Authors: Joon Chong & Wesley Grimm from Webber Wentzel. The Budget Review 2021 includes a proposal to impose a deemed retirement withdrawal tax on retirement assets of emigrants as an exit tax. The proposal is unclear and has numerous issues. Data from various sources suggests that around 23 000 South African (SA) tax residents emigrate each year in search of greener pastures. Individuals who cease to be tax residents currently pay an exit tax on their worldwide assets, with certain exclusions. At present, immovable properties and retirement funds that remain invested in South Africa are excluded from the exit tax net.
Non-profit organisations (NPOs) play a critical role in their communities and broader society by sharing in the responsibility of Government to pursue the social and developmental needs of South Africa. Certain NPOs can qualify as public benefit organisations (PBOs) which entitles them to a preferential tax regime. Most PBOs are dependent on donor funding and some of them are able to encourage such funding by being able to issue section 18A tax deductible receipts which entitles the donor to claim an income tax deduction. In broad terms, entities that can issue section 18A tax deductible receipts include, amongst others:
Since South Africa introduced the principle of worldwide taxation in 2001, a number of so-called tax amnesty programmes have seen the light of day. A number of these amnesty programmes were focused on encouraging South Africans to declare and regularise their offshore income and assets, including the 2003 tax amnesty and the special voluntary disclosure programme (SVDP), which was in place between 1 October 2016 and 31 October 2017. A more permanent fixture in this regard has been the voluntary disclosure programme (VDP), which came into effect on 1 October 2012 and is contained in Chapter 16, Part B of the Tax Administration Act 28 of 2011 (TAA).
Owing to the detrimental effect of the COVID-19 pandemic on business and individuals alike, it has been decided that Government will not introduce measures to increase tax revenue in the Budget. In keeping with this approach, no significant VAT amendments have been announced. We nevertheless highlight some of the more technical and minor policy amendments in this article. Zero-rating of super fine maize meal Section 11(1)(j) of the VAT Act provides for the zero-rating of certain foodstuffs as set out in Part B of Schedule 2 of the VAT Act.
Trusts are versatile legal constructs or arrangements that are often used for tax planning purposes, inter alia with a view to avoid estate duty on appreciating assets. However, the line is sometimes very thin between legitimate tax planning and schemes that are, at least from a policy point of view, considered unacceptable avoidance arrangements. The list of specific anti-avoidance rules that have been introduced in relation to trusts over the years is long. These include, most notably, the introduction of section 7C of the Income Tax Act, which effectively disincentivises the transfer of an asset to a trust by a connected person on interest-free or low-interest loan account or simply granting interest-free or low-interest credit to a trust for purposes of acquiring an asset in that trust. The amount by which the interest is less than the official rate of interest will be treated as a donation in the hands Read More …
Bracket creep is the phenomenon where a state collects increased revenue without making increases to the tax rate. Instead the state relies on inflation to bring more individual taxpayers into higher tax brackets, resulting in an increased revenue collection. While South African individual taxpayers have been spared an increase in tax rates in the recent past, this was based on the intention that bracket creep would provide the additional revenue required by the state. The Minister has announced that the tax thresholds and seven tax brackets for individuals will be raised by 5%. The two tables below demonstrate the brackets for 2020/21 and 2021/22:
Controlled foreign companies (CFC) are companies where more than 50% of their participation rights or voting rights are held directly or indirectly by South African residents. The CFC regime is one of the measures put in place to tax South African residents that have majority held equity investments offshore. The provisions do this through (absent the qualification of an exemption), the imputation of the net income of the CFC (in essence, the taxable income of the CFC had it been South African resident) to the South African resident shareholders, in proportion to the interest held in the CFC. The Minister has proposed two amendments relating to CFCs as discussed below.
Following the amendments included in the recently published Taxation Laws Amendment Act 23 of 2020, which alter the rules regarding withdrawal of retirement benefits upon emigration from 1 March 2021, it was announced that other provisions dealing with retirement benefits may be amended. Specifically, the Budget identifies a potential anomaly arising in the context of a person ceasing to be a South African tax resident, but retaining her investment in a South African retirement fund and only withdrawing from the retirement fund when she passes away or retires from employment. When an individual ceases to be a South African tax resident, retirement funds are not always subject to withdrawal tax in terms of the Income Tax Act. Section 9(2)(i) of the Income Tax Act is important in this context, which section states the following regarding the source of a lump sum, pension or annuity payable by a retirement fund:
The corporate restructuring rules in sections 41 to 47 of the Income Tax Act are extremely useful for creating, restructuring and dismantling groups of companies. They allow for tax-neutral transfers of businesses and shares, amalgamations, unbundlings and liquidations. Each rule has specific clawback and ring-fencing provisions that can be triggered after the deal is concluded. Some of these clawback and ring-fencing periods last for 18 months, others for six years and the rest last forever. There are anomalies in the current rules, as some of these clawback and ring-fencing provisions result in double tax, while others are easily avoided by using the corporate rules in a certain sequence. The Minister has therefore proposed the following changes as discussed below.
Section 8F and 8FA of the Income Tax Act are anti-avoidance provisions which seek to re-characterise the taxation of interest on debt instruments issued by a company where either the debt instrument itself or the interest incurred on the debt instrument has certain equity-like features. The objective behind the section is to tax the return on the instrument in accordance with its substance (and according to what the Act deems its true nature) rather than its named form in order to avoid the deliberate manipulation of the nature of the instrument for purposes of seeking more beneficial tax implications. Stated simplistically interest on debt instruments that have equity features are required to be taxed as a return on equity (dividend) and not as interest.