Revenue Laws Amendment Bills 2008

Portfolio Committee on Finance

19 August 2008

2

Taxation Laws Versus Revenue Laws Amendment Bills

• Taxation Laws:– The Taxation Laws Amendment Bills cover rates,

thresholds, urgent and quick matters– This year’s Bills were introduced in March and tabled in

May– Key changes were made to individual marginal rates,

corporate rates were reduced to 28%, and priority corporate avoidance schemes were addressed

• Revenue Laws:– The Revenue Laws Amendment Bills deal with the more

complex and substantive announcements made in the 2008 Budget Review

– Due to their complexity, this set of Bills comes later in the year and requires more public debate

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Overview of Key Issues: Individuals and Employment

• Ongoing Retirement Reform:– New simplified system for pre-retirement

withdrawals– Defaults switched upon job changes to preserve

retirement savings

• Employers and Employees:– Enhanced broad-based share incentives (amount

shifted from R9 000 to R50 000 over 3 years)– Closure of executive share schemes that seek to

avoid full tax on salary bonuses– Employers can deduct PBO donations from payroll

to encourage monthly donations

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Overview of Key Issues:Small Business

• Presumptive Tax:– Businesses (sole proprietors and companies) with a turnover

up to R1 million may elect into a simplified turnover tax– VAT is now elective up to R1 million (from the previous R300

000); but taxpayers using the presumptive tax may not utilise VAT

• Venture Capital Companies:– Taxpayers (individuals and listed groups) receive a special

deduction for investing in Venture Capital Companies– Venture Capital Companies are basically portfolio

management vehicles designed to invest in small businesses (and junior mining)

– This vehicle gives small businesses access to equity finance

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Overview of Key Issues:Business Incentives

• Industrial Policy Projects:– R20 billion allocated to DTI/NT approved industrial projects– Additional allowances for investments in upgraded plant

and machinery

• Housing:– Urban Development Zone incentives renewed for 5 years

and enhanced rate of depreciation for new buildings– Simplified 5% depreciation regime for residential housing

units– Accelerated 10% depreciation regime for low cost housing

(R200 000 housing/R250 000 apartments)– 10% allowance for low-cost housing provided by emloyers

to employees on loan account

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Overview of Key Issues: STC Conversion to a Shareholder Tax

• The new 10% dividend tax applies at a shareholder-level• Dividends paid to pension funds, PBOs and domestic

companies will be exempt• Treaty relief will now exist for foreign shareholders (5%)• STC transitional credits for a 3-year period• New dividend tax base that relies solely on tax concepts• The new dividend tax will have a withholding mechanism

for the tax to be paid by the company payor or an intermediary

• The new dividend tax is to be effective upon completion of joint ratification of nine revised treaties (target date: latter half of 2009)

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Overview of Key Issues: Indirect Taxes

• VAT:– Zero rating for land reform acquisitions

• Estate Duty:– Exemption for insurance and pension payouts– 5-year time limit cut-off

• Electricity Levy (Law and Regulation):– 2 cents /kWh charge for electricity produced from

non-renewable sources– Exemption for electricity from renewable sources

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Importance of Public Consultation Process

• Time for Public Comment:– Taxpayers have 1 month to comment on

the Bill– Bill published on 31 July– Comments due on 29 August/5 September– 20 and 22 August: Taxpayer Hearings

• Further Tentative Dates:– 09 September: NT/SARS Response– 16 September: Tabling

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Outline of Key Amendments

• Income Tax– Retirement– Employers and

Employees– Individuals– Small Business– Business Incentives– Corporate and

Commercial

• Other Taxes– Estate Duty– Environmental Levy– Value-added Tax– Repeal of Stamp Duties– Customs

• Tax Administration

RETIREMENT ISSUES

• Taxation of withdrawals• Divorce settlements• Default withdrawals• Transfers from pension to provident funds

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Pre-Retirement Withdrawals: Background

• Pre-retirement withdrawals are taxed at the taxpayer’s highest average tax rate for the current or previous year

• A small amount is tax-free (R1,800, which has not been adjusted for many years)

• Formula difficult to calculate and understand

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Pre-Retirement Withdrawals: Proposal (section 1 (clause 6(n), section 6 (clause 8), paragraph 7 of 2nd schedule (clause 60))

• Tax-free amount tied to 50% of the primary rebate (increased to R23,000)

• Taxable amount calculated in terms of stand-alone tax table– Tax table applies to aggregate of withdrawal

benefits received over the tax-payer’s life-time

– Stand-alone tax table linked to individual tax tables and adjusted annually

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Retirement – Divorce Settlements (paragraphs 2, 2B, 4, 6 of 2nd schedule, clauses 54, 55, 57, 59)

• Background– Spousal payments from retirement funds

stemming from divorce orders are taxed in hands of member

– Member has right of recovery of tax from non-member spouse

– System is difficult to understand, administer and execute effectively

• Proposal– The non-member will pay the tax on amounts

awarded to him/her from member’s retirement fund

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Retirement – Default Withdrawals (paragraph 4 of 2nd schedule, clause 57)

• Generally, an automatic tax event when members of occupational retirement funds’ employer terminates

• This does not encourage members to preserve retirement savings until retirement

• Proposed amendment will only trigger tax when member elects to receive the retirement fund interest, in cash

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Retirement – Pension to Provident Fund Transfers

(paragraph 2 of 2nd schedule, clause 54)

• Background– A Transfer from a pension to a provident fund is a

taxable event• Employee contributions to pension funds are tax-

deductible but not for provident fund contributions• Reason: Pension funds must pay an annuity (2/3rds)

upon retirement

– Court decision treats some transfers from pension to provident funds as tax-free

• Proposal– Proposed amendment aims to trigger tax on all

pension to provident fund transfers

EMPLOYERS AND EMPLOYEES

• Repayable employee benefits• Personal use of business cell-phones and computers• Consolidation of deemed employee regimes• Payroll giving• Deductions in respect of learnerships

