Six tax changes tax practitioners should know about
05 June 2011
Posted by: Stiaan Klue
National Treasury released for public comment a draft of the 2011 Taxation Laws Amendment Bills that gives effect to the 2011 Budget Review tax proposals, as well as to additional urgent measures.
The draft legislation and explanatory memorandum can be found on the National Treasury (www.treasury.gov.za).
As noted in the 2011 Budget Review (page 62), the "2011 Budget tax proposals are intended to broaden the tax base in support of inclusive growth. Businesses will receive tax breaks to support skills development and job creation.... Various loopholes will be closed and tax equity will be improved ....".
The TLAB thus provides for further personal income tax relief, the introduction of a third rebate for aged individuals 75 years and over, transfer duty relief, various monetary threshold adjustments including increases in the capital gains exclusion amounts, measures to enhance the learnership and industrial policy incentive programmes in support IPAP and the New Growth Path, increase in the turnover tax exemption threshold for micro businesses, measures to build on South Africa's role as a regional gateway regime, and includes new and tougher anti-avoidance measures.
The TLAB includes most, but not all the 2011 Budget proposals, as some proposals require further work or consultation; the taxation of gambling winnings and contributions to retirement funds are thus not included. These outstanding matters will be covered by separate legislation in the form of a second set of bills. For technical constitutional reasons, the TLAB continues to be split into two bills - a money bill (section 77 of the Constitution) covering issues relating to rates and base, and an ordinary bill covering administration (section 75 of the Constitution).
The draft 2011 Taxation Laws Amendment Bills (TLAB) are published for public comment before formal introduction in Parliament. The Standing Committee of Finance (SCOF) convenes informal hearings on these draft bills and considers public comments received. The National Treasury and SARS will consider all the comments received, and thereafter submit a response document to the SCOF in August. The draft Bills are then revised and formally introduced in Parliament by the Minister of Finance (expected to be in early September).
1. Rates and thresholds:
The main purpose of the Bills is to give effect to the changes in rates and thresholds so these items can formally go into effect at the start of the tax year or as provided in the 2011 Budget Review. The full list of rates and threshold changes involving the Income Tax and Value-Added Tax Acts are dealt with at the end of this statement (see Rates and Thresholds Annexure A) for easy reference. These changes include: Personal income tax relief through adjustments to the personal income tax brackets and rebates amounting to R8.1 billion.Introduction of a third rebate of R2000 per year for taxpayers' 75 years and older.Increase in the transfer duty exemption threshold from R500 000 to R600 000 and introduction of a reduced 3 per cent interval from R600 000 to R1 million.Adjustments to various thresholds, such as the capital gain annual exclusion increasing from R17 500 to R20 000 annually.Increase in the tax-free interest-income annual threshold from R22 300 to R22 800 for individuals below 65 years and from R32 000 to R33 000 for individuals aged 65 years and older.Adjustments to the turnover tax exemption threshold for micro businesses from R100 000 to R150 000 per year.Extension of the learnership tax incentive for a further five years.
2. Income tax: Individuals, savings and employment:Living annuities:
The Bills contain a proposal to open up the provision of living annuities (to be relabelled as Retirement Income Drawdown Accounts) in order to promote competition, and not restrict policyholders to costly policies. Under the new regime, collective investment schemes (CIS) companies, banks using their CIS licences and Government using its retail bonds will be allowed to offer these products (in addition to the current dispensation for life insurers). Medical tax credits: The Bills give effect to the 2011 Budget proposal to convert expenditures associated with medical aid contributions converted into tax credits. In addition, a discussion paper on a more comprehensive conversion into credits for all other current medical deductions will be published for public comment and consultation.Long-term insurance: In 2011, changes were made to the taxation of long-term insurance in order to prevent executives from using key person plans as a means of avoiding fringe benefit tax. These changes, however, highlighted the need to revise the whole system as applied to policyholders and beneficiaries. The basic system focuses on payments versus proceeds. Premiums paid with after-tax contributions generate tax-free proceeds on pay-out; premiums paid with pre-tax contributions result in taxable proceeds.
