Cliffe Dekker Hofmeyr
At Cliffe Dekker Hofmeyr (CDH) we believe the right partnership can lead to great things. The partnerships we cherish and value most are those we have forged through time and experience with our clients and, of course, our people. We are a full service corporate and commercial law firm and provide experienced support wherever in the world you conduct business. We offer an authentic knowledge-based and cost-effective service for clients looking to do business in Africa. Our Africa practice brings together the resources and expertise of leading business law firms across the continent. With first hand, in-depth experience, our Africa lawyers offer sector-specific insights and knowledge of regulatory nuances to provide an exceptional integrated service. Whatever the scope of your transaction, we offer a depth of skills and experience to support your day-to-day business needs and long-term strategies. Our structure suits many clients that operate on a national and international basis. We are able to project manage complex cross-border activity and offer a seamless experience through a single point of contact with a trusted CDH adviser who understands your business and strategic objectives.Show more
The Supreme Court of Appeal recently determined whether the net realisable value of taxpayers' trading stock should be accepted as representing the value of the trading stock held and not disposed of at the end of the respective assessment years. This judgment will undoubtedly have a far-reaching and profound impact on how taxpayers and the South African Revenue Service consider, interpret and apply Section 22(1)(a) of the Income Tax Act.
The South African Revenue Service (SARS) recently issued a binding private ruling dealing with relief from the double taxation of interest under the double tax agreement between South Africa and Brazil. SARS ruled that the agreement grants exclusive taxing rights to Brazil in respect of the interest that applicants receive on bonds issued by the Brazilian government, which means that the interest will not be taxable in South Africa.
In response to the ever-increasing world of e-commerce and cross-border digital trade, South Africa introduced legislation with effect from 1 June 2014 which requires foreign suppliers of e-services to register as value added tax vendors. Following the revised draft regulations which were published on Budget Day 2018, the National Treasury published the final regulations, which will significantly broaden the definition of 'electronic services'.
The National Treasury and the South African Revenue Service recently appeared before Parliament's Standing Committee on Finance to provide it with a further update regarding some of the proposals contained in the draft Taxation Laws Amendment Bill published earlier in 2018. These amendments will come into force once the bill has been passed by Parliament, signed by the president and published in the Government Gazette.
Since its establishment in October 2013, the Office of the Tax Ombud (OTO) has been expected to enhance South Africa's tax administration system. Although the OTO has proven its value to the industry and taxpayers alike by resolving complaints, securing large refunds and launching much-anticipated investigations, its greatest challenge continues to be proving that it is equipped and has the capacity to go toe-to-toe with the South African Revenue Service.
The Supreme Court of Appeal recently considered whether the South African Revenue Service commissioner had been correct in disallowing the use of certain assessed losses under Section 103(2) of the Income Tax Act. Section 103(2) of the act is an anti-avoidance provision which essentially allows the commissioner to disallow the offsetting of an assessed loss or balance of an assessed loss against a taxpayer's income where certain requirements are met.
The South African Revenue Service recently published Binding Private Ruling 309, which deals with the disposal of assets by public benefit organisations. Specifically, the ruling deals with the application of the definition of 'gross income' in the Income Tax Act and the capital gains tax exemption in the Eighth Schedule to the act.
The South African Revenue Service recently published Binding Private Ruling 310, which deals with the tax treatment of customer loyalty programmes. The applicant was a local company supplying goods and services in the course of trade, which had – in order to enhance its business – proposed to implement a customer loyalty programme through which participating customers could benefit.
The South African courts have held, on a number of occasions, that taxpayers are entitled to deduct damages or compensation paid to third parties. However, this principle does not apply in all cases. A recent High Court decision has made clear that before a taxpayer calculatedly breaches an agreement, it should carefully consider the incidence of tax.
United Manganese of Kalahari (Proprietary) Limited (UMK) recently applied to the High Court for declaratory relief in relation to the correct interpretation and application of Section 6(3)(b) of the Mineral and Petroleum Resources Royalty Act. The South African Revenue Service alleged that UMK had incorrectly deducted transport and distribution costs from gross sales and, in so doing, had estimated these costs instead of using actual costs incurred.
Under Section 93 of the Tax Administration Act, there are five circumstances under which the South African Revenue Service may issue a reduced assessment in order to reduce a person's tax liability. While Section 93 makes it possible to 'skin a cat' (ie, reduce tax liability) in more ways than one, taxpayers should be mindful of the requirements that must be met and the correct process to follow in order to achieve the desired result.
