National Treasury published the Draft 2021 Taxation Laws Amendment Bill and the Draft 2021 Tax Administration Laws Amendment Bill has been saved
National Treasury published the Draft 2021 Taxation Laws Amendment Bill and the Draft 2021 Tax Administration Laws Amendment Bill
On 28 July 2021 National Treasury published the Draft 2021 Taxation Laws Amendment Bill and the Draft 2021 Tax Administration Laws Amendment Bill which give effect to the 2021 budget proposals announced on 24 February 2021. The draft bills are open for public comment. The draft bills were open for public comment up until close of business on 28 August 2021
We bring you a series of highlights aimed at providing an overview of the more pertinent tax proposals.
References below to the ITA refer to the Income Tax Act No.58 of 1962, and references to the TAA refer to the Tax Administration Act No.28 of 2011. Whereas references to the Carbon Tax Act refer to the Carbon Tax Act No.15 of 2019, and references to the Customs Act refer to the Customs and Excise Act No.91 of 1964.
Article 1 - Income tax proposals pertaining to International tax and Financial institutions and products
Clarifying the controlled foreign company anti-diversionary rules
The ITA contains provisions in section 9D that are aimed at taxing South African residents on the net income of a controlled foreign company (CFC). Broadly speaking, an amount equal to the net income of the CFC is included in a South African resident shareholder’s income according to the resident’s percentage of participation rights in the CFC.
The CFC rules contain a foreign business establishment (FBE) exemption, though, which provides that the CFC income will be exempt from imputation (i.e., not taxed in the SA resident’s hands) if such income is attributable to an FBE of the CFC. However, the FBE exemption does not apply to so-called ‘diversionary income’. For example, the FBE exemption will not apply to income derived by the CFC from the sale of goods to a connected person who is a SA resident, unless those goods are purchased from an unrelated party within the CFC’s country of residence.
It is proposed that the diversionary rule dealing with the outbound sale of goods in section 9D(9A)(a)(aa) and (dd) be amended to provide clarity that when the CFC purchases those goods, the goods should be physically present or delivered within the CFC’s country of residence.
The purpose of the proposal is to address instances where CFCs are entering into contracts of purchase in the CFC’s country of residence when in fact the goods are never physically present or delivered in the CFC’s country of residence.
The proposed amendment comes into operation on 01 January 2022 and applies in respect of years of assessment commencing on or after that date.
Clarifying the interaction between the provisions dealing with a CFC ceasing and the participation exemption
The ITA contains a participation exemption, in paragraph 64B of the Eighth Schedule to the ITA, which essentially disregards any capital gain or loss where shares in a non-resident company are disposed of to another a non-resident third party, subject to certain requirements.
In 2020, there was an amendment to the ITA to address potential tax avoidance opportunities that emerged as a result of the relaxation of requirements for loop structures. The amendment ensured that the participation exemption in paragraph 64B will not apply to the disposal of shares in a CFC to the extent that the value of assets in the CFC are derived from South African assets. For example, if a person disposes of its shares in a CFC and 20% of the CFC’s asset value is attributable to South African assets, only 80% of the ensuing capital gain will be disregarded under paragraph 64B.
This 2020 amendment created uncertainty on whether the section 9H(5) exemption, which deals with a foreign company ceasing to be a CFC as a direct or indirect result of the disposal of equity shares in a CFC, would apply if the paragraph 64B exemption is only partially applied.
To iron out the uncertainty, it is proposed that section 9H(5) will be amended such that where the capital gain or loss is partially disregarded under paragraph 64B, section 9H(5) will still apply. Thus, where a foreign company ceases to be a CFC as a result of a person disposing of its equity shares in a CFC, and the capital gain determined in respect of the disposal is only partially disregarded in terms of paragraph 64B, section 9H(5) will continue to apply. This means that the CFC will not be deemed to have disposed of its assets, in terms of section 9H(3), on the day before ceasing to be a CFC, even though a percentage of its value is attributable to its South African assets.
This amendment become effective retrospectively on 01 January 2021 and applies to disposals on or after that date.
Clarifying the rules dealing with withholding tax exemption declaration
Withholding tax on royalties applies to any royalty payments made from a source within South Africa to or for the benefit of a foreign person. The withholding tax rate is 15% but may be reduced in terms of a tax treaty. Similarly, dividends tax is currently levied at a rate of 20% but may also qualify for an exemption or a reduced rate in terms of a tax treaty.
In relation to the withholding tax on interest, the ITA provides that a person must not withhold an amount if the foreign person receiving the interest has submitted a declaration that the amount is exempt ‘as a result of an applicable double tax treaty agreement’. However, a similar declaration does not exist for the withholding tax on royalties and the withholding of dividends tax – this is contrary to the intent of National Treasury to align the withholding tax regime.
To achieve alignment, it is proposed that the tax legislation [specifically the wording in section 49E(2)(b), 64G(2)(a) and 64H(2)(a)] be amended to provide for the release from the obligation to withhold if the foreign person to or for the benefit of which that payment is to be made has, before the payment is paid, submitted to the person making the payment a declaration that the payment is exempt from the withholding tax on royalties/dividends in terms an agreement for the avoidance of double taxation.
The proposed amendments will come into operation on 1 January 2022 and will apply in respect of the payment of royalties or dividends to foreign persons on or after that date.
