Small Business Tax Amnesty & Amendment of Taxation Laws Bills

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Small Business Tax Amnesty & Amendment of Taxation Laws Bills. Select Committee on Finance 21 June 2006. Major Themes. Rate and Threshold Relief Small Business Tax Amnesty Municipalities Customs & Excise Miscellaneous Amendments & Technical Corrections. - PowerPoint PPT Presentation

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  • Small Business Tax Amnesty & Amendment of Taxation Laws BillsSelect Committee on Finance21 June 2006

  • Major ThemesRate and Threshold ReliefSmall Business Tax AmnestyMunicipalitiesCustoms & ExciseMiscellaneous Amendments & Technical Corrections

  • Continued economic growth and effective SARS administration allow for yet another year of broad-based tax relief . . .

  • Individual Income Tax RatesMarginal Brackets [Clause 18 and Schedule 1):18% rate tops out at R100 000 (versus the former R80 000)25% rate tops out at R160 000 (versus the former R130 000)30% rate tops out at R220 000 (versus the former R180 000)35% rate tops out at R300 000 (versus the former R230 000)38% rate tops out at R400 000 (versus the former R300 000)40% rate kicks-in at R400 000 (versus the former R300 000)Thresholds (Rebates):The general tax threshold (for ages below 65) kicks-in at R40 000 (versus the former R35 000) [Clause 20]The threshold for ages 65 and above kicks-in at R65 000 (versus the former R60 000)

  • Individual ThresholdsInterest (Dividend) Exemption [Clause 23]:Ages Below 65: Domestic interest (dividends) is exempt up to R16 500 (versus the former R15 000)Ages 65 and Above: Domestic interest (dividends) is exempt up to R24 500 (versus the former R22 000)Foreign interest and dividends are exempt up to R2 500 (versus the former R2 000)Capital Gains:Annual capital gain/loss exemption increases to R12 500 (versus the former R10 000) [Clause 32]Exclusion on death increases to R60 000 (versus the former R50 000) [Clause 32] Primary residence (i.e. home) sale exemption increases to R1,5 million (versus the former R1 million) [Clause 33]

  • Retirement and Inter-Generational TransfersRetirement:Retirement fund taxation drops to 9% (versus the former 18%) [Clause 54] Corresponding regulatory reform will occur to ensure tax savings translate into individual savingsEstate Duty/Donations Tax:The Estate Duty threshold increases to R2,5 million (versus the former R1,5 million) [Clause 17]The Donations Tax threshold increases to R50 000 (versus the former R30 000) [Clause 27]

  • Real Estate Purchasesand RentalsTransfer Duty Relief (Purchases) [Clause 14]:The zero rate tops out at R500 000 (versus the former R190 000)The 5% duty kicks-in at R500 001 (versus the former R190 001)The 8% duty kick-in at above R1 million (versus the former R330 001)Company/trusts rates drops to 8% (versus the former 10%)Stamp Duty Relief (Rentals) [Clause 38]:Exemption kicks-in at R500 per agreement (versus the former R200); stated differently, rental agreements with aggregate rent up to R100 000 are now exempt

  • Prior-Year Individual Holdovers:Base-BroadeningCar Allowance:Deemed private distance travelled will be 18 000 km (versus the former 16 000 km) in terms of the overall 32 000 km deemed amount) [Clause 21]Monthly PAYE withholding for the motor vehicle allowance will be 60% (versus the former 50%) in order to prevent under-withholding due the change in deemed private distance[Clause 28]Medical [Clause 31]:New monetary cap system (versus the former 2/3rds formula) takes effectEmployer-provided medical assistance on-site and off-site is now excluded from income in terms of uninsured employeesEmployer-assistance will now also be available for medically-insured employees as long as the medical scheme reimburses the employer (i.e. no double-dipping)

  • Tax Incentive for LearnershipWages [Clause 25]Initial sunset date: Extended from 2006 to 2011 (in line with the 2010 extension for the National Skills Development Strategy)An additional allowance (i.e. deduction) for salary will be available within increased maximum caps:Starting maximum cap for existing employees will be R20 000 (versus the former R17 500)Starting maximum cap for new employees will be R30 000 (versus the former R25 000)Completion maximum cap for all employees will be R30 000 (versus the former R25 000)Disabled person category added:150% additional starting allowance for existing employees with a R40 000 maximum cap175% additional starting allowance for new employees with a R50 000 maximum cap175% additional completion allowance for all employees with a R50 000 maximum cap