The Supreme Court of Appeal recently had to determine whether an assessment issued for secondary tax on companies (STC) in respect of a dividend cycle ending in February 2007, which had been levied under the Income Tax Act, had prescribed in accordance with the Tax Administration Act. The key issue for consideration was whether the Tax Administration Act had prohibited the South African Revenue Service from issuing the assessment for STC in respect of that dividend cycle.
In deciding whether to invest abroad and which country to invest in, taxpayers will usually consider whether South Africa has a double tax agreement with that country. However, taxpayers should also ensure that they comply with South Africa's exchange control rules when making an offshore investment. One of the biggest pitfalls to avoid in this regard is the creation of a loop structure, which is considered to be a serious contravention of these rules.
An amendment to the Eighth Schedule to the Income Tax Act, as proposed in the draft Taxation Laws Amendment Bill, seeks to clarify that capital losses between connected persons will be ring-fenced where a person redeems its interest in the other person (eg, a company) and the two persons are connected. The amendment directly addresses the discrepancies ensuing from Income Tax Case 1859 and clarifies the legal position in respect of the redemption of shares.
The draft Taxation Laws Amendment Bill 2018 has proposed a number of significant legislative amendments, including with regard to the allowance for doubtful debts set out in Section 11(j) of the Income Tax Act. The proposed amendments envisage separating the tax treatment of two defined categories of taxpayer – namely, those which use International Financial Reporting Standards 9 for financial reporting purposes and those which do not.
The draft Taxation Laws Amendment Bill, which was recently published for public comment, represents a first for South African taxpayers as it introduces legislative provisions regarding cryptocurrencies. The draft bill is indicative of the National Treasury's approach to the tax treatment of cryptocurrencies, with the proposed amendments demonstrating an identifiable impact on cryptocurrency traders at the outset.
The supply of cryptocurrencies can cause administrative difficulties with regard to the value added tax (VAT) system. As such, the former minister of finance recently proposed that the VAT legislation be amended. In the interim, the South African Revenue Service has stated that it will not require persons to register for VAT for the supply of cryptocurrencies until there has been policy clarification in this regard. The exemption of cryptocurrency transactions from VAT is undoubtedly the preferred route.
Re-prioritising of sorts? Proposals on interaction between dividend stripping rules and corporate reorganisationsSouth Africa | 31 August 2018
The Explanatory Memorandum on the Taxation Laws Amendment Bill notes that the 2017 amendments to the Income Tax Act which provided that the anti-avoidance rules on dividend stripping override the corporate reorganisation rules may affect some legitimate transactions. As such, a number of amendments have been proposed to remedy this issue.
Given the current economic climate, debt restructuring and relief have increased and thus received concomitant increased attention from the relevant tax and finance authorities. The latest round of proposed tax amendments in this regard attempt to address a number of concerns discussed in the explanatory memorandum on the draft Taxation Laws Amendment Bill.
If no tax debt, SARS must pay refund: notable judgment on Tax Administration Act's refund provisionsSouth Africa | 10 August 2018
A recent judgment dealt with the pertinent and relevant issue of whether the South African Revenue Service (SARS) was legally justified in refusing to pay certain value added tax (VAT) refunds to a taxpayer on the grounds that the taxpayer owed an income tax debt, which SARS alleged was due and payable. The judgment should be seen as positive by taxpayers that have experienced difficulties in getting SARS to pay VAT refunds.
Section 31 of the Income Tax Act concerns transfer pricing, one of the most contentious areas of tax law not only in South Africa, but also around the world. Historically, there has been no judicial precedent in South Africa regarding the application of Section 31 – in particular, the arm's-length principle. However, the High Court recently issued its findings regarding the application of certain provisions included in Section 31.
Dividends are exempt from income tax even if a person receives the dividend by virtue of a cession to that person of the right to receive the dividend. In a notable exception to this principle, if a shareholder cedes the right only to receive dividends (ie, without transferring the other rights attaching to the underlying shares) to a company, the dividend accruing to the company is subject to income tax.
In 2016 the Davis Tax Committee (DTC) formed a corporate income tax (CIT) sub-committee to prepare a CIT report setting out the DTC's position. To ensure that the recommendations made in the report were practical, the DTC took into consideration South Africa's present economic position as well as its outlook. The DTC recognises that in the context of low economic growth, taxes must be raised in a manner that causes as little disruption to economic growth and employment as possible.
