BUDGET & TAX UPDATE
Presented by
DIETER SCHULZE
The morning ahead

2005 Budget

2004 Tax update
– The Taxation Laws Amendment Act 16 of 2004
– The Revenue Laws Amendments Act 32 of 2004
– The Second Revenue Laws Amendment Act 34 of 2004
•
•
•
•
•
•
•
•
Share incentive schemes
Assets acquired or disposed of for contingent or unquantified amounts
Assets acquired in exchange for shares issued
Deferral mechanism for disposal or acquisition of equity share
Withholding tax on sale of immovable property by non-residents
Registration of tax practitioners
Advanced tax rulings
VAT
2005 BUDGET

Company tax rate reduced to 29%

Tax and compliance concessions for small business

No change to VAT, STC, CGT, Donations tax or Estate
Duty rates

Significant increase in tax threshold those aged 65 and
over

Changes to travel allowance and company cars
Personal income tax

Reduction in personal tax

Tax thresholds

Rebates

Interest exemption

Pensioners
Medical scheme membership

Current 2/3 tax free, para 12A of 7th schedule

Encourage broader medical scheme coverage

Extend benefits to self employed

Effective 1 March 2006
– 2/3 to be replaced with a monthly monetary cap that
will take into account number of dependants
Motor vehicle allowances

System of deemed business/pvt mileage

Abuse by high income earners

Encourages purchase of higher value vehicles

Unfairly influences household travel choices
6
Motor vehicle allowances – Cont.

Deemed cost & mileage method to be changed from
1/3/2005

Fixed cost element
– Residual value of 30% after 5 years
– Value capped at R360,000

Deemed private km’s
– 14,000 up to 16,000 – 2006 y.o.a
– 16,000 up to 18,000 – 2007 y.o.a
7
Motor vehicle allowances – Cont.

If using actual costs
– Finance charges or lease payments limited to value of
R360,000
– W&T limited to value of R360,000 and determined over a
period of 7 years from date of original purchase

Company car taxable value
– 1,8% up to 2,5% - 2007 y.o.a
– 4% Second company car remains
8
Subsistence allowance

Tax free per diem allowance - no need to keep slips
– Local R60 or R196
– Foreign US$190

Concerns of abuse

In future allowance must be closely linked to travel

Foreign per diem limits to be revised
9
Withholding tax on visiting
entertainers and sportspeople

Taxed in SA on SA source income

Tax compliance has been poor

Final withholding tax to be introduced
– On gross payments to entertainer or sportsperson
– 5% for residents of African countries
– 15% for residents of other countries
10
TRANSFER DUTY

Individuals only
– Threshold for transfer duty increased
from R150k to R190k
– Max rate of 8% for values over R330k

Rate remains 10% for corporate taxpayers
Corporate initiatives

Reduction in corporate tax rate
– From 30% down to 29%
– Immediate 1% neither here nor there
– Sign of things to come
Corporate initiatives – Cont.

Reduction in other rates linked to the corporate
tax rate
– SA branches from 35% down to 34%
– Employment companies from 35% down to 34%
• Personal service company
• Labour broker
– Long-term insurer policyholder funds and corporate
funds from 30% down to 29%
– Gold mining companies formula changed
Corporate initiatives – Cont.

Tonnage tax regime for shipping industry

Facilitating company restructuring

Refining film incentives

Government grants

Stamp duty on new issue of shares

Duty on debit entries on bank accounts

Business activities of PBO’s
14
TAX STIMULUS IN
SUPPORT OF SMALL
BUSINESS
Small business corporation

Definition (sec 12E)
– excludes personal services, to be expanded
– Include personal services
– Provided employees
• 4 or more full time, excl member or s/holder or connected
• involved in core operations
– Turnover limit up from R5mill to R6mill
16
Small business corporation – Cont.

