Herewith please find comments put together by Deloitte’s Cape Town National Tax Technical team on the draft Revenue Laws Amendment Bill which was recently released for public comment.
The major issues addressed in the draft RLAB are:
1. Retirement issues
1.1. Taxation of withdrawals from retirement funds – tax-free withdrawal lump sum has been increased to R23000;
1.2. Allocations to spouses on divorce – a simplified regime is proposed to provide more certainty around the tax treatment of amounts awarded in terms of divorce orders;
1.3. Default withdrawals – in an effort to preserve retirement funds within the retirement fund industry, it is proposed that where an employment relationship is terminated, there will no longer be an automatic triggering of a withdrawal and tax -- this will be postponed until the member elects to receive the payment in cash;
1.4. Transfers from pension to provident funds – it is proposed that transfers from a pension to a provident fund be treated as a lump sum withdrawal benefit in the hands of the member and trigger tax.
2. Employers and employees
2.1. Repayable employee benefits – it is proposed that employees who are required to repay a conditional amount to an employer be provided with a tax deduction in respect of this amount;
2.2. Personal use of business cell phones and computers – it is proposed that incidental use of cell phones, landlines and computers no longer give rise to a fringe benefit;
2.3. Consolidation of deemed employee regimes – it is proposed that the regimes relating to personal service companies, independent contractors and labour brokers be consolidated and all treated in the same manner. There is unlikely to be significant change in the treatment of these newly termed “personal service providers”;
2.4. Deductions in respect of the learnerships -- amendments have been made to make the deductions greater / more widely available in order to encourage job creation;
2.5. Payroll giving – it is proposed that employees will now be entitled to the section 18A deduction at the time of the donation made through payroll, as opposed to on submission of his/her tax return.
3. Individuals
3.1. Deductions in respect of disability expenses – a change in terminology from “handicapped person” to “disabled person” is proposed. Furthermore a list of tax deductible expenses will be released to enable greater certainty on the tax treatment of such expenses. This list will be reviewed regularly in consultation with organisations representing the disabled fraternity;
3.2. Estate redistributions - amendments are proposed to clarify the treatment where an heir contributes an asset to the estate for no consideration as a result of massing or in terms of a redistribution agreement;
3.3. Broad-based employee share schemes – it is proposed that the qualifying requirements be expanded as they are considered to be too stringent. In particular, the monetary cap will be increased from R9000 to R50000 over five years, the participation percentage threshold will be lowered from 90% to 80% and the permissible restrictions may be relaxed.
4. Corporate and commercial issues
STC reform
4.1. STC reforms: Conversion from STC to a dividend tax – a two-phased approach to STC reform was announced in 2007. The first phase entails the reduction of the STC rate as well as the revision of the tax base, being essentially the definition of dividend, on which the STC relies. The second phase entails the replacement of STC with a new tax on distributions of companies that is levied at the shareholder level, which is referred to as the “dividend tax”. The lowering of the rate has already been effected. These proposals now seek to implement the latter part of the first phase as well as the second phase.
4.2. Basics of the dividend tax – this will be levied at shareholder level at a rate of 10%. The beneficial owner of the dividend will be exempt from the dividend tax if it is a South African company, a sphere of the South African government, and exempt parastatal, a pension or benefit fund, an approved PBO, or an environmental rehabilitation trust.
4.3. Transitional arrangements in relation to the STC credits –
4.3.1.An exemption will exist for dividends previously subject to STC.
4.3.2.When declaring a dividend, the company will be forced to utilise the STC credits.
4.3.3.Dividends that are eligible for STC credits will be allocated pro rata amongst all shareholders with in the same class entitled to the dividends, irrespective of whether the shareholders are exempt from the dividend tax.
4.3.4.Communication between the payor of the dividend and the beneficial owner of the dividend will be required in order to ensure that the STC credits have been correctly applied.
4.3.5.All STC credits will be forfeited on the third anniversary of the date that the dividend tax becomes effective, which we expect to be in the latter half of the 2009 calendar year.
4.3.6.Other transitional arrangements will apply for the first year after the effective date.
4.4. STC reforms: Revised dividend definition -- the reliance of STC on accounting and company law principles is seen as an issue, as it raises unnecessary complexity and results in the creation of opportunities for avoidance. It is proposed that a new “dividend” definition be introduced which would include as a dividend any amount distributed or otherwise paid in respect of a share, unless the distribution is made out of contributed tax capital (“CTC”). As such, all operating and liquidating distributions, and all amounts paid in redemption, cancellation or otherwise in exchange for shares surrendered, will be regarded as a dividend, whether in cash or otherwise.
4.5. In order to support the new dividend definition, a definition of CTC will also be introduced. CTC is essentially a notional amount derived from the value of any contribution made to a company as consideration for the issue of shares by the company. As a result of the introduction of this definition, amendments are also proposed to the definition of trading stock as well as the treatment of amalgamation transactions and unbundling transactions. It is specifically noted in the explanatory memorandum that on liquidation of a company, the CTC is simply lost. In addition, if a company has two classes of shares, a CTC account should be maintained for each.