Financial institutions and products
Refining the expense deduction formula for long‐term insurer policyholder funds
Long-term insurers have to a apply a specific formula, called the expense ratio, when determining what portion of indirect expenditure would be deductible in the calculation of taxable income of its policyholder tax funds. In general, this ratio is based on taxable income divided by total income. A few years ago, this formula was revised to include unrealised capital gains, while unrealised capital losses were disregarded in the formula. Since then, uncertainty has existed in the industry on whether the unrealised capital losses should be disregarded per individual asset, or only disregarded when the aggregate of all the assets in a tax fund results in an unrealised loss position.
The proposed change to section 29A clarifies that the unrealised gains and losses for a year should be aggregated for all assets allocated to the relevant policyholder fund, and unrealised losses should therefore only be disregarded when a tax fund, as a whole, is in an unrealised loss position for that year.
Request for clarification in this regard has been made previously by the insurance industry, and obtaining it now is welcomed.
Clarifying the income tax treatment for the transfer of an insurance book of business between short‐term insurers
Some uncertainty exists in the current tax legislation when an insurance book of business is transferred between short-term insurers, specifically regarding the transfer of liabilities, which is not specifically catered for in section 28 of the ITA that deals with the taxation of short-term insurers. The interpretation of the general provisions of the ITA read with section 28 of the ITA in this regard, has sometimes resulted in inconsistent tax treatments by the insurers that are parties to the transfer of business.
The proposed amendments to section 28 of the ITA clarify the treatment to be followed. The transferor may, for purposes of section 11(a), deduct an amount equal to liabilities on investment contracts relating to short-term insurance business and amounts of insurance liabilities relating to premiums and claims, transferred to the other short-term insurer. Likewise, the same amount allowed as a deduction for the transferor must be included in the income of the short-term insurer to which the liabilities were transferred. This proposed change will come into operation on 1 January 2022 and apply in respect of years of assessment ending on or after that date.
This clarification is welcomed and would result in a consistent income tax treatment between short-term insurers when transferring a book of business.
Article 2 - Income tax proposals pertaining to individuals, savings and employment
Reviewing the nature of long service awards for fringe benefit purposes
Currently, a taxable benefit arises when an employee acquires an asset from an employer, either for no consideration or for a consideration which is less than the value of the asset. However, where any asset is granted to an employee as a long service award, the value of the asset is reduced by the lesser of the cost to the employer of all such assets given to the employee during the tax year and R5 000. In other words, to the extent that the long service award (given in the form of a non-cash asset) does not exceed R5 000, no taxable benefit arises in the employee’s hands.
Employers could provide their employees with both cash and non-cash assets long service awards such as gift vouchers, cash, services or right of use of an employer-owned asset for private purposes.
It is therefore proposed that the no value provision, in respect of long service awards, is amended to not limit these awards to non-cash assets only. Instead, it is proposed that it be extended to apply to other reasonable awards granted for long service. That said, all the other requirement to qualify for the preferential tax treatment will continue to apply, such as the number of years required to be considered a long service period and the requirement that the value of the long service award should not exceed R5 000.
The proposed amendments will come into operation for years of assessment commencing on or after 1 March 2022. This proposal is welcomed as in practice most employers provide long services awards in many forms.
Clarifying the calculation of the fringe benefit in relation to employer contributions to a retirement fund
A taxable benefit arises where an employer contributes to a retirement fund on behalf of its employees. The value of the taxable benefit is, broadly speaking, dependent on the type of fund the employee belongs to and the composition of the benefits payable to the members.
Currently, where a retirement fund provides a retirement benefit that consists of both “defined contribution components” and a self-insured risk benefit, the total contribution to the fund would be classified as a “defined benefit component”. This in turn means that the value of the taxable benefit would be determined in terms of a prescribed formula and the employer is required to provide a contribution certificate. This is because self-insured risk benefits are not considered a “defined contribution component”.
National Treasury has proposed that the self-insured risk benefits should be classified as a “defined contribution component” to ensure that the value of the benefit for both the retirement fund and the self-insured risk benefits would be determined as the cost to the employer (i.e., the actual contribution made by the employer in respect of these benefits).
The proposed amendments will come into operation for years of assessment commencing on or after 1 March 2022.
Curbing abuse of the employment tax incentive
The employment tax incentive (ETI) initiative was established in terms of the Employment Tax Incentive Act No. 26 of 2013 (the ETI Act) to promote employment, particularly of young workers. The ETI allows registered employers to reduce their pay-as-you-earn (PAYE) tax liability to the South African Revenue Service (SARS) for the first two years in which the qualifying employees are employed.
It is proposed that the definition of an “employee” and “qualifying employee” be enhanced in the ETI Act to specify that work must be performed in terms of an employment contract and that the employee must be documented in the employer’s records to curb abuse where ETI is claimed for individuals who do not work for Employers. These changes will seek to clarify that substance over legal form will be considered when assessing whether an employer can claim ETI. The proposed amendments will come into operation on 1 March 2021 and apply in respect of years of assessment commencing on or after that date.
Employers claiming ETIs are encouraged to consult with their tax and legal advisors to ensure that they are compliant with the proposed amendments of the ETI Act.
Allowing members to use retirement interest to acquire annuities on retirement
Members retiring from a retirement fund are currently allowed to withdraw a maximum of one third of the total value of the retirement interest as a lump sum. The balance of this retirement interest may be utilised to purchase an annuity (including a living annuity).
Currently, the annuity by the retirement fund is provided in one of three ways:
1. Paid directly by the retirement fund to the member;
2. Purchased from a South African registered insurer in the name of the fund; or
3. Purchased by the retirement fund from a South African registered insurer in the name of the life retiring member.
National Treasury proposes to expand the types of annuities members can purchase when they retire. This is to increase flexibility for a retiring member and maximise the retirement capital available to provide annuities.