Old tax rate

– R0
R150,000
– R150,001 and above
New tax rates

15%
30%
– R0
R35,000
0%
– R35,001 R250,000
10%
– R250,000 and above
29%
Accelerated depn allowance 50:30:20 on non-manufacturing
assets purchased after 1 April 2005

Manufacturing assets 100% write off

Removed R20,000 double deduction at start-up
17
Small business

Small retailers VAT package
– Simplified method of accounting for Std and Zero rated
supplies
– Ready for implementation 1 April 2005
– Applies to vendors with turnover of <R1mill

VAT return filing every 4 months from 1 Aug 2005
– Ease VAT compliance
– Assist with cash flow
– Repeat offenders can be put back to 2 months
18
Small business

Skills development levy
– Obligation on every employer in SA who
• is registered with SARS as employer, or
• annual payroll > R250,000
– 1% based on remuneration as defined

R250,000 threshold to increase to R500,000

Drop the obligation, …..is registered with
SARS as employer
19
Small business

Small PBO’s
– Comprehensive application form and
supporting documentation. Process of
registration will be simplified.
– Detailed annual tax returns to be simplified
20
Anti-avoidance measures

Section 103
–
–
–
–

Past it’s sell-by date
Ineffective
Sec 103 to be overhauled
Discussion paper to be circulated in 2005
Provisions dealing with bribes, penalties and
other illegal activities to be introduced
– Clarify inclusion in income and deductibility
21
INDIRECT TAXES

Duties on tobacco products

Duties on alcoholic beverages

Duties on sun cream and digital cameras

General fuel levy and Road accident fund
levy
RSC levies

RSC levies discontinued 30 June 2006
– Replaced with alternative tax instruments or
funding arrangements
– Alternatives to be agreed by Sept 2005

Supreme Court - Dividends received by
certain holding companies subject RSC
– Act to be amended to make clear
– To show they are all heart, no retroactive application
23
COMPLIANCE MEASURES

Single registration for all tax products per taxpayer

E-Filing to be extended
– E-stamping from 1 April 2005, transfer duty, tax on
retirement funds, STC, air passanger tax
– Submission of IT12S
– Application for tax clearance certificates for tenders
– Government procurement officers to get access to tax
status of applicants

Full view of account for taxpayers and tax practitioners
COMPLIANCE MEASURES – Cont.

Identifying undisclosed income
– Property transactions
– High net worth individuals department at SARS

Voluntary disclosure dispensation
– Incentive to come clean before SARS gets to you
– Waiver of penalties or additional tax
25
MISCELLANEOUS
Forthcoming attractions 2005

Individual home office expenses

Certainty for deductible donations

Whole year learnership allowances for part-year
learnerships

Foreign tax credits and provisional tax payments
PROGRESS ON IMPLEMENTATION OF
TAX REFORM INITIATIVES

Exchange control amnesty
– 43,000 applications
– 30,000 processed by mid Feb 2005
– Total assets disclosed R65 billion
– Levies expected R2,4 billion
• To be used for social and residential infrastructure
PROGRESS ON IMPLEMENTATION OF
TAX REFORM INITIATIVES

Accelerated tax depn urban development zones
– Section 13quat allowances
– 9 municipalities approved so far
– 7 in 2005
– Balance in 2006?

FIFA World Cup 2010
– Tax exemptions required by FIFA
– Amendment in pipeline to accommodate
28
2004 TAX UPDATE
29
DEVELOPMENTS IN 2004

Taxation Laws Amendment Act 16 of 2004
– 27 July 2004

Revenue Laws Amendment Act 32 of 2004
– 24 January 2005

Second Revenue Laws Amendment Act 34 of 2004
– 24 January 2005

Interpretation notes 20 to 26
30
Taxation Laws Amendment Act 16 of 2004
31
Prescribed interest rate

Linked to the PFMA rate 1 April 2003

To allow time for SARS to adjust system
– Change takes effect from 1st day of 2nd month
following date on which PFMA rate changed

Section 1 “prescribed rate”
– On refunds at 4% below PFMA rate
– On tax owing at PFMA rate
32
Scrapping allowance

Section 11(o), “plant” omitted in error has
now been added
33
Entertainment allowance

Section 11(u)
– Limited to R2,500 or R300 + 5% of taxable
income
– Now removed
34
Farming equipment

