BUDGET & TAX UPDATE Presented by DIETER SCHULZE. The morning ahead 2005 Budget 2004 Tax update –The Taxation Laws Amendment Act 16 of 2004 –The Revenue

BUDGET & TAX UPDATEPresented by

DIETER SCHULZE

The morning ahead 2005 Budget

2004 Tax update– The Taxation Laws Amendment Act 16 of 2004

– The Revenue Laws Amendments Act 32 of 2004

– The Second Revenue Laws Amendment Act 34 of 2004• Share incentive schemes• Assets acquired or disposed of for contingent or unquantified amounts• Assets acquired in exchange for shares issued• Deferral mechanism for disposal or acquisition of equity share• Withholding tax on sale of immovable property by non-residents• Registration of tax practitioners• Advanced tax rulings• VAT

2005 BUDGET

Company tax rate reduced to 29%

Tax and compliance concessions for small business

No change to VAT, STC, CGT, Donations tax or Estate Duty rates

Significant increase in tax threshold those aged 65 and over

Changes to travel allowance and company cars

Personal income taxReduction in personal tax

Tax thresholds

Rebates

Interest exemption

Pensioners

Medical scheme membership Current 2/3 tax free, para 12A of 7th schedule

Encourage broader medical scheme coverage

Extend benefits to self employed

Effective 1 March 2006

– 2/3 to be replaced with a monthly monetary cap that will take into account number of dependants

6

Motor vehicle allowances System of deemed business/pvt mileage

Abuse by high income earners

Encourages purchase of higher value vehicles

Unfairly influences household travel choices

7

Motor vehicle allowances – Cont. Deemed cost & mileage method to be changed from

1/3/2005

Fixed cost element

– Residual value of 30% after 5 years

– Value capped at R360,000 Deemed private km’s

– 14,000 up to 16,000 – 2006 y.o.a

– 16,000 up to 18,000 – 2007 y.o.a

8

Motor vehicle allowances – Cont.

If using actual costs

– Finance charges or lease payments limited to value of R360,000

– W&T limited to value of R360,000 and determined over a period of 7 years from date of original purchase

Company car taxable value

– 1,8% up to 2,5% - 2007 y.o.a

– 4% Second company car remains

9

Subsistence allowance Tax free per diem allowance - no need to keep slips

– Local R60 or R196

– Foreign US$190 Concerns of abuse

In future allowance must be closely linked to travel

Foreign per diem limits to be revised

10

Withholding tax on visiting entertainers and sportspeople

Taxed in SA on SA source income

Tax compliance has been poor

Final withholding tax to be introduced

– On gross payments to entertainer or sportsperson

– 5% for residents of African countries

– 15% for residents of other countries

TRANSFER DUTYIndividuals only

– Threshold for transfer duty increased from R150k to R190k

–Max rate of 8% for values over R330k

Rate remains 10% for corporate taxpayers

Corporate initiativesReduction in corporate tax rate

– From 30% down to 29%

– Immediate 1% neither here nor there

– Sign of things to come

Corporate initiatives – Cont. Reduction in other rates linked to the corporate

tax rate

– SA branches from 35% down to 34%

– Employment companies from 35% down to 34%• Personal service company

• Labour broker

– Long-term insurer policyholder funds and corporate funds from 30% down to 29%

– Gold mining companies formula changed

14

Corporate initiatives – Cont. Tonnage tax regime for shipping industry

Facilitating company restructuring

Refining film incentives

Government grants

Stamp duty on new issue of shares

Duty on debit entries on bank accounts

Business activities of PBO’s

TAX STIMULUS IN SUPPORT OF SMALL

BUSINESS

16

Small business corporationDefinition (sec 12E)

– excludes personal services, to be expanded

– Include personal services

– Provided employees• 4 or more full time, excl member or s/holder or connected• involved in core operations

– Turnover limit up from R5mill to R6mill

17

Small business corporation – Cont. Old tax rate

– R0 - R150,000 15%

– R150,001 and above 30% New tax rates

– R0 - R35,000 0%

– R35,001 - R250,000 10%

– R250,000 and above 29% Accelerated depn allowance 50:30:20 on non-manufacturing

assets purchased after 1 April 2005

Manufacturing assets 100% write off

Removed R20,000 double deduction at start-up

18

Small business Small retailers VAT package

– Simplified method of accounting for Std and Zero rated supplies

– Ready for implementation 1 April 2005

– Applies to vendors with turnover of <R1mill

VAT return filing every 4 months from 1 Aug 2005

– Ease VAT compliance

– Assist with cash flow

– Repeat offenders can be put back to 2 months

19

Small businessSkills development levy

– Obligation on every employer in SA who• is registered with SARS as employer, or• annual payroll > R250,000