This is a welcome proposal as it increases the flexibility that a member of a retirement fund has in choosing how to invest their retirement savings.
Transfer between retirement funds by members who are 55 years or older
Where a member of a retirement fund scheme (who has reached normal retirement age in terms of the rules of the fund but has not yet elected to retire from the fund) makes a transfer into the below funds, the transfer will not be taxable in the hands of the individual. This applies to:
• Transfers from a pension fund to a pension preservation fund or a retirement annuity fund; or
• Transfers from a provident fund to a pension preservation fund, a provident preservation fund or a
retirement annuity fund.
The intention behind this is that any transfers to a similar fund, under the above circumstances, should not be taxed.
However, due to an anomaly in the wording, certain transfers (for example transfers between two preservation funds) were not included in the above definition resulting in gross income in the hands of the individual.
National Treasury has proposed an amendment to address this anomaly by allowing for tax‐free transfers from a preservation fund into similar funds by members who have already reached normal retirement age.
This proposal is welcomed as it will assist individuals in their attempt to maximise the return on their retirement savings without being concerned about a potential tax liability when transferring their retirement savings from one fund to another.
Applying tax on retirement fund interest when an individual ceases to be a tax resident
When a natural person ceases to be a resident of South Africa, that individual is deemed to have disposed of their worldwide assets, subject to certain exclusions, on the date immediately before the day on which they ceases to be a resident. The disposal is deemed to be made by the individual as a resident at an amount equal to the market value of each asset on that date (this is commonly referred to as a deemed disposal). Certain assets are not included in this deemed disposal, such as for example, South African-situated immovable property that is held by the individual. The individual will, furthermore, be treated as having repurchased each of the relevant assets at the market value on the day they cease to be a resident. As a result of this, the individual will be required to account for the capital gains tax (CGT) that will arise as a result of this deemed disposal of their assets (i.e., the so-called CGT exit charge).
An interest held in a retirement fund (e.g., a pension fund, provident fund, or retirement annuity fund, etc.) is currently not listed as one of the assets that are excluded from the CGT exit charge when a person ceases to be a tax resident. While the interest in a retirement fund is currently subject to the CGT exit charge, due to the construction of the provisions in the Eighth Schedule to the ITA (which governs the determination of CGT in South Africa), it often (but not always) transpires that no capital gain (or loss) may need to be accounted for, on the date the employee ceases to be a resident, in respect of the deemed disposal of the persons’ retirement interest.
Further when the person ultimately withdraws, or retires, from the South African retirement fund (i.e., after the individual ceased to be a South African tax resident), the application of a double tax agreement (DTA) that South Africa has with the individual’s country of residence may give sole taxing rights of the retirement interest to the individual’s country of residence, and South Africa will have to forfeit the taxing rights (despite that it may be the country that previously allowed the individual to claim a tax deduction in respect of the retirement fund contributions against their income). This must be contrast to the scenario where the person remains a South African tax resident – in which case the retirement interest would be subject to tax on retirement or withdrawal from the retirement fund.
Thus to “ensure neutrality of tax treatment for all types of withdrawals”, regardless of the residency status of the individual at the time of withdrawal, the following amendments to the legislation are proposed, with effect from 1 March 2022 and applying to year of assessment commencing on or after that date:
• It is proposed that the list of assets which are excluded from the deemed disposal provisions, for CGT; purposes,
when ceasing to be a resident include the value of the retirement interest held in a South African retirement
• It is further proposed that when a person ceases to be a resident in South Africa, that person will be deemed to
withdraw from the retirement fund. However, any tax payable on such “withdrawal” will be deferred until such
time that individual receives payment of the retirement interest from the retirement fund, either when the
individual withdraws or retires from the retirement fund, depending on the circumstances.
The tax payable to SARS at that date (i.e., when the person receives payment from the retirement fund) will be determined according to the prevailing tax tables at that time and SARS will levy interest at the prescribed rate until the tax is paid in full.
While the proposed amendment may result in a more equitable tax treatment of an interest held in a retirement fund, administration of the proposed regime as well as the responsibilities of the various stakeholders (i.e., the retirement fund, the taxpayer and SARS) will need to be clarified.
Clarifying the timing of disposal rules in respect of an asset acquired from a deceased estate
In terms of the ITA, a deceased person must be treated as having disposed of their assets at the date of their death, subject to certain exemptions. Consequently, the heir or legatee of a deceased person (excluding a surviving spouse) is treated as having acquired the assets from the deceased estate for an amount of expenditure incurred equal to the market value at the date of the death. The Estate Duty Act No. 45 of 1955 makes provision for the assets of the deceased person to form part of a deceased estate before such assets are distributed to the respective heirs. The heirs have a personal right to claim delivery of the assets from the deceased estate after the finalisation of the liquidation and distribution account.
Due to the time delays that can take place in finalising the liquidation and distribution account, it is proposed that the ITA clarify the timing of disposal by inserting a provision that the deceased estate be treated as having disposed of the assets on the date when the liquidation and distribution account becomes final.
The proposed amendment will come into operation on 1 March 2022 and will apply in respect of liquidation and distribution accounts finalised on or after that date.