Section 12B(2), 50:30:20 on cost
– Only applies to farmers

Bio fuel producers
– The whole production chain will now qualify
for the allowance
– Machinery, plant, implement, utensil or article
– Brought into use for first time
35
Urban development zones

Section 13quat introduced 2003

Demarcation of municipal areas by 30 June
2004

Too ambitious

Now open ended
36
UIF interest and penalties

Section 23(d)

Penalties and interest from non-compliance

UIF now added
37
Labour brokers

Para 1 of 4th schedule, defines

Para 2(5)(a) deals with exemption certs
– 80% gross inc from 1 client
– Provides services of any other labour broker
– Provides specified employees

80% is ignored if 3 full-time, unconnected
employees involved in supply of core
services
38
PAYE relief on income protection policies

Para 2(4) of 4th schedule
– Pension
– RAF
– Medical aid contributions, 65 or older

Extended to include
– Premiums on income protection insurance
policies
39
CAPITAL GAINS TAX

Valuation date of person that becomes
taxable
– Para 1 “valuation date”
• Previously applied only to sec 10(1)(cA)
– Now extended to all exempt persons who at
any time become taxable
40
CAPITAL GAINS TAX – Cont.

Capitalisation shares
– Para 78 now clarifies rules
•
•
•
•
Cap shares acquired on date of distribution
Nil base cost
Except to extend treated as dividend
If dividend then base cost = dividend
41
Revenue Laws Amendment Act 32 of 2004
Second Revenue Laws Amendment Act 34 of 2004
42
DONATIONS TO OFFSHORE TRUST

Section 7(8) deemed accrual
– Technical deficiency
• Excluded non SA sourced income of offshore trust
– Amended to ensure that all income of a nonresident trust can be deemed back to the SA
donor if applicable
43
SHARE INCENTIVE SCHEMES
44
Gains made by directors or employee

Section 8A
– Remains but only applies to
•
•
•
•
Marketable securities exercised, ceded or released
in whole or in part
if the right was obtained by the director or employee
before 26 Oct 2004
45
Broad-based employee share plan

Section 8B introduced

Incentive to offer shares to all employees

Targets lower income employees

Encourage long-term participation
46
Broad-based employee share plan- Cont.

GeneraI terms for tax free treatment

- Tax-free treatment of “qualifying shares”
- Even if acquired at no cost or at discount
Qualifying share
– Must be in terms of broad-based employee share
plan
– Total shares received under the plan by
employee may not exceed R9,000 in value over 3
years
47
Broad-based employee share plan- Cont.

What is a broad-based employee share plan?
– Equity shares for minimum consideration
- Within requirements of Companies Act
- Company can offer low interest loan
– Widespread participation
- 90% of permanent, full-time employees with 1 years service
- Can ignore temps, part-time staff
- Employee may not participate in another share plan
- No dividend or voting restrictions
- Limitation on sale restrictions, other than
- Legislated, buy-out clause, 5 year max restriction
48
Broad-based employee share plan- Cont.

Subsequent sales - Employee
– If within 5yrs full proceeds included in income
– If after 5yrs gain should be capital

Subsequent sales – Employees’ tax
– Employer responsible for withholding any
income tax that becomes due
49
Broad-based employee share plan- Cont.

Fringe benefit position
– Para (a) of 7th schedule deems a taxable benefit to arise
on issue of shares to employee at discount to market
value
– Specific exclusion added where shares acquired in
terms of 8B

Employers position
– Section 11(lA) introduced to allow a deduction to
employer = market value on date of grant
– Limited to R3,000 per employee per y.o.a
– If excess can be c/fwd to succeeding y.o.a
50
Broad-based employee share plan- Cont.

Deduction of cost by employee
– Employee pays for his shares
– If sells within 5 yrs no provision to allow
deduction of cost
– If sells after 5 yrs can claim cost as base cost
for CGT purposes

Examples pg 20 of notes
51
Vesting of equity instruments

Section 8C introduced

Taxation of directors & employees

Equity instruments acquired after 26.10.04

Essentially defers all appreciation and taxes
full gain as revenue
52
Vesting of equity instruments – Cont.