  • Small Business ReliefSmall Business Corporations:Definitional limit increases to R14 million (versus the former R6 million) [Clause 24]The 10% rate upper limit tops out at R300 000 (versus the former R250 000) [Schedule 1]Exemption threshold tops out at R40 000 (versus the former R35 000 similar to individuals) [Schedule 1]One-Time CGT Exemption for Small Business Sales:Exemption increases to R750 000 (versus the former R500 000) [Clause 34]100% Depreciation:Small items of all businesses eligible for 100% depreciation operates under an increased limit of R5 000 (versus the former R2 000)VAT Thresholds [Clause 50]:Definitional limit for 4-monthly filers increases to R1,2 million (versus the former R1 million)Definitional limit for 6-monthly small farmers increases to R1,2 million (versus the former R1 million)

  • Small Business Amnesty . . .Special Relief to Assist Small Business (Informal and Formal)

  • RationaleBroaden the tax baseNormalisation of tax affairsImprove tax compliance cultureFacilitate the taxi recapitalisation

  • Who May Apply[Clause 2]Types of parties:Individuals (i.e. natural persons)Trusts and estatesUnlisted companies (completely owned by individuals and/or estates)Activity level:The party must carry on businessR10 million gross business turnover limit for the 2006 assessment yearPro rate R10 million for years that are shorter or longer than 12 months

  • Core RequirementsTime Period [Clause 3]: Starting 1 August 2006 Ending 31 May 2007(Two phase amnesty process dropped)2006 Assessment Year Information5% Maximum LevyNo SARS Notice

  • 2006 Information Requirement(Clause 4)One: Full disclosure of all business taxable income for the 2006 assessment year:Only for a single year (no 2005 Income Tax assessment year requirements)No PAYE, Unemployment Insurance, Skills Development Levy, VAT or Royalty Withholding informationTwo: Income Tax return for the 2006 assessment yearThree: An asset/liability balance sheet at cost at the close of the 2006 assessment year

  • Reasonable Estimates[Clauses 4 & 12]The amnesty permits reasonable estimates in lieu of actual amounts if actual disclosure is impractical (due to concerns about informal businesses)Amnesty relief will be withdrawn if these reasonable estimates if not materially correctMoving the year forward to 2006 should reduce the need for reasonable estimates as well as the reasonable estimate procedure

  • Levy Requirement[Clause 6]Maximum 5%:Maximum 5% of the total taxable business income for the 2006 assessment yearFor this purpose, unused pre-2006 losses cannot be set off against 2006 taxable income Schedule of Rates:0% rate for 0 R35 0002% rate for R35 001 to R100 0003% rate for R100 001 to R250 0004% rate for R250 001 to R500 0005% rate for R500 001 or more

  • No SARS Pre-Amnesty Contact[Clause 5]The basic amnesty will generally be denied if SARS issues a notice to the applicant (or the applicants representative) before the amnesty submission of an:Audit,Investigation; orOther enforcement actionRelating to a period otherwise covered by the amnestyThe term enforcement action will be clarified by the Commissioner via GazetteNote: SARS notice will be ignored if withdrawn or finalised before submitting the amnesty application

  • Amnesty Relief[Clauses 8 & 9]One: The amnesty covers improperly undeclared or unpaid business income (including incidental investment income):Income Tax and STC amounts arising before the 2006 assessment year; andVAT, PAYE, UIC, SDL and Royalty Withholding before 1 March 2006Two: The amnesty similarly covers:Additional tax, penalties and interestCriminal prosecution for failure to disclose [Clause 5 of 2nd Bill]

  • No Carry Forward Benefits[Clause 11]Taxpayers may not carryover tax benefits from a pre-2006 yearHence,Loss carryovers,STC credits, andVAT input credits Cannot be utilised if stemming from a pre-2006 year receiving amnesty relief

  • Amnesty Process[Clause 5; Clause 6 of 2nd Bill]Amnesty approval is non-discretionaryAmnesty applications will be reviewed by a separate SARS unit with regional presenceSARS notice of amnesty approval or denial is requiredAll SARS decisions are subject to objection and appeal

  • Not For Organised Crime[Clause 10, FICA Regulations] The Amnesty does not apply to fraudulent VAT schemes:VAT not paid due to the submission of fictitious purchase invoicesVAT not paid due to fictitious zero-rated exports for sales actually occurring locallyThe Financial Intelligence Centre Act will not prevent advisors from providing tax advice, but they must disclose applicants involved in other offences (e.g. drug dealing / money laundering)

  • Amnesty Subsequently Void[Clause 12]Despite initial SARS approval, amnesty approval will later become void if:The applicant subsequently fails to pay the full amnesty levy within 12 months;The taxpayer failed to make full disclosure of required information for 2006; orEstimates (if any) are materially incorrect

  • Outstanding Debt Amnesty[Clause 13]Taxpayers will receive an outstanding debt amnesty if they have not yet paid, but have:Submitted a return or information indicating payment due; orSARS indicates payment is due via SARS assessmentCoverage: Penalty, additional tax and interestProcess: Ministerial regulation for public comment and Parliamentary scrutiny