Strengthening anti-avoidance rules in respect of loan transfers between trusts
Loans and advances to trusts once again come under scrutiny in the latest draft proposals issued. Anti-avoidance measures were first introduced in 2016 to address instances of assets being transferred to trusts in exchange for interest free or low-interest loans that in many instances would remain outstanding or be waived. The anti-avoidance measures deem a donation to be made, calculated as the difference between the actual interest charged on the loan and interest had the SARS official rate of interest been applied, by the individual who advanced the loan or at whose instance a company advanced the loan, in every year of assessment that the loan remains outstanding. Further anti-avoidance measures were introduced in 2017 to address instances where the loan is not provided directly to a trust but rather to a company that is a connected person in relation to a trust.
In 2020, additional measures were implemented to deem the subscription price of preference shares to be a loan advanced and any dividends in respect of those preference shares deemed to be interest for the purposes of the anti-avoidance provisions. This applies in instances where an individual (or at the instance of an individual, a company that is connected in relation to that natural person), subscribes for preference shares in a company if at least 20% of the equity shares in that company are directly or indirectly held or the voting rights can be exercised by a trust that is a connected person in relation to the subscribing individual, whether alone or together with any person who is a beneficiary.
Further proposals to limit anti-avoidance measures have now been proposed to include loans, advances or credits that a trust, directly or indirectly provides to another trust in relation to which its beneficiaries or the founder are connected persons in relation to the founder or beneficiaries of the trust that provided the loan, advance or credit. Such loans will also deem a donation to be made where the actual interest charged on the loan is less than the interest had the SARS official rate of interest been applied.
The proposed amendments will come into operation on the date of publication of the draft Taxation Laws Amendment Bill for public comment (i.e. 28 July 2021) and applies to any amount owed by a trust in respect of a loan, advance or credit provided to that trust, before, on or after that date. The proposals once again highlight National Treasury’s focus on eliminating the use of trusts in complex tax planning schemes.
Penalty for non-submission of bi-annual PAYE reconciliations based on estimated PAYE
Employers are required to submit six-monthly returns of employees’ taxes and SARS may impose a penalty for the non-submission of these returns. The penalty is currently calculated as a percentage of the employees’ tax for the period covered by the return. However, as SARS does not know the value of the employees’ tax due to the non-submission of the return, the penalty can only be imposed retrospectively.
The proposed amendment seeks to impose an immediate penalty on the non-submission to encourage the timeous submission of the six-monthly returns by allowing SARS to raise the penalty on an alternative basis where the employers have not submitted the return on the due date. The proposal is that the penalty be calculated through an estimate of the employees’ tax, which can then be adjusted once the actual employees’ tax is known.
While the legislation around the submission of the six-monthly returns are clear, the imposition of the penalty using an estimate of employees’ tax could create a cash flow problem for employers and result in a credit due to the employers by SARS, where the penalty is calculated on an excessive employees’ tax amount.
Provisional tax relief for short tax periods
Provisional taxpayers are required to make provisional tax payments every six months in a year of assessment. The first payment is made six months into the year of assessment and the second payment is made at the end of the second six months. There is currently no provision for instances where the taxpayer has a short year of assessment, either due to death or ceasing tax residency (individuals) or on initial incorporation or a change in a company’s financial year (companies).
The proposed amendment seeks to remedy this omission by allowing the taxpayer to not submit a first provisional tax return and make the corresponding payment when the duration of a year of assessment does not exceed six months.
The new tax legislation that has affected expatriate taxpayers has resulted in high number of outbound taxpayers seeking to cease South African tax residency when they accept permanent employment outside of South Africa. The proposal seeks to address the administrative tax challenges that result from ceasing tax residency.
Alignment of certain penalty provisions for employers
An employer currently has an obligation to provide its employees with an employees’ tax certificate (IRP5/IT3a certificates) under paragraph 13 of the Fourth Schedule to the ITA. The employees’ tax certificate must reflect the total remuneration (including the amount of any taxable benefits and allowances) and the sum of the employees’ tax (PAYE) deducted during that period. Where the employer has deducted a lower PAYE than required and a lower PAYE has been paid to SARS due to the understatement of the taxable benefits, SARS must impose a penalty of 10% on the employer for the understatement.
In addition to the above, an employer currently also has an obligation to determine the value of the taxable benefit granted to its employees and is required to disclose the nature of the taxable benefit and its value on the employees’ tax certificate or on a separate certificate, in accordance with paragraph 17 of the Seventh Schedule to the ITA. If the employer fails to comply with this requirement, SARS may also impose a penalty equal to 10% of the amount by which the cash equivalent is understated.
The two paragraphs therefore impose a separate penalty on the same understatement. The proposed amendment removes the penalty imposed under paragraph 17 of the Seventh Schedule to the ITA in order to remove the double penalty.
The amendment is welcomed as it will streamline the penalties imposed and address the same infringement under one paragraph only.
Article 3 – Carbon tax proposals and proposals pertaining to customs and excise
Renewable energy premium
The Carbon Tax Act makes provision for taxpayers to reduce their net levy payable by deducting the renewable energy (RE) premium from the gross levy payable (determined based on emissions and applicable allowances as per section 6 of the Carbon Tax Act). The present wording of the Carbon Tax Act is unclear on which taxpayers are eligible to make use of the RE premium. The proposed amendment clarifies that the RE premium is open to all carbon taxpayers that conduct electricity generation activities and purchase additional primary renewable energy directly under the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) or via a Private Independent Power Producers (IPPs) agreement. The proposed amendment is effective from 1 January 2021.