4.6. STC reforms: Dividend tax withholding regime – rules are set out for the withholding of tax in relation to certificated shares and uncertificated shares. Rules will also be introduced in order to deal with the withholding by intermediaries.
Other corporate amendments
4.7. Passive holding companies – one of the major concerns in relation to the dividend tax is the possibility of the deferral of dividends in order to delay the incidence of the tax. In addition, due to the arbitrage in the company versus individual marginal tax rate, companies are used to accumulate passive income, such as interest that, according to the explanatory memorandum “can just as easily be earned in individual hands but for the tax”. As a result, a passive holding company regime is proposed, in order to eliminate the arbitrage benefit referred to above. Such companies will be subject to a tax rate of 40% and a 10% charge on dividends. The proposal will apply regardless of the number of shareholders. Subjective passive holding company triggers have been set out, which in my view would be difficult to determine if applicable.
4.8. Company reorganisations: De-grouping charge -- detailed proposals are made to alleviate flaws in the current de-grouping formula. These include reconsideration of the basic gain, CGT base costs, trading stock, depreciation costs.
4.9. Company reorganisations: Elections and reorganisations – it is proposed that the need to make an election be removed and that rollover treatment apply as an automatic default for all reorganisations. Where appropriate, parties will be allowed to elect out of rollover treatment if desired.
4.10. Share issue anomalies – section 24B of the Income Tax Act provides that if shares are issued by a company in exchange for an asset, the company is deemed to have incurred expenditure equal to the market value of that asset at the time of its acquisition by the company. The person disposing of the asset is deemed to have disposed of the asset for the market value thereof. The existing provision apparently creates opportunities for avoidance and as such it is proposed that the section be amended so that it is no longer applicable for purposes of donations tax, and will also be amended to clarify the intention behind the section.
4.11. Intellectual property arbitrage – section 23I was introduced in 2007 and was regarded by some as being too broad in its application. It is therefore proposed that the section will be amended in order to more accurately target the perceived mischief.
5. Small businesses
5.1. Small business presumptive tax – the small business presumptive tax is a stand-alone elective tax regime intended to ease the administrative burden on very small businesses. This presumptive tax will effectively replace income tax, CGT, STC and VAT. Payroll taxes (PAYE and UIF contributions) are excluded from the presumptive tax. The draft Bill sets out a new Sixth Schedule to the Income Tax Act, titled the Determination of Turnover Tax Payable by Very Small Businesses. This new schedule set out in detail the following:
§ Who will qualify as a very small business;
§ Amounts not taken into account in qualifying turnover;
§ Anti-avoidance rules for qualifying turnover;
§ Certain disqualifications such as limits on interests in other companies and limit on investment income;
§ The fact that very small businesses must not be registered for VAT;
§ Special rules relating to partnerships;
§ Determination of the “taxable turnover”;
§ Administration including registration, deregistration, submission of returns and payment of the turnover tax;
§ Increase in the VAT compulsory registration threshold and related relief;
§ CGT and STC/dividend tax relief.
5.2. The venture capital company regime – a new section 12J is proposed, and is intended to assist small and medium-sized businesses in raising equity finance, by providing tax incentives for those who invest in such businesses through venture capital companies (“VCC’s”). The proposed section sets out the requirements in order to qualify including in the investee company requirements, the requirement for SARS approval of the VCC status and the situations in which the VCC status can be lost.
6. Miscellaneous income tax issues
6.1. Depreciation allowance for residential units – proposals are made to give relief where ownership of residential units is transferred from employers to employees.
6.2. Allowances in respect of expenditure on government business licences – tax deductions to cover upfront licence fees and annual licence fees paid in cash or in kind to the government have been proposed.
6.3. Allowances in respect of industrial policy projects – allowances for training and depreciation as well as other amendments have been proposed.
6.4. Donations to multilateral humanitarian organisations – it is proposed that United Nations agencies with diplomatic immunity status in South Africa should qualify for section18A tax-deductible donation status, without having to register as a PBO in South Africa.
6.5. Promotion of biodiversity – an amendment is proposed to create a mechanism for the deductibility of environmental maintenance and rehabilitation expenses as well as the loss of the right of use of land associated with biodiversity conservation and management.
7. VAT
Amendments relating to the following matters are proposed:
7.1. Industrial development zones;
7.2. Vocational training;
7.3. Public-private partnerships;
7.4. Supply of the right to receive money under a rental agreement;
7.5. Land reform transactions; and
7.6. Storage warehouses.
8. Estate duty
Amendments relating to the following matters are proposed:
8.1. General anti-avoidance rules;
8.2. Time limits for assessment; and
8.3. Life insurance and pension benefits.
9. Stamp Duties Act
The repeal of the act is proposed.
The Draft Revenue Laws Second Amendment Bill contains administrative provision amendments.
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