– 1% based on remuneration as definedR250,000 threshold to increase to R500,000

Drop the obligation, …..is registered with SARS as employer

20

Small businessSmall PBO’s

– Comprehensive application form and supporting documentation. Process of registration will be simplified.

– Detailed annual tax returns to be simplified

21

Anti-avoidance measuresSection 103

– Past it’s sell-by date

– Ineffective

– Sec 103 to be overhauled

– Discussion paper to be circulated in 2005Provisions dealing with bribes, penalties and

other illegal activities to be introduced

– Clarify inclusion in income and deductibility

INDIRECT TAXES

Duties on tobacco products

Duties on alcoholic beverages

Duties on sun cream and digital cameras

General fuel levy and Road accident fund levy

23

RSC leviesRSC levies discontinued 30 June 2006

– Replaced with alternative tax instruments or funding arrangements

– Alternatives to be agreed by Sept 2005

Supreme Court - Dividends received by certain holding companies subject RSC

– Act to be amended to make clear

– To show they are all heart, no retroactive application

COMPLIANCE MEASURES Single registration for all tax products per taxpayer

E-Filing to be extended

– E-stamping from 1 April 2005, transfer duty, tax on retirement funds, STC, air passanger tax

– Submission of IT12S

– Application for tax clearance certificates for tenders

– Government procurement officers to get access to tax status of applicants

Full view of account for taxpayers and tax practitioners

25

COMPLIANCE MEASURES – Cont. Identifying undisclosed income

– Property transactions

– High net worth individuals department at SARS Voluntary disclosure dispensation

– Incentive to come clean before SARS gets to you

– Waiver of penalties or additional tax

MISCELLANEOUSForthcoming attractions 2005

Individual home office expenses

Certainty for deductible donations

Whole year learnership allowances for part-year learnerships

Foreign tax credits and provisional tax payments

PROGRESS ON IMPLEMENTATION OF TAX REFORM INITIATIVESExchange control amnesty

– 43,000 applications

– 30,000 processed by mid Feb 2005

– Total assets disclosed R65 billion

– Levies expected R2,4 billion• To be used for social and residential infrastructure

28

PROGRESS ON IMPLEMENTATION OF TAX REFORM INITIATIVES Accelerated tax depn urban development zones

– Section 13quat allowances

– 9 municipalities approved so far

– 7 in 2005

– Balance in 2006?

FIFA World Cup 2010

– Tax exemptions required by FIFA

– Amendment in pipeline to accommodate

29

2004 TAX UPDATE

30

DEVELOPMENTS IN 2004 Taxation Laws Amendment Act 16 of 2004

– 27 July 2004

Revenue Laws Amendment Act 32 of 2004

– 24 January 2005

Second Revenue Laws Amendment Act 34 of 2004

– 24 January 2005

Interpretation notes 20 to 26

31

Taxation Laws Amendment Act 16 of 2004

32

Prescribed interest rateLinked to the PFMA rate 1 April 2003

To allow time for SARS to adjust system

– Change takes effect from 1st day of 2nd month following date on which PFMA rate changed

Section 1 “prescribed rate”

– On refunds at 4% below PFMA rate

– On tax owing at PFMA rate

33

Scrapping allowanceSection 11(o), “plant” omitted in error has

now been added

34

Entertainment allowanceSection 11(u)

– Limited to R2,500 or R300 + 5% of taxable income

– Now removed

35

Farming equipmentSection 12B(2), 50:30:20 on cost

– Only applies to farmers

Bio fuel producers

– The whole production chain will now qualify for the allowance

– Machinery, plant, implement, utensil or article

– Brought into use for first time

36

Urban development zonesSection 13quat introduced 2003

Demarcation of municipal areas by 30 June 2004

Too ambitious

Now open ended

37

UIF interest and penaltiesSection 23(d)