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Repayable Employee Benefits (section 23 and par 2 of 4th schedule, clauses 31 and 62)

• Background:– Employee receives taxable conditional payments

(e.g. maternity payments)– Employee fails to meet conditions, amount

received is repaid to employer but no tax relief for employee

• Proposal:– Repaid benefit will be allowed as tax deduction for

employee by way of:• PAYE refunded by employer; or• Tax deduction on tax return

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Personal Use of Business Cell-Phones and Computers

• Background:– Employees often receive cell-phones and laptops

from employers for business use, but invariably some private use exists

– At issue is how to tax the private use

• Proposal:– As a matter of simplicity, cell-phone, laptops and

related items are not subject to fringe benefit tax if the employer provides the equipment mainly for business use

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Consolidation of Deemed Employee Regimes

(sections 11, 23, paragraphs 1, 2, 11 of 4th schedule, clauses 16, 31, 61, 62, 64)

• Background:– Three deemed employee regimes exist, including:

Personal services companies, Personal services trusts and Labour brokers

– These entities effectively perform the same type of function (artificial independent relationship treated as an employment relationship)

• Proposal: – All three anti-avoidance regimes to be combined

(to be called Personal Service Provider)– Should assist legitimate small businesses by

reducing practice of “defensive” withholding

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Donations via Payroll (section 18A & par 12 of the 4th Schedule; clauses 28 & 62)

• Background:– Taxpayers can obtain a year-end deductions for

PBO donations– No reduction of PAYE calculation

• Proposal:– Employers can deduct donations when calculating

monthly PAYE– Reduces employee income tax without waiting to

year-end– Automatic procedure should facilitate PBO

donations

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Learnership Additional Allowances: Background

• Employers receive additional allowances (i.e. deductions) for utilising learnership programs to enhance employee skills

• These additional allowances are upon initiation of the learnership and successful completion

• At issue are multi-year learnerships, which receive less tax benefits than a series of 1-year learnerships

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Learnership Additional Allowances: Proposal (section 12H; clause 19)

• To correct the current disparity in the tax allowances (deductions) for learnerships (annual contracts) vs. apprenticeships (three to five years contracts).

• For longer-term (both time based and competency based modular training) apprenticeships a cumulative allowance will be paid at the end of the contract, upon successful completion.

• For example annual learnership contracts qualify for a R30 000 deduction (allowance upon entering into a contract) and an additional deduction of R30 000 upon the successful completion of the learnership, i.e. R60 000 per annum, and R180 000 over three years.

• Longer term apprenticeship (e.g. three years): able to deduct from taxable income R30 000 upon entering into a contract and an additional R30 000 x 5 = R150 000, at the end of the three years.

• Currently such longer term contracts only qualify for deductions amounting to R30 000 at the beginning and R30 000 at the end, i.e. R60 000 instead of R180 000.

• It should be noted that the total tax benefit in this example is equal to 28% x R180 000 = R50 400 in the case of incorporated businesses.

INDIVIDUALS

• Disability expenses• Broad-based employee share schemes• Executive share schemes

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Disability Expenses: Background

• Taxpayers with a handicap or a handicapped dependant receive deductions for all medically-related expenses (without regard to the 7.5% floor)

• The term ‘handicapped person’ outdated • In addition, there is uncertainty as to the type

of expenses that will be viewed as medically related

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Disability Expenses: Proposal (section 18, clause 27)

• Replace definition of ‘handicapped person’ with def. of ‘disabled person’– Definition as approved by Cabinet– In addition, the condition must last longer than

one year and should continue after maximum correction or control of the impairment

– Assessment by duly registered medical practitioner

• Types of deductible expenses listed– List to be drafted by SARS in consultation with

representative bodies– List to be reviewed annually

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Broad-Based Employee Share Schemes (section 8B, clause 10)

• Background:– Employer grants shares to employees:

• Tax-deduction for employer upon grant • No taxable fringe benefit in hands of employee

– Qualifying requirements too stringent, preventing full utilisation of incentive

• Proposal:– Tax-free ceiling raised to R50 000 over 5 years (previously

R9 000 over 3 years)– Employee participation lowered from 90% to 80%– Permissible restrictions relaxed – employer may now re-

acquire shares during restriction period at initial market value if the employee is subsequently engaged in misconduct/poor performance

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Executive Share Schemes(section 8C; clause 11)

• Background– Legislation exists to ensure that executive share schemes

are taxed as ordinary revenue upon cash-out (like any other deferred executive bonus)

– Tightened several years ago but new schemes have emerged

• Proposal– Various derivatives (e.g. cash amounts determined in

reference to share values held in trust) are now added– Schemes designed to indirectly acquire shares are now

added (e.g. Cash bonus must be used for acquisition of shares with security required over other executive assets)

– Capital distributions on share schemes will now be treated as ordinary revenue when the restricted instruments vest

SMALL BUSINESS

• Small business presumptive tax

• Venture capital company regime

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Presumptive Turnover Tax (PTT): General Objectives

• Policy response to alleviate the tax compliance costs for very small businesses;

• Not necessarily to reduce the tax liability;• Designed as an elective turnover based tax

regime, targeted at very small businesses with an annual turnover of up to R1 million per annum;

• Both incorporated and unincorporated enterprises (sole proprietors) can elect into the proposed regime.

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Presumptive Turnover Tax: Basic Rules

(6th schedule; clause 66)

• The introduction of the regime also comes with an increase in the compulsory VAT registration threshold from R300 000 to R1 million;

• Businesses opting to register for the simplified PTT regime will not be allowed to register for VAT;

• Qualifying businesses are exempt from STC/dividend withholding tax if dividends do not exceed R200 000;

• Shareholding in multiple businesses will disqualify a person/business from registering for the PTT regime.

