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On 22 February 2022, the South African Revenue Service (SARS) issued a draft interpretation note (Draft IN) for public comment, which appears to have been published to provide clarity on the interplay between the recoupment provisions under section 8(4)(a) of the Income Tax Act 58 of 1962 (ITA) and the newly introduced deemed-disposal rule under section 8(4)(k)(iv) of the ITA. Background Section 8(4)(a) of the ITA contains recoupment provisions that aim to include in a taxpayer’s income all amounts claimed as a deduction or allowance under certain sections of the ITA whether in the previous or current years of assessment, which have been recovered or recouped in the current year of assessment. Therefore, the effect of section 8(4)(a) is, subject to certain exemptions and exclusions under the ITA, to include in income, amounts which have either been recovered or recouped by the taxpayer on the disposal of an asset or Read More …

Digital business models create value in ways that are not neatly captured by our tax systems which are designed to tax “bricks and mortar” economic activity. The source and residence rules on which today’s tax systems are based were not designed to tax the types of economic interactions that take place online. Free-to-use digital services provide a good example of the disruption caused by digital business models to existing tax rules. With free-to-use digital services there is no transaction between the service provider and consumer. The payment for the service provided is not how the service provider generates its income. Advertising revenue is often a significant part of how such businesses earn income. However, it is indisputable that the provision and consumption of the free service is at the core of its trading activities. This, along with the international mobility of the digital service provider’s intellectual property (including branding, collected Read More …

The Employment Tax Incentive Act 26 of 2013 (ETIA) creates a motivation, known as the employment tax incentive (ETI), whereby employees’ tax may be reduced in terms of the formulae provided in the ETIA for the benefit of the employer. In its preamble, the ETIA explains that this measure aims to support employment growth in the face of South Africa’s concerning rate of unemployment and for Government to share the costs of expanding job opportunities with the private sector. In the case of Taxpayer M v CSARS (Case no: IT 45585) (as yet unreported), the appellant, Taxpayer M (Employer), was eligible to receive the ETI in respect of its qualifying employees. As required by the ETIA, the Employer timeously submitted its monthly employer declaration returns (known as an EMP201). During this time, an ETI in the amount of R3,757,633 was available to the Employer. However, in the employer reconciliation declaration Read More …

Authors: Joon Chong, Partner from Webber Wentzel SARS has announced the deadline dates for filing income tax returns for the 2022 year of assessment as well as the details of those exempt from filing returns On 3 June 2022, SARS will publish a notice in the Government Gazette specifying the taxpayers that do not need to file income tax returns for the 2022 year of assessment, and the deadlines for taxpayers that have to file an income tax return. Taxpayers who are exempt from filing are individuals who receive total income of less than ZAR 500 000 for the year from only one source and receive no other allowances or benefits, and from whom PAYE has been deducted according to the prescribed tax deduction tables. Individuals who only receive (i) interest below the interest exemption thresholds; (ii) amounts from Tax Free Savings Accounts; or (iii) dividends and are non-residents throughout the year, Read More …

Despite recent implications to the contrary, the Minister of Finance (Minister) announced in the 2022 Budget Speech that the corporate income tax (CIT) rate will be reduced to 27% for years of assessment ending on or after 31 March 2023. SHARE PAGE The reasons outlined by the minister for proceeding with this reduction, against many expectations, are as follows: Corporate income and profits have been more resilient than anticipated with tax collection recently buoyed by strong increases in the prices of exports relative to imports. South Africa’s corporate income tax rate exceeds the Organisation for Economic Co-operation and Development’s average of 23%. The CIT rates of countries with strong investment and trading ties to South Africa have significantly lower rates of CIT, which provides a strong incentive for tax avoidance. The reduction in CIT is part of a broader restructuring of the corporate income tax system in South Africa. While the Read More …

The intra-group transaction rule allows for tax-neutral transfers of assets within a group of companies. However, it comes with many caveats that need to be managed. One of these is that, where an asset is transferred on intercompany loan or for shares, the transferor is deemed to have a nil base cost for such loan or shares. Before last year, this nil base cost was only ignored where the loan was repaid, or share capital was returned, within the same group of companies. This nil base cost rule could result in economic double tax in some circumstances. For example, if the transferee de-groups within six years, the de-grouping claw back would be triggered in the hands of the transferee, whereas the transferor would still have a nil base cost for the loan and would trigger tax on the repayment or sale of the loan. The 2021 amendments provided for additional Read More …

“Contributed tax capital” is defined in section 1 of the Income Tax Act 58 of 1962 and is a key concept in differentiating between distributions that are regarded as dividends and distributions that are regarded as returns of capital for tax purposes. In a very general sense, the contributed tax capital of a company (in relation to a particular class of shares) is the aggregate of all capital that has been contributed to a company by shareholders in that class, less the capital that has been returned to them. Where a company distribution reduces the contributed tax capital, it is considered a return of capital, and where there is no reduction it is a dividend for tax purposes. The definition of “contributed tax capital” contains a proviso to the effect that no shareholder (in relation to a particular class of shares) may receive contributed tax capital in excess of that Read More …

The debt forgiveness rules set out a waterfall of adverse tax consequences that are triggered where debt is forgiven or capitalised. To apply these rules, the debtor needs to identify what the forgiven debt was used for. For example, if the debtor used the proceeds of the debt to fund operational expenditure and claimed an income tax deduction for such expenditure, the debtor must recoup the income tax deduction. Likewise, if the debtor used the proceeds of the debt to acquire a fixed asset which is written off annually for tax purposes, the debtor must recoup the wear and tear allowances. According to the 2022 Budget Speech, there is a perceived gap in these rules in relation to assets that were sold in previous years, and where the debtor claimed a scrapping allowance or realised a capital loss. It has been proposed that the debt forgiveness rules be amended to Read More …

Tax incentives are applied to encourage certain behaviours and activities by providing businesses and individuals with favourable tax treatment. The introduction of a tax incentive is generally based on a social, economic or environmental need that has been identified and can be alleviated by the actions or behaviours of taxpayers in exchange for a tax benefit. SHARE PAGE Although tax incentives are introduced in order to remedy or improve a particular circumstance or behaviour, there are potential negative effects from these incentives that make them economically less desirable, including: the reduction of the tax base; increasingly complicated governing legislation; greater benefits to larger entities that can obtain specialised tax advice; and additional South African Revenue Service resources required to monitor and audit the incentives. In order to mitigate these possible negative effects, tax incentive provisions often include a sunset clause that indicates a predetermined date on which the relevant incentive will Read More …

Tax incentives are applied to encourage certain behaviours and activities by providing businesses and individuals with favourable tax treatment. The introduction of a tax incentive is generally based on a social, economic or environmental need that has been identified and can be alleviated by the actions or behaviours of taxpayers in exchange for a tax benefit. Although tax incentives are introduced in order to remedy or improve a particular circumstance or behaviour, there are potential negative effects from these incentives that make them economically less desirable, including: the reduction of the tax base; increasingly complicated governing legislation; greater benefits to larger entities that can obtain specialised tax advice; and additional South African Revenue Service resources required to monitor and audit the incentives. In order to mitigate these possible negative effects, tax incentive provisions often include a sunset clause that indicates a predetermined date on which the relevant incentive will cease Read More …