Preference share funding structures are often preferred by banks and other financial institutions because dividends received by certain holders – including banks and other juristic persons – are exempt from income tax. As such, the provisions of the Companies Act and the Income Tax Act must be considered in the context of the outcome which a company wishes to achieve before it settles the terms of a preference share funding structure.
The Supreme Court of Appeal recently ruled on the South African Revenue Service's (SARS's) right to impose understatement penalties on a taxpayer and the quantum thereof. The judgment will be welcomed by taxpayers involved in disputes with SARS regarding understatement penalties, as it reaffirms that the Tax Court cannot, of its own volition, increase an understatement penalty.
This article delves into the National Treasury's proposal to address abusive arrangements aimed at avoiding the anti-dividend stripping provisions in the Income Tax Act. It first discusses the history of the amendments, followed by an examination of the anti-dividend stripping provisions and a brief discussion of the National Treasury's proposal in the 2019 Budget.
The historically high level of unemployment among South Africa's youth has led to the introduction of various tax incentives and benefits which aim to encourage the employment and training of such persons. Among these is the employment tax incentive scheme. A review of the scheme has demonstrated positive outcomes, including a significant increase in the employment growth rate and the number of employees in firms that have claimed the employment tax incentive.
One of the amendments proposed by Budget 2019 aims to reconcile the incongruency that exists between South African company law and income tax law with regard to the deregistration or liquidation of companies that are involved in amalgamation transactions. The amendment is a welcome change, as it will ensure that the Companies Act and the Income Tax Act operate in conjunction with, and in support of, each other.
When the domestic treasury management company (DTMC) regime came into effect in 2013, a 'DTMC' was defined in the Income Tax Act as a company that is incorporated or deemed to be incorporated in South Africa. The 2019 Budget explains that in 2017 the Income Tax Act was amended to remove this requirement, which conflicts with the South African Reserve Bank's requirements, prompting calls for reassessment.
The 2019 Budget noted that a global downward trend in corporate taxation rates may lead to an unintended increase in the imputation of the net income of controlled foreign companies (CFCs) in South African shareholders' taxable income. This could occur despite the fact that at its inception, a CFC has operated in a jurisdiction with tax rates which met the threshold contained in the Income Tax Act. As such, the budget proposes to reduce the threshold to less than 75%.
It has always been a contentious issue whether a purchaser of shares can claim a deduction for the interest that it incurs on monies borrowed to acquire the shares. The legislature intervened by introducing Section 240 of the Income Tax Act, which allows purchasers to deduct interest for a debt that is used to fund the acquisition of shares in certain circumstances. However, the target must be an operating company and form part of the same group of companies as the acquirer.
The Taxation Laws Amendment Act introduced a new section into the Income Tax Act which deals with value mismatches involving the transfer of assets in exchange for the issue of shares. Essentially, the section applies where the value of the asset given in consideration for the shares issued is different from what it would have been had the transaction been between independent persons acting at arm's length.
Abusive schemes whereby taxpayers retain shares for at least 18 months before they are disposed of for a nominal consideration recently came to the attention of the National Treasury, which proposed that the share buy-backs and dividend stripping rules be amended with effect from 20 February 2019. The treasury provided no guidance on the nature of the amendments, but taxpayers should expect a complicated provision that might have several unintended consequences.
In a recent unreported case regarding a taxpayer that conducted business in the wholesale and retail industry, the Tax Court had to decide whether the taxpayer could claim the employment tax incentive under the Employment Tax Incentive Act for certain periods. In its decision, the court not only considered the provisions of the act, but also applied various principles of South African labour law.
Under the Tax Administration Act, persons that enter into certain types of transaction must report the details of those transactions to the South African Revenue Service. These types of transaction are called 'reportable arrangements'. In order to determine when the information must be disclosed by, the parties must first establish when the arrangement qualified as a reportable arrangement.
A recent Value Added Tax Act amendment has created certainty regarding suppliers' ability to correct tax invoices that have already been issued and provides a remedy to recipient vendors which previously had difficulty obtaining a corrected tax invoice from suppliers. However, it remains unclear whether suppliers will be allowed to issue manual tax invoices reflecting the correct details where their systems do not allow for the issued tax invoice's particulars to be amended.
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 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.
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.