Penalties and interest from non-compliance

UIF now added

38

Labour brokersPara 1 of 4th schedule, defines

Para 2(5)(a) deals with exemption certs

– 80% gross inc from 1 client

– Provides services of any other labour broker

– Provides specified employees80% is ignored if 3 full-time, unconnected

employees involved in supply of core services

39

PAYE relief on income protection policies

Para 2(4) of 4th schedule

– Pension

– RAF

– Medical aid contributions, 65 or older

Extended to include

– Premiums on income protection insurance policies

40

CAPITAL GAINS TAX

Valuation date of person that becomes taxable

– Para 1 “valuation date”• Previously applied only to sec 10(1)(cA)

– Now extended to all exempt persons who at any time become taxable

41

CAPITAL GAINS TAX – Cont.

Capitalisation shares

– Para 78 now clarifies rules• Cap shares acquired on date of distribution• Nil base cost• Except to extend treated as dividend• If dividend then base cost = dividend

42

Revenue Laws Amendment Act 32 of 2004

Second Revenue Laws Amendment Act 34 of 2004

43

DONATIONS TO OFFSHORE TRUST

Section 7(8) deemed accrual

– Technical deficiency• Excluded non SA sourced income of offshore trust

– Amended to ensure that all income of a non- resident trust can be deemed back to the SA donor if applicable

44

SHARE INCENTIVE SCHEMES

45

Gains made by directors or employee

Section 8A

– Remains but only applies to• Marketable securities exercised, ceded or released• in whole or in part• if the right was obtained by the director or employee• before 26 Oct 2004

46

Broad-based employee share planSection 8B introduced

Incentive to offer shares to all employees

Targets lower income employees

Encourage long-term participation

47

Broad-based employee share plan- Cont.

GeneraI terms for tax free treatment

- Tax-free treatment of “qualifying shares”

- Even if acquired at no cost or at discount Qualifying share

– Must be in terms of broad-based employee share plan

– Total shares received under the plan by employee may not exceed R9,000 in value over 3 years

48


What is a broad-based employee share plan?

– Equity shares for minimum consideration- Within requirements of Companies Act- Company can offer low interest loan

– Widespread participation- 90% of permanent, full-time employees with 1 years service- Can ignore temps, part-time staff- Employee may not participate in another share plan

- No dividend or voting restrictions

- Limitation on sale restrictions, other than- Legislated, buy-out clause, 5 year max restriction

49


Subsequent sales - Employee

– If within 5yrs full proceeds included in income

– If after 5yrs gain should be capital

Subsequent sales – Employees’ tax

– Employer responsible for withholding any income tax that becomes due

50


Fringe benefit position– Para (a) of 7th schedule deems a taxable benefit to arise

on issue of shares to employee at discount to market value

– Specific exclusion added where shares acquired in terms of 8B

Employers position– Section 11(lA) introduced to allow a deduction to

employer = market value on date of grant– Limited to R3,000 per employee per y.o.a– If excess can be c/fwd to succeeding y.o.a

51


Deduction of cost by employee

– Employee pays for his shares

– If sells within 5 yrs no provision to allow deduction of cost

– If sells after 5 yrs can claim cost as base cost for CGT purposes

Examples pg 20 of notes

52

Vesting of equity instrumentsSection 8C introduced

Taxation of directors & employees

Equity instruments acquired after 26.10.04

Essentially defers all appreciation and taxes full gain as revenue

53

Vesting of equity instruments – Cont.

Basics of 8C

– Vesting as the tax event• Employee/director• acquires equity instrument• by virtue of employment or office• will result in taxable income/deductible loss• in year that equity instrument “vests”

– Section 9B is overridden

– Section 23(m) is overridden

54

Vesting of equity instruments – Cont. Basics of 8C – Cont.

– Date of vesting depends on whether• Unrestricted equity instrument• Restricted equity instrument

– Unrestricted equity instrument• Vesting on date of acquisition

– Restricted equity instrument• Vesting on earliest of 4 events

– when all restrictions are lifted– immediately before employee sells– when option terminates– immediately before employee/director dies

55

Vesting of equity instruments – Cont. Terms used

– Equity instrument• Share or part thereof• Options• Instrument convertible into a share (conv. debenture)• Members interest in cc

– Restricted equity instrument• Not free to sell• Can be forfeited at < market value• If right to impose restriction• Option on restricted equity instrument• Instrument convertible into restricted equity instrument• Employee escape clause (cancel or repurchase)

56


Terms used throughout – Cont.

