PRESENTATION TO THE SCoF
2010 06 01
Muneer Hassan: Project Director Tax
Wessel Smith: Member of SAICA’s NTC
Puleng Owen Manyaka: Project Manager Tax
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FOCUS AREAS
1.Narrowing the interest threshold exemption
2.Employer-provided motor vehicles
3.Tax-free fringe benefits for employerprovided professional fess and indemnity
payments
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FOCUS AREAS
1. Narrowing the interest threshold exemption
Page 9 – 11 of the SAICA Submission
2.4 of the Explanatory Memorandum
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NARROWING THE INTEREST THRESHOLD
EXEMPTION
Current law: Section 10(1)(i)(xv)
• Exempts interest received by or accrued to “resident
natural persons” as follows:
Under 65
R22 300 (2010: R21 000)
Aged 65 years and older
R32 000 (2010: R30 000)
• Of the total interest exemption, the first R3 700
(2010: R3 500) of foreign interest and dividend received is
exempt from tax
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NARROWING THE INTEREST THRESHOLD
EXEMPTION
Proposed change:
• “these exemptions will be limited to savings
through widely available interest-bearing
instruments, such as bank deposits, government
retail bonds and collective investment money
market funds”
• Specific inclusion list – new section 10C of the
Act
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NARROWING THE INTEREST THRESHOLD
EXEMPTION
Problem statement:
• Taxpayers entitled to consistency and certainty
• Amendment favours certain categories of interest bearing
products
• Affects retired individuals who have invested in private
projects
• Affects legitimate transactions (example 1)
• Big blow for small businesses (example 2)
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NARROWING THE INTEREST THRESHOLD
EXEMPTION
Problem statement: Affects legitimate transactions
Taxpayer A
Seller: Primary
residence
Taxpayer B
Unconnected
Purchaser: Unable to obtain
financing
• Taxpayer A grants 20 year loan to Taxpayer B (house
used as security)
• Loan bearing interest at market rates
• A receives from B interest BUT no interest exemption
• Had A received the cash and then invested in a bank the
interest earned would be EXEMPT
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NARROWING THE INTEREST THRESHOLD
EXEMPTION
Problem statement: Big blow for small businesses
Unconnected
investor: loan funding
Start up business
cannot obtain loan
funding from a bank
Owner: obtain loan
from bank and on
lends to business
• Unconnected person: R278 750
• Options: Either invest in business or bank at 8% return
• Return = R22 300 (R278 750 at 8%return)
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NARROWING THE INTEREST THRESHOLD
EXEMPTION
Problem statement: Big blow for small businesses
Investment: R278 750
Return: 8% pa
Business
Bank
Return pa
Interest exemption
Balance subject to tax
22 300
0
22 300
22 300
22 200
0
Tax
Post tax returns
Net return as % of investment
8 920
13 380
4.8%
0
22 300
8%
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NARROWING THE INTEREST THRESHOLD
EXEMPTION
Proposed solution:
Main
• Remove the proposed exemption to limit the interest
exemption
• Focus on the avoidance schemes
• Current anti-avoidance legislation:
 Specific - Sections 7(1) – 7(11)
 General - Sections 80A – 80K “GAAR”
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NARROWING THE INTEREST THRESHOLD
EXEMPTION
Proposed solution:
Alternative
• Remove the proposed exemption to limit the interest
exemption
• Add specific anti-avoidance legislation after extended
consultation period with stakeholders
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COMPANY CARS
• Pages 1 to 5 of SAICA submission and pages 16 to
20 of Explanatory Memorandum
• Explanatory memorandum: “The percentage rate
for employer-provided vehicles (including the first)
will now be 4% per month of the vehicle’s determined
value (instead of the current 2.5% rate for the first
car).”
• “Determined value” to include VAT and maintenance
plan
• 80% of fringe benefit subject to employee tax (3.2%)
COMPANY CARS – Example “effect of
the proposal”
On vehicle with cost of R300 000 excluding VAT, and
employee on maximum marginal tax rate (40%):
• Before amendments: 2.5% cash value = R7 500,
therefore monthly tax at 40% = R3 000.
• After amendments: 4% cash value, but 3.2% subject to
PAYE = R13 680 x 80% = R10 944, therefore monthly
tax at 40% = R4 378.
• After amendments: At year-end, if no business mileage
can be proved, then the monthly tax effect would be
R5 472!
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COMPANY CARS
• Problem: “Determined value” to include VAT
although employer in some cases will be able to
claim back the input VAT!
Proposed solution:
Where an employer is able to claim the
input VAT on a vehicle, the determined
value should not include the VAT portion.
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COMPANY CARS
• Problem: Maintenance plan also included in
determined
value
-
Vehicles
that
include
maintenance / service plans will, if the amendment
is effected, carry a higher fringe benefit rate
when compared to vehicles that do not have
maintenance plans.