In recent years, taxpayers have frequently been unsuccessful in their disputes with the South African Revenue Service, especially where the dispute has involved the interpretation or application of the substantive provisions of tax legislation. However, where disputes have involved compliance with the procedural requirements of tax legislation, taxpayers have generally had greater success.
The Davis Tax Committee (DTC) recently issued a media statement announcing the publication of four additional final reports and the conclusion of its work based on its terms of reference. The closing report on the work done by the DTC states that the 12 sub-committees consulted widely and that a number of themes emerged from the consultations with various stakeholders. The closing report also mentions some of the challenges faced by the DTC.
The focus of a recent Supreme Court of Appeal case was not the merits of the dispute between the parties, but rather the correctness of the procedure that the taxpayer had followed in its appeal to the Tax Court. The Supreme Court of Appeal held that determining whether the Tax Court's decision was appealable was contingent on whether the decision was one contemplated in the Tax Administration Act.
A recent Supreme Court of Appeal judgment referred with approval to certain sections of a South African Revenue Service (SARS) interpretation note. The taxpayer appealed to the Constitutional Court, which held that the courts should not have regard to SARS interpretation notes when interpreting legislation, but may do so where SARS's practice is evidenced by an interpretation note which has been recognised by SARS and the taxpayer.
The South African Revenue Service (SARS) recently announced that it will continue to apply normal income tax rules to cryptocurrencies and expects affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income. Due to the growing popularity of cryptocurrencies in South Africa and the absence of legislation concerning their taxation and regulation, SARS's decision to address this issue was widely anticipated.
In line with the removal of the remnants of the administrative assessment system in 2015, the South African Revenue Services commissioner's discretion in respect of the doubtful debt allowance was to be deleted from the Income Tax Act. The intention behind this deletion was that, in future, the allowance would be claimed according to certain criteria set out in a public notice. However, according to the recent budget, it is now proposed that the criteria for determining the allowance be included in the act.
Although an increase of 1% in the value added tax rate was announced in the budget in February 2018, no adjustments have been made to the top four income tax brackets. Rather, below-inflation adjustments to the bottom three income tax brackets were announced. It was also announced that the primary, secondary and tertiary rebates will be partially adjusted to account for inflation.
The minister of finance recently announced that the standard rate of value added tax (VAT) will increase from the current rate of 14% to 15% from April 2018. Unfortunately, the date of introduction of the new rate leaves vendors little time to amend their systems and implement procedures to ensure that VAT is correctly accounted for from that date. There is also uncertainty as to when supplies still qualify for VAT at 14% and when VAT should be levied at 15%.
One of the key changes to the tax administration regime following the Tax Administration Act's promulgation in 2012 was the conversion from the so-called 'additional tax' regime to the understatement penalty regime. While this shift towards greater certainty has been welcomed, a key challenge remains as the new regime's criteria are open to differing interpretations. In this regard, the South African Revenue Service recently published its Guide to Understatement Penalties.
The South African Revenue Service (SARS) recently issued a press release regarding its intention to investigate possible tax non-compliance in the religious sector. According to SARS, the investigation is in response to, among other things, general reports which have suggested that certain religious organisations and leaders are contravening tax laws and enriching themselves at the expense of tax compliance and their altruistic and philanthropic purpose.
Section 42 of the Income Tax Act allows taxpayers to transfer assets to a company free of immediate tax consequences, provided that certain requirements are met (ie, there is a roll over for tax purposes). However, certain anti-avoidance provisions may be triggered if the company that acquired the assets disposes of them within 18 months of acquisition. The South African Revenue Service recently provided some guidance on this matter in a binding private ruling.
The imposition of understatement penalties under Chapter 16 of the Tax Administration Act, and the factors to consider when imposing such a penalty, is an issue unresolved by the courts. However, a recent Tax Court judgment has set out some helpful principles in this regard.
The South African Revenue Service recently issued Binding Private Ruling 291, which addresses the taxation of subsistence allowances paid by employers to their employees in certain circumstances. The ruling appears to offer guidance regarding the application of Section 8 of the Income Tax Act and suggests that employers may have some leeway in structuring the subsistence allowances that they provide to their employees.
The South African Revenue Service (SARS) recently published a binding private ruling on the application of Paragraph 38(1) of the Eighth Schedule to the Income Tax Act to the distribution of shares by a trust to beneficiaries in the context of an employee share scheme. Although SARS stated that Paragraph 38(1) was not applicable to the trust's distribution of shares, the matter is complicated by the interaction between Section 8C of the act and the rules contained in the Eighth Schedule.
