The President has given effect to the 2021 tax proposals by signing three tax Acts into law. On 14 January 2022, the President gave his assent to the Rates and Monetary Amounts and Amendment of Revenue Laws Act No. 19 of 2021 (“Rates Act”), the Taxation Laws Amendment Act No. 20 of 2021 (“TLAA”) and the Tax Administration Laws Amendment Act No. 21 of 2021 (“TALAA”). These Acts were promulgated on 19 January 2021.
The Rates Act gives effect to changes in tax rates and certain monetary thresholds, whereas the TLAA and the TALAA contain more profound technical and administrative changes. Highlighted below are 5 key changes taxpayers need to know.
- Assessed losses will be restricted – the TLAA enacts the proposal to restrict the offset of the balance of assessed losses carried forward to 80% of taxable income. To cater for all sectors and recognise that not all companies have sufficient cash flow to face an additional tax burden in the first year they become profitable, the TLAA imposes a R1 million threshold beyond which the restriction applies. Therefore, the company will be able to set off the higher of R1 million or 80% of taxable income. The amendment takes effect on the day when the Minister of Finance announces the reduction in the corporate tax rate in the annual Budget Speech.
- Curbing ETI abuse – Government amended the Employment Tax Incentive Act to counter schemes where employers claim the ETI in respect of simulated employment agreements. These schemes involved the “employment” of students who do not perform any work or gain any experience for the employer, which undermined the objective of the ETI. The TLAA amends the definition of “employee” to ensure that the substance of the employment relationship will determine eligibility for the ETI claim, as opposed to its legal form. This principle is bolstered by the inclusion of a proviso that the ETI shall only apply to employees not mainly involved in the activities associated with studying. Finally, the TLAA also stipulates that only remuneration paid in cash will be taken into account to determine if the employee qualifies for the ETI. These amendments come into operation on 1 March 2022, which deviates from the initial intention to have a retroactive effective date of 1 March 2021.
- Section 7C proposals withdrawn – the proposals to bolster the provisions that curb the tax-free transfer of wealth to trusts using low interests or interest free loans have been withdrawn. The reason for this decision is the recognition that the proposal seeks to address avoidance schemes that fall outside the scope of section 7C. That being said, National Treasury indicated that it may introduce more specific anti-avoidance measures to counter the mischief under consideration.
- Allowing use of retirement interests to acquire annuities – previously, a person was restricted in terms of the annuities they may acquire upon retirement. The TLAA increases the flexibility for a retiring member by expanding the types of annuities a member can purchase upon retirement. For example, the full value of the member’s retirement interest following commutation can be utilised to purchase a combination of living and guaranteed annuities. In line with current legislation, the portion of the retirement interest utilised to purchase each type of annuity must exceed R165 000. The effective date for this amendment is 1 March 2022.
- Scrapping of proposed exit tax on retirement interests – the TLAB contained a proposal to tax the retirement interests of individuals upon cessation of their South African tax residency. The proposal was widely opposed by industry stakeholders and the Expat Petition Group and after hearing submissions in Parliament, it was announced that the proposal will be withdrawn. The decision to scrap (for now) the proposal is confirmed with promulgation of the TLAA.
Taxpayers need to speak to their advisors to understand these changes and when they will come into operation. In particular, we look forward to the Budget Speech for a potential reduction in our corporate tax rate.
Written by Jean du Toit, Head of Tax Technical at Tax Consulting SA