240Vermeulen#Street# Legal#&Policy# The#South#African#Revenue#Service… · 2018. 4. 14. ·...

29 November 2013

Ms N. Nkumanda The National Treasury 240 Vermeulen Street PRETORIA 0001

Ms A. Collins Legal & Policy The South African Revenue Service Lehae La SARS PRETORIA

BY E-‐MAIL: [email protected] / [email protected]

Dear Ms Nkumanda and Ms Collins

RE: ANNEXURE C PROPOSALS

Thank you for the opportunity to contribute proposals for the inclusion in Annexure C for the Budget Review, 2014. Set out below, is the consolidated commentary on the Individuals Tax issues only developed from both an internal review of the provisions as well as from consultations with members, stakeholders and industry. The commentary reflects the collective view of members, stakeholders and industry role players consulted. 1. INCOME TAX ACT ISSUES

1.1 Reimbursement for study expenses – Section 10(1)(q)

Problem statement

The receipt of a bone fide scholarship or bursary is exempt in terms of section 10(1)(q) of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as the Income Tax Act) if it is granted to enable or assist a person to study at a recognized educational or research institution provided that certain requirements are met.

There is however a problem at hand with the current provisions of section 10(1)(q). Paragraph 4.1 to Interpretation Note 66, dealing with scholarships and bursaries states the following:

“…reimbursement of study expenses, borne by a person, after completion of studies, does not qualify for the exemption, as the grant must have been made solely to enable or assist the grantee to study.”

By limiting the exemption only to scholarships or bursaries that are given upfront, a huge class of students are excluded. There is also no difference between paying an amount upfront for study expenses and reimbursing someone upon the completion of his or her studies.

Proposed solution / recommendation

We recommend that a bone fide scholarship or bursary include the reimbursement of study expenses by the employer upon the successful completion thereof by the employee. It is known that the requirement for employees to repay the bursaries to their employers should they fail to complete their studies (with certain exceptions) are aimed at motivating the employees to successfully complete their studies. Exempting the reimbursement by the employer would also serve the same purpose, since the employee was in the first place liable for his/her own tuition fees.

1.2 Short-‐term DTA relief – ‘Gross income’ definition section 1

Problem statement

Non-‐residents are, in terms of the ‘gross income’ definition in section 1 of the Income Tax Act liable for tax on amounts received from a source within the Republic. For services rendered, they would therefore be liable for tax in South Africa, if the services were physically rendered within South Africa.

This creates an administrative burden, because each short-‐term assignment must be evaluated (in terms of Binding Private Ruling 085 issued on 27 May 2010) in order to determine if the employee concerned may qualify for treaty relief – some of them are only in South Africa for two to three weeks. In our opinion, the added revenue received by the South African fiscus does not justify the administrative costs involved.


We should have a de minimus time period i.e. 60 days per year of assessment in which the remuneration earned by these non-‐residents from services rendered within South Africa is exempt. The United Kingdom is following a similar exemption which is also based on 60 days.

1.3 Problem in legislation with definition of ‘resident’ – Section 1

A proviso to the definition of ‘resident’ in section 1 of the Income Tax Act excludes “any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the governments of the Republic and that other country for the avoidance of double taxation”.

The Explanatory Memorandum on the Exchange Control Amnesty Amendment of Taxation Laws Act, 2003 states the following: “Any person exclusively deemed to be a resident of another country for purposes of one or more tax treaties (by virtue of tax treaty tie-‐breaker rules or otherwise) will not be a resident for purposes of the Income Tax Act, 1962, regardless of any other rules pertaining to the definition of resident contained therein”. The purpose of this proviso was therefore to ensure that a person should no longer be tax resident in South Africa from the date when that person is considered exclusively resident of another country after the application of the residency provisions tie-‐breaker clause in a DTA and that this determination will happen irrespective of whether a double tax situation actually exists.

The phrase “for purposes of the application of” implies that only where a double taxation situation arises, will a person be assigned exclusive tax residence and then taxed on the income or capital gains concerned in terms of such assignment. Therefore you would only consider this provision if there is a double tax situation.


The proviso should be amended to state “in terms of” rather than “for purposes of the application of” in order to achieve a greater amount of clarity regarding the interpretation.

1.4 Medical insurance vs. medical aids – why a different approach? Section 6A

Problem statement

Section 6A (2)(a)(i) & (ii) of the Income Tax Act only provide a tax credit for contributions made to South African and foreign medical schemes, and not to medical insurance policies. However, contributions towards these insurance policies constitute taxable benefits in terms of paragraph 2(k) of the Seventh Schedule to the Income Tax Act.

