Below are some of the proposed amendments raised in the Budget regarding retirement income provisions in the IT Act. Exemption relating to annuities from a provident or preservation fund Once a member of a retirement fund retires and receives an annuity as a retirement benefit, any contributions to the retirement fund that did not qualify for a deduction when determining the members taxable income are tax-exempt. This exemption does not apply to annuities received from a provident or provident preservation fund. To encourage annuitisation (regular payments in retirement), it is proposed that this exemption be extended to provident and provident preservation fund members who receive annuities. The exemption would apply for contributions made after 1 March 2016.
The Budget noted a global downward trend in corporate taxation rates. This downward trend may lead to an unintended increase in the imputation of the net income of controlled foreign companies (CFCs) in South African shareholders taxable income. This is despite the fact that at the inception, the CFC may have operated in a jurisdiction with rates of tax which would have met the present threshold contained in paragraph (i) of the proviso to s9D(2A)(l) of the IT Act.
One of the amendments proposed by the Budget aims to reconcile the incongruency that exists between South African company law and South African income tax law with regards to the deregistration or liquidation of companies that are involved in amalgamation transactions. The Companies Act, No 71 of 2008 (Companies Act) makes provision for the amalgamation of companies in s113. In terms of this section, once one or more companies have amalgamated, the amalgamated companies are deemed to have been deregistered by operation of law. As such, there are no formalities that must be complied with in order for the company(s) to be deregistered.
Following on the 2018 budget review in which the Minister increased the VAT rate to 15%, no further significant VAT amendments were announced. Clearing of VAT refund backlog In October 2018, the Minister stated in the Medium Term Budget Policy Statement that VAT refunds owing to vendors amounted to massive R41.8 billion. SARS made an effort to pay the outstanding refunds since then, which now stands at R31 billion. However, according to a SARS estimate, the outstanding refunds should be about R22 billion if uncompleted verifications and refunds withheld due to suspected fraud is taken into consideration. This effectively means that by reducing the VAT refund backlog from R41.8 billion to an acceptable R22 billion, the total expected additional revenue resulting from the increase in the VAT rate in the first year following the increase on 1 April 2018, is applied to pay outstanding VAT refunds.
While recent presidential elections and appointments in the United States of America and Brazil breathed fresh air into the lungs of climate change denialists, in South Africa, there is still general political recognition of the negative effects of climate change. This is in line with governments ongoing commitment to the Paris Climate Agreement, which aims to keep the increase in the global average temperature to well below 2C above pre-industrial levels. As a result of governments undertaking to reduce greenhouse gas emissions and meet its international commitments, various specific environmental tax proposals have been announced including the announcement that carbon tax will be implemented on 1 June 2019, that the energy-efficiency savings initiative will be extended, and that the tax exemption for certified emissions reduction will be repealed. These welcome announcements should be seen within the broader review of environmental fiscal reform policy announced in the Budget. This article briefly Read More …
National Treasury amended legislation governing share buy-backs and dividend stripping in 2017 and again in 2018. The specific anti-avoidance provisions can be found in s22B of the Income Tax Act, No 58 of 1962 (IT Act), which takes aim at shares held as trading stock, and paragraph 43A to the Eight Schedule to the IT Act, which applies if the shares are held on capital account. These provisions generally find application when corporates structure the disposal of qualifying interests with the desire to receive an income tax exempt dividend as opposed to taxable income or capital gains. In order to generate the income tax exempt dividend these disposals are generally structured as share buy-back transactions or dividend distributions combined with the immediate disposal of the shares.
The Taxation Laws Amendment Act, No 22 of 2012 introduced a new s24BA into the IT Act, which deals with value mismatches involving the transfer of assets in exchange for the issue of shares. Essentially, the section applies where the value of the asset given in consideration for the shares issued is different from what it would have been had the transaction been between independent persons acting at arms length. Where the market value of the asset before the disposal exceeds the market value of the shares issued, the excess is deemed to be a capital gain for the company issuing the shares. The amount of the excess must also be applied to reduce the tax cost of the shares in the hands of the subscriber.
It has always been a contentious issue whether a purchaser of shares can claim a deduction of the interest that it incurs pursuant to monies borrowed by the purchaser in order to fund the acquisition of shares. The argument has traditionally been that the purchaser will only receive dividends in respect of the shares and these dividends are not taxable. Given the fact that the interest therefore does not generate income, the interest was traditionally disallowed as a deduction. A number of years ago the legislature intervened by allowing the deduction of interest in respect of a debt that is used to fund the acquisition of shares in certain circumstances in terms of s24O of the IT Act. However, it is a requirement that the target company:
Personal income tax rates Many predicted that, given the already small tax base in South Africa, the already high personal income tax rates, the significant increases in tax rates over recent years and the current state of the economy, there would be very few changes to personal income tax rates in the Budget Speech. In recent years, South Africans faced an increase in personal income tax rates (refer for example to the 45% tax bracket introduced for individuals earning R1,5 million and above), the value-added tax rate, dividend withholding tax rate and the capital gains tax inclusion rates.
In terms of s25BA of the IT Act, distributions of amounts that are not of a capital nature that are made by a CIS to unitholders within 12 months after they accrued to, or in the case of interest was received by a CIS, follow the flow-through principle and are deemed to directly accrue to unitholders on the date of distribution and are subject to tax in the hands of unitholders. The IT Act does not provide a definition of what constitutes an amount of a capital nature and one is required to have regard to the specific facts and circumstances as well as tests handed down by Courts to decide whether an amount is of a capital nature.