• Upon joining the system, businesses will be required to remain in the system for at least 3 years; and

• Where businesses opt out of the regime, they can’t migrate back into it for a period of 3 years.

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Presumptive Turnover Tax: Rates

(6th schedule; clause 66)

• The proposed rates try to mirror the tax burden imposed under the standard income tax system;

• Based on Stats SA data, net profit ratios of between 15 – 20 percent were used;

• The rates are steep towards the higher turnover end (R750 000 - R1.0 million) in order to encourage businesses to graduate into the standard income tax system;

• Implementation date: March 2009.Turnover Tax liability & Marginal Rates R0 - R100 000 0%R100 001 - R300 000 1% of each R1 above R100 000R300 001 - R500 000 R2 000 + 3% of the amount above R300 000R500 001 - R750 000 R8 000 + 5% of the amount above R500 000R750 001 - R1 000 000 R20 500 + 7% of the amount above R750 000

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Venture Capital Companies (VCC): Conceptual Background

(section 12J; clause 21)

• Objective:– A tax incentive to help address the equity financing gap faced by SMEs;– International examples, e.g. UK VCT model;– Also replaces the flow through share model proposed in Budget 2007 for

junior mining exploration companies.

• Venture Capital Company Requirements:– Intermediary company which pools retail investments from investors;– Will be approved by SARS;– Must comply with the provisions of the Financial Intermediaries and Advisory

Services Act.

• Investee enterprises:– Qualifying high growth potential companies with annual gross assets not

exceeding R10 million immediately after the investment;– For junior mining exploration companies gross assets not exceeding R100

million immediately after the investment.

• Investor profile:– Individual investors; and– Listed corporate investors.

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Venture Capital Companies: Detailed Requirements (section 12J; clause 21)

• 100% upfront deduction for investments in VCC ordinary shares:– Capped at R750 000 for individuals per annum, with a 3x (R2.25 million) life time

limit (to be added to the draft legislation). Tax benefit equals 40% of R750 000 = R300 000;– No limit for listed corporations;– To protect the limit for individuals, unlisted corporations are excluded from the

regime.

• Minimum gross assets to qualify as a VCC:– R50 million for investments in non-mining qualifying enterprises;– R250 million for investments into qualifying junior mining exploration enterprises.

• VCC qualifying investments:– At least 10% in enterprises with up to R5 million gross assets, after the investment;– At least 70% in enterprises with up to R10 million gross assets, after the investment; and – In the case of junior mining exploration companies R100 million gross assets after the

investment.

• SARS to consider and approve applications for VCC status.– New VCCs will be given 36 months to qualify for full VCC approval.– Over the medium term, special financial regulations for VCCs considered

• Consider a sunset clause; 12 year period with compulsory review after 10 years.

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Venture Capital Companies: Diagram

VCC(FAIS Compliant)

Investor:Indiv / Listed

QualifyingSME

100% deduction

10% - R5 millionGross assets

70% - R10 millionGross assets

20% - any asset class

Individual – R750K deduction limit paListed – No limit, subject to a 10% Shareholding limit in the VCC

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Venture Capital Companies: Excluded Investee Activities

(section 12J; clause 21)

• List of excluded activities:– Dealing in land, property development including refurbishment, rentals,

redevelopment of property and deriving profits from the disposal of land when developed;

– Financial service activities such as banking, insurance, money lending, hire-purchase financing and any other financial service activities;

– 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/munitions; and

– Franchising.• Rationale for excluded activities:

– The aim of the intervention is to alleviate the equity gap for high risk enterprises;

– The exclusion serves to better target the tax incentive; reduce deadweight loss and compliment/not replicate current government access to finance interventions;

– The higher the enterprise risk, the lower the chances of obtaining venture capital and the longer the lead time for development;

– The so-called lifestyle, personal services and other listed activities are of a much lower risk profile and are not suitable for venture capital funding.

BUSINESS INCENTIVES

• Depreciation for Residential Units• Urban Development Zones• Employer Sales of Low Cost Housing• Amortisation of Government Business Licences• Additional Allowances for Industrial Policy Projects• Donations to Multi-Lateral Humanitarian Organisations• Promotion of Biodiversity

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Depreciation for Residential Units (sections 13sex; clauses 22, 24 & 25)

• Background:– In addition to pre-existing grants, the tax system will be used to

stimulate increased supply of low cost housing stock by the private sector

– Current regime is fragmented and overly complicated

• Proposals:– Depreciation of all new residential housing 5% per annum; low

cost housing will have a 10% rate (regime replaces former 12% initial/2% regime and other select employer regimes)

– Low cost housing is defined as having a cost up to R200 000 in the case of free standing houses and R250 000 in the case of apartments

– The depreciation applies to all rental housing and employer-provided housing

– To be depreciable, at least 5 units must be owned (to distinguish a real trade from vacation/personal arrangements)

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Urban Development Zones: Accelerated Depreciation

(section 13quat; clause 23)

• Background:– This pre-existing incentive is designed to rejuvenate key inner

cities– The incentive is set to expire in 2009

• Proposal:– The incentive will be extended by 5 years– Existing municipalities are invited to apply for possible

extended areas– More enhanced depreciation allowances:

• All new buildings: 20%(first year) & 8% p.a. (next 10 yrs) [existing system allows 20% (first year) & 5% p.a. (16 years)]

– Low cost housing in UDZ: • New buildings: 25% (first year), 13% (next 5 yrs) 10% (7th year)• Improvements to existing buildings: 25% p.a. (in lieu of current

20% p.a.)

