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Budget Review 2018

Thursday, 22 February 2018   (0 Comments)
Posted by: Authors: Joon Chong and others
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Authors: Joon Chong, Donald Fisher-Jones, Nola Brown, Graham Viljoen & Karen Miller (Webber Wentzel)

The Budget Review 2018 (Budget) was released by the National Treasury this afternoon. In this e-alert, we discuss significant amendments included in Annexure C and Chapter 4 of the Budget. 

All references to "section" below are to sections in the Income Tax Act (ITA), and to "para" are to paragraphs in the Eighth Schedule of the ITA.

Proposed amendments under the heading of "Business (general)" include the following: 

  • The perceived abuse of share buy-back schemes were targeted in 2017 where "extraordinary dividends" received by a shareholder company holding a "qualifying interest" were deemed to be proceeds for capital gains tax (CGT) purposes, or income on the disposal of the shares. The amended section 22B and para 43A also overrules the corporate rules, resulting in a tax impact to a holding company receiving a liquidation distribution in terms of the corporate rules. National Treasury notes these concerns and proposes to review the interaction between these provisions and the corporate rules. Further, the rules on when preference dividends are "extraordinary dividends" would also be clarified.  
  • The amended "concession or compromise" provisions in section 19 and para 12A introduced in 2017 were intended to provide relief to companies in financial distress but which provide limited or no relief at all to such debtors. National Treasury has noted concerns about the unintended consequences of these provisions and proposes further amendments to address these concerns. 
  • Companies using debt funding to acquire a qualifying controlling interest in an operating company are allowed a special interest deduction on the debt in section 24O. An operating company is currently defined as a company where at least 80% of its receipts and accruals are income for tax purposes. National Treasury proposes to clarify when the 80% test should be applied and whether the test should be applied when the operating company transfers its business as a going concern to another company in the same group.  
  • The tax relief provided to collateral lending arrangements will be reconsidered to prevent the perceived abuse between foreign shareholders using listed shares as collateral for loans with resident companies. The resident companies would be exempt from dividends withholding tax on the dividends distributed by the listed company, and the full amount distributed would then be paid to the foreign shareholders as manufactured dividends. In contrast, the foreign shareholder would only have received an amount net of dividends withholding tax had it not entered into the arrangement.

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