Tax amendments: substantive changes limited
12 January 2015
Posted by: Author: Ernest Mazansky
Author: Ernest Mazansky (Werksmans Attorneys)
2014’s Taxation Law Amendment Bill and Tax Administration Laws Amendment Bill are being processed through parliament. Unlike previous years’ amendments, the number of substantive changes of widespread interest is extremely limited, and the bills are replete with technical amendments.
No doubt, a part of the reason for this (despite there being a number of important legislative changes required) is the reduction of capacity in the relevant department of National Treasury, given the resignation of a number of key and experienced individuals, and Treasury’s inability to replace them with persons of the same level of knowledge, experience and institutional memory.
For this reason, 2014’s publication is limited to those aspects which are likely to be of relevance to more than parties with very narrow interests.
Extension of implementation dates
Two important changes to the implementation dates of previously enacted legislation have been provided for. These are:
- The commencement date of the withholding tax on interest, which is now to be March 1 2015 instead of January 1 2015; and
- The commencement date of the retirement reforms, which has been extended from March 1 2015 to March 1 2016.
Transfer pricing rules
The amendment relates to the socalled secondary adjustment when a South African taxpayer’s taxable income has been increased as a result of a transfer pricing adjustment. Hitherto, the increase in taxable income was deemed to be an interest-free loan made by the taxpayer, which, in turn, attracted a further transfer pricing adjustment in the form of tax on deemed interest on that loan.
That further transfer pricing adjustment would have ceased if the foreign party "repaid” the loan, by transferring a sum of money to the South African taxpayer equal to the value of the original adjustment. With effect from January 1 2015, the secondary adjustment will be the following:
- Where the South African resident, in respect of whom the transfer pricing adjustment has been made, is a company, the adjustment will be deemed to be a dividend in specie, thereby triggering dividends tax at the rate of 15% (and presumably if the company’s shareholder is in a country with which South Africa has concluded a double tax agreement which allows for a lower rate of dividends tax, the rate applied will be such lower rate); and
- Where the resident is a person other than a company, the adjustment is deemed to be a donation, which will trigger donations tax at the rate of 20%.
In either case, the deemed dividend or donation is deemed to take place at the end of six months following the end of the tax year. Where the deemed loan referred to above, which arose under the previous system, has not been repaid by January 1 2015, on that date there will either be a deemed dividend or deemed donation, as the case may be, equal to the amount of that deemed loan.
Section 18A of the Income Tax Act 1962 allows for tax-deductible donations in certain circumstances when made to a qualifying public benefit organisation (PBO) which meets certain criteria. While, as a donor, the person is, upon receipt of the relevant certificate from the PBO, entitled to rely on same for purposes of deductibility, the PBO itself (which includes certain charitable trusts run by corporates as part of their CSI) must comply with certain new requirements.
The previous requirement, where the PBO itself was disbursing the donations received to other PBOs, was that the PBO was obliged to distribute an amount equal to at least 75% of the donations received during the current or next tax year. In order to give more flexibility to the PBOs and to enable them to build up funds to strengthen their organisations, the rules have been relaxed in certain respects, but failure to comply does have adverse consequences.
In summary, the following are the changes:
- Within 12 months after the end of the tax year, the PBO must distribute or incur the obligation to distribute at least 50% of donations received, instead of the previous 75%;
- The PBO must, in respect of the undistributed amounts, distribute or incur the obligation to distribute all amounts received in respect of investment assets held by it (other than proceeds on disposal of investments) to another PBO no later than six months after each five years from March 1 2015 (or from the date on which the PBO received its approval from SARS, where it was formed after March 1 2015); and
- If the PBO has not made these distributions or incurred the obligation to do so, the amounts will be taxable in the PBO’s hands (at the rate of 28%).
Where a lessee is obliged, in terms of the lease, to effect improvements to the lessor’s property, the lessee is entitled to amortise the cost over the period of the lease. As a result of certain avoidance schemes, the entitlement was limited in the 1980s to the situations where the lessor was not exempt from tax.
Recognising that this caused a blockage in infrastructure development in the case of public-private partnerships, certain concessions were made where government was the owner of the land, and last year the arrangements were formalised further by the enactment of section 12N of the act.
Now the arrangements have been widened by the enactment of section 12NA of the act, as section 12N applies only where government is the owner of the land, whereas there could be circumstances where the private-sector participant is not erecting improvements on government-owned land.
The example given in the Explanatory Memorandum to the bill is where the private-sector company concludes an agreement with a Department of State to erect an office block and manage it. Here the private-sector company is not the lessee, and thus section 12N will not apply.
Under section 12NA, it is enough if government holds the right of use or occupation of the land or building. Where government also pays the private-sector company a tax-free subsidy for the purpose of effecting the improvements, the deduction under section 12NA will be limited to the cost incurred after deducting the amount of the subsidy.
The tax-free investments legislation has been enacted to enable individuals to invest in these types of investments on the basis that the income and capital gains will be exempt from tax. The maximum investment will be R500 000, and the maximum amount per year invested is limited to R30 000.
The concession is intended to become operative on March 1 2015, although regulations are still required to be promulgated which identify who the administrators of the tax-free investment will be, as well as requirements relating to the types of financial instruments, and compliance and disclosure requirements. Provision is also made for:
- The tax-free status of a Small Business Funding Entity;
- A special allowance for land conservation in respect of nature reserves or national parks; and
- Funding to small, medium and micro enterprises,
and amendments have also been made to the research and development incentive.
There were a number of technical amendments in respect of VAT, customs duty and the employment incentive, as well as technical amendments to the Tax Administration Act 2011.
This article first appeared on lexis.hosted.inet.co.za.