– Market value• Willing buyer and willing seller etc• NB: Ignore any restrictions

– Consideration• Amount paid or to be paid for the equity instrument• Ignore services provided• Includes amount paid for a prior instrument

57


Calculation of gain or loss on vesting

– Vesting triggers either• Inclusion in taxable income• as if an adjustment to salary, or• a tax-deductible loss• to extent market value on date of vesting• above or below consideration paid

– Examples pg 26 & 27

58

Vesting of equity instruments – Cont. Employees’ tax

– Employers obligation• Any gain arising from vesting• included in remuneration• tax directive to be sought by employer to determine how much

employees tax to deduct or withhold• if the tax exceeds amount from which it is deductible SARS must

be notified immediately– Employees obligation

• If employer not a party to the transaction• Gain resulted• Must inform employer• Failure could result in fine < R2,000

59


Subsequent transfers by way of a swap

– Special rules• Company restructures• Employee moves within same group

– Tax is not triggered on swap

– Same rules apply to new instrument acquired• Trigger income/loss only when vests

60


Connected persons transfers

Non-arm’s length transfers

– Incentive for employee to vest a.s.a.p

– Special rules to stop early vesting

– See notes for detail and examples

61

JSE SECURITIES AND BOND EXCHANGE

Section 10(1)(d) amended

Both the JSE and Bond Exchanges will become taxable entities at date still to be determined

62

INTEREST RECEIVED BY NAMIBIAN, SWAZILAND AND LESOTHO INVESTORS

Section 10(1)(h) amended

Foreign residents not taxed on SA interest income, except

– if present in SA for >6months in a y.o.a

– carry on business through a permanent establishment in SA

The exemption did not apply to residents from countries within the Common Monetary Area

Exclusion removed

63

FOREIGN PURCHASED ANNUITIES

Section 10A(11)

Amounts received no longer translated to Rand at spot but at average rate

64

RESEARCH & DEVELOPMENT

Section 11B

– Provides for deduction of expenditure, and

– Allowance in respect of assets used for R&D purposes

Anti-avoidance provisions now added

– Allowance determined on lesser of• Actual cost• Market value had it been arms length sale• Actual cost to connected person

65

PUBLIC PRIVATE PARTNERSHIPS

Lessee can deduct leasehold improvements over duration of lease if the lessor is a taxable entity

Problem for PPP’s erecting buildings on state owned land (exempt from tax)

Sec 11(g)(vi) now allows a PPP’s to claim the deduction

Also any costs remaining on termination may be written off in full (all taxpayers)

Example 1 & 2 pg 41

66

PART DISPOSAL RULE REVISED

Where sec 11(g) cannot be applied e.g. because voluntary improvement made by lessee

Para 33(3)(c) introduced in Dec 2003

Para 33(3)(c) now deleted so lessee can once again claim a capital loss in year improvements are effected = bare dominium value of the improvements.

Targeted to allow PPP’s to make use of this

67

URBAN DEVELOPMENT ZONES

Section 13quat introduced in 2003

Accelerated depreciation allowances

Some of the demarcation and reporting requirements relating to municipalities have been relaxed

See details in notes

68

ASSETS ACQUIRED IN EXCHANGE FOR SHARES

Assets and trading stock acquired in exchange for shares did not acquire any cost for CGT and income tax purposes

Issue of shares is not a cost ‘actually incurred’

Capital assets acquired on loan account only received base cost to the extent the loan had been repaid

– This does not apply to trading stock

69

ASSETS ACQUIRED IN EXCHANGE FOR SHARES – Cont.

Section 24B has been introduced

Shares for assets now acquire base cost

Debt for assets

– Assets acquire full base cost Example 1

Exceptions, anti avoidance

– Shares or debt issued for shares or debt

– Retain zero, and pay as you go principle

70

ASSETS ACQUIRED OR DISPOSED OF FOR CONTINGENT OR UNQUANTIFIED AMOUNTS

Section 24M introduces new concept

– Cash basis of taxing certain amounts

Old Law

– Immediate taxable event on disposal of asset even if consideration deferred over years• Seller, taxed immediately on full proceeds• Buyer

– CGT base cost is deferred until exp due and payable, but– if trading stock expenditure is incurred up front

– Contingent and unquantified pmts cause problems

71

ASSETS ACQUIRED OR DISPOSED OF FOR CONTINGENT OR UNQUANTIFIED AMOUNTS – Cont.