Section 6 of the Carbon Tax Act allows for emissions sequestered by a taxpayer to be deducted from its combustion emissions, thereby reducing its overall carbon tax exposure. The proposed amendments seek to clarify the scope and definitions of “sequestered emissions” in order to align with how these emissions are reported to the Department of Forestry, Fisheries and the Environment (DFFE). The added definitions further aim to prevent double benefits being claimed. The proposed definitions limit forestry linked sequestration activities where the taxpayer has direct operational control, i.e. plantation sequestered emissions only (“up to the mill gate”). Other sequestered emissions in the form of harvested wood products are excluded until more robust methodologies are developed to ensure that these emissions can be accurately quantified. The proposed amendments are effective from 1 January 2021.
Carbon budget allowance
The Carbon Tax Act permits an allowance of 5% to taxpayers participating in the DFFE voluntary carbon budget system - during or before the tax period. The DFFE piloted Phase 1 of the voluntary carbon budget system covering emissions from 2016 – 2020. The DFFE extended the system (Phase 1 Ext) for the period 2021 – 2025. The proposed changes seek to specify the relevant dates linked to budget system participation (from 1 January 2021 to 31 December 2022) to prevent confusion relating to when taxpayers will be eligible for the allowance. The proposed change is effective from 1 January 2021.
Alignment of Schedule 2 emissions activities and thresholds with the Greenhouse Gas Emission Reporting Regulations
The activities and thresholds presented in Schedule 2 of the Carbon Tax Act are based on Annexure 1 of the National Greenhouse Gas Emission Reporting Regulations (NGERS) issued by the DFFE. The DFFE made changes to the Annexure 1 activities and thresholds on 11 September 2020. The proposed amendments seek to align Schedule 2 of the Carbon Tax Act with Annexure 1 of the NGERs.
The proposed amendments are tabled below and will be deemed to have come into operation on 11 September 2020. It is unclear how these proposed changes will affect completed tax submissions for the 2020 calendar year, as such we will be engaging with National Treasury to get clarity on these proposed changes.
Intergovernmental Panel on Climate Change (IPCC) activity
1A2m (Brick manufacturing)
1 million bricks (replaces 5 million bricks)
1A2n (Manufacture of ceramic products by firing in particular roofing tiles, tiles, stoneware or porcelain)
5 tonnes of production a day (new)
2A4a (Industrial processes and product use – Ceramics)
50 tonnes of production a month (new)
2A4b (Industrial processes and product use – Other uses of soda ash)
50 tonnes of production a month (new)
2A4d (Industrial processes and product use – Other)
20 tonnes of production a month (new)
2B10 (Fluorochemical production - Other)
20 tonnes of production a month (new)
2C7 (Metal industry – Other)
50 tonnes of production a month (new)
2G1b (Other product manufacture and use - Use of electrical equipment)
50 kilograms of production per year (new)
3A2i (Agriculture, forestry and other land use – Livestock poultry)
40 000 places for poultry (new)
3C1a (Emission sources on land – Biomass burning in forest lands)
100 hectares of plantations (new)
3C4 (Emission sources on land – Direct N2O emissions from managed soils)
100 hectares of plantations (new)
3C5 (Emission sources on land – Indirect N2O emissions from managed soils)
100 hectares of plantations (new)
3D1 (Other – Harvested wood products)
[N/A] Harvested wood products produced from timber harvested from forest owners registered for reporting under IPCC code 3B1a and 3B1b (new)
Customs and excise
Expanding the purposes for which air cargo may be removed to degrouping depots
National Treasury has proposed that Section 6 of the Customs Act be amended in order to regulate the consolidation of air cargo at degrouping depots and to further regulate the movements of the same cargo to transit sheds for export. Currently, Section 6(1)(hB) deals with container depots for air cargo. In practice, air cargo is also consolidated for export at degrouping depots and therefore regulation in that respect is needed. This is a welcome change to enable business and make it easier to comply by aligning the law to the commercial realities of imports and exports.
Diesel refund scheme amendment
The present diesel refund scheme, introduced in 2000, has gone through many changes. The first regulatory measure was to link the administration of the diesel refund scheme to the existing Value-Added Tax (VAT) administration system, for easy reporting, assessment and administration.
The second regulatory measure was to limit the benefits of the scheme to primary producers in the industries listed as beneficiaries of the scheme. Its benefits were not available to users further than the primary production phase or to other role players in the production chain. The purpose was to reduce the input cost of such industries in the primary production phase in order to make them internationally more competitive.
The third measure was to confine the benefits of the scheme to the use of diesel in the primary production phase at the place where the mining operation is carried out. One of the current requirements is that, in order for the user to qualify, the contractors used must be on “dry” basis. This means that the user must supply the diesel to the contractor who in turn only bring their own equipment.
The proposed amendment now allows the contractors to purchase the fuel themselves and subsequently invoice the user. This is a welcomed development as it will ensure that smaller users are not excluded as they often collect and dispense their diesel purchases directly for use without it being stored at the user’s premises. It further allows contractors to get diesel in their own time and subsequently invoice the user.
Supply of stores and spares to foreign going ships and aircrafts
It is proposed all licensee or exporters, not only those that are accredited, will be able to supply goods to foreign going ships or aircrafts on the issuing by that licensee or exporter, of a dispatch and delivery note (or such other document as the Commissioner may prescribe or approve by rule). This amendment is as a result of the announcement in the 2021 Budget Speech that the South African Revenue Service (SARS) is changing its accreditation system to more closely reflect the requirements of the SAFE Framework of Standards issued by the World Customs Organisation. The benefits for accreditation needed to be more pronounced. By doing this, SARS wants every trader to see the value in compliance and self-regulation. SARS launched its Authorised Economic Operator (AEO) Programme in November 2020 and according to their website, currently 137 companies, certified as accredited traders, enjoy trade facilitation benefits. SARS’s objective is that over the next four years, the programme will expand to include all supply chain actors, a simplified programme for small, medium and micro enterprises, a Single Government AEO Programme and a Single Southern African Customs Union (SACU) AEO Programme with augmented benefits.