  • Parliamentary Report[Clause 7 2nd Bill]The success of the amnesty must be reported to ParliamentThese details include:Number of applications receivedNumber of applications approved and deniedNumber of new taxpayer registrations (per tax type)All amnesty levies payableRetention of new taxpayers on the register for 2008 and 2009

  • Municipalities . . .RSC Levy Repeal &VAT Simplification

  • Regional Services Levy Repeal [Clause 59]The RSC Levies (both the turnover and employee elements) will be repealed with effect from 1 July 2006This repeal provides:R7 billion of tax relief; andSimplifies taxpayer compliance (especially for small business)Repeal technically requires:Repeal of section 93(6) of the Local Government: Municipal Structures Act; andReplacement legislation: Municipal Fiscal Powers and Functions Bill (the latter of which will be presented to Parliament shortly)

  • Municipalities and VAT: ObjectivesRevenue Shifting: Zero-rating of property rates is designed to shift revenue from the National Government to Municipalities due to RSC Levies repeal (the rest is financed via national grants).

    2.Administrative Ease: The proposal also simplifies VAT administration by eliminating allocation issues for input credits

  • Note: Municipal As, Bs & Cs

    South Africa has 283 municipalities consisting of:

    Category A municipalities have exclusive municipal executive and legislative authority in their areas (x6)

    Category B municipalities share municipal executive and legislative authority in an area with a category C municipality (x231)

    Category C municipalities have municipal executive and legislative authority in an area that includes more than one municipality (x46), which may include District Management Areas (certain Cs, such as nature reserves) ABCCBBBBBB

  • Zero Rating of Property Rates[Clauses 40 to 52]As of July, property rates will go from out of scope status to zero rating statusAs a result, VAT input tax relating to property rates will be unlockedThe proportion of municipal exempt/out of scope revenues will decrease, thereby reducing input allocation issues

  • Property Rates as Cross-SubsidiesZero rating for property rates will apply even if those rates act as a hidden subsidy for standard rated services (e.g. sewage, refuse)Potential misuse is limited because of municipal rate guidelines and external pressuresHowever [Clauses 40 & 42] flat fee rate funding covering all services will be viewed as a standard rated service (historic relic in certain townships) (old section 8(6)(a) continued)Rates levied for electricity, gas, water, drainage, sewage and garbage removal to be standard rated

  • Modernising the Local Authority Definition [Clause 40]The current VAT local authority definition predates recent changes to the Municipality acts

    Local authority currently means:(a) any divisional council, rural council, municipal council, (b) any other body, council, board, committee or institution established or deemed to be established by or under any law which has functions similar to those of the councils, boards and committees in paragraph (a) and which may levy rates on the value of immovable property within its jurisdiction or receive payments for services rendered or to be rendered; and( c ) any water board or regional water services corporation or any other institution which has powers similar to those of any such boards or corporations

    Proposals:Point #1: Parts (a) and (b) part of the definition will be modernised into the Category A, B and C municipal definitionsPoint #2: The water boards will fall under the designated entity (PFMA) definition; pre-effective date status of water boards will also be clarified due to previous overlap

  • Removing the Special Enterprise Definition [Clause 40]VAT only applies to an enterprise. A special enterprise definition exists for local authority activities (other local authority activities are simply out of scope)The following supplies by local authorities will always be part of an enterprise:Electricity, gas or water;Drainage, removal or disposal of sewage or garbage;Incidental goods or servicesHowever, when it comes to any other types of supplies, the following activities trigger the enterprise definition only if all of the following conditions are metThe supplies must be of the same kind or similar to taxable supplies made by any private vendor (i.e. the competition clause);The income derived from the activity (including amounts received as a grant) should be sufficient to cover all the costs of conducting that activity (i.e. cost coverage clause); andThe business activity must fall within the Ministerial list - see Government Notice No. 2570Proposal:Delete the special local authority definition;All local authorities will fall under the general enterprise definition

  • Simplified Municipal Revenue StreamsBy mainstreaming the enterprise definition, municipal supplies will generally be standard rated (not just listed items)Areas to be clarified by way of SARS interpretation:Licenses and fees will be standard ratedPenalties and fines will be exempt

  • Housing(Basic Principle Retained)Municipal rental housing will remain exemptThe sale of housing by municipalities will remain subject to VATHousing grants:National grants for subsidised rentals remain exemptNational grants for subsidised sales remain zero rated (special rule for housing)

  • Transport (Basic Principle Retained)Public transport will remain outside the VAT netThis result matches the private sector (e.g taxis and other passenger transport)

  • Grants TO MunicipalitiesVAT treatment...

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