“Open transaction” method introduced

– Applies to deferred instalments that• do no accrue because of contingencies• with deferred instalments containing unquantified

amounts

– These instalments will only be accounted for as they are received/paid

72


Transfers of non-depreciable capital assets

– Unquantified and contingent amounts• Seller

– Determine capital gain or loss as normal– Proceeds for initial year only to extent quantified and no

contingency– Initial capital gain taxable as normal– Initial capital loss disregarded– Further consideration in later years treated as capital gain– This gain reduced by any disregarded loss remaining– Disregarded loss can be claimed in full when no further

proceeds

73


Transfers of non-depreciable capital assets – Cont.– Unquantified and contingent amounts

• Purchaser– Future quantified amounts are immediately incurred for

base cost purposes– Expenditure incurred (base cost) to extent amounts

become quantified or contingency has been satisfied• If buyer sells asset all unquantified and contingent amounts

are ignored for base cost purposes– Capital losses arise to extent amounts are incurred after

the sale Examples 1,2 and 4 (pg 47 & 49)

74


Transfers of depreciable assets

– Unquantified and contingent amounts• Seller

– Rules same as for non-depreciable assets– Proceeds for initial year only to extent quantified and no

contingency– First calculate 11(o) losses– Initial 11(o) loss is disregarded– Second, account for section 8(4) recoupments– Offset disregarded 11(o) loss against recoupment– Proceeds in excess of recoupment will be capital gain– Disregarded 11(o) losses remaining can be deducted in

full when no further proceeds

75


Transfers of depreciable capital assets – Cont.

– Unquantified and contingent amounts• Purchaser

– Future quantified amounts are immediately incurred for base cost purposes

– Expenditure incurred (base cost) to extent amounts become quantified or contingency has been satisfied

• Depreciation calculation becomes complex

– Provides for catch up as amounts become quantified

Example pg 52

76


Transfers of trading stock

– Unquantified and contingent amounts• Rules same as for non-depreciable and depreciable

assets• See detailed notes in this regard

77

DEFERRAL MECHANISM FOR DISPOSAL OR ACQUISITION OF EQUITY SHARES

Sales of shares for amounts based on future profits or receipts

Trigger immediate taxation based on anticipated proceeds

Many BEE transactions structured on this basis

Section 24N introduced to promote the sale of businesses supported by self financing

Tax implications are deferred

78

DEFERRAL MECHANISM FOR DISPOSAL OR ACQUISITION OF EQUITY SHARES – Cont.

Seller

– Determine capital gain or loss on disposal

– Amounts due and payable in later years are ignored

– Initial capital gain is taxable

– Initial capital loss is disregarded

– Further consideration treated as capital gain in future years

– Future gains can be reduced by remaining disregarded losses

– Disregarded losses remaining can be claimed in full when no further proceeds due

79


Buyer

– Equity shares purchased within section 24N will accumulate base cost over time

– Expenditure incurred to extent amounts become due and payable

– If buyer sells the shares before all amounts become due and payable these amounts are not taken into base cost• When paid they will generate capital losses

80


5 conditions to be satisfied

– >25% of price must be deferred beyond year of sale and price must be based on future profits

– Sellers must sell >25% of total value of equity shares

– Buyer and seller must not be connected persons after the sale

– If buyer defaults on payment shares must be returned to seller

– The sellers claim on the buyer cannot be payable on demand or readily tradeable on the open market

81

INCOME OF TRUSTS AND BENEFICIARIES OF TRUSTS

Section 25B regulates taxation of trust income

The section refers to income

Longstanding debate about the meaning of income

“Income” has now been replaced with “amount”

Clarify the more general meaning intended

82

WITHHOLDING TAX ON SALE OF IMMOVABLE PROPERTY BY NON-RESIDENTS

Non-residents subject to capital gains tax on any interest they own in immovable property in SA

Enforcement has been a problem

Section 35A introduced

Places onus on the purchaser to withhold tax

83

WITHHOLDING TAX ON SALE OF IMMOVABLE PROPERTY BY NON-RESIDENTS – Cont.