Article 4 - Income tax proposals pertaining to general business
Limitation of interest deductions
The ITA contains rules in section 23M aimed at limiting excessive interest deductions in respect of debts owed to persons not subject to tax (in the hands of the creditor) in South Africa, where the debtor and creditor are in a controlling relationship (e.g where the creditor directly or indirectly holds at least 50% of the equity shares in the debtor or can exercise at least 50% of the voting rights of the debtor).
National Treasury is proposing the following changes to section 23M of the ITA (and consequently section 23N) to strengthen the existing interest limitation rules in South Africa:
• The definition of “interest” for the purposes of section 23M will be expanded to also include payments of interest
in terms of interest rate swap agreements, the finance cost component included in finance lease payments and
foreign exchange differences. The inclusion of all foreign exchange differences, and not those only related to
interest-bearing debt, may introduce a significant amount of volatility in a taxpayer’s ability to deduct its interest
expense, largely due to the performance of the Rand.
• The interest deduction limitation ratio will be fixed and limited to 30% of a taxpayer’s “adjusted taxable income” as
compared to the earlier flexible percentage (capped to 60%) adjusted upwards and downwards based on the average
repo rate. Consequently, the deduction formula in section 23N will be amended to align with proposed changes.
• It is proposed that section 23M should also apply to interest incurred by a debtor in respect of a debt owed to a
creditor that is in a controlling relationship with the debtor, if that creditor, directly or indirectly through another
creditor that is in a controlling relationship with that creditor, obtained the funding for the debt advanced to the
debtor from a person that is in a controlling relationship with that creditor or that other creditor. This is to curb
instances where the interest limitation rules are circumvented with the use of back-to-back loan arrangements.
• Where a debtor pays interest at a withholding tax rate higher than zero percent, a portion of the interest expense
will be regarded as “not subject to tax” and potentially be subject to section 23M. The portion of interest incurred or
paid that will be regarded as “not subject to tax” will be determined with reference to a defined formula. The aim is to
prevent instances where the application of section 23M can be avoided, specifically where interest payments are
subject to tax but at a reduced rate in terms of a favourable treaty.
• The definition of “adjusted taxable income” will be amended for real estate investment trusts (REIT) to allow a
REIT to take into account “qualifying distributions” when calculating its “adjusted taxable income” for the purposes of
section 23M. This proposed change is welcomed as it will prevent a distortion in a REIT’s “adjusted taxable income”.
The proposed amendments will come into operation on 1 April 2022 and apply in respect of years of assessment commencing on or after that date.
Restricting the set-off of the balance of assessed losses in determining taxable income
Currently, the ITA allows companies to set off their balance of assessed losses carried forward from the previous tax year against their income. Provided the company continues to trade, any unutilised assessed loss balance is carried forward and may be set off against future income. Accordingly, as it stands, taxpayers will only pay income tax once their assessed loss balance has been fully utilised.
However, if the proposal in terms of the 2021 Draft Taxation Laws Amendment Bill (Draft TLAB) is adopted, the offset of the balance of assessed losses carried forward for companies will be limited to 80% of taxable income, each year. Any unutilised assessed loss balance may continue to be carried forward for future set-off, provided the continuous trade requirement is met, and again, limited to 80% of taxable income. The effect of this is that some tax will be payable in the year that a company generates taxable income, even if it has significant assessed losses carried forward.
The proposed amendment is to come into operation on 1 April 2022 and apply in respect of years of assessment commencing on or after that date. Once effective, the proposed amendment would apply to the balance of assessed losses at the time of implementation, i.e., it is not only the accumulation of losses starting from the date of implementation that will be subject to the new rules.
It is understood that one of the reasons for the proposed change is that it is meant to form part of a corporate income tax package to broaden the tax base and reduce the headline corporate income tax rate (from 28% to 27% for years of assessment commencing on or after 1 April 2022, as announced in the 2021/2022 Budget Speech) in an overall revenue neutral manner. It is believed that reducing the corporate income tax rate (while at the same time introducing restrictions on the utilisation of assessed losses) will improve the country’s competitiveness and is in keeping with an international trend.
However, South African taxpayers, most of whom have been hard hit by the impact of a global pandemic as well as the recent unrest in the country, may argue that now would not be the time to introduce what would effectively be a “minimum tax” on entities that may just have turned the corner and become profitable. This may be particularly concerning given that taxable profits do not necessarily translate into positive cashflows.
Further considerations related to the proposed amendment include the following:
• Given that no amendments are proposed to restrict/defer the utilisation of pre-trade losses (provided for in terms of
section 11A of the ITA), it will become increasingly important for taxpayers (and the South African Revenue Service
[SARS]) to separately track such losses.
• Taxpayers entitled to accelerated allowances could potentially be worse off in instances where such allowances
result in the creation of assessed losses that must then be deferred.
• Inconsistencies may arise across different industries such as for example, oil and gas as well as mining where
additional allowances are granted and/or specific provisions apply to the treatment of losses and the calculation
of taxable income.
• If enacted, the proposed amendment may have an impact on the calculation of provisional tax estimates, which
could result in the imposition of underestimate penalties if incorrectly calculated.