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Employer Sales of Low Cost Housing

(section 13sept; clause 25)

• Background:– Some employers would prefer to sell housing to employees

rather than rent– Current incentives exist only for rental

• Proposal:– Employers are entitled to a special write-off when selling

low cost housing to employees at no more than employer cost

– A 10% yearly write off exists for employer-loan portion of the sale

– Recoupment exists when principal is repaid– Applies to all parts of the economy (not just to specific

sectors like the mining)

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Amortisation of Government Business Licenses

(new section 37D)

• Background:– Businesses often require Government licenses in order to

conduct certain activities (e.g. mining, casinos, telecoms etc)– Acquisition of these licenses may require an upfront cash

outlay, annual fees or cash outlays towards social expenditure– The expenditure for these licenses are often not deductible

under section 11(a)

• Proposal:– Initial outlay to acquire a Government license will be

depreciation over the life of the license– Annual fees to maintain a license will be fully deductible, even

if funds a not paid directly to Government (i.e. even if used for required social expenditure)

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Industrial Policy Projects: Background

• The incentive seeks to support the Government’s Industrial Policy Action plan (promoted by the Department of Trade and Industry)

• The focus is the manufacturing sector (with some exclusions), which has not kept pace with global trends

• The proposal targets greenfield investments as well as brownfield expansions and upgrades

• R20.0 billion allowable deductions over 5 years (an estimated R5.6 billion tax revenue forgone)

• This incentive replaces the prior Strategic Industrial Project regime but focuses both on capital investment as well as training

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Industrial Policy Projects: Minimum Requirements (section 12I; clause 20)

– Greenfield projects: Investment of R200 million in new industrial assets

– Upgrades and expansions / brownfields: Investments of least 25% of value of existing industrial assets subject to a minimum of R30 million.

– Energy efficiency: 10% reduction in usage– Spend more than 2% of wage bill on training– Training: Detailed skills development programme

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Industrial Policy Projects: Scoring Criteria

(section 12I; clause 20)

• Minimum of 5 points for qualifying status• Minimum of 8 points for preferred status• A sub-minimum of 2 points must be attained in the

labour component (employment creation + training)

Greenfield investments  

Expansions / Brownfield investments and substantial upgrades

Energy efficiency Energy efficiency

Use of cleaner production technology / methodsUse of cleaner production technology methods

Innovation, cluster / linkages to small business Innovation

Location in an industrial development zone Small business linkages

Employment creation (x per R1 million)Employment creation (x per R1 million)

Training of employees Training of employees

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Industrial Policy Projects: Additional Allowances

(section 12I; clause 20)

Projects with qualifying status (5 to 7 points)• 35% investment tax allowance / deduction

– maximum of R550 million per project for greenfield;– maximum of R350 million per project for upgrades or expansions / brownfield)

• Actual training expenses as a tax allowance / deduction up to a maximum – R36,000 per employee, and – an overall maximum of R20 million per entity over 4 years.

Projects with preferred status (8 to 10 points)• 55% investment tax allowance / deduction

– maximum of R900 million per project for greenfield projects;– maximum of R550 million per project for upgrades and expansions / brownfields).

• Actual training expenses as a tax allowance / deduction up to a maximum – R36,000 per employee, and – an overall maximum of R30 million per entity over 4 years.

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Donations to Multilateral Humanitarian Organisations

(section 18A; clause 28)

• Background:– Donations to PBO are potentially deductible (especially for

humanitarian causes) but only if the PBO is South African registered

– Donations made by taxpayers to multilateral humanitarian organisations such as the United Nations Agencies are accordingly not tax deductible

– While foreign PBOs can often obtain deductible donation status via the use of South African registered affiliates, UN agencies cannot form a South African affiliate by virtue of the UN’s unique status

• Proposal:– The legislation accordingly allows UN Agencies (that enjoy

diplomatic immunity status in South Africa) to qualify for tax deductible donation status

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Background - Environmental Regulation:• The DEAT has established a regulatory framework to encourage the conservation

and protection of biodiversity and priority areas by private landowners to support sustainable economic development.

• The key pieces of legislation that enables this process are: National Environmental Management

– Biodiversity Management Act (No 10 of 2004) (Biodiversity Areas)– Priority Areas Act (No 57 of 2003) (National Parks and Reserves)

• Private landowners may enter into agreements and management plans in terms of above legislation:

– Private owners surrender some level of use in the land (and improvements thereon)– Private owners are often required to make operating and capital expenditure to maintain

the land

Background – Tax:• Even though operating expenses may be required under these agreements, these

items provide no tax relief unless part and parcel of a trade• Capital expenditures under these agreements cannot be depreciated (nor can the

cost of land be deducted)

Promotion of Biodiversity: Background

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Promotion of Biodiversity: Proposal (section 37C; clause 36)

• Two issues arise:– Landowners incur conservation and maintenance expenses for the

greater good.– Landowner restricted from using the land for other purposes except as

stipulated in the agreement.

• Amendments:– Biodiversity Agreements – Conservation maintenance and rehabilitation

expenses incurred by landowners within the geographical vicinity of a trade and farming will be allowed as deduction against trading of farming income (Biodiversity Agreements)

– National Parks and Reserves – Loss of right to use land (outside the vicinity of a trade/farm):

• Conservation maintenance and rehabilitation expenses incurred by landowners subject to 30 year declaration will qualify for a tax deductible section 18A donation

• Amount of cost to landowner to acquire land plus capital expenditure incurred by landowner in respect of the land declared as a national park or nature reserve subject to a 99 year period of declaration will qualify for a tax deductible section 18A donation

CORPORATE AND COMMERCIAL

• STC Reforms:– Conversion from STC to Dividend Tax– Revised dividend definition– Dividend tax withholding regime

• Passive Holding Companies• Company Reorganisations

– De-grouping charge– Elections and reorganisations

• Share Issue Anomalies• Intellectual Property Arbitrage

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STC Reforms: Background

Current Law:• Liability falls on company distributing the dividend (as opposed to

shareholder receiving the dividend)• The charge is 10%

Problem Statement:• Internationally, dividends are generally taxed at shareholder (as

opposed to company) level. Therefore:– SA companies are at a disadvantage to international counterparts

