Taxation - Proposed Legislation - Draft Taxation Laws Amendment Bill 2010
The National Treasury has published a draft Taxation Laws Amendment Bill 2010 together with a draft Explanatory Memorandum dealing with proposed amendments to the Income Tax Act, 1962. The proposed amendments provide inter alia for the following:
1. Personal tax:
• Employee car schemes - employer owned vehicles will deemed to be used by employee / taxpayer for private purposes except to the extent otherwise proved. There will also be an increase in the amount to be included as a fringe benefit.
• Employment severance payments and retirement fund settlements - changes to the way in which deductions for tax must be made - withdrawal of R30,000 allowance.
• Key man insurance policies - further restrictions on circumstances under which employers may deduct premiums for tax purposes.
• Interest allowances - additional limitation - allowances may not be used in respect of interest on loans to related parties..
• Commutation (early withdrawal) under annuity policies - provision for tax consequences where policies are commuted by spouses and other dependants.
• Transfer of benefits under umbrella retirement funds - employees may transfer their retirement benefits to pension preservation or provident preservation funds where employer has terminated participation in an umbrella fund.
• Retirement fund benefit payments - provision for deduction of income tax at source from payments to third parties (such as creditors of members).
• Professional fees and indemnity payments for employees - to be included as a fringe benefit unless payments meet narrower criteria.
• Share incentive schemes: Dividends in scheme shares will be subject to income tax but free of standard tax on companies. A participating employee may substitute scheme shares by a swap with another employee and no adverse tax consequences will arise from the substitution provided that the substitute shares are in the same employer or and entity associated with the employer. Where a participating employee acquires shares of the employer from another employee, the shares will be deemed to be acquired in the course of employment and any gain on those shares will be subject to income tax.
• Standard income tax on employees (SITE) - to be phased out and replaced with normal income tax over three years.
2. Exemptions from income tax - professional sports bodies are granted various tax exemptions and concessions to promote development of amateur sport.
3. Tax exempt entities - loss of status - if a tax exempt entity (or public benefit organisation) loses its tax exempt status, it may elect either to transfer its assets to another tax exempt entity or to pay income tax on the value of its remaining assets.
4. Deductable donations to trans-frontier parks - Donations to trans-frontier wildlife parks will be deductable for tax purposes notwithstanding that the parks extend outside South African territory.
5. Limitation of deductions in respect of financial instruments - It is proposed to overturn the decision in Commissioner for Inland Revenue v Standard Bank  All SA 512 (A) by introducing a new section 24K which provides that where a taxpayer has received tax free income on financial instruments (e.g. dividends on preference shares) and has also incurred expenses in respect of its business of trading in financial instruments (e.g. interest on borrowings), the expenses are disallowed to the extent of the tax free income unless the taxpayer proves that the expenses were not incurred to generate the tax free income (e.g. that the borrowing were not made to fund the acquisition of the preference shares).
6. Islamic Finance - Provision is made to accommodate three types of Islamic finance products. The products are investment and finance products designed to achieve returns and risk profiles similar to conventional products but without actually referring to interest. The proposals involve changes to income tax, value-added tax and transfer duty provisions so that the Islamic products are treated similarly to their conventional equivalents.
7. Small/Micro business turnover tax - Businesses with a turnover of less than R1 million p/a that qualify for the simplified turnover tax (instead of income tax, capital gains tax, secondary tax on companies and value-added tax) are to be given dispensations to allow them to use shelf companies. The rules relating to qualification for turnover tax are relaxed to allow businesses that provide a certain level of professional services (no more than 20% of turnover) to qualify. Various changes are proposed to the way in which turnover tax is calculated.
8. Corporate reorganisations involving plantations - Simplification of income tax rules relating to the transfer of plantations.
9. Asset-for-share transactions -waiver of tracing requirement in the case of share-for-share listed company reorganisations - the requirement in section 42 that a company must acquire target shares in the same character as the transferor will be eliminated in certain circumstances.
10. Inter-group transactions - roll-over provisions in section 45 relating to transfer of capital assets and trading stock from one group company to another. The provisions shall no longer apply to trading stock that is "regularly and continuously" disposed of by the transferee company. Furthermore, the roll-over provisions will no longer apply automatically - for the provisions to apply, the taxpayer must make a written election at the time of conclusion of the agreement for the transfer.
11. Valuation of financial instruments held as trading stock - must be valued for tax purposes at mark-to-market and not at cost.
12. Short-term insurers - the current discretion by SARS to adjust deductable reserves will be extended pending finalisation of the review by the FSB of prudential requirements relating to short-term insurers. Furthermore, deductions allowed as claims incurred by policyholders, but not yet reported ("IBNR") cannot be claimed again as estimated unearned premiums.