• It is also submitted that part of the 4% monthly
fringe benefit value already includes a portion for
the fringe benefit relating to the employer incurred
maintenance cost.
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COMPANY CARS
• Problem: Maintenance plan included (continued)
Proposed solution:
The maintenance plan should be excluded
from the determined value to achieve an
equitable outcome for all vehicles as it
relates to an operating expense.
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COMPANY CARS
• Problem: There is no distinction made between
“tool of trade” vehicles and the company car
“schemes”. By “tool of trade” we mean that the
vehicle is an essential tool that enables the
employees to perform his / her duties, for example
a delivery man that has the dedicated use of a
small bakkie, van or delivery vehicle.
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COMPANY CARS
• Problem: “tool of trade” vehicles (continued)
Proposed solution:
We propose that the legislation be amended to
distinguish between benefit “schemes” such as
those that allocate funds from a Cost To
Company package and a “tool of trade” vehicle
given for legitimate business use.
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COMPANY CARS
• Problem: We submit that the 4% value applied
against the value of the vehicle is not in line with
the actual cost of maintaining and running the
vehicle.
• On R200 000 vehicle AA rates cost = R7 186,
while the fringe benefit value would be R8 000!
• The fringe benefit is therefore higher than the
actual benefit received.
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COMPANY CARS
• Problem: 4% value (continued)
Proposed solution:
The rate of 4% should be revised to bring it in
line with the actual benefit received, i.e. the
expense incurred by the employer or the
expense that the employee would have incurred
if he/she had purchased, maintained and run the
car themselves.
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COMPANY CARS
• Problem: Employee tax - Employees that do
travel frequently for business would have a higher
percentage of business travel mileage than 20% of
their total. It follows that such employees would
only be able to claim relief on assessment. We
believe that the delay experienced between the
monthly employees’ tax charged and the refund
upon assessment could create hardship for
employees.
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COMPANY CARS
• Problem: Employee tax 80% (continued)
Proposed solution:
The employer should have the ability to, on a
discretional basis; lower the percentage from 80% to
a lower percentage for the purposes of withholding
employees’ tax on a monthly basis. Alternatively, the
employee should have the option to apply to SARS
for a hardship directive to fix the percentage of tax
withholding on a monthly basis in this regard.
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COMPANY CARS
• Problem: This proposal will also now include 80%
of the deemed private use of the vehicle (4%) in
the calculation for amounts due for Skills
Development (“SDL”) and Unemployment
Insurance Fund (“UIF”).
• The presumption of private use is, therefore,
extrapolated to the SDL and UIF contributions due
for these employees regardless of actual business
use.
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COMPANY CARS
• Problem: SDL and UIF contributions (continued)
Proposed solution:
The SDL and UIF contribution should both exclude a
travel allowance and the fringe benefit on employer
provided motor vehicles.
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FOCUS AREAS
3. TAX-FREE FRINGE BENEFIT FOR
EMPLOYER-PROVIDED
PROFFESSIONAL FEES AND
INDEMINITY INSURANCE
Page 11 – 12 of the SAICA Submission
2.8 of the Explanatory Memorandum
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TAX-FREE FRINGE BENEFIT FOR EMPLOYERPROVIDED PROFFESSIONAL FEES AND
INDEMINITY INSURANCE
Current law:
Paragraph 13(2)(b) of the Seventh Schedule to the Act
• Professional fees and indemnity insurance paid by
employers on behalf of their employees are exempted
from fringe benefit tax under paragraph 13(2)(b) of the
Seventh Schedule. Example of such fees are membership
fees paid to professional bodies and insurance indemnity
payment in the following professions:
Charted Accountants; Medical Doctors; Attorney’s;
Engineers
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TAX-FREE FRINGE BENEFIT FOR EMPLOYERPROVIDED PROFFESSIONAL FEES AND
INDEMINITY INSURANCE
Problem Statement:
Paragraph 13(2)(b) of the Seventh Schedule v Sec 23(m) of the Act
• The exemption provided under paragraph 13(2)(b) of the
Seventh Schedule on the payment of the professional fees and
indemnity insurance payments is discriminatory.
• Proposed amendment only favours certain categories of
taxpayers (e.g. only taxpayers who receive this kind of benefit
from their employers).
• Taxpayers who do not enjoy this privilege of being provided
with this kind of benefit by their employers and have to pay
these fees for themselves are not allowed get a tax deduction
in terms of section 23(m) of the Act.
• Taxpayers entitled to consistency and certainty.
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TAX-FREE FRINGE BENEFIT FOR EMPLOYERPROVIDED PROFFESSIONAL FEES AND
INDEMINITY INSURANCE
Proposed solution:
Main
• Clarity that the legislation provides in terms of
paragraph 13(2)(b) of the Seventh Schedule is
welcomed.
• HOWEVER we propose the relief be extended to
also allow professional fees and insurance
indemnity payments as a tax deduction for the
employee in terms of section 23(m) of the Act.
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