Basics of 8C
– Vesting as the tax event
•
•
•
•
•
Employee/director
acquires equity instrument
by virtue of employment or office
will result in taxable income/deductible loss
in year that equity instrument “vests”
– Section 9B is overridden
– Section 23(m) is overridden
53
Vesting of equity instruments – Cont.

Basics of 8C – Cont.
– Date of vesting depends on whether
• Unrestricted equity instrument
• Restricted equity instrument
– Unrestricted equity instrument
• Vesting on date of acquisition
– Restricted equity instrument
• Vesting on earliest of 4 events
– when all restrictions are lifted
– immediately before employee sells
– when option terminates
– immediately before employee/director dies
54
Vesting of equity instruments – Cont.

Terms used
– Equity instrument
•
•
•
•
Share or part thereof
Options
Instrument convertible into a share (conv. debenture)
Members interest in cc
– Restricted equity instrument
•
•
•
•
•
•
Not free to sell
Can be forfeited at < market value
If right to impose restriction
Option on restricted equity instrument
Instrument convertible into restricted equity instrument
Employee escape clause (cancel or repurchase)
55
Vesting of equity instruments – Cont.

Terms used throughout – Cont.
– Market value
• Willing buyer and willing seller etc
• NB: Ignore any restrictions
– Consideration
• Amount paid or to be paid for the equity instrument
• Ignore services provided
• Includes amount paid for a prior instrument
56
Vesting of equity instruments – Cont.

Calculation of gain or loss on vesting
– Vesting triggers either
•
•
•
•
•
Inclusion in taxable income
as if an adjustment to salary, or
a tax-deductible loss
to extent market value on date of vesting
above or below consideration paid
– Examples pg 26 & 27
57
Vesting of equity instruments – Cont.

Employees’ tax
– Employers obligation
• Any gain arising from vesting
• included in remuneration
• tax directive to be sought by employer to determine how much
employees tax to deduct or withhold
• if the tax exceeds amount from which it is deductible SARS must
be notified immediately
– Employees obligation
•
•
•
•
If employer not a party to the transaction
Gain resulted
Must inform employer
Failure could result in fine < R2,000
58
Vesting of equity instruments – Cont.

Subsequent transfers by way of a swap
– Special rules
• Company restructures
• Employee moves within same group
– Tax is not triggered on swap
– Same rules apply to new instrument acquired
• Trigger income/loss only when vests
59
Vesting of equity instruments – Cont.

Connected persons transfers

Non-arm’s length transfers
– Incentive for employee to vest a.s.a.p
– Special rules to stop early vesting
– See notes for detail and examples
60
JSE SECURITIES AND BOND EXCHANGE

Section 10(1)(d) amended

Both the JSE and Bond Exchanges will
become taxable entities at date still to be
determined
61
INTEREST RECEIVED BY NAMIBIAN, SWAZILAND AND
LESOTHO INVESTORS

Section 10(1)(h) amended

Foreign residents not taxed on SA interest
income, except
– if present in SA for >6months in a y.o.a
– carry on business through a permanent
establishment in SA

The exemption did not apply to residents from
countries within the Common Monetary Area

Exclusion removed
62
FOREIGN PURCHASED ANNUITIES

Section 10A(11)

Amounts received no longer translated to
Rand at spot but at average rate
63
RESEARCH & DEVELOPMENT

Section 11B
– Provides for deduction of expenditure, and
– Allowance in respect of assets used for R&D
purposes

Anti-avoidance provisions now added
– Allowance determined on lesser of
• Actual cost
• Market value had it been arms length sale
• Actual cost to connected person
64
PUBLIC PRIVATE PARTNERSHIPS

Lessee can deduct leasehold improvements over
duration of lease if the lessor is a taxable entity

Problem for PPP’s erecting buildings on state owned
land (exempt from tax)

Sec 11(g)(vi) now allows a PPP’s to claim the deduction

Also any costs remaining on termination may be written
off in full (all taxpayers)

Example 1 & 2 pg 41
65
PART DISPOSAL RULE REVISED

Where sec 11(g) cannot be applied e.g. because
voluntary improvement made by lessee

Para 33(3)(c) introduced in Dec 2003

Para 33(3)(c) now deleted so lessee can once
again claim a capital loss in year improvements
are effected = bare dominium value of the
improvements.