13. Dividends Tax - Further refinements to the proposed dividends tax. The dividends tax is to replace secondary tax on companies (STC) once the government has renegotiated international tax treaties to ensure that the government receives some of the dividends flowing offshore. Dividends tax, generally speaking, is provided for in and is levied at the rate of 10% on dividends paid by a company to any person other than a South African company (see sections 64E and 64F). Refinements now proposed are:
• Where a company' shares are dematerialised, the obligation to withhold and account for dividends tax will be shifted to the applicable central securities depository participants (a "regulated intermediary"). In other cases, the obligation to withhold and account for dividends tax will be shifted to other regulated intermediaries such as brokers, investment managers and collective investment scheme management companies;
• Regulated intermediaries will be responsible for administration involved in determining whether beneficial owners are exempt from dividends tax. In certain cases, such as with foreign shareholders, declarations must be obtained. A declaration need not be obtained for each and every dividend payment.
• SARS will bear credit risk relating to the insolvency of regulated intermediaries. Where a regulated intermediary fails to make a deduction of dividend tax, the client of the regulated intermediary will remain responsible for the dividends tax.
• For purposes of dividends tax, a foreign dividend will be defined with reference to the foreign tax law definition of a dividend of the country of residence of the company making a distribution. This approach is in line with tax treaties. In the event that the foreign country of residence does not have an income tax (or similar tax system), reference must be made to that country's company law.
• Transitional rules proposed for the phasing in of dividends tax to avoid overlapping STC and Value Extraction Tax (VET).
14. Relief for transferring residential properties from trusts and companies - relief from tax for the transfer of residential properties from trusts and companies to individuals is extended for another year and made subject to further qualifications.
15. Company law reform - Changes to tax legislation in order to accommodate changes in company law. For example, the new companies act does away with par value shares whilst various tax provisions still refer to balance sheet items peculiar to par value shares.
16. Exemption of tax on foreign dividends - narrowing of the participation exemption - As a general rule, foreign dividends are taxable as ordinary revenue unless, broadly speaking, the recipient of the foreign dividend holds hold at least 20% of the total equity share capital and voting rights in the distributing company. This is referred to as the participation exemption. Changes to the participation dividend are proposed in order to restrict its application to discretionary dividend distributions and to introduce further anti-tax avoidance provisions.
17. Restricting cross-border interest exemption - As a general rule, interest payable by residents to non-residents is not subject to South African tax. Changes are proposed to exclude from the exemption private loans by non-residents to residents. Interest on various other loans, including government bonds, bank deposits and listed bonds remain unchanged.
18. Transfer pricing - Transfer pricing rules are, generally speaking, aimed at ensuring that taxpayers do not allocate income and expenses artificially in different tax jurisdictions so as to arbitrage different tax regimes. Changes are proposed to allow SARS greater power to disregard and recast for tax purposes arrangements that SARS do not consider to be at arms length.
19. Tax relief to foreign companies - Various exemptions are to be extended to foreign companies to make South Africa more tax friendly as a gateway to other African countries. The 3:1 thin capitalisation rule will be relaxed in respect of foreign company loans made via South African subsidiaries of foreign companies into other African countries. There is will also be a concession on attributing income to non-residents in circumstances where they are deemed to have a presence in South Africa only by virtue of carrying on business in South Africa using partnerships and trusts.
20. Thin capitalisation rules - branches of foreign companies - financial assistance by a non-resident to another non-resident with a permanent establishment in South Africa will now be subject to the thin capitalisation rules. This change effectively seeks to place foreign-owned South African branches on par with foreign-owned South African subsidiaries.
21. Foreign currency rules - Tax legislation generally presupposes that taxpayers carry on their business in South African Rand with provisions relating to gains and losses in respect of foreign currency transactions. Changes are intended to accommodate financial reporting in a foreign currency within the tax rules. New rules will also be introduced for tax treatment of abandoned hyperinflation currencies.
22. Value-added tax - intra group supplies on loan account - The rule that a group company can base a claim for VAT input on the basis on a bad debt if the claim is not paid within 12 months is to be changed to provide that the claim can only be made if there is a written agreement between the relevant group companies regarding the bad debt.
23. Value-added tax - removing the double vat charge on cessation of a vendor's enterprise - provision is made to remove the double VAT charge that can arise when a deregistering vendor has bad debts.
24. Value-added tax - movable goods supplied to a foreign-going ship or aircraft - will be zero-rated.
25. Value-added tax - exit and re-entry into the vat system - clarification that the R100,000 relief on the claw-back of VAT arising on re-entry into the VAT system is a maximum amount.
26. Mineral and Petroleum Royalty Resources Act - Royalty payments to government - Various changes are proposed to rules relating to royalty payments. Provision is made for: defining the term "wind and recovers"; providing that theft, destruction, loss and consumption also trigger royalty payments; temporary exports of minerals for refining purposes will not trigger a royalty payment; providing for increases in tax and deductions where output or extraction rates falls below specified levels; providing that where small mines supply minerals to extractors for refinery purposes, the extractors may be liable for royalty payments; Certain proposed changes specifically related to platinum group metals, vanadium and ferrochrome.
For further information concerning any item in this publication please contact Jurgens Bezuidenhout on JB@JurgensB.co.za or telephone +27 82 922 3671
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