Withholding obligation on the buyer– Any person that acquires any interest in SA

immovable property– From a non-resident– Must withhold from amounts actually paid

• 5% if the non-res is an individual• 7,5% if the non-res is a company• 10% if the non-resident is a trust

– Amount withheld must be paid to SARS• Within 14 days if purchaser is SA resident• Within 28 days if purchaser is non-resident

– Examples pg 57

84


Advance against the seller’s income

– Amount withheld operates as an advance against seller• Seller must still submit a IT12 tax return

• Advance could result in refund due to seller

Exemption

– R2 mill exemption• No withholding if total amount payable < R2 mill• If > R2 mill then withholding requirements apply in full (e.g. 1 & 2 pg

57 & 58)

85


Directives

– Non-resident seller can seek relief through a directive• Reduced withholding• No withholding

– Conditions for directive• Adequate security provided (e.g. bank note)• Other assets within SA• Person not subject to tax (reorganisation rules or DTA)• Actual liability results in loss or less than withholding amount

86


Liability – Purchaser– Personally liable if knows or should know– No withholding required if

• purchaser relies on estate agent or conveyancer, and• purchaser is not provided with required notification

Obligation – Estate agent and conveyancer– If knows or should know– If entitled to compensation for the transfer– Each must notify the purchaser of his obligation– Failure triggers joint & several liability limited to any

comm/fee earned

87


Recourse to seller

– Any person subject to personal liability as a result of failure to withhold

– has right of recovery against seller

– limited to withholding amount, not penalties & interest

Commencement date

– Date to be set in future

88

SECONDARY TAX ON COMPANIES

Section 64B has seen some fairly technical changes

See detailed notes on pg 62 to 64

89

NOTIFICATION OF CHANGE OF ADDRESS

Section 67 now requires change of address to be communicated to SARS within 60 days

Section 75(1)(aA) provides that failure to comply is an offence

90

REGISTRATION OF TAX PRACTITIONERS

2002 Budget first announced proposal to regulate tax consultants and advisors

A separate Board, distinct from SARS will be established to administer and regulate

Separate Bill to be produced in 2005

As interim measure Section 67A has been introduced

Requires registration with SARS

91

REGISTRATION OF TAX PRACTITIONERS – Cont.

Who must register?

– Natural persons

– provide tax advice

– complete any docs for submission to SARS

– assist in completion of any docs for submission to SARS

By when?

– On prescribed form by later of– 30 June 2005– 30 days after date first provides such service

92

REGISTRATION OF TAX PRACTITIONERS – Cont.

Who is excluded from registering?– No consideration to themselves or employer– Advocates and lawyers if advice is given during or in

anticipation of litigation– Advice is given which is incidental to sale of goods or

services (e.g. Insurance broker)– Employees who provide advise or complete docs of

their employers or connected person to employer (e.g. group tax manager or payroll supervisor)

– Employees under the direct supervision of a tax practitioner (e.g. trainee accountant)

– Advice or docs in terms of Custom and Excise Act

93

ADVANCED TAX RULINGS

Back in the 80’s SARS would issue rulings

No centralised procedure

Disastrous effect

Nothing for many years

Part IA inserted in Chapter III

Covers all taxes administered by SARS except Customs and Excise Act

94

ADVANCED TAX RULINGS – Cont.

3 types of rulings on offer

– Binding general rulings

– Binding private ruling

– Binding class ruling

95


Binding general ruling

– Initiated by Commissioner

– Cover topics of general interest

– Same as interpretation notes

– Binding on Commissioner

– Taxpayer & Comm. can cite before court

– Comm. may modify or withdraw

– Change in law will not require a change ruling

96

ADVANCED TAX RULINGS – Cont. Binding private ruling

– Issued in response to app. made by taxpayer– Comm. opinion regarding interpretation or application of tax law

relating to a proposed transaction or arrangement– Binding on Comm. only with respect to applicant and proposed

transaction– Cannot be relied on or cited by any other taxpayer– Comm. can withdraw or modify prospectively only– Retrospective withdrawal or modification only if

• Proposed transaction has not commenced• Other taxpayers will suffer bigger disadvantage if not withdrawn• Materially erode SA tax base & in public interest

– Subject to application fee and cost recovery fee– Ruling will be published without revealing ID of applicant

97


Binding class ruling

– Issued in response to app. made by taxpayer

– Comm. opinion regarding interpretation or application of tax law to specific class of taxpayer relating to a proposed transaction or arrangement

– Relieve every participant in the transaction of need to apply for separate binding private ruling e.g. Company applies regarding tax treatment of a share incentive scheme for employees.