The South African Revenue Service (SARS) recently released a binding class ruling which addressed, among other things, the eligibility of a partner in an en commandite partnership to claim a deduction in respect of venture capital shares acquired by the partnership. SARS ruled that subject to the Income Tax Act, each class member will be entitled to claim the deduction pro rata to its proportionate share of the investment in the partnership.
The Tax Court recently delivered a judgment that will be of interest to any taxpayers involved in prolonged disputes with the South African Revenue Service (SARS), particularly where there are delays on the part of SARS. The case involved an application by the taxpayer for default judgment and an application by SARS for condonation for the late filing of its answering affidavit opposing the default judgment application.
For the purposes of determining a party's taxable income derived from carrying on a trade, the Income Tax Act provides for the deduction of legal expenses which arise during or by reason of its ordinary trading operations. However, in order for a taxpayer to deduct legal expenses, they must relate to a claim, dispute or action at law. Further, they must have arisen during or by reason of the taxpayer's ordinary operations undertaken in the course of its trade and must not be of a capital nature.
The process of applying for a value added tax (VAT) ruling is quite efficient and comes at no cost to the applicant. Such a ruling provides guidance as to the South African Revenue Service's views on certain transactions before entering into them and therefore mitigates the risks of proposed transactions. As there is virtually no risk in applying for a VAT ruling, it is advisable to apply for such a ruling in cases of uncertainty.
The Tax Court recently issued its decision in a case concerning a taxpayer's claim for R90 million as an expense or loss during the 2007 assessment year, the deduction of which was prohibited by the South African Revenue Service. Among other things, the court had to consider whether the taxpayer had been carrying on the trade of selling coal when it had paid the R90 million and whether the expense had been incurred in the production of income or for trade purposes.
The debt reduction provisions provided for in the Income Tax Act have been the subject of significant debate since their introduction. As a result, the National Treasury included various proposed changes to the provisions in the first draft of the Taxation Laws Amendment Bill 2017. Following consultation on the bill, the National Treasury recently published a revised bill, which contains further significant amendments.
Under the Tax Administration Act, a Tax Court judgment regarding an appeal under the dispute resolution provisions contained in the act must be published for general information purposes. The South African Revenue Service recently published a raft of Tax Court judgments that have thus far been handed down in 2017, which provide for interesting reading and cover a broad range of procedural and administrative issues.
The Tax Court recently addressed the question of whether a taxpayer is entitled to condonation for the late filing of an appeal under the Tax Administration Act. The Tax Court referred to a Constitutional Court judgment which found that a delay cannot be a determining factor in condonation applications. In addition, it noted that other important considerations should be taken into account, such as whether the omission or failure was the applicant's fault and the extent of the delay.
Following the implementation of the Organisation for Economic Cooperation and Development's Base Erosion and Profit Shifting Action Plans, which impose country-by-country reporting requirements on multinational enterprises, taxpayers can no longer – or at least cannot easily – strategically escape taxation by shifting their profits to low or no-tax jurisdictions. This is because the South African Revenue Service has become aware of issues regarding tax avoidance and is actively taking steps to address them.
Under the Value Added Tax Act, vendors were previously prohibited from claiming notional input tax deductions for the acquisition of second-hand goods comprising gold or goods containing gold in an attempt to curb fraudulent notional input tax deductions regarding the acquisition of gold and gold jewellery. However, the amendment had a negative impact on legitimate transactions in the industry, so the definition of second-hand goods was recently amended in order to limit the extent of the exclusion.
The Mthatha High Court recently ruled that the South African Revenue Service (SARS) had failed to comply with Section 96 of the Tax Administration Act in ordering an additional assessment of a taxpayer's income tax. The case reaffirms the fact that just as taxpayers have a duty to pay tax, SARS has duties that it must fulfil in order to be entitled to collect this tax.
South African Revenue Services decisions are generally subject to the internal remedy available under Section 9 of the Tax Administration Act. However, decisions that are given effect to in an assessment or notice of assessment are excluded, since assessments generally have the separate remedy of objection and appeal. A recent memorandum on the Draft Tax Administration Laws Amendment Bill proposes that such decisions be subject to the remedy under Section 9 of the act.
There has been a great deal of uncertainty surrounding the claiming of value added tax (VAT) input credits, particularly where mixed taxable and non-taxable supplies are made and in the context of expenses relating to corporate actions. This uncertainty regarding the deductibility of input tax credits in certain instances has created a VAT risk for many vendors. The courts and the South African Revenue Service have differing views on this matter.
