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The Tax Court recently gave judgment in favour of the taxpayer in a so-called ‘convertible loan’ case. The revenue authorities alleged that the taxpayer was dishonest and that it essentially acted fraudulently, or that it entered into a mere paper exercise. The court found that the transactions had the twofold purpose of enabling the taxpayer to borrow funding and of obtaining maximum tax benefit.
The treatment of interest-free loans has been under the spotlight pursuant to the recent judgment of the Supreme Court of Appeal in South African Revenue Service v Brummeria Renaissance. The court was asked to consider whether the taxpayer received an alleged benefit pursuant to the right to receive interest-free loans and, if so, whether such benefit fell within the definition of 'gross income'.
A number of amendments to the Income Act have been proposed by the 2008 Taxation Laws Amendment Bill, which focuses on non-residents. These proposals relate mainly to anti-avoidance provisions which are to be introduced into the revenue laws in circumstances where structures have been introduced so as to avoid the payment of secondary tax on companies.
Dividends are determined and taxed pursuant to the Revenue Laws Amendment Act 2007. They are exempt from income tax. However, when a company declares the dividend, it is subject to a 10% secondary tax. This tax will be changed during 2008 to create a true withholding tax on dividends. The recipients will be subject to a withholding tax of 10%, rather than the company declaring the dividend as liable for tax.
In a recent case the courts had an opportunity to consider the effect of double taxation treaties that have been concluded by South Africa. The judgment is significant in view of the fact that Article 14 of the double taxation treaty with Lesotho was not relevant with reference to the profits derived by the taxpayer.
The long-awaited draft Revenue Laws Amendment Bill 2007 was recently published for comment. A number of significant amendments are proposed to address company distributions and the associated consequences. To the extent that persons may have benefited from capital reductions in the period between October 1 2001 and July 1 2008, a tax liability will arise on July 1 2008 in respect of those capital distributions.