The most significant tax event during the month of July was the publication of the 2013 taxation bills, the Draft Taxation Laws Amendment Bill (‘TLAB’) and the Draft Tax Administration Laws Amendment Bill (‘TALAB’).
This month’s Tax Flash focusses on issues related to these bills. We also include our regular feature ‘What’s new from SARS’.Should you have missed any of our previous editions of Tax Flash.
Payouts from disability policies to be exempt from Income Tax
In terms of proposed amendments contained in the 2013 Draft Taxation Laws Amendment Bill, individuals will in future enjoy an exemption from Income Tax in respect of all payouts from disability insurance policies in respect of which they are the policyholder. This exemption will apply irrespective of whether the policy is a capital or income protection policy.
At present capital protection policies are non-deductible in the hands of such an individual but are tax-free on payout whereas income protection policies are tax deductible but taxable on payout. Premiums paid by an employer in respect of either type of policy will be tax deductible in the hands of the employer provided that the employee is taxed on the premiums as a fringe benefit. The payouts in such a case will be tax-free.
According to the Explanatory Memorandum, one reason for this amendment is such insurance policies are of a personal nature. Another reason is that the distinction between the types of policies can too easily be blurred so as to suit the Income Tax needs of the contributor.
Good news for taxpayers is that the system is meant to operate ‘cleanly’ going forward, according to the Explanatory Memorandum. In other words, even if deductions in respect of income protection policies have been claimed in the past, payouts after the effective date (1 March 2014) will be wholly tax free.
Dividends received in respect of all restricted shares to become taxable
The 2013 Draft Taxation Laws Amendment Bill proposes that all dividends in respect of restricted shares will in future not be exempt from Income Tax. Under the current regime, dividends from equity shares that lack hybrid features are exempt, as are dividends that take the form of equity shares issued and dividends accrued in respect of a restricted interest in a share incentive trust which only holds equity shares without hybrid features.
It appears from the Explanatory Memorandum that it is National Treasury’s view that dividends in such cases act as disguised low-taxed salary for employees.
In terms of the proposal, the gross income definition in section 1 of the Act is to be amended by specifically including ‘any dividend in respect of an equity instrument as defined in section 8C(7) that has not vested in that person as contemplated in section 8C(3)’ as an amount received or accrued in terms of paragraphs (c) or (d) i.e. services rendered, instead of as an amount received or accrued in terms of paragraph (k) i.e. dividends. Hence there is a re-characterisation of such an amount in the hands of the recipient, and it is not regarded as a dividend received. It is therefore taxable as an amount for services rendered rather than as a dividend received.
In the hands of the company declaring the dividend, a new deduction provision gives a deduction of the amount of such dividends declared to the extent that the dividends are included in the income of the recipient in terms of paragraph (c) or (d).The provision is proposed to become effective on 1 March 2014 and to apply in respect of dividends declared on or after that date.
Exit charge to apply to shares in property companies
The 2013 Draft Taxation Laws Amendment Bill proposes that the capital gains tax ‘exit charge’ will in future be levied in respect of shares in a company or ownership interests in another form of entity that derives 80 per cent or more of its value from immovable property situated in the Republic. The exit charge applies where a person ceases to be a ‘resident’ for purposes of South African Income Tax and takes the form of a deemed disposal of all assets of the person at market value. South African immovable property interests and permanent establishment assets are excluded.
At present the exit charge does not apply to ownership interests in an entity that derives 80 per cent or more of its value from immovable property situated in the Republic, since if such interests are disposed of by the [now] non-resident subsequent to the change of residence, capital gains tax is chargeable at that stage.
However, Double Tax Treaties often provide an escape from the subsequent levying of capital gains tax in these circumstances as capital gains are often only taxable in the new country of residence of the recipient.
It is proposed that the taxpayer will be deemed to have disposed of such interests at market value on the day immediately before the cessation of residence for their market value on that day. The proposal also extends to a resident company that becomes a headquarter company during the year of assessment and a controlled foreign company (‘cfc’) that ceases loses its cfc status during its year of assessment, otherwise than by way of it becoming a South African resident.
The amendment is proposed to become effective from 1 July 2013 and to apply in respect of years of assessment commencing on or after that date.