The National Treasury recently published the Draft Taxation Laws Amendment Bill 2017, which proposes to clarify the tax implications that arise when a person assumes contingent liabilities under the corporate reorganisation rules contained in the Income Tax Act. The proposal is to insert a new definition in Section 41 of the act, expressly stating that debt for the purposes of the corporate reorganisation rules includes contingent debt.
In order to assist companies in financial distress, it has been proposed that definitive rules dealing with the tax treatment of conversions of debt into equity be introduced. The Draft Taxation Laws Amendment Bill 2017 therefore proposes that the rules dealing with a debt that has been cancelled, waived or discharged should not apply to a debt that is owed by a debtor to a creditor that forms part of the same group of companies.
The Income Tax Act states that if a South African resident works in a foreign country for more than 183 days a year, with more than 60 of those days being continuous, any foreign employment income earned is exempt from tax. The draft Taxation Laws Amendment Bill 2017 proposes to repeal this exemption in its entirety, as the National Treasury has realised that it creates opportunities for double non-taxation. In addition, the exemption has led to the unequal treatment of public and private sector employees.
In February 2017 the South African Revenue Service published two binding general rulings which provided much-needed clarity on various interpretational issues, but failed to cover certain practical issues. Subsequent publications, media releases and revisions have offered further practical guidance on the manner in which companies and non-executive directors should have dealt with the taxation of their earnings before June 1 2017.
The South African Revenue Service recently issued Binding General Ruling 41, in which it ruled that non-executive directors (NEDs) should register and account for value added tax (VAT) on their directors' fees where the fees exceed the VAT registration threshold of R1 million in a 12-month period. SARS recently issued an updated ruling in which it determined that, in accordance with the VAT Act, the VAT registration liability date for NEDs was June 1 2017.
The South African Revenue Service (SARS) recently released a statement regarding improvements that have been introduced to the existing dispute resolution process. According to the statement, SARS is implementing these improvements as part of its ongoing commitment to deliver a better service to taxpayers. The statement refers to the implementation of an electronic request for reasons for an assessment and the introduction of a guided process for SARS's eFiling system, among other things.
The South African Revenue Service recently set out the tax consequences for the restructuring of an unlisted property portfolio under the Income Tax Act. The parties to the transaction were a listed company incorporated and resident in South Africa which carried on business as a long-term insurer (the applicant), a company incorporated and resident in South Africa and 100% owned by the applicant and a corporate real estate investment trust to be listed on the Johannesburg Stock Exchange.
In many businesses, it is common for employers to provide their employees with free or low-cost transport services from their homes to their place of employment. However, under the Income Tax Act, such arrangements could constitute a taxable fringe benefit in the hands of the employees, depending on the circumstances and facts of the case. The South African Revenue Service recently released Binding Private Ruling 262, which deals with this issue.
A recent South African Revenue Service ruling on an employee incentive scheme suggests that Paragraph 80(2) of Schedule Eight of the Income Tax Act (58/1962) applies in respect of any gains realised on a disposal of shares and must be disregarded by the trust where the gains are vested in the beneficiaries. However, the ruling is silent as to whether any such gains must be taken into account for the purposes of calculating the beneficiaries' aggregate capital gains or losses.
Better late than never? Tax Court decision and recent legislative amendments regarding lodging objectionsSouth Africa | 24 March 2017
In a recent case, the Tax Court held that the taxpayer had failed to prove that exceptional circumstances had caused the delay in lodging its objection to an assessment issued by the South African Revenue Service (SARS) and dismissed the appeal. In light of the National Treasury's budget shortfall, SARS may be more aggressive in collecting tax in future. This judgment should therefore be taken seriously.
The South African Revenue Service recently issued two binding general rulings which address how non-executive directors should account for tax on their earnings as directors. The rulings determined that companies must not withhold employee pay-as-you-earn tax on amounts paid to non-executive directors and that non-executive directors may claim deductions against their income for certain expenses, provided that they meet the requirements of the Income Tax Act (58/1962).
When disputing a tax debt, especially one involving the complex issue of unlawful tax avoidance, taxpayers should always exercise caution. This sentiment was echoed in a recent judgment which made reference to a taxpayer's dispute with the South African Revenue Service (SARS). SARS had rejected the taxpayer's claim for input tax and concluded that the transaction had been a scheme to obtain an undue tax benefit under Section 73 of the Value Added Tax Act.
