SARS exclusions in line with international regulation

David Warneke, Partner, Head of Income and VAT Technical, BDO Incorporated

While South African tax law is well established and is seen as one of the most prominent laws of its kind in Africa, there are very few exemptions in the law which may often take advantage of vulnerable parties. This is however changing through an investi

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’).

The following article was received from BDO.

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 issued by SARS, one reason for this amendment is that these types of 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 (March 1, 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 exempted 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.

As this concluded the BDO article FAnews looked into what the international benchmark is.

International benchmark regarding disabilities

While South Africa is technically a developing nation, we have a well-established legislative system which is comparable with international counterparts. It is therefore worthwhile to benchmark the SARS resolutions according to international laws.

In Canada, citizens qualify for disability tax credit. The disability amount is a non-refundable tax credit that a person with a severe and prolonged impairment in physical or mental functions can claim, to reduce the amount of income tax he or she has to pay in a year. This amount includes a supplement for persons under 18 years of age at the end of the year.

In the USA, the law is a bit more complex whereby disability is both taxable and non-taxable. If you pay the premiums with after-tax dollars, the benefits you receive are tax free. If you are enrolled in a group disability insurance plan sponsored by your employer, the taxability of your benefits depends on who pays the premium. If you pay the total premium using after-tax income, then your benefits will be tax free. On the other hand, if your employer pays the total premium and does not include the cost of coverage in your gross income, then your benefits will be taxable.

In the UK, disability income is non-taxable.

Editor’s Thoughts:
It is clear that South Africa is making a concerted effort to level the playing field between itself and the rest of the world. This is being driven by adopting legislation which at times mirrors international laws and at times challenges them. But is enough being done? Are there other insurance policies which SARS can exempt from tax?  Please comment below, interact with us on Twitter at @fanews_online or email me your thoughtsjonathan@fanews.co.za.