(because profits are reduced by dividend tax)– STC generally not catered for by tax treaties (premised on a tax at

shareholder level)– Unfamiliarity with STC of foreign investors– Raises costs of equity financing

• February 2007: Minister of Finance announced that STC would be replaced with a new shareholder dividend tax

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New Shareholder Dividend Tax(sections 64E and 64F; clause 48)

• The new tax applies at the shareholder level (by the beneficial shareholder)

• Applies only to dividends declared by SA resident companies• Rate: 10%• Beneficial owner will be exempt from the dividend tax if:

– A South African resident company;– Any sphere of the South African government (i.e. national, provincial and

local);– an exempt parastatal;– a pension or benefit fund;– an approved PBO; or – an environmental rehabilitation trust

• Note: The SA resident company exemption means that dividends passed through a chain of SA companies are only taxed at end of chain (versus current regime of taxing initial company with STC credit relief)

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STC Transitional Arrangements (sections 64I and 64J; clause 48)

Background:• Transitional arrangements were widely requested by taxpayers to prevent

double taxation through a chain of companies• STC applies first with relief through the chain; the new dividend regime exempts

first with tax at the end of the chainProposal:• An exemption will exist for dividends previously subject to the STC• STC credit dividends will be exhausted first• Dividends eligible for STC credits will be allocated pro rata amongst all

shareholders within the same class of shareholders, irrespective of whether those shareholders are exempt from the dividend tax

• STC credits will work themselves through a chain of SA resident companies• Reporting requirements – STC credits will be dependent on reporting by initial

company payor to payee, failing which there will be no STC credit• STC credits will disappear three years after the effective date of the new

Dividend Tax

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New Dividend Definition (section 1; clause 6(1)(b) and (c))

Background:• Considerable overlap exists between company law/accounting

and tax in determining what constitutes a dividend; therefore,– Significant complication of the tax system– Opportunities for avoidance (especially for return of share capital

or share premium relief)Proposal:• New dividend definition in section 1: any amount distributed or

otherwise paid in respect of a share, unless the distribution is made out of “contributed tax capital” (CTC)

• Covers all distributions and share buybacks• CTC: a notional amount, derived from the value of any

contribution made to a company as consideration for the issue of shares by the company (no STC bump-up for tax-free contributions by more than 20% shareholders)

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Dividend Tax Withholding (sections 64G and 64H; clause 48)

• The STC collection mechanism will be replaced with a new withholding regime

• SA companies that pay dividends will be required to withhold 10% of that dividend from the payment– Listed share pass-through system to regulated

intermediaries– Unlisted share pass-through system by “declared” nominee

arrangements

• Simplifying assumptions/administrative convenience• Tax withheld is due by the end of the month following

the month of the dividend (same as STC)

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Passive Holding Companies(section 9E; clause 13)

• Background: – The rate of tax for companies is 28% and up to 40% for

individuals. The 28% company tax rate offers an arbitrage advantage for individuals investing through a company

– Under the new dividends tax regime, company-to-company dividends will be exempt, offering another deferral advantage to individuals investing through companies

• Proposal: – Passive Holding Company regime to be introduced to

eliminate the arbitrage advantage of certain passive holding companies

– Effectively, a 40% charge on passive ordinary revenue from financial instruments and a 10% charge on dividends will be imposed on passive holding companies

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Company Reorganisations – De-Grouping Charge

(section 45, clause 43)

• Background:– Assets can be transferred within a group of companies

on a tax-deferred basis– A degrouping charge applies when the group breaks

apart within a 6-year period– Unfortunately, the charge results in double tax and fails

to properly account for multiple tax-free reorganisations preceding a de-grouping

• Proposal:– Degrouping will only trigger gain/not loss– All double tax issues will be removed– The degrouping charge will account for multiple

preceding tax-free reorganisations

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Company Reorganisations – Elections and Reorganisations

(part III; clauses 40 to 47)

• Background:– Generally, rollover treatment is elective– Parties almost universally prefer rollover

treatment; the election therefore creates an unnecessary administrative burden

• Proposal:– Rollover treatment will apply as the automatic

default for all reorganisations– Parties will generally be allowed to elect out

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Share Issue Anomalies (section 24B; clause 33)

• Current Law:– Normally, if a company issues shares, that company has a base

cost equal to market value for asset received in exchange– However, the cross-issue of shares by two companies to one

another is tax-free but also result in a nil base cost in both sets of shares issued

– Anti-avoidance rule prevents artificial creation of base cost where the cross-issue is performed “indirectly”

• Proposal:– Companies receive a market value base cost in assets even if

shares of an equal value are not issued (market value mismatch scheme to be closed)

– The rule applies for purposes of the Act (i.e. also for purposes of donations tax)

– The “directly or indirectly” wording has been incorrectly interpreted

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Intellectual Property (IP) Arbitrage

(section 23I; Clause 32)

• Background:– In 2007, anti-avoidance legislation was introduced to

prevent SA taxpayers from shifting IP offshore (and to other tax-exempt persons) and obtaining deductions for licensing the IP

– Legislation delayed as overly broad • Proposal:

– Narrows anti-avoidance scope to three situations– Situation #1: IP previously owned by taxable end user (or

connected person)– Situation #2: IP owned by any taxable person two years

before use by end user– Situation #3: End user (or connected person) involved in

the development of the IP and the IP eventually owned by a tax-free (e.g. foreign) 20% owned subsidiary

ESTATE DUTY

• General anti-avoidance rule

• Time limits for assessment

• Life insurance and pension benefits

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General Anti-Avoidance Rule (Estate Duty Act section 25B, clause 4)

• All tax acts (other than Estate Duty Act) have general anti-avoidance provisions