The majority of young employees are, however, not members of a medical aid, but rather take out medical insurance due to the lower costs associated with it. Many expats are also making use of foreign medical insurance and whether they’ll receive the tax credit all depends on whether the country in which the fund is registered contains a medical schemes act or not.

There is no need for such a distinction in section 6A. By making such a distinction, people may be inclined not to take out medical insurance which may be problematic if one takes into account the significant costs associated with a routine operation.


It is proposed that medical insurance policies be included in the tax credit system.

1.5 Incorrect omission in section 25D

Problem statement

Section 25D(1) is not made subject to the proposed additions thereto in the form of section 25D(5) and (6). In addition to the above, the proposed section 25D(6) does not refer to an ‘international shipping company’ as defined in section 12Q(1).


Section 25D(1) should be amended by including subjection (5) and (6) to the phrase “… -‐(1) Subject to subsections (2), (3) and (4)…”. The proposed section 25D(6) should also refer to an ‘international shipping company‘as defined in section 12Q(1).

1.6 Holder of a share – Proviso (ii) to section 10(1)(k)(i)

Problem statement

Uncertainty exists as to who is regarded as the holder of a share in terms of the wording of the proviso. For example, in the case of a typical section 8B share trust, can the employee escape this provision on the grounds that he or she, rather than the trust, actually holds the share? It would be disastrous for the vast majority of section 8B share trusts in South Africa if the trust (and not the employees) were to be regarded as the holder of the shares.


A definition of the “holder of a share” should be inserted in section 1 of the Income Tax Act.

1.7 Implementation date of amendments to section 24J(9) not corresponding to effective date of section 24JB

Problem statement

The proposed insertion in section 24J(9) will be effective as from 1 April 2014, whilst the new section 24JB will be effective as from 1 January 2014.


The effective date of the insertion in section 24J(9) should be changed to 1 January 2014.

1.8 Amendment to section 10C

Problem statement

Section 10C (with an effective date of 1 March 2014) was amended by section 26 of the TLAB, 2013. This amendment removes the reference to section 11(n) effective from 1 March 2015 and applies in respect of contributions made during years of assessment commencing on or after that date. This amendment therefore overlooks RAF contributions made prior to 1 March 2015 that were not allowed as a deduction under section 11(n) while that provision was in existence.


RAF contributions made prior to 1 March 2015 should fall within the section 10C exemption.

2. FOURTH SCHEDULE TO THE INCOME TAX ACT ISSUES

2.1 PAYE withholding on the vesting of equity instruments after close of payrolls (solution similar to variable remuneration (section 7B) necessary?)

Problem statement

Where the vesting of an equity instrument is on the last day of the month, it is virtually impossible to get a directive and this transaction onto your payroll run, because the payroll is normally run by the 25th and vesting on the 30th. The problem is therefore that the payment cannot be changed to accommodate the vesting.

For example, there is an accrual on the 31st of March, so if you apply for a directive and get it, then you cannot run it through the payroll, because your payroll already closed on the 25th of March and you’ll therefore need to have a separate payroll run. Because it accrued in March, the PAYE must be withheld in March – not in April.

The problem is how does one deal with these accruals and payroll runs?


We suggest that the vesting be included under a similar provision to that of section 7B of the Income Tax Act. The time that the tax is due is still on the date of accrual but you one should be permitted to withhold pay as you earn in the month thereafter.

2.2. Unifying PAYE, SDL, UIF and Workmen’s Compensation principles/definitions

Problem statement

At the moment, there is a compliance concern with offshore employers who don’t have a permanent establishment in South Africa, so they registered but don’t need to withhold PAYE. The requirements for these employers with regard to SDL and UIF are not precise and clear.


To simplify matters, we suggest that a unified definition for remuneration be implemented for PAYE, SDL and UIF – especially from a small business perspective. The registration is already aligned, so aligning the definition can just add to the unification process.

3. SEVENTH SCHEDULE TO THE INCOME TAX ACT ISSUES

3.1 Tax compliance service fees for expatriates – valuation of taxable benefit – Paragraph 2(f)

Problem statement

Something that is quite specific to expats is the tax compliance fees paid by an employer that constitutes a taxable benefit in terms of paragraph 2(f) of the Seventh Schedule to the Income Tax Act.