Targeted to allow PPP’s to make use of this
66
URBAN DEVELOPMENT ZONES

Section 13quat introduced in 2003

Accelerated depreciation allowances

Some of the demarcation and reporting
requirements relating to municipalities
have been relaxed

See details in notes
67
ASSETS ACQUIRED IN EXCHANGE FOR SHARES

Assets and trading stock acquired in exchange
for shares did not acquire any cost for CGT and
income tax purposes

Issue of shares is not a cost ‘actually incurred’

Capital assets acquired on loan account only
received base cost to the extent the loan had been
repaid
– This does not apply to trading stock
68
ASSETS ACQUIRED IN EXCHANGE FOR SHARES – Cont.

Section 24B has been introduced

Shares for assets now acquire base cost

Debt for assets
– Assets acquire full base cost

Example 1

Exceptions, anti avoidance
– Shares or debt issued for shares or debt
– Retain zero, and pay as you go principle
69
ASSETS ACQUIRED OR DISPOSED OF FOR CONTINGENT
OR UNQUANTIFIED AMOUNTS

Section 24M introduces new concept
– Cash basis of taxing certain amounts

Old Law
– Immediate taxable event on disposal of asset
even if consideration deferred over years
• Seller, taxed immediately on full proceeds
• Buyer
– CGT base cost is deferred until exp due and payable, but
– if trading stock expenditure is incurred up front
– Contingent and unquantified pmts cause problems
70
ASSETS ACQUIRED OR DISPOSED OF FOR CONTINGENT
OR UNQUANTIFIED AMOUNTS – Cont.

“Open transaction” method introduced
– Applies to deferred instalments that
• do no accrue because of contingencies
• with deferred instalments containing unquantified
amounts
– These instalments will only be accounted for
as they are received/paid
71
ASSETS ACQUIRED OR DISPOSED OF FOR CONTINGENT
OR UNQUANTIFIED AMOUNTS – Cont.

Transfers of non-depreciable capital assets
– Unquantified and contingent amounts
• Seller
– Determine capital gain or loss as normal
– Proceeds for initial year only to extent quantified and no
contingency
– Initial capital gain taxable as normal
– Initial capital loss disregarded
– Further consideration in later years treated as capital gain
– This gain reduced by any disregarded loss remaining
– Disregarded loss can be claimed in full when no further
proceeds
72
ASSETS ACQUIRED OR DISPOSED OF FOR CONTINGENT
OR UNQUANTIFIED AMOUNTS – Cont.

Transfers of non-depreciable capital assets –
Cont.
– Unquantified and contingent amounts
• Purchaser
– Future quantified amounts are immediately incurred for
base cost purposes
– Expenditure incurred (base cost) to extent amounts
become quantified or contingency has been satisfied
• If buyer sells asset all unquantified and contingent amounts
are ignored for base cost purposes
– Capital losses arise to extent amounts are incurred after
the sale

Examples 1,2 and 4 (pg 47 & 49)
73
ASSETS ACQUIRED OR DISPOSED OF FOR CONTINGENT
OR UNQUANTIFIED AMOUNTS – Cont.

Transfers of depreciable assets
– Unquantified and contingent amounts
• Seller
– Rules same as for non-depreciable assets
– Proceeds for initial year only to extent quantified and no
contingency
– First calculate 11(o) losses
– Initial 11(o) loss is disregarded
– Second, account for section 8(4) recoupments
– Offset disregarded 11(o) loss against recoupment
– Proceeds in excess of recoupment will be capital gain
– Disregarded 11(o) losses remaining can be deducted in
full when no further proceeds
74
ASSETS ACQUIRED OR DISPOSED OF FOR CONTINGENT
OR UNQUANTIFIED AMOUNTS – Cont.