• It is proposed to introduce a general anti-avoidance provision in Estate Duty Act

• This rule mimics the historical GAAR (as opposed to the GAAR recently used in the Income Tax Act)

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Estate Duty – Time Limits for Assessment

(Estate Duty Act section 9; clause 3)

• Background:– Some estates (or assets that formed part of the estate) are

only reported many years after the person died– SARS has to assess the estate at the time of death of that

person– Creates compliance/administrativeburden to apply the law

as it stood decades ago• Proposal:

– The liquidation and distribution account will set a 5-year (automatic) assessment period

– Assets found within the 5 years trigger a re-opening of that tax estate

– Assets found afterwards are deemed to be their own Estate without going back to the date of death

62

Estate Duty – Life Insurance and Pension Benefits

(Estate Duty Act section 3, clause 2)

• Background:– Estate Duty levied on life insurance policies and pension

benefits – deemed part of deceased’s estate– At death of income provider, surviving spouse and

dependant children rely on these savings to alleviate financial difficulties

– Tax not in line with Government’s social objectives to reduce the value of benefit in these circumstances

• Proposal:– All proceeds from life insurance policies and any lump sum

benefit from retirement fund will be exempt

ENVIRONMENTAL LEVY

• Electricity Levy

64

Electricity Levy: Background

• Need for encouraging long-term protection of the environment, through the imposition of environmental taxes like carbon taxes

• Recent electricity shortages emphasises the need for urgent demand-side interventions

• Key 2008 Budget announcement to impose a 2 c/kWh tax on the sale of electricity generated from non-renewable sources, to be collected at source by the producers/generators of electricity

• First step towards the introduction a more comprehensive carbon tax• Advantage of electricity levy is that it is imposed on all users, including

mega-users who have long-term lower-cost contracts• The implementation date has been shifted from 1 September to 1

October 2008. No need for RLAB to deal with this tax, as Customs and Excise Act already provides for the imposition of environmental levies, except for a minor amendment to allow for certain exemptions.

• NT and SARS reviewing possible legal complexities arising from Electricity Act and the MFMA

– Legislation should ensure that regulators do not play any role with regard to tax or expenditure decisions

65

Electricity Levy: Legislation and Regulation

• The implementation of the electricity levy, however, requires additional rules and amendments / additions to Part 3 of Schedule No.1 of the Customs and Excise Act.

• In brief the 2 cents / kWh will be imposed on electricity generated in South Africa from non renewable sources, e.g. coal, petroleum based liquid fuels, natural gas and uranium.

• Electricity produced from renewable sources, e.g. wind, water (hydro), solar, geothermal, biomass and biogas will be exempted from this levy. In addition, electricity generated by:

– way of co-generation whether or not from non-renewable sources, given that co-generation results in no additional emission beyond that already emitted during other business activities; and

– any electricity plant with a generation capacity below 5 megawatt (including plants below this size using non-renewable sources as inputs) will be exempted from the levy, to simplify administrative burden as impractical to register a large number of very small electricity generators

• Exclude households and businesses that make use of back-up electricity supply units, mostly driven by small to medium size diesel driven generators.

VALUE-ADDED TAX

• Industrial Development Zones• Public Private Partnerships• Supply of Right to Receive Money Under Rental Agreement• Land Reform Transactions• Storage Warehouses

67

Industrial Development Zones (section 8(24); clause 103(d))

• Background:– Goods temporarily removed from a Customs

Controlled Area are subject to VAT if not returned within 30 days

– Goods returned after 30 days do not receive any VAT relief

• Proposal:– Goods returned after 30 days are eligible for VAT

input credits (as an offset against the late charge)– However, the VAT input credits are limited to the

lesser of the initial charge or an amount based on the returned value (this test taxes the devaluation as consumption)

68

Public-Private-Partnerships (PPPs)

(section 1; clause 96(a))

• Background:– Government payments to designated entities (e.g. business

PFMA entities) are subject to VAT– PPPs are treated as designated entities

– An entity engaged in a PPP may receive grants from government that should be treated differently from payments in terms of the PPP

• Proposal:– The rule will apply only to a parties privy to a PPP

agreement)– PPP activities of an entity will be ring-fenced from other

activities

69

Supply of the Right to Receive Money under a Rental Agreement

(section 2(4)(b); clause 97)

4. Lessee pays rental amount (R11 400 for month 1)

2. Cession of right to rental income

1. R

en

tal

Ag

ree

me

nt

Lessor Financier

Lessee

3. Financier pays present value of the rental stream

70

Rental Agreements (Etc…): Background

• Facts Explained:– The lessor and lessee enter into a rental agreement for a fixed

period of time (say 10 years). The lessee pays the monthly lease rentals to the lessor who rents out the property to the lessee;

– The financier (e.g. a bank) is introduced into the transaction;

– The financier pays the lessor the present value of the lease rentals over the tenure of the rental agreement. In return, the lessee now pays the lease rentals to the financier (in effect the lessor is supplying the right to receive money under a rental agreement to the financier)

• Current Law:– This supply of financial services is exempt from VAT;

– The supply by the lessor is taxable at 14% as it is not a financial service

7171

Rental Agreements (Etc…): Background

• Facts Explained:– The lessor and lessee enter into a rental agreement for a fixed

period of time (say 10 years). The lessee pays the monthly lease rentals to the lessor who rents out the property to the lessee;

– The financier (eg. a bank) is introduced into the transaction;

– The financier pays the lessor the present value of the lease rentals over the tenure of the rental agreement. In return, the lessee now pays the lease rentals to the financier (in effect the lessor is supplying the right to receive money under a rental agreement to the financier)

• Current Law:– The supply by the lessor is taxable at 14% as it is not a financial

service

72

Rental Agreements (Etc…): Proposal

• Exempt financial services should not be disguised rental payments

• The supply by the lessor to the financier is taxable at 14% - however in the hands of the financier, the input tax cannot be claimed as the lessor (and not the financier) made the property available to the lessee;

• The financier was just the intermediary for providing funding and the lessor merely ceded its right to the income from the rental agreement to the financier – the financier thus made no taxable supply to enable it to claim the incurred input tax;

• It was PROPOSED to delete section 2(4)(b) (that makes the supply to the financier taxable)

7373

Rental Agreements (Etc…): ProposalSection 2(4)(b); Clause 97

• It is proposed to delete section 2(4)(b) (that makes the supply to the financier taxable)

• The supply of the right to receive the rentals will therefore be a financial service and hence exempt.