• From an accounting perspective, the proposed amendment may have an impact on the recognition of deferred tax
assets in respect of assessed losses, given that it may take longer to fully utilise such losses.
Clarifying the definition of contributed tax capital
The proviso to the definition of contributed tax capital (CTC) which requires that no holder of shares, within a particular class of shares, may receive CTC in excess of the amount per share derived by dividing the total CTC by the number of shares in that class immediately before that distribution has been exploited by companies allocating CTC on the basis of an alleged ‘share premium’ contributed by a particular shareholder, but not to all shareholders holding shares in the same class of shares.
To combat possible exploitation, it is proposed that the definition is clarified so that shareholders within the same class of shares should equally, in relation to their shareholding, share in the allocation of CTC.
The proposed amendment will be deemed to come into effect on the date of publication of the 2021 Draft TLAB for public comment, being 28 July 2021.
While the proposed amendment appears to stop such abuse, it will at the same time have a significant impact on other transactions such as share-buy backs and the redemption of preference shares. That is, a company will not be able buy back shares or redeem preference shares of a shareholder unless it buys back or redeems all the shares of the same class.
Business: Corporate rules
Addressing concerns when having to apply both the anti-value shifting rules and corporate reorganisation rules
The current interaction between the anti-value shifting rules in sections 24BA and 40CA of the ITA and the corporate reorganisation rules can give rise to unusual results.
In terms of section 40CA, the capital gain triggered under the anti-value shifting rules in section 24BA is added to the base cost of an asset acquired in exchange for the issue of shares by a company, when the asset for share transaction is implemented outside of the corporate reorganisation rules.
However, the capital gain triggered under the anti-value shifting rules in section 24BA is not considered when triggered in respect of transactions that are subject to the corporate reorganisation rules, as the corporate reorganisation rules only makes provision for the rolled over base cost.
As a result, a company will, on the future disposal of an asset acquired under the reorganisation rules be subject to double taxation as the company is not granted an uplift of base cost in respect of the capital gain previously triggered in terms of the anti-value shifting rules in terms of section 40CA.
To address these concerns, it is proposed that section 40CA is amended to:
• Provide for an additional base cost equal to any deemed capital gain resulting from the application of the anti-value
shifting rules in section 24BA for corporate reorganisation rules included in section 42, 43 and 44.
• Only provide for this additional base cost immediately before a subsequent disposal of an asset previously acquired
in terms of a section 42, 43 or 44 transaction in a transaction that falls outside of the corporate reorganisation rules.
The proposed amendments will come into operation on 1 January 2022 and apply in respect of any disposal of an asset on or after that date.
Clarifying the rules that trigger additional consideration in asset- for-share transactions when a debt is assumed by a company
It is proposed that section 42(8) of the ITA be amended in order to prevent the anti-avoidance rules, outlined in section 42(8) of the ITA, from being undermined when the shares acquired in section 42 asset-for-share transactions are subsequently transferred in terms of a corporate reorganisation transaction. The proposal is that the “additional consideration” which triggers in this anti-avoidance section will be deemed to accrue to the transferor in relation to any assumed debt immediately before any subsequent disposal of the shares acquired in terms of an asset-for-share transaction, and irrespective of whether the subsequent disposal of the shares is in terms of a corporate reorganisation rule or not.
The proposed amendments will come into operation on 1 January 2022 and apply in respect of the disposal of a share on or after that date.
Clarifying the early disposal anti-avoidance rules in intra-group transactions
The corporate rules contain anti-avoidance provisions to prevent taxpayers making use of the corporate rule roll-over relief and shifting built-in gain assets into a transferee company with excess losses, following which the transferee company could then immediately sell the asset/s and setoff any gain against its losses.
It is proposed that this anti-avoidance rule in section 45(5) be amended so that the early disposal anti-avoidance rules outlined in this section will apply to any capital gain, capital loss or income arising in the hands of a transferee company from any early disposal of an asset that was previously acquired in terms of an intra-group transaction without regard to any capital gain, capital loss or income that would have arisen on the date of the intra-group transaction.
The Draft Explanatory Memorandum on the 2021 Draft TLAB outlines that the proposed amendment is made to address an ambiguity in the existing rules. However, it is not clear that the proposed amendment in its current form aligns with the policy intent with which the initial anti-avoidance rule was introduced, and further clarification and refinement of this proposed amendment is required.
The proposed amendment comes into operation on 1 January 2022 and applies in respect of the disposal of any asset on or after that date.
Extending the reversal of the zero-base cost rules to apply on the sixth anniversary of an intra-group transaction
In 2020, amendments to section 45(3B) were proposed and became effective on 1 January 2021, applying in respect of years of assessment commencing on or after that date. These amendments addressed an anomaly that existed when the transferor and transferee cease to form part of the same group of companies, and they were subject to an intra-group transaction where assets were disposed of by the transferor to the transferee on loan account.
The anomaly addressed in 2020 is summarised as follows:
• On the date of de-grouping, the transferee will trigger taxes.
• If the loan between the transferor and transferee is still outstanding on the date of de-grouping, any subsequent
settlement of that loan will result in a capital gain for the transferor as the loan has a zero-base cost, and the
transferor as well as transferee no longer form part of the same group of companies.
• As such, it was possible for tax to be paid twice on the same transaction, firstly in the hands of the transferee and
then in the hands of the transferor.
The 2020 amendments revised section 45(3B) so that on the date that the transferor and transferee cease to form part of the same group of companies, the debt or non-equity shares in respect of which the zero-base cost rules applied are deemed to have a base cost equal to market value on the date of the intra-group transaction less any repayments made in respect of debt or reductions in the base cost made in respect of non-equity shares prior to the de-grouping.