Transfers of depreciable capital assets – Cont.
– Unquantified and contingent amounts
• Purchaser
– Future quantified amounts are immediately incurred for
base cost purposes
– Expenditure incurred (base cost) to extent amounts
become quantified or contingency has been satisfied
• Depreciation calculation becomes complex
– Provides for catch up as amounts become quantified

Example pg 52
75
ASSETS ACQUIRED OR DISPOSED OF FOR CONTINGENT
OR UNQUANTIFIED AMOUNTS – Cont.

Transfers of trading stock
– Unquantified and contingent amounts
• Rules same as for non-depreciable and depreciable
assets
• See detailed notes in this regard
76
DEFERRAL MECHANISM FOR DISPOSAL OR ACQUISITION
OF EQUITY SHARES

Sales of shares for amounts based on future
profits or receipts

Trigger immediate taxation based on anticipated
proceeds

Many BEE transactions structured on this basis

Section 24N introduced to promote the sale of
businesses supported by self financing

Tax implications are deferred
77
DEFERRAL MECHANISM FOR DISPOSAL OR ACQUISITION
OF EQUITY SHARES – Cont.

Seller
–
–
–
–
–
Determine capital gain or loss on disposal
Amounts due and payable in later years are ignored
Initial capital gain is taxable
Initial capital loss is disregarded
Further consideration treated as capital gain in future
years
– Future gains can be reduced by remaining disregarded
losses
– Disregarded losses remaining can be claimed in full when
no further proceeds due
78
DEFERRAL MECHANISM FOR DISPOSAL OR ACQUISITION
OF EQUITY SHARES – Cont.

Buyer
– Equity shares purchased within section 24N
will accumulate base cost over time
– Expenditure incurred to extent amounts
become due and payable
– If buyer sells the shares before all amounts
become due and payable these amounts are
not taken into base cost
• When paid they will generate capital losses
79
DEFERRAL MECHANISM FOR DISPOSAL OR ACQUISITION
OF EQUITY SHARES – Cont.

5 conditions to be satisfied
– >25% of price must be deferred beyond year of sale and
price must be based on future profits
– Sellers must sell >25% of total value of equity shares
– Buyer and seller must not be connected persons after
the sale
– If buyer defaults on payment shares must be returned to
seller
– The sellers claim on the buyer cannot be payable on
demand or readily tradeable on the open market
80
INCOME OF TRUSTS AND BENEFICIARIES OF TRUSTS

Section 25B regulates taxation of trust income

The section refers to income

Longstanding debate about the meaning of
income

“Income” has now been replaced with “amount”

Clarify the more general meaning intended
81
WITHHOLDING TAX ON SALE OF IMMOVABLE
PROPERTY BY NON-RESIDENTS

Non-residents subject to capital gains tax
on any interest they own in immovable
property in SA

Enforcement has been a problem

Section 35A introduced

Places onus on the purchaser to withhold
tax
82
WITHHOLDING TAX ON SALE OF IMMOVABLE
PROPERTY BY NON-RESIDENTS – Cont.

Withholding obligation on the buyer
– Any person that acquires any interest in SA
immovable property
– From a non-resident
– Must withhold from amounts actually paid
• 5% if the non-res is an individual
• 7,5% if the non-res is a company
• 10% if the non-resident is a trust
– Amount withheld must be paid to SARS
• Within 14 days if purchaser is SA resident
• Within 28 days if purchaser is non-resident
– Examples pg 57
83
WITHHOLDING TAX ON SALE OF IMMOVABLE
PROPERTY BY NON-RESIDENTS – Cont.

Advance against the seller’s income
– Amount withheld operates as an advance against
seller
• Seller must still submit a IT12 tax return
• Advance could result in refund due to seller

Exemption
– R2 mill exemption
• No withholding if total amount payable < R2 mill
• If > R2 mill then withholding requirements apply in full (e.g. 1 & 2 pg
57 & 58)
84
WITHHOLDING TAX ON SALE OF IMMOVABLE
PROPERTY BY NON-RESIDENTS – Cont.

Directives
– Non-resident seller can seek relief through a
directive
• Reduced withholding
• No withholding
– Conditions for directive
•
•
•
•
Adequate security provided (e.g. bank note)
Other assets within SA
Person not subject to tax (reorganisation rules or DTA)
Actual liability results in loss or less than withholding amount
85
WITHHOLDING TAX ON SALE OF IMMOVABLE
PROPERTY BY NON-RESIDENTS – Cont.