Following its announcement in the 2016 Budget Speech, the legislation governing the Special Voluntary Disclosure Programme (SVDP) has finally come into effect. The amount payable under the SVDP will be equal to the amount of the receipts and accruals not declared to the South African Revenue Service, as required by the Estate Duty Act or the Income Tax Act, from which an asset – situated outside South Africa and held between March 1 2010 and February 28 2015 – was wholly or partly derived.
SARS issues ruling on tax accountability following assumption of contingent liabilities in sale of businessSouth Africa | 10 February 2017
The South African Revenue Service (SARS) recently provided guidance on the difficult issue of accounting for tax following the assumption of contingent liabilities on the acquisition of a business as a going concern. Parties should proceed with caution when structuring sale of business agreements, as it is likely that SARS will adopt the position set out in its interpretation note.
An efficient advertising campaign is often the difference between a successful and an unsuccessful business venture. However, when advertising the price of their products, businesses must observe the Value Added Tax (VAT) Act. The Advertising Standards Authority of South Africa Directorate recently addressed this matter and upheld a complaint regarding the advertised prices in a print ad for safety wear, which had excluded VAT.
The Tax Court recently considered whether the South African Revenue Service was correct to levy an understatement penalty on a taxpayer that had incorrectly claimed the deductible allowance of enhancement income provided for by the Income Tax Act. The taxpayer submitted that the understatement had arisen as a result of a bona fide inadvertent error, as contemplated in Section 222(1) of the Tax Administration Act, and that it therefore did not have to pay a penalty.
The High Court (Gauteng Division, Pretoria) recently found that the South African Revenue Service (SARS) erred in its finding that the applicant had failed to pay certain amounts of value added tax and incorrectly levied penalties and interest. On the facts, it appeared that the applicant had made payment as required, and that SARS had incorrectly allocated the amount paid. As such, the court granted an order to the effect that SARS must pay interest on the amounts paid by the applicant under protest.
A number of cases have examined whether an interim order or decision which does not dispose of a case finally is appealable. In a recent Supreme Court of Appeal case, a taxpayer wanted to appeal, among other things, the Tax Court's decision regarding the onus of proof and duty to adduce evidence first. The court's judgment provides an important warning for taxpayers to consider the applicable legislation and whether an appeal is worthwhile.
Due to the nature of their business, many multinationals send their employees to work in other countries. Such employees are often subject to taxation in their host country, yet remain tax residents in their home country. The Johannesburg Tax Court recently considered issues that arose as a result of the tax arrangements entered into between the host country employer and its expatriate employees, who were seconded from their home countries to work in South Africa.
SARS rules on donations-related tax consequences of transaction to introduce BEE shareholder into groupSouth Africa | 16 December 2016
The South African Revenue Service (SARS) recently issued a binding private ruling regarding the donations-related tax consequences of a proposed transaction which would introduce a black economic empowerment (BEE) shareholder into a group of companies in order to benefit all of the entities within the group in respect of their BEE scorecard ratings and increase the profitability of the applicant.
The long-awaited final public notice regarding the record-keeping requirements pertaining to transfer pricing transactions was recently published. While the public notice clarifies the additional record-keeping requirements for transfer pricing transactions, these requirements may increase compliance costs for certain taxpayers. Further, taxpayers risk the South African Revenue Service auditing them and finding that they have failed to keep the required records.
Following the recent release of the first Draft Taxation Laws Amendment Bill 2016 and its explanatory memorandum, the proposed amendments applicable to trusts and employee share schemes have received significant attention. However, another proposed amendment with potentially far-reaching consequences has received little attention, but could result in a taxpayer paying tax at one rate one day and another the next, as determined by the minister of finance.
In today's tough economic climate, it is common for companies to consider alternative funding arrangements to fund their activities, which minimises cash-flow obligations to third parties in the short term, while also ensuring compliance with relevant tax legislation. One option to consider is the creation of a loan account by a debtor in favour of a creditor. The Tax Court recently had to address this issue and, specifically, the consequences of Section 22(3) of the Value Added Tax Act.
Investors in shares can defer capital gains tax using unit trusts. If a taxpayer transfers listed shares to a unit trust in exchange for units in the trust, the transfer will not give rise to capital gains tax or securities transfer tax, provided that the unit trust meets the requirements under the Collective Investment Schemes Control Act and the transfer meets the requirements under the Income Tax Act.