National Treasury now proposes that section 45(3B) be revised further, to align with the timing of the de-grouping anti-avoidance rule, which ceases to apply on the sixth anniversary of an intra-group transaction, and that the zero-base cost anti-avoidance rule should similarly be reversed on the sixth anniversary of an intra-group transaction.
The proposed amendment will come into operation on 1 January 2022 and apply in respect of years of assessment commencing on or after that date.
Clarifying the interaction between early disposal anti-avoidance rules and the zero-base cost anti-avoidance rules
We have outlined above how the 2020 amendment removed the potential double taxation when a de-grouping or deemed de-grouping occurs as defined in section 45.
The early asset disposal anti-avoidance rules in section 45(5) reverse the tax deferral benefit in respect of the disposal of an asset which was acquired in terms of a section 45 intra-group transaction within 18 months of such an acquisition and it is proposed that changes be made in the intra-group rules:
• To give effect to the reversal of the application of the zero-base cost anti-avoidance rule in instances when the early
asset disposal anti-avoidance rule applies.
• Which will restrict the reinstatement of the base cost for any debt or non-equity share to the extent to which the
debt and/or non-equity share facilitated or funded an asset disposed of early and in respect of which the provisions
of the Act applied to reverse and ring-fence the deferred capital gain, capital loss, taxable income or assessed loss.
The proposed amendments will come into operation on 1 January 2022 and apply in respect of years of assessment commencing on or after that date.
Refining the provisions applicable to unbundling transactions
In 2020, amendments to section 46 were proposed, which became effective for any unbundling transactions entered into on or after 28 October 2020. These amendments result in tax triggering in the hands of the unbundling company when the unbundling distribution is distributed to any shareholder who:
• is a disqualified person; and
• holds at least 5% of the equity shares in the unbundling company.
Tax consequences trigger in the hands of the unbundling company with the result being that all the shareholders in the unbundling company are indirectly subject to the tax triggered in the unbundling company, an inequitable outcome for the “non-disqualified shareholders”.
The 2021 amendments propose that the “non-disqualified shareholder” will be able to include as expenditure, in relation to the unbundled shares received, a portion of the tax paid by the unbundling company on the unbundling transaction, determined in accordance with the “non-disqualified shareholder” shareholding in relation to all the issued equity shares in the unbundling company immediately before the unbundling transaction.
The proposed amendment will come into operation on 1 January 2022 and apply in respect of the allocation of expenditure to unbundled shares acquired on or after that date.
Extension of the learnership tax incentive sunset date
The section 12H learnership tax incentive is a programme that supports skills intensity through the tax system. This incentive provides employers with an additional tax deduction over and above the normal remuneration deduction, to encourage skills development and job creation. To claim the allowance, the employer, learner and an accredited training provider must enter into a formal learnership contract.
The learnership tax incentive was first introduced in the ITA on 1 October 2001, with an initial sunset date of 1 October 2011. In 2011, a review was conducted to assess the effectiveness of the learnership tax incentive in achieving its objectives, and based on the review findings, the learnership tax incentive was extended by another five years to 1 October 2016.
A comprehensive review was again conducted in 2016. The outcome of the review indicated that there was sufficient evidence to support the continuation of the learnership tax incentive. However, the review also revealed that claims were not evenly spread across sectors. Sectors with high uptake were those where Sector Education and Training Authorities were perceived to administer training programmes more effectively.
The review then recommended:
(i) the extension of the incentive sunset date to 1 April 2022,
(ii) improving the targeting of the incentive by encouraging employers to train learners in those skill categories
where demand is highest, and
(iii) to improve future incentive policy analysis, completion of the SARS IT180 form was made compulsory for
taxpayers to claim the learnership tax incentive.
With the current sunset date of 1 April 2022 looming, the effectiveness of the learnership tax incentive in achieving its objectives will need to be assessed before this date to determine whether this incentive will continue further.
In line with the announcement by the Minister of Finance in the 2021 Budget Review, it is therefore proposed that changes be made to section 12H of the ITA to extend the learnership tax incentive by another two years, to 1 April 2024, while a review is completed. This proposed amendment will come into effect on 1 April 2022 and applies in respect of learnership agreements entered into on or after this date.
Tax Administration Act
Assessments based on estimates and prescription
Where a taxpayer does not submit a return or submits a return or relevant material that is incorrect or inadequate, SARS may in terms of section 95 of the Tax Administration Act make an original, additional, reduced or jeopardy assessment based in whole or in part on an estimate. SARS may also make an estimated assessment if a taxpayer does not respond to a request from SARS for relevant material if this material has been requested more than once.
The taxpayer may, within 40 business days from the date of the estimated assessment, request SARS to issue a reduced or additional assessment by submitting a true and full return or the relevant material. This period may currently be extended by a senior SARS official for a period not exceeding the relevant prescription periods under section 99 of the Tax Administration Act.
In some instances, it may happen that SARS issues an additional estimated assessment close to the end of the applicable prescription period. The 40-business day period may accordingly end very close to, or after the prescription date. The taxpayer is therefore unable to request a reduced or additional assessment.
The proposed amendment to section 95 addresses this situation and provides SARS with a discretion to extend the 40-business day period for up to 40 business days beyond the prescription date in these unusual circumstances.
In view of the proposed amendment to section 95, section 99 pertaining to prescriptions will be amended accordingly.