Tax News

SA Budget 2020/21 – Clarifying rollover relief for unbundling transactions involving non-resident shareholders

Author: Jerome Brink. Generally, as a matter of tax parity within South Africas corporate tax system, the distribution of an asset (including shares) by a company to its shareholders should have the same tax impact as a company sale of the asset followed by a distribution of after-tax cash proceeds. However, section 46 of the Act makes provision for rollover relief where shares of a resident company (referred to as an unbundled company) that are held by another resident company (referred to as an unbundling company) are distributed to the shareholders of that unbundling company in accordance with the effective interest of those shareholders.

SA Budget 2020/21 – Contract mining and capital expenditure: Proposed amendments following the benhaus mining judgment

Authors: Tsanga Mukumba and Louis Botha. Mining by its nature requires large initial capital outlays and in recognition of this the Act provides for an accelerated deduction of such capital expenditure by miners. In Benhaus Mining (Pty) Ltd v Commissioner for the South African Revenue Service (165/2018) [2019] ZASCA 1, it was held that this special regime extended to contract miners who engage in mining operations, under a contract with the holder of a mining right, and who earn a determinable fee under such agreement. For a discussion of this case see our Alert of 12 April 2019.

SA Budget 2020/21 – Refining the taxation of real estate investment trusts (REITS)

Authors: Aubrey Mazibuko and Jerome Brink. Prior to the commencement of specific legislation regarding real estate investment trusts (REITs) on 1 April 2013, two forms of listed property investment entities existed in South Africa, namely, property loan stock companies (PLS) and property unit trusts (PUT), i.e. collective investment schemes in property. These entities were subject to different regulatory controls and tax treatment.

SA Budget 2020/21 – Export of dual listed securities – Proposed income tax amendments

Authors: Tsanga Mukumba and Louis Botha. Under South Africas current exchange control (Excon) rules, South African residents are required to seek approval from the South African Reserve Bank (SARB) should they wish to export a South African listed security outside of the Common Monetary Area. As a result of the proposed modernisation of South Africas Excon regime, discussed in the Exchange Control section of our Budget Alert, under which the SARBs permission will no longer be required, it is proposed that such an export results in income tax consequences. Specifically, the Budget proposes that such a transfer now constitute a deemed disposal of that security for income tax purposes, with further consequences once the share is traded on the relevant foreign exchange.

SA Budget 2020/21 – Proposal to prevent tax avoidance through the use of loop structures

Author: Louis Botha. According to the Budget, the current exchange control provisions restrict the use of loop structures, in part to protect the tax base. The current policy is that a South African resident may not collectively hold more than a 40% interest in an offshore entity, which in turn, holds interests in a South African entity or made loans to a South African company. Where an interest is held in this manner, it is known as a loop structure.

Utilisation of trusts as a planning tool remains under the microscope

Author: Jerome Brink Historically many individuals made use of estate planning schemes through trusts, whereby taxpayers would transfer assets to a trust and the purchase price owed by the trust to the taxpayer in respect of the assets would be left outstanding as a loan, advance or credit in favour of that taxpayer on which no interest or very low interest would be charged. Alternatively, taxpayers would advance a low interest or interest-free cash loan, advance or credit to a trust in order for the trust to use the money to acquire assets.

SA Budget 2020/21 – Value-added tax

Despite much speculation regarding another increase in the VAT rate, it was announced that the VAT rate would remain unchanged. This is on the basis that a further increase in the VAT rate would not be possible without significant relief measures, either in the form of further zero-rated supplies or increased social grants to poor households at the same time as any increase. No further significant VAT amendments were announced.

Share re-purchase and profit extraction transactions

The favourable tax treatment afforded to dividends in contrast to other forms of income (including capital gains subject to capital gains tax) in terms of South African tax law has resulted in many opportunities for tax arbitrage especially where one is dealing with the sale of shares. Given that dividends are generally exempt from tax in terms of the Income Tax Act No. 58 of 1962 (the ITA) and in certain instances (most notably payments by South African tax resident companies to other South African tax resident companies) exempt from dividends tax, many transactions have typically been structured to take advantage of the favourable dispensation afforded to dividends. A classic example would be for a corporate shareholder to exit its share investment in a company by means of a share repurchase transaction as opposed to the direct sale of shares. There are many commercial benefits of doing so but the Read More …