Taxation Laws Amendments 2008
Select Committee on Finance
15 May 2008
Outline of Key Amendments
• Rates and thresholds
– Adjustments
– New thresholds plus depreciation
• Urgent matters
– Pension Streamlining and codification of interpretations
– Anti-avoidance
• Miscellaneous policy amendments
– Holdovers from 2007
– New isolated amendments
• Miscellaneous administrative amendments
• *More complex substantive policy amendments to
follow in the Revenue Laws Amendment Bills
2
Rates and Thresholds
(Appendix I; also see Explanatory Memorandum)
• Key Rates
–
–
–
–
PIT adjustments
CIT 28% rate
Gold mining 34% formula
Foreign owned South
African branch 33% rate
– Adjustments to fuel levy
and excise duties
• Key Thresholds
– Income tax threshold
• Below 65 yrs – R46 000
• 65 yrs and above – R74 000
– Interest exemption
R19 000 (under age 65)
– Interest exemption
R27 500 (from age 65)
– CGT exclusion R16 000
– Bursary (R100 000
salary/R10 000 exemption)
– PBO housing ceiling:
R7 500 household income
per month
3
Home Associations
(Section 10(1)(e))
• Current Law: Sectional title, share block
companies and other home associations
are generally taxable except for
homeowner levies
• Proposal: Up to R50 000 of investment
income (e.g. interest) will be exempt per
annum
4
Depreciation Issues
• Water Pipelines for Electricity Power Plants
(Section 12D(1))
– 5% depreciation allowed
• Small Business Company Option (Section 12E(1A)):
– Non-manufacturing small business companies may
use the current 50:30:20 rate or a rate more
generally available
– Allows for the 100% small equipment rate
• Sale-Lease Situations (Section 23D)
– Old regime limited depreciation for landlord to the
lesser of the landlord’s/licensor’s cost or the cost of
all previous connected tenants/licensees
– New regime clarifies the tenant/licensee look back
goes only 2 years
5
Pension Tax Amendments
Streamlining
Overall Retirement Issues
• General objective
– To streamline and clarify the retirement tax
dispensation
• Specific proposals:
– Ensuring the continued tax-free dispensation for
retirement savings
– Allowing more flexibility within the retirement sector
without triggering a tax charge
– Aligning retirement definitions in the Income Tax Act
with provisions in the Pension Funds Act
7
Preservation Funds
(New definitions section 1)
• Preservation funds are registered as
pension or provident funds for tax
purposes
• A number of problems arose due to this
registration process, including
– Limited choice of funds upon termination of
employment
– Lack of portability between preservation funds
– Membership linked to employment
• Problems addressed in the new standalone preservation fund definitions
8
Preservation Funds (2)
(Section 10 & Para. 6 of the 2nd Schedule)
• Growth within preservation funds will
remain tax-free
• Tax-free transfers between preservation
funds and other retirement funds
• Same tax treatment as other retirement
funds upon a member’s:
– Retirement; or
– Withdrawal from the fund
9
Retirement Lump Sums and
Provisional Tax
(Para. 19 of the 4th Schedule)
• Provisional tax is payable on amounts not
subject to withholding tax
• The tax is calculated with reference to a prior
year’s taxable income
• Only recurring taxable income from a prior year
should be taken into account and once-off
amounts should be excluded
• Retirement lump sums (like capital gains) are
not recurring payments and will accordingly be
excluded from the provisional tax base
10
Urgent Matters
Intra-Group and Cross-Border
Avoidance
(Media Statement Release)
Intra-Group 2008 Amendments
(Section 45)
• 2007 Amendments
– Group definition changed to exclude all taxpayers not subject to
worldwide tax (including foreign companies)
– The narrowed group definition legislatively triggers a degrouping charge for pre-1 October 2007 transactions
– Changes to be effective 1 January 2009
• Proposed 2008 Modifications
– Foreign companies with a South African tax residence (i.e.