Liability – Purchaser
– Personally liable if knows or should know
– No withholding required if
• purchaser relies on estate agent or conveyancer, and
• purchaser is not provided with required notification

Obligation – Estate agent and conveyancer
–
–
–
–
If knows or should know
If entitled to compensation for the transfer
Each must notify the purchaser of his obligation
Failure triggers joint & several liability limited to any
comm/fee earned
86
WITHHOLDING TAX ON SALE OF IMMOVABLE
PROPERTY BY NON-RESIDENTS – Cont.

Recourse to seller
– Any person subject to personal liability as a
result of failure to withhold
– has right of recovery against seller
– limited to withholding amount, not penalties &
interest

Commencement date
– Date to be set in future
87
SECONDARY TAX ON COMPANIES

Section 64B has seen some fairly technical
changes

See detailed notes on pg 62 to 64
88
NOTIFICATION OF CHANGE OF ADDRESS

Section 67 now requires change of address
to be communicated to SARS within 60
days

Section 75(1)(aA) provides that failure to
comply is an offence
89
REGISTRATION OF TAX PRACTITIONERS

2002 Budget first announced proposal to
regulate tax consultants and advisors

A separate Board, distinct from SARS will be
established to administer and regulate

Separate Bill to be produced in 2005

As interim measure Section 67A has been
introduced

Requires registration with SARS
90
REGISTRATION OF TAX PRACTITIONERS – Cont.

Who must register?
–
–
–
–

Natural persons
provide tax advice
complete any docs for submission to SARS
assist in completion of any docs for submission to
SARS
By when?
– On prescribed form by later of
– 30 June 2005
– 30 days after date first provides such service
91
REGISTRATION OF TAX PRACTITIONERS – Cont.

Who is excluded from registering?
– No consideration to themselves or employer
– Advocates and lawyers if advice is given during or in
anticipation of litigation
– Advice is given which is incidental to sale of goods or
services (e.g. Insurance broker)
– Employees who provide advise or complete docs of
their employers or connected person to employer (e.g.
group tax manager or payroll supervisor)
– Employees under the direct supervision of a tax
practitioner (e.g. trainee accountant)
– Advice or docs in terms of Custom and Excise Act
92
ADVANCED TAX RULINGS

Back in the 80’s SARS would issue rulings

No centralised procedure

Disastrous effect

Nothing for many years

Part IA inserted in Chapter III

Covers all taxes administered by SARS except
Customs and Excise Act
93
ADVANCED TAX RULINGS – Cont.

3 types of rulings on offer
– Binding general rulings
– Binding private ruling
– Binding class ruling
94
ADVANCED TAX RULINGS – Cont.

Binding general ruling
– Initiated by Commissioner
– Cover topics of general interest
– Same as interpretation notes
– Binding on Commissioner
– Taxpayer & Comm. can cite before court
– Comm. may modify or withdraw
– Change in law will not require a change ruling
95
ADVANCED TAX RULINGS – Cont.

Binding private ruling
– Issued in response to app. made by taxpayer
– Comm. opinion regarding interpretation or application of tax law
relating to a proposed transaction or arrangement
– Binding on Comm. only with respect to applicant and proposed
transaction
– Cannot be relied on or cited by any other taxpayer
– Comm. can withdraw or modify prospectively only
– Retrospective withdrawal or modification only if
• Proposed transaction has not commenced
• Other taxpayers will suffer bigger disadvantage if not withdrawn
• Materially erode SA tax base & in public interest
– Subject to application fee and cost recovery fee
– Ruling will be published without revealing ID of applicant
96
ADVANCED TAX RULINGS – Cont.

Binding class ruling
– Issued in response to app. made by taxpayer
– Comm. opinion regarding interpretation or application of
tax law to specific class of taxpayer relating to a proposed
transaction or arrangement
– Relieve every participant in the transaction of need to
apply for separate binding private ruling e.g. Company
applies regarding tax treatment of a share incentive
scheme for employees.
– Application, withdrawal & modification, retrospectivity and
publication same as for binding private rulings
97
ADVANCED TAX RULINGS – Cont.