The Tax Court recently determined whether input tax could be claimed by a close corporation which carried on business in the courier industry on the purchase of a vehicle used to make taxable supplies. Taxpayers whose business involves making taxable supplies and which are vendors in terms of the Value Added Tax Act should ensure that they can claim an input tax deduction on motor vehicles purchased for their business.
Membership-based organisations and the willingness of members to pay membership fees are becoming increasingly less attractive as a result of restrictive funding requirements in the Income Tax Act. There may be merit in extending the partial taxation regime currently governing public benefit organisations to membership-based organisations. In this way, membership-based organisations could maintain their tax-exempt status.
The Financial Surveillance Department of the South African Reserve Bank recently issued an exchange control circular regarding the information that is required in an application for exchange control relief. The circular forms part of the joint tax and exchange control Special Voluntary Disclosure Programme, which was announced by the minister of finance in the 2016 budget speech.
The South African Revenue Service recently ruled on rollover relief provisions in the Income Tax Act, finding that the disposal by amalgamated companies of their businesses to the resultant company will meet the requirements of an amalgamation transaction. This ruling suggests that under certain circumstances, each amalgamated company may not need to conclude a separate amalgamation transaction with the resultant company to qualify for the rollover relief.
The South African Revenue Service (SARS) has traditionally adopted a conservative approach in issuing rulings which approve a tenuous interpretation of the Income Tax Act in favour of the taxpayer. However, in a recent binding private ruling SARS adopted an interesting interpretation of the corporate rollover relief provisions in Section 44 of the act, raising a number of questions.
The South African Revenue Service has issued a number of rulings regarding the conversion of debt to equity, and recently issued a binding private ruling which again dealt with the matter. The ruling involved a restructure of a group of companies. As part of the restructure, one company in the group (a tax resident in South Africa) acquired a loan account in its wholly owned subsidiary company (a tax resident in another country).
Under the dispute resolution procedures in Chapter 9 of the Tax Administration Act, taxpayers must sometimes defend themselves before court in respect of one tax period while simultaneously objecting to and appealing the same legal issues in respect of earlier or later years of assessment. However, taxpayers may benefit from a test case mechanism provided by the act.
Taxpayers are often assessed for more than one tax period at a time. However, problems arise when the issues being investigated by the South African Revenue Service overlap with disputes pending before the Tax Court. The taxpayer must then defend itself in respect of one tax period before court while simultaneously sourcing and providing relevant material pertaining to the same legal issues for an audit of a later tax period.
Following Budget 2016, a number of amendments have been proposed to the laws and regulations that apply to tax-free investments (TFIs). These include amending the Income Tax Act in order to prevent the circumvention of estate duty; removing the requirement to submit dividend tax returns following the receipt of dividends from TFIs; and introducing draft regulations to outline the process for transferring TFIs between service providers.
A taxpayer that is aggrieved by an assessment or decision of the South African Revenue Service may object to the assessment or decision, but must do so within 30 business days of the date of the assessment. This period may be extended by no more than 21 business days, unless 'exceptional circumstances' caused the delay. The South Gauteng Tax Court recently considered the meaning of this term.
The South African Revenue Service (SARS) recently issued Draft Interpretation Note 16 (Issue 2) for public comment. Compared to the present Interpretation Note 16, the draft note indicates a shift in SARS's interpretation of a tax exemption for foreign employment income under the Income Tax Act. With the draft note, SARS is tightening the requirements for accessing the foreign employment tax exemption without changing the wording of the act itself.
Taxpayers should take great care when selling assets where the price is paid in instalments, as the transaction may trigger tricky capital gains tax consequences. This is because where a taxpayer becomes entitled to an amount which is payable in a subsequent tax year (eg, through an asset sale), the full amount must be treated as having accrued to the taxpayer in the current tax year.
The South African Revenue Service (SARS) recently issued a binding private ruling which dealt with the interpretation and application of Section 8EA of the Income Tax Act. This anti-avoidance provision deems the amount of any dividend or foreign dividend received or accrued to the holder of a preference share to be income (as opposed to exempt income) for tax purposes. The provision applies when the preference share in question is a third-party backed share.
Budget Day saw the proposal of a number of measures affecting taxpayers. Key proposals cover the recharacterisation of proceeds in case of share buyback; the conversion of interest into dividends; the submission date of the estimate for the second provisional tax payment for the tax year; the withdrawal of the proposed withholding tax on service fees; and collective investment schemes.
In Commissioner for SARS v Sunflower Distributors CC the High Court recently decided whether a provisional preservation order granted in favour of the South African Revenue Service (SARS) should be made final. The judgment provides some comfort to taxpayers facing such an application by SARS, since it shows that the court will not easily grant such an order and that SARS must provide full disclosure of all the relevant facts.