74

Land Reform Transactions (sections 11(1)(s)&(t) & section 9 of the Transfer Duty Act; clause 100)

• Background:– Government seeks to buy land for redistribution to

previously disadvantaged farmers– Government may also hold the land for temporary use by

these farmers (followed by their purchase from Government)

– Government is bearing a VAT charge, thereby adding to the cost of reform

• Proposal:– VAT zero-rating of land purchases in terms of Land Reform

and Land Restitution programmes– These transactions were previously zero-rated in terms of a

specific ruling– This zero rating is akin to pre-existing zero ratings for

Government subsidised housing

7575

Storage Warehouses (section 12(k); clause 101)

• Background:– The supply of goods that are imported and entered into a storage

warehouse (provided the goods are not entered for home consumption) are zero rated for VAT purposes.

– However, most storage warehouses operated by foreigners became liable to register for VAT while many foreign businesses would prefer not to register for VAT.

• Proposal:– The proposal aims to exempt the supply of goods imported and

entered for storage in a storage warehouse. – This proposal should ease the administrative burden on foreigners

who store and supply goods in a storage warehouse .– Persons who store and supply goods in the Storage warehouse

may elect to register for VAT if desired. When registering, supplies of goods in the storage warehouse will be zero rated.

76

Repeal of Stamp Duties Act(clause 95)

• Current Law: Stamp duty applies to real estate leases• Problem: Disparity between the cost of leasing of property in terms

of a long-term lease, and the acquisition of property. – When the property is sold, VAT levied is also claimed as an

input tax by the purchaser;– Also a deduction of an amount equal to the transfer duty would

have been allowed as a deduction as input tax had the property been purchased;

– However if the property is subject to a long-term lease), stamp duty is payable which is not deductible as an input tax, and which forms an additional cost.

• Proposal: Repeal of the Stamp Duties Act.– The Stamp Duty is to be completely repealed (without any

replacement for this leasing charge)– The Stamp Duties Act will continue to apply to any instrument

described in Schedule 1 of the Act executed before the date of the repeal as if the Act had not been so repealed.

CUSTOMS DUTIES

• Powers of arrest, carrying of firearms and acquisition of equipment for border control.

• Advance Passenger Information (API).

• Simplified clearance and release procedures.

• Levels of accreditation.

• Simplified removal of dutiable goods from storage warehouses and loss allowances.

• Refunds in terms of a practice generally prevailing

78

Powers of arrest, carrying of firearms & acquisition of equipment for border control

(sections 4A, B and C; clauses 21, 22 & 23)

• Problem Statement:– The Customs Border Control Unit (CBCU) requires specific

enforcement powers in order to fully discharge it’s mandate.

• Proposal:– The insertion of sections 4A and B is proposed to empower

the Commissioner to create categories of officers to carry out arrests and carry firearms for the purpose of enforcing the provisions of the Act.

– The insertion of section 4C is proposed to empower the Commissioner to acquire the necessary equipment to patrol the land and sea borders of the Republic (e.g. patrol boats).

79

Mandatory Advance Passenger Information (API)

(sections 7A & 101B; clause 23 & 37)

• Background:– In his 2008 Budget Review the Minister announced that

legislative amendments will be considered to make compulsory the electronic furnishing of Advance Passenger Information (API) to SARS.

• Proposal:– The insertion of section 7A is proposed to make compulsory

the supply of API so as to enable more precise targeting of customs control as the risk posed by a traveller can be assessed prior to arrival in the country. API is considered an important tool to process the increased number of travellers expected to attend the FIFA 2010 Soccer World Cup.

– Strict measures for the protection of personal information contained in API are proposed.

80

Simplified clearance and release procedures

(sections 39B, C and D; clauses 31, 32 & 33)

• Background:– In his 2008 Budget Review the Minister announced that

legislative amendments will be made to ensure the successful implementation of the General Annex to the Kyoto Convention.

• Proposal:– The insertion of section 39B is proposed to make provision

for the use of incomplete, provisional and supplementary bills of entry.

– Section 39C is proposed to regulate the use of simplified clearance and release procedures for authorised (e.g. accredited) persons.

– Section 39D is proposed to provide for the use of simplified procedures in order to obtain the immediate release of goods in certain circumstances.

81

Levels of Accreditation (section 64E; clause 34)

• Problem statement:– The current section 64E provides for accredited status of

clients, but not for different levels of accredited status.• Proposal:

– The proposed amendment empowers the Commissioner to determine by rule different levels of accredited client status, to determine the criteria and benefits relating to each and to provide for regular re-accreditation and a time frame for operating on a specific level.

– A transitional period is provided for the existing clients to be

re-accredited per level .

82

Simplified removals of dutiable goods from storage warehouses and loss allowance

(section 38 / clause 83)

• Background:

– In his 2008 Budget Review, the Minister announced that provision will be made for the periodic clearance of goods imported into a licensed customs and excise warehouse.

• Proposal:– The proposed amendment empowers the Commissioner to

permit the removal of imported dutiable goods from a licensed customs and excise storage warehouse on the basis of an invoice or certificate, provided that both the licensee of the warehouse and the importer of the goods have been accredited by the Commissioner.