effective management) will remain in the group
– All taxpayers subject to legislative de-grouping via the
amendment will be exempt from the de-grouping charge
– The legislation will be effective as of 21 February 2008
12
Company Groups
PARENT
100%
100%
100 Note
SUB 1
Seller
SUB 2
Buyer
Assets 100
value
20 tax cost
13
Intra-Group Asymmetry
• In a group transfer, assets are transferred from
one group company to another in exchange for
a note or cash
• The assets transferred have a rolled-over tax
cost, but the note and the cash have a market
value tax cost
• Example:
– Facts: Sub 1 transfers assets with a R100 value and
a R20 base cost to Sub 2 in exchange for a Sub 2
note
– Result: Sub 2 has a R20 base cost in the assets.
Sub 1 has a R100 base cost in the note
14
Intra-Group Avoidance
• Initial Intent:
– Intra-group relief is intended as deferral rollover
relief (not as an exemption)
– The goal is to restructure group ownership, not to
promote sale cash-outs (which should be subject to
CGT)
• Current Usage:
– Intra-group relief is being used to promote leveraged
buy-out acquisitions
– In aggressive cases, the market value note (or cash)
is being used to turn deferral into an exemption
15
Intra-Group Push-Down Debt
Acquiring
OPCO
Target
NEWCO
Buyer
Bridging Loan
Permanent
Loan
Bank
• Intra-group rollover relief has become important
for share acquisitions
• Instead of buying shares, debt is connected to
assets via section 45 in order to obtain interest
deductions on acquisition debt
• The proposed legislation has to cater for this
reality
16
Intra-Group Proposals
• The goal is to eliminate the potential
exemption for cash-outs without
interfering with “push-down” debt
• The proposal achieves this result by:
– Triggering a de-grouping charge not only for
separations between transferor and
transferee but also from the line of controlling
parent companies
– Additionally triggering a degrouping charge
for notes/cash received leaving the group
without consideration
17
Indirect Redomicile (Paragraph 64B):
South African Multinationals
SA HQ
PARENT
Foreign Sub 1
Foreign Sub 2
Foreign Sub 3
18
Indirect Redomicile:
Foreign Subsidiary Unbundlings
SHAREHOLDERS
SA HQ Parent
Foreign
Subsidiary
Subsidiary
Shares Sold
19
Indirect Redomicile: Arguments
• Taxpayer arguments
• Response
– SA shareholders receive
additional overall value
– The value of the newly
independent foreign sub
shares is offset by the
decline in the HQ shares
– Probable inward listings
– SA company shares
devalued on the JSE
– SA shareholders will have
greater CGT and UST
– Tax law should not apply
to deals in progress
– Corporate-level CGT is
lost
– The tax system can enact
law to halt impending
avoidance (especially if
the deals are not final)
20
Multiplying Foreign CGT Exemption:
Basic Rule (Section 23K)
• Foreign taxpayers are exempt from CGT
on the disposal of assets, except for:
– South African real estate
– South African permanent establishments
• Tax treaties generally enshrine this rule
• International competitiveness and
administrative reality mean that the CGT
exemption will probably have to remain
21
Multiplying Foreign CGT Exemption:
Problem
• Foreign taxpayers are now taking the CGT
exemption due to the market-based purchased
cost
• Two steps:
– Foreign taxpayers sell shares to a connected South
African parent, leaving the latter with a market value
tax cost (obtained free of CGT)
– South African parent unbundles lower-tier
subsidiaries with the new market value tax cost
• Foreign-owned South African groups are now
completely CGT exempt on shares versus
wholly local groups
22
Multiplying Foreign CGT Exemption:
Chart
F Parent
South African
Parent
Sub 1
Sub 2
23
Multiplying Foreign CGT Exemption:
Remedy
• Foreign CGT exemption remains
• However, the tax cost of the connected
person purchaser is limited to the lesser
of actual cost or the tax cost held by the
foreign seller (i.e. the tax cost before the
tax-free market value step-up)
• The reduced tax cost applies only if an