A new binding general ruling clarifies the interpretation of the term 'substantially the whole' as used in the Income Tax Act. Approved associations, public benefit organisations, recreational clubs and small business funding entities may carry out limited business undertakings; provided that 'substantially the whole' of these undertakings are directed at the recovery of costs, the receipts and accruals are tax exempt.
The Tax Administration Act prescribes the period of limitations for issuance of assessments. A new bill proposes to extend these prescription periods to account for delays arising from failure by the taxpayer to provide requested material, resolution of information entitlement disputes and certain audits and investigations under the Tax Administration Act. The proposed amendments seek to address the issue of delaying tactics used by taxpayers.
The Supreme Court of Appeal recently ruled in favour of the taxpayer in respect of a motor vehicle salary sacrifice scheme. The judgment underlines the importance of employers and employees properly agreeing, understanding and implementing any remuneration structures that contain a salary sacrifice component.
In 2015 the Davis Tax Committee released its first report on estate duty for public comment. The committee was tasked with considering the use of trusts as vehicles employed by taxpayers to divest themselves of their assets during their lifetime, thereby saving estate duty on their death. Its report contained a number of disconcerting recommendations with regard to the taxation of trusts.
Having been the subject of various discussion papers since 2011, the introduction of a carbon tax in South Africa is becoming a reality with the release of a draft carbon tax bill earlier this month. It has been clear since at least 2013 that South Africa would opt for a carbon tax in order to price carbon, as opposed to an emissions-trading scheme. The draft bill sets out the mechanics of the carbon tax.
The South African Revenue Service recently amended the ITR12T form (the income tax return for trusts). The amended form incorporates certain legislative changes, makes mandatory certain previously optional fields and includes automatic calculations. The amendments arise from the implementation of system changes to cater for the processing of certain collective investment scheme registrations and value added tax registrations.
The South African Revenue Service (SARS) recently released a binding private ruling dealing with the merger of two controlled foreign companies (CFCs) for purposes of Section 9D of the Income Tax Act, which provides relief from any exit charge that could arise as a result of one of the merging parties ceasing to be a CFC. SARS ruled that the proposed transaction would constitute an amalgamation transaction, thus triggering relief.
The 2015 Taxation Laws Amendment Bill proposes an amendment to the Income Tax Act concerning withholding percentages from payments due to non-resident sellers of immovable property situated in South Africa. The proposed amendment raises interesting questions regarding compliance with tax laws through the submission of returns for assessment versus a final withholding tax.
The Supreme Court of Appeal (SCA) recently ruled in a case concerning the determination of the valuation date value of shares for the purposes of calculating the capital gain or loss that arose on their disposal. The SCA accepted the South African Revenue Service's claim that the forecast amounts used in the taxpayer's valuation of the shares were unreasonably optimistic.
Where an employer wishes to regularise its employee's tax affairs through the Voluntary Disclosure Programme and cannot recover the tax directly from the employee, it must pay the pay-as-you-earn tax on behalf of the employee. Such payment constitutes a 'payment of the employee's debt' which triggers a taxable fringe benefit in the hands of the employee.
The South African Revenue Service recently released a binding private ruling which considered the meaning of 'controlled group company' and 'equity share' in terms of Section 12J of the Income Tax Act. The ruling concerned an approved venture capital company in terms of Section 12J which proposed to incorporate a new company with two other resident companies.
The South African Revenue Service recently published the fourth issue of Interpretation Note 64, which seeks to provide guidance on the application and interpretation of Section 10(1)(e) of the Income Tax Act. With the rising prevalence of complex developments, security estates, shopping centres, wellness compounds and high-rise flats in South Africa, body corporates, homeowners' associations and share block companies are commonplace and clear guidelines as to the taxation of these entities is imperative.
Many residential property developers will begin 2018 with a major cash-flow challenge, as they may be faced with a substantial value added tax (VAT) liability in respect of the temporary letting of residential units which have been developed for resale. It is hoped that the South African Revenue Service and the National Treasury will urgently address the problems with regard to the VAT rules concerning the change-in-use adjustments for property developers.
Tech, Data, Telecoms & Media
Section 12O of the Income Tax Act provides an incentive to stimulate the domestic production of films in the form of an exemption from normal tax for income derived from the exploitation rights of a film. The South African Revenue Service recently issued guidance reflecting its interpretation of this provision.