Exclusions & refusals
– This is not to assist tax advisors in developing
tax avoidance schemes
– Aimed at providing clarity, consistency and
certainty in the application and interpretation of
tax law. E.g. guidance to foreign investor on tax
consequences of making an investment in SA
– Not suitable to fact intensive questions e.g.
transfer pricing or valuations
98
ADVANCED TAX RULINGS – Cont.

Section 76B through S
– This is the most detailed section in the Income
Tax Act
– The provisions have been reproduced on pages
67 to 74 of the notes
– Having been through the details you will see that
making an application will be a costly and
involved process
– The provisions will only come into operation at a
date still to be announced
99
VALUE ADDED TAX
100
GRANTS PAID BY PUBLIC AND LOCAL AUTHORITIES

We see further amendments relating to these Grants

Key to determine whether VAT is charged or not is
whether the public entity is conducting an
enterprise. If so it will be registered as a vendor.

Grants by Government will be zero rated. Grants
exclude payments for the supply of goods and
services

See notes pg 75 & 76 for details of how the various
public and local authorities will be treated for VAT
purposes.
101
COMMERCIAL ACCOMODATION

Definition of enterprise amended to exclude
– Commercial accommodation enterprises if turnover less
that R60,000 per annum

If so, vendor will have to deregister

Beware deemed supply on deregistration

Section 8(2B) introduced to soften the blow by
allowing final payment to be made in monthly
instalments
– Provided application to deregister made before 30 June
2005
102
GAME VIEWING VEHICLES AND HEARSES

Definition of motor car has been amended

Game viewing vehicles and hearses are now
excluded from the definition

Both will qualify for input VAT deduction

Other sections amended to accommodate above
see pg 77 of notes

Example page 77
103
TAX INVOICES

Vendor must now issue a tax invoice within 21 days
of supply, even if no invoice is requested

If supply is for second hand goods the tax invoice
must say so

Full tax invoice only need be issued where
consideration above R3,000

If a vendor purchases second-hand goods on which
no VAT is charged or goods are repossessed, a
VAT264 must be completed by the supplier
confirming the non-taxable supply (>R1,000 applies)
104
FARMERS

Farmers must now notify SARS once the value
of total supplies exceeds R1 million in 12 month
period
105
CANCELLATION OF REGISTRATION

Vendor who fails to notify SARS of his
cancellation of registration is guilty of an
offence.
106
HYBRID FINANCIAL INSTRUMENTS

Section 8E too narrow

Debt instrument
– Interest deducted by debtor and taxable in hands of creditor

Equity instrument
– Dividends paid (subject to STC) not deductible and exempt in
hands of recipient

8E used to counter avoidance where debt is disguised as
equity expanded in two ways
– Recharacterise dividends as interest
– Recharacterise interest as dividends
107
HYBRID FINANCIAL INSTRUMENTS – Cont.

Look out for
– Preference shares redeemable within 3 yrs
from date of issue
– Any other share redeemable or disposable
within 3 yrs which contains preferences
• Ranks above other ordinary shares
• Div payable linked to interest rate, capital subscribed or
loan
– Shares linked to a limited life company (likely
to be terminated within 3 yrs)
108
HYBRID FINANCIAL INSTRUMENTS – Cont.

Section 8F introduced
– Targets hybrid debt instruments
– Equity disguised as debt
– Limits deductibility of interest and still
taxes recipient
109
HYBRID FINANCIAL INSTRUMENTS – Cont.

Look out for
– Debt at option of issuer is exchangeable for
shares in issuer within 3 yrs
– Repayment of debt by issue of shares within 3
yrs
– Repayment of debt within 3 yrs linked to issue of
shares in issuer
– Debt at option of holder is exchangeable for
shares in issuer within 3 yrs and value of shares
is likely to exceed value of debt by >20%
110
INCURRAL AND ACCRUAL OF INTEREST

Section 24J

Regulates the timing of the accrual and
incurral of interest

See detailed notes for amendments
111