unbundling occurs within 2 years of a
connected person transfer of South
African unbundling parent shares
24
Miscellaneous Policy
Amendments
Foreign Skilled Expatriates: 2008
Adjustment (Para. 9 of the 7th Schedule)
• 2007 Amendments:
– Foreign expatriates visiting South Africa can receive tax-free
employer-provided accommodation for up to 1-year
– Affirms SARS practice and overturns case law allowing for
unlimited employer-provided accommodation
• Proposed Modifications:
– The exemption period is extended to 2 years in line with
temporary work permits
– The rule operates with the implicit understanding that shortterm expatriates often retain a second home back in their home
country
– The new exemption is subject to a monetary ceiling of R25 000
per month (with no limit for short stays of 90 days (hotel
accomodation))
26
R&D Incentive: 2008 Adjustment
(Section 11D(7))
• Current Law:
– Taxpayers receive a 150% deduction for R&D
– If one party funds another to conduct R&D on the
funding party’s behalf
– The 150% deduction applies to the funding party
• Problem:
– The funding regime generally works, except if the
funding party is outside the tax net
• Proposed Legislation:
– Taxpayers receiving funding can obtain a 150%
deduction if the funding party is not eligible for a
deduction
27
Reorganisations: 2008 Adjustments
•
Collective Investment Schemes (Sections 42 and 44):
– Corrects and clarifies the law so that collective investment schemes can be
formed and merged as initially intended
•
Ongoing Services (Section 42(1)):
– Under current law, natural persons can receive newly issued shares in a
company as part of a tax-deferred section 42 rollover either by actively
participating in the Newco company, despite the failure to hold a 20% share
interest in Newco
– Under the proposal, permissible active participation extends to any controlled
group company in relation to the company issuing the shares
•
•
Liquidations (Section 47(6)):
– Tax-free liquidations can occur within an 18-month period (in lieu of the prior 6month period) plus a discretionary extension
1 January 2007 effective date issues:
– In 2007, share-for-share relief was merged into the asset-for-share relief to
assist taxpayers
– This relief was retroactive to 1 January 2007 at the behest of certain taxpayers
– The proposed amendments clarify that taxpayers can using old share-for-share
relief automatically fall into the new merged tax-free regime
28
Domestic Distributions: 2008 Adjustment
• Share Issues (Para. 74 of the 8th Schedule):
– Clarifies that a company’s issue of new shares is exempt from CGT
• Buybacks (section 1 “dividend” definition):
– Clarifies that buybacks are treated as dividends (just like redemptions)
• Cross-Redemptions and Cancellations (section 1 “dividend” definition):
– Eliminates schemes that seek to reduce company profits without
triggering STC
• Deemed Intra-Group Dividends (Section 64C):
– Current law allows for a tax-free intra-group dividend unless the
deemed paying subsidiary reduces profits without a corresponding
increase for the parent shareholder
– Proposed law allows for a tax-free intra-group dividend unless the
deemed paying subsidiary reduces profits without a corresponding
increase for the parent shareholder or a connected company within the
group
29
Diamond Levy Amendments: 2008
Adjustment
• With implementation of the Diamond Levy pending,
small operational issues have been identified
• Re-imports (Section 14 of the Levy):
– The 40% local sales formula is being adjusted to properly
account for re-imported diamonds subsequently sold within
South Africa
• Transitional Rules (Section 14 of the Levy):
– Calculations have been added to account for the first
assessment period if that period turns out to be shorter than 6
months
• Short-Term Diamond Permit Holders (Section 5 of the Levy
(Administration)):
– SARS will have the power to impose immediate collection for
taxpayers not regularly engaged in local diamond sales (e.g.