3. Income tax: Business Anti-avoidance measures:
The Bills contain a number of new anti-avoidance measures including the hiatus of section 45 and ordinary tax treatment of dividends from third-party backed shares (seeSuspension of Intra-Group Rollovers - Annexure B). In addition, these Bills treat dividend cessions as ordinary revenue (as well as dividends in respect of long-held shares when matched by offsetting short positions). Like third-party backed shares, dividends in these cases should not be entitled to tax-free treatment because the holder lacks any meaningful economic interest in the underlying shares giving rise to the dividends. As a consequential measure, the imposition of Securities Transfer Tax on the cession of dividends is withdrawn.Completion of the dividends tax: As stated in the 2011 Budget Review, the proposed Dividends Tax will be made operational as of 1 April 2012 (via Ministerial notice in the Government Gazette). The Bills accordingly make the final adjustments associated with implementation of the new tax. Most notably, foreign dividends will effectively become subject to the same 10 per cent level of tax. The Value Extraction Tax (i.e. the successor to deemed dividend treatment under the Secondary Tax on Companies) will be dropped in favour of a facts and circumstances approach to deemed dividends.Incentives: Government is revising a number of pre-existing tax incentives: Firstly, the requirements associated with venture capital company incentive will be greatly eased to encourage pooling of investments for junior mining and small business. Secondly, the industrial policy incentive will be enhanced for projects located within industrial development zones to support the objectives of the industrial policy action plan and the New Growth Path. Thirdly, the research and development incentive will now require a pre-approval system to curtail avoidance while providing enhanced certainty for legitimate projects. Lastly, the film allowance for film owners will be converted into an exemption so as to encourage film profit (as opposed to the current emphasis on costs).Government Islamic bonds: A tax framework will be enacted that will allow for Government to issue Islamic bonds (i.e. Sikuks). The regime will essentially allow for asset-based financing with the yield giving rise to tax that is equivalent to interest. These bonds will serve as the standard for risk-free Islamic financing within South Africa.
4. Income tax: International Regional gateway initiatives:
The Bills largely expand on the Gateway to Africa initiatives initiated in 2010. The Bills remove the potential for double taxation by South African multinationals operating abroad through a variety of legislative measures, such as the use of a revised source system and through the addition of special tax credits in the case of foreign withholding taxes imposed on South African sourced management fees. The Bills also remove a number of practical anomalies associated with the "headquarter company" regime introduced in 2010.Controlled foreign company (CFC) revisions: The Bills contain substantial revisions to the taxable versus tax-free nature of the activities associated with a CFC. The revised rules eliminate the current transfer pricing penalty but more explicitly require an arm's length analysis when determining whether income is attributable to exempt active business activities. The anti-avoidance rules have also been revised to better target the tainted activities of concern and eliminate the use of discretionary trusts (and other forms of de facto ownership) employed to undermine the CFC regime.Offshore cell companies: In recent years, it was announced that cell companies would be the target of anti-avoidance legislation. The Bills achieve this result by treating each cell of an offshore cell company as a separate company for purposes of the CFC regime. The net result of this segregated treatment is to ensure that CFC status is measured on a cell-by-cell basis, thereby triggering a greater likelihood of CFC treatment.
5. Value-added Tax: Notional input credits in respect of fixed residential property:
The proposed rules eliminate the current Transfer Duty limitation when VAT vendors acquire second-hand fixed property from non-VAT vendors. As a result, VAT vendors acquiring properties from non-VAT vendors will be eligible for input credits based on the full purchase price. This change should assist the cash-flow needs of many developers when acquiring residential property.Temporary relief for developers engaged in short-term rentals of residential fixed property: Under current law, application of residential property for rental purposes triggers an automatic deemed VAT charge. This deemed VAT charge effectively undercuts attempts by developers to obtain short-term cash-flows when difficult market conditions prevent desired sales. The proposed amendment provides relief by deferring this deemed charge for a period lasting up to three years.
6. Other taxes:Securities Transfer Tax - Broker-member exemption:
The broker-member exemption will be temporarily expanded to provide relief for all broker-members acting in their capacity as principal. This amendment will apply from 1 January 2011 until the close of 31 December 2012. The purpose of this temporary adjustment is to review current commercial practices on the JSE. Upon completion of this review, the broker-exemption will be explicitly revised so as to apply solely to situations where the Securities Transfer Tax would otherwise inhibit JSE liquidity.Transfer Duty - Company rollovers: Companies (and trusts) will now be subject to the same progressive rate of Transfer Duty as natural persons. As part of this change, taxpayers engaged in asset-for-share rollovers (e.g. upon formation of a company) will now additionally obtain relief from Transfer Duty.
Part B: Discussion Documents and further legislation
1. Urgent Retirement Reforms Discussion Document
The 2011 Budget Review also contains proposals on the retirement contribution base and the tax treatment of contributions to retirement funds which includes proposed thresholds for tax deductions up to 22.5 per cent and limited to R 200 000 per annum. In addition, statements pertaining to the imposition of the 1/3rd lump sum / 2/3rd annuity split for provident funds are also made. Given the need for further consultation, these issues will first be addressed in discussion documents for public comment, after which legislation will be considered, either in late 2011 or in 2012. These discussion documents will be published in July 2011.
2. Medical Credit Discussion Document
A discussion document will be issued covering the conversion of medical deductions into medical credits (due out next week). These credits are to promote greater equity in the tax system.
3. Legislation on Taxation of Gambling
Further details on the taxation of gambling winnings will be published for public comment later this year. This will focus on the design and administrative aspects of the tax.