83

Simplified removals of dutiable goods from storage warehouses and loss allowance

(section 38 / clause 83)

• Background:– In his 2008 Budget Review, the Minister announced that

customs procedures relating to the storage and movement of bulk goods will be simplified with the aim of reducing industry compliance costs and of easing SARS’ administration.

• Proposal:– The proposed amendment empowers the Minister to

determine a maximum percentage loss in respect of any class or kind of goods by notice in the Gazette that may be deducted by a licensee of the warehouse in respect of storage or removal losses..

84

Refunds in terms of a practice generally prevailing

(section 76B / clause 92)

• Background:– In terms of the Income Tax Act, 1962 and the Value-Added

Tax Act, 1991, the Commissioner shall not authorise any refund if the initial amount was paid in accordance with the practice generally prevailing at the date of payment.

• Proposal:– The proposed amendment is aimed at aligning the Customs

and Excise Act, 1964 with the other Acts mentioned in order to create similar provisions in respect of refunds and drawbacks, as well as the underpayment of duty.

TAX ADMINISTRATION

• Provisional tax• Estimated employees’ tax liability• Administrative penalties• Advance tax rulings

86

Provisional tax (paragraph 20 of 4th schedule, clauses 12 and 13)

• Background:– Currently the amount of the second provisional tax payment

by provisional taxpayers is based on the lesser of 90% of the actual tax liability for the tax year or the basic amount (tax according to latest assessment raised)

– As the committee has noted the use of the basic amount may lead to a substantial underestimate when compared to the year’s actual results, which must then be addressed by SARS

• Proposal:– Determine the second provisional tax payment only with

reference to 90% of the actual tax liability for the year

87

Estimated employees’ tax liability

(paragraph 12 of 4th schedule, clause 9)

• Background:– If an employer fails to furnish an annual PAYE return, fails

to deduct employees’ tax or fails to pay over employees’ tax deducted from employees the Commissioner is not allowed to estimate amounts of PAYE in order to raise a notice of assessment or to commence collection procedures.

• Proposal:– In order to support the modernisation of SARS systems it is

proposed that the Commissioner be allowed to make a reasonable estimate of employees’ tax in certain circumstances in order to issue a notice of assessment.

88

Administrative penalties (sections 35A, 66, 75B, 101, paragraphs 6,16, 27 and 31 of 4 th Schedule, clauses 2, 3, 4, 7,

8, 11, 14 and 15 )

• Background:– Section 75B providing for regulations to be

issued by the Minister of Finance to regulate the imposition of administrative penalties.

• Proposal:– A number of consequential amendments

are proposed to support the implementation of the administrative penalty regime.

89

Advance tax rulings (section 76O, clause 5)

• Background:– Currently the SARS has to publish all

binding private rulings and binding class rulings.

• Proposal:– A ruling that is similar to a ruling that has

already been published need not be published.

ADDITIONAL ITEMS

• Retirement - Death Benefits• Unbundlings with a Tax-Exempt Shareholder• Domestic PBOs Conducting Funding Raising for

Foreign Causes• Ministerial Acceleration of Returns/Payments Due • Mutual Agreement on Collection

91

Retirement - Death Benefits (paragraph 3 of 2nd schedule, clause new)

• Background:– Death benefits:

• taxed as lump sum retirement benefit in hands of deceased; or

• Annuity in hands of beneficiaries

– If fund rules only provide for lump sum but beneficiaries want annuity, amount taxed as lump sum

• Proposal:– No tax on lump sum if beneficiaries elect to

receive annuity

92

Unbundlings with a Tax-Exempt Shareholder

(section 46; clause new)

• Background:– Unbundlings (a distribution of subsidiary shares

by a parent company) can be tax-free– However, 20% of the shares distributed cannot be

transferred to exempt shareholders (foreign taxpayers; government; PBOs)

• Proposal– The 20% test should not look to the subsidiaries

distributed but to all the subsidiary shares in total– The test looks to see the level of overall control of

the subsidiary (otherwise too harsh in some cases; too soft in others)

93

Domestic PBOs Conducting Fundraising for Foreign Causes

(9th schedule; clause new)

• Background:– PBOs that raise funds for distribution to other PBOs located

in South Africa qualify for tax exempt status.– However, current tax legislation does not cater for PBOs that

raise and distribute those funds to other PBOs located outside South Africa.

• Proposal:– Donations made to PBOs located outside South Africa are

often made on humanitarian grounds such as poverty, disaster, war, etc. It is proposed that domestic PBOs raising and distributing funds to to an offshore PBO meeting the stated requirements should qualify for tax exemption.

– Donations to these domestic PBOs will, however, continue not to be eligible for tax deductible status

94

Adjustment of date of payment of tax to SARS

(new)

• Background:– Determining whether the revenue target has been

reached by 31 March (end of the fiscal year) is complicated by the fact that some taxpayer payment dates fall exactly on the same day

• Proposal:– The Minister of Finance is granted the power to

move any date for payments falling on 31 March forward by a maximum of two business days

95

Reciprocal assistance in collection of taxes (section 93; clause new)

• Section 93 of the Act provides for the collection of income tax debts due to another country if a double tax agreement with that country provides for reciprocal assistance in the collection of taxes.

• The procedure currently prescribed requires the interposition of the President of the tax court in the collection process if the taxpayer concerned denies liability.

• This is not aligned with the provisions of article 27(6) of the OECD Model Convention, which forms the basis of the DTA’s which South Africa negotiates with other countries.

• The proposed changes to section 93 extend its ambit to all taxes and align the prescribed procedure with the provisions of the OECD Model Convention by removing the interposition of the President of the tax court from the process.

• Collection of amounts disputed in the other country will instead be suspended, unless it appears after consultation between the competent authorities that—

– the dispute has been entered into solely to delay or frustrate collection of the amount; or

– there is a risk of dissipation or concealment of assets by such person.