This will typically happen where you’ve got a person that is taxable in both the home and host country and the person pays tax in South Africa but he needs to apply for credit on the other side, because there is for example, no ruling or directive process. The employer then pays the tax in the home country but there is a timing issue between the employer’s payment and the time when the assessment comes through. This payment is then treated as a loan (which is normally interest-‐free), causing a taxable benefit to arise in the expat’s hands. However, the loan is not a settlement of the tax debt – it is just a loan to settle the expat’s tax liability which is repaid by the expat once the refund has been made or tax credit refunded.


This interest-‐free or low interest loans can be seen as a relocation expense which is exempt from normal tax in terms of section 10(1)(nB) of the Income Tax Act. We therefore recommend that the value of the taxable benefit be included in the above exemption or that a de minimis exemption be provided for this taxable benefit.

3.2. Foreign medical scheme contributions – Paragraph 2(i)

Problem statement

Paragraph 2(i) of the Seventh Schedule applies to contributions made to a medical scheme registered under the provisions of the Medical Schemes Act, (No. 131 of 1998) which is a South African medical scheme. In paragraph 12A(1), reference is made to both medical schemes registered under the Medical Schemes Act, (No. 131 of 1998) as well as medical schemes registered under a similar provision under the law of another country. Paragraph 2(i) therefore only takes into account contributions to local medical schemes, while paragraph 12A values contributions to both local and foreign medical schemes.

Contributions to foreign medical schemes ought to be exempt as taxable benefits, unless paragraph 2(j) is used to calculate the benefit. Paragraph 2(j) is however linked to paragraph 12B and the aforementioned paragraph can’t be used to value the benefit, since the contributions to foreign medical schemes are expressly addressed in paragraph 12A.


It is believed that it was not the intention of the legislature to exclude contributions to foreign medical schemes from paragraph 2(i) of the Seventh Schedule and it is therefore proposed that such contributions be included in the said paragraph.

3.3. Determination of rental value – Paragraph 9

Problem statement

Where the formula in paragraph 9(3) of the Seventh Schedule to the Income Tax Act must be used to determine the taxable benefit accruing to an employee, it may result in a disproportionately high taxable benefit. This is especially the case with expats, who may have received a high salary during the previous year, which causes the remuneration factor, stipulated in paragraph 9(1) of the said Schedule, to exceed the economic benefit enjoyed by the employee.

This situation is of particular concern when determining the fairness of the said formula, due to the fact that a person will be taxed more heavily than another due to his remuneration factor being higher, even though, in the current year, the two employees may earn the same salary and the high taxed employee may occupy inferior accommodation.

Although one may resort to paragraph 3(3) and 9(5) of the Seventh Schedule to the Income Tax Act in order to place a lower value on the benefit, this increases the administrative and compliance costs.


It is suggested that if the accommodation is provided in terms of an arm’s length lease, then the normal rental cost to the employer must be used. In order to apply for a directive, the employer would have to prove that the transaction (rental cost) is at arm’s length, so there wouldn’t be any additional administrative duty on the employer. You place the obligation on the employers and if they happen to get it wrong, then they can be subject to penalties and interest.

Where the property is owned by the employer or an associated institution in relation to the employer, it is suggested that the rental value be the higher of arm’s length cost to provide the accommodation or the cost to the employer.

3.4 Sharing of accommodation and motor vehicles – Paragraph 9 & 7

Problem statement

Problems are specifically encountered with Chinese and Indian expats where multiple persons share employer-‐provided accommodation. A value then needs to be placed on the use for every individual based on the space occupied. One then needs to apply for a directive in order to apportion the taxable benefit, due to par 9 of the Seventh Schedule not specifically catering for the situation where residential accommodation is shared.

The same problem is encountered with the vehicle used by those employees to travel from home to work and vice versa. Must you then have separate logbooks if some of the employees use the vehicle after hours? The case is unclear as paragraph 7 of the Seventh Schedule does not address the situation where a single motor vehicle is shared by more than one employee. In certain instances, apportionment weren’t allowed for the employees.

Although paragraph 3(3) of the Seventh Schedule can be used in order to obtain a directive for both instances above, and paragraph 9(5) can be used to place a lower value on the benefit arising from the accommodation, it results in an administrative burden and increased compliance costs for the employer.


We recommend that paragraph 9 and 7 of the Seventh Schedule to the Income Tax Act be amended in order to allow for the apportionment where a single residential unit or motor vehicle is shared by two or more employees.