temporary agents or foreign parties)
30
Special Measures: 2010 World
Cup South Africa
• Proposed Amendments to Schedule I to the
Revenue Laws Amendment Act, 2006
– The Host Broadcaster is recognised as FIFA Designated Service
Provider as it operates outside of the tax-free bubbles
– The definition of affiliated entities is broadened to cater for groups
of companies which provide services to FIFA
– UIF and SDL payments by FIFA are restricted to employees who
are resident in the Republic
– The Commissioner and FIFA may agree to specific areas which will
be tax-free bubbles and the period FIFA can operate tax-free in the
bubbles
– Entities (paragraph 6 entities) which have a commercial
relationship with FIFA are not subject to withholding tax on
payments amongst themselves
– Entities (paragraph 6 entities) whose employees’ “gross incomes”
are exempt from tax need not deduct employees tax, SDL or UIF
contributions from these employees
31
Cross-Border
• Inward Listings (section 10(1)(k)):
– The exemption for dividends paid by foreign companies listed
on the JSE is extended to cover all foreign companies (not just
those above a 10% JSE listing)
• Foreign cooperative repatriations (section 10(1)(k)):
– Dividends back to SA from foreign co-ops are exempt just like
dividends from foreign companies
• Intra-CFC debt forgiveness (section 9D(fA)):
– Both creditor loss and debtor gain will be eliminated on intraCFC debt cancellations (just like other intra-CFC debt
transactions)
• CFC multi-tiers (Para. 20 of the 8th Schedule):
– Ensures that only one level of tax applies if multiple levels of
CFCs exist with certain shareholding falling below 100%
32
Public Benefit Organisations (PBOs)
• Foreign PBO Activities
– Under current law, at least 85% of the
activities of a PBO must be conducted for the
benefit of persons in the Republic in order for
the PBO to be exempt
– This restriction is removed
• PBO Liquidations (Section 30(3)):
– Under current law, PBO status requires that
PBO liquidation proceeds be transmitted only
to “similar” PBOs (or to Government)
– The “similar” requirement is dropped
33
Administrative Policy
Amendments
Employees’ Tax
• Allow re-determination of amount of SITE
where monthly tax was determined on
amounts which exceed annual
remuneration (Para. 11B of the 4th Schedule)
• Propose that employers be prohibited
from issuing IRP 5s until the employer
has submitted an acceptable annual
reconciliation to SARS. Effective date to
be announced by the Minister. (Para. 28 of
the 4th Schedule)
35
Administrative Penalties
(Section 75A)
• Propose that the current regime relating
to administrative penalties be revamped.
• Introduce a more objective penalty
system to be administered in accordance
with defined set of criteria.
• Create more certainty for taxpayers.
36
Tax Return Filing Requirements
• Supporting documents are no longer
required to be attached to tax returns
(Section 13, 13bis, 13quat, 18A, 27, 70, 72, 72A, 73,
Para. 13A of the 1st Schedule, Para. 13 of the 4th
Schedule)
• It is proposed that employers which fail to
submit PAYE/IRP5 reconciliations to
SARS should be penalised. The penalty
may be remitted should circumstances
warrant it. (Para. 13 of the 4th Schedule)
37
Interest for Non-Provisional Taxpayers
• Allow for the payment of interest (and charging
of interest) for individuals who are not
provisional taxpayers from 7 months after end
of tax year (effective date). (Section 89quat)
• Propose that individuals who are nonprovisional taxpayers may make a top-up tax
payment before effective date should PAYE not
be sufficient to cover annual tax liability. (Para. 23A
of the 4th Schedule)
• Current intention is for amendment to apply to
2007/8 tax year with “effective date” for
calculation of interest from 1 October 2008
38
Year of Assessment
(Section 66)
• Proposed that companies be allowed to
use financial accounts ending on a fixed
day approved by SARS, e.g. last Friday
of a financial year. The day should fall
within 10 days before of after the last day
of a financial year.
39
Payment of Tax and Interest
(Section 88)
• Clarify that decision of SARS not to
receive or recover taxes chargeable while
an objection or appeal is being
considered does not affect the taxpayer’s
ultimate obligation to pay interest.
40