– Application, withdrawal & modification, retrospectivity and publication same as for binding private rulings

98


Exclusions & refusals

– This is not to assist tax advisors in developing tax avoidance schemes

– Aimed at providing clarity, consistency and certainty in the application and interpretation of tax law. E.g. guidance to foreign investor on tax consequences of making an investment in SA

– Not suitable to fact intensive questions e.g. transfer pricing or valuations

99


Section 76B through S

– This is the most detailed section in the Income Tax Act

– The provisions have been reproduced on pages 67 to 74 of the notes

– Having been through the details you will see that making an application will be a costly and involved process

– The provisions will only come into operation at a date still to be announced

100

VALUE ADDED TAX

101

GRANTS PAID BY PUBLIC AND LOCAL AUTHORITIES

We see further amendments relating to these Grants Key to determine whether VAT is charged or not is

whether the public entity is conducting an enterprise. If so it will be registered as a vendor.

Grants by Government will be zero rated. Grants exclude payments for the supply of goods and services

See notes pg 75 & 76 for details of how the various public and local authorities will be treated for VAT purposes.

102

COMMERCIAL ACCOMODATION Definition of enterprise amended to exclude

– Commercial accommodation enterprises if turnover less that R60,000 per annum

If so, vendor will have to deregister

Beware deemed supply on deregistration

Section 8(2B) introduced to soften the blow by allowing final payment to be made in monthly instalments

– Provided application to deregister made before 30 June 2005

103

GAME VIEWING VEHICLES AND HEARSES

Definition of motor car has been amended

Game viewing vehicles and hearses are now excluded from the definition

Both will qualify for input VAT deduction

Other sections amended to accommodate above see pg 77 of notes

Example page 77

104

TAX INVOICES

Vendor must now issue a tax invoice within 21 days of supply, even if no invoice is requested

If supply is for second hand goods the tax invoice must say so

Full tax invoice only need be issued where consideration above R3,000

If a vendor purchases second-hand goods on which no VAT is charged or goods are repossessed, a VAT264 must be completed by the supplier confirming the non-taxable supply (>R1,000 applies)

105

FARMERS

Farmers must now notify SARS once the value of total supplies exceeds R1 million in 12 month period

106

CANCELLATION OF REGISTRATION

Vendor who fails to notify SARS of his cancellation of registration is guilty of an offence.

107

HYBRID FINANCIAL INSTRUMENTS Section 8E too narrow

Debt instrument

– Interest deducted by debtor and taxable in hands of creditor Equity instrument

– Dividends paid (subject to STC) not deductible and exempt in hands of recipient

8E used to counter avoidance where debt is disguised as equity expanded in two ways

– Recharacterise dividends as interest

– Recharacterise interest as dividends

108

HYBRID FINANCIAL INSTRUMENTS – Cont.

Look out for

– Preference shares redeemable within 3 yrs from date of issue

– Any other share redeemable or disposable within 3 yrs which contains preferences• Ranks above other ordinary shares• Div payable linked to interest rate, capital subscribed or

loan

– Shares linked to a limited life company (likely to be terminated within 3 yrs)

109


Section 8F introduced

– Targets hybrid debt instruments

– Equity disguised as debt

– Limits deductibility of interest and still taxes recipient

110


Look out for

– Debt at option of issuer is exchangeable for shares in issuer within 3 yrs

– Repayment of debt by issue of shares within 3 yrs

– Repayment of debt within 3 yrs linked to issue of shares in issuer

– Debt at option of holder is exchangeable for shares in issuer within 3 yrs and value of shares is likely to exceed value of debt by >20%

111

INCURRAL AND ACCRUAL OF INTEREST

Section 24J

Regulates the timing of the accrual and incurral of interest

See detailed notes for amendments

Documents

BUDGET & TAX UPDATE Presented by DIETER SCHULZE. The morning ahead 2005 Budget 2004 Tax update –The Taxation Laws Amendment Act 16 of 2004 –The Revenue