3.5 De minimus exemption for gifts to employees – Paragraph 2(a)

Problem statement

It is common for employers to provide employees with branded T-‐shirts or small gifts that are branded with the employer’s logo during seminars or other events sponsored by the employer. The purpose of these gifts is not to disguise remuneration, but merely to advertise the employer’s business.

These gifts will typically fall under paragraph 2(a) of the Seventh Schedule to the Income Tax Act, constituting taxable benefits in the hands of the employees. The concern is that the processing of these gifts through the payroll really is an administrative hassle and the taxing of these gifts serve as a deterrence to employers to provide them to the employees.


A de minimis-‐type of exemption for gifts awarded to employees is proposed. The exemption can be capped at the higher of 1% of remuneration or R750 in order to prevent abuse.

3.6 Acquisition of immovable property by an employee -‐ Paragraph 5 of the Seventh Schedule

Problem statement

The wording of the amendment to paragraph 5 has the effect that all three of the requirements of subparagraph (3A) must be met before the benefit will be taxable. Therefore the amendment would allow an exemption to the taxable benefit received by an employee earning remuneration of for example R700 000 per year of assessment, receiving residential accommodation with a market value of i.e. R 900 000 as long as the employee is not a connected person in relation to the employer.

It is believed that it was not the intention of the legislature to benefit high income earners as the explanatory memorandum stated that the employee salary limitation was aimed at restricting the incentive to employees within certain socio-‐economic levels.

Proposed solution/recommendations

It is proposed that the “and” at the end of paragraph 19(3A)(b) be replaced with an “or”. This will have the effect that the benefit will be taxable if one of the three tests are met (i.e. if the remuneration for the year of assessment exceeds R250 000 or if the market value of the accommodation exceeds R450 000 or if the employee is a connected person in relation to the employer) and not all three.

4. EIGHTH SCHEDULE TO THE INCOME TAX ACT ISSUES

4.1 Ring fencing of losses in a trust – Paragraph 70 -‐73 & 80

Problem statement

At current, paragraph 70 to 73 and 80 of the Eighth Schedule to the Income Tax Act only refers to specific assets. This has the result that it is impossible for a net capital gain to be attributed to a donor or to vest in a beneficiary, since the capital losses of these assets will be trapped in the trust. In the current situation, if you wind up a trust, then you can get all the gains out, while the losses are ring-‐fenced. This has the effect that the beneficiaries in vested trusts will not be able to utilise these losses and only to the extent that the trust realise its own capital gains, would it be able to offset it against the losses.


We suggest that it be made possible to attribute a net capital gain (as contemplated in paragraph 8 of the Eighth Schedule to the Income Tax Act) to a donor or to vest it in a beneficiary and that any assessed capital loss be carried forward.

4.2 Timing on disposal of immovable property – Paragraph 13(1)(a)(i) & (ii)

Problem statement

In terms of paragraph 13(1)(a)(ii) of the Eighth Schedule to the Income Tax Act, the time of disposal in terms of any agreement not subject to a suspensive condition will be the date on which the agreement is concluded. Should the agreement be subject to a suspensive condition, the time of disposal will be the date on which the condition is satisfied in terms of paragraph 13(1)(a)(i) of the Eighth Schedule.

This time of supply rules present a practical problem on the disposal of immovable property falling within the South African tax net. This is due to the time it takes to register the transfer of ownership of the property to the purchaser and to release the proceeds to the seller. Consider the following example:

Where a transaction for the sale of South African immovable property was subject to a suspensive condition which was satisfied near the end of one year of assessment, then the time of supply will be on that day (close to year-‐end) in terms of paragraph 13(1)(a)(i). Should the transfer of ownership of the property only be registered during the following year of assessment, then the seller would suffer financial hardship, since he would have to pay provisional tax at the end of the year of assessment during which the time of supply takes place, while he’ll only receives the proceeds after the provisional tax payment was made.


To prevent such financial hardship, it is proposed that a provision specifically relating to the disposal of immovable property be included in paragraph 13 of the Eighth Schedule which provision must state that the time of disposal for immovable property must be at the time of successful registration of ownership in the purchaser’s name (which can only take place after the initial disposal event and which would lead to the proceeds being released by the purchaser).

Yours sincerely, Prof Sharon Smulders

Chief Executive Head: Tax Technical Policy & Research Acknowledgements for inputs (listed alphabetically): V. Andhee, J. Arendse, D. Foster, P. Gering, D. Howell, J. La Grange, C. Madden, S. Mohan, M. Santana, D Warneke.

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