 2014. Thereafter, the effective date of this withholding tax was delayed to 1 January 2016 to allow for further public consultation. The withholding legislation stated that any service fee that is paid by any person to or for the benefit of a non-resident to the extent that the amount is regarded as having been received by or accrued to the non-resident from a South African source should attract service fee withholding tax at a rate of 15% (subject to double taxation agreement relief).
On 3 February 2016, SARS released a new Public Notice which inter alia requires residents, in terms of the reportable arrangement sections of the TAA, to report on South African-sourced service fees that are paid to a non-resident which exceed R10 million in aggregate. Accordingly, it has been proposed that withholding tax on service fees be withdrawn from the Act and dealt with under the reportable arrangement sections contained in the TAA (since this reporting is already in effect).
Tax base protection and hypothetical foreign tax payable due to foreign group tax losses
Controlled Foreign Companies’ (CFC) income is exempt from tax in South Africa in cases where the CFC pays an amount of foreign tax equal to at least 75% of the tax that would have been due and payable in South Africa, had the CFC been a South African tax resident. The high-tax exemption is based on a calculation of a hypothetical amount of foreign taxes, by disregarding foreign group company losses. This created an unintended anomaly where an exemption is granted in situations where no foreign tax is actually payable. The adjustment for foreign group losses in the calculation for high-tax exemption will therefore be deleted.
Foreign companies and collective investment schemes
Currently, section 9D of the Act taxes South African owners of foreign-owned entities on amounts equal to that entity’s earned income. This causes uncertainty for Collective Investment Schemes (CIS) which invest in a foreign CIS. The uncertainty is whether it is the local fund or the investor in the local fund that should be considered to be the holder of the participation rights in the foreign CIS. For clarity purposes, it is proposed that a CIS be excluded from applying section 9D to investments made in foreign companies.
Interest withholding tax where interest is written off
Where interest withholding tax is paid on interest that becomes due and payable, but the interest is subsequently written off as irrecoverable, there is no mechanism for a refund of interest withholding tax already paid. Government has proposed that a refund for this interest withholding tax paid be allowed.
Bad Debt Deduction
Section 11(i) of the Act provides for a deduction of any debt owing to the taxpayer that has gone bad during the year, provided that this amount is or was included in the taxpayer’s income. Where a taxpayer, not being a money-lender (e.g. not FirstRand Bank), lends an amount denominated in a foreign currency to another person, any exchange differences arising on such a loan are taken into account in the determination of taxable income as an inclusion in or deduction from income, as the case may be. However, where such a loan becomes bad, no deduction is available under section 11(a) of the Act regarding any exchange gains included in income. The loss is of fixed, rather than floating, capital. The result is that a taxpayer would not be entitled to any tax relief in relation to irrecoverable amounts on which they have been taxed. Based on the above, it is proposed that section 11(i) of the Act be amended to specifically apply to any exchange difference in respect of a debt that has been included in income.
Valued-Added Tax (VAT)
The VAT standard rate remains unchanged at 14%.
Taxation of non-executive directors’ fees
It is proposed that the taxation of directors’ fees be further investigated in terms of whether PAYE should be deducted or VAT levied.
The following VAT legislative amendments are proposed:
• The VAT implications of loyalty programmes and the redeeming of loyalty points will to be analysed.
• Input tax claims may be made within 5 years. It is proposed that certain claims will only be permitted in the period in which the supply occurred.
• The determined value of company cars for VAT purposes is to be aligned with the Seventh Schedule of the Act.
• Surrendering the right to receive the money between connected persons could give right to an unintended output tax liability and will be further researched.
• Grants received from the National Skills Fund to be aligned to grants received from Sector Education and Training Authorities (SETAs).
The transfer duty rate on property sales above R10 million will increase from 11% to 13%. The new rate will become effective for property acquired on or after 1 March 2016.
Transfer duty rates 2016/2017:
|Property Value (R)||Rates of tax|
|R0 – R750 000||0% of property value|
|R750 001 – R1 250 000||3% of property value above R750 000|
|R1 250 001 – R1 750 000||R15 000 + 6% of property value above R1 250 000|
|R1 750 001 – R2 250 000||R45 000 + 8% of property value above R1 750 000|
|R2 250 001 – R10 000 000||R85 000 + 11% of property value above R2 250 000|
|R10 000 001 and above||R937 500 + 13% of property value above R10 000 000|
Securities Transfer Tax (STT)
No changes to STT are proposed.
The general fuel levy will increase by 30c per litre on 6 April 2016.
Environmental, sugar tax and other indirect taxes
As of 1 October 2016, a new tyre tax will be implemented. A new tax on sugar-sweetened beverages will be implemented on 1 April 2017. The draft carbon tax bill will be placed on hold.
The 2016 tax legislation will effect various technical corrections mainly to cover inconsequential items, such as typing errors, grammar, updating or removing obsolete provisions, changes to effective dates, but also include the incorporation of regulation and commonly accepted interpretations into formal law. A final set of technical corrections relates to modifications that account for practical implementation of the tax law. Although tax amendments go through an intensive comment and review process, new issues arise once the law is applied. Technical corrections of this nature are almost exclusively limited to recent legislative changes.
Should you require any further information in relation to any of the items discussed above, or have any related queries, please contact one of the following members of the FirstRand Group Tax team:
Leon Coetzee : Head of Group Tax – Tel: (011) 282 – 1391
Mark Heffer: Head of Direct Tax – Tel: (011) 282 – 1381
Ian Cloete: Head of Indirect Tax – Tel: (011) 282 – 1654
Tracy Brophy: Head of Tax Risk Management – Tel: (011) 282 – 1393
Anneline Janse van Rensburg: Head of Insurance and Asset Management Tax – Tel: 087 320 5077