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2016 Budget and Tax Up-date

March 2016Workbook

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2016 BUDGET AND TAX UPDATE CONTENTS

PART 1 -TAX PROPOSALS 8

Budget 2016 9

Individuals 10

Tax tables 2016/17...................................................................................................................................................... 10

Tax tables 2015/16...................................................................................................................................................... 10

Rebates....................................................................................................................................................................... 10

Tax threshold............................................................................................................................................................... 10

Tax savings per annum............................................................................................................................................... 11

Local interest exemption.............................................................................................................................................. 11

Taxable foreign dividend exemption............................................................................................................................ 11

Monthly medical scheme tax credits............................................................................................................................ 11

CGT exclusions (natural persons)............................................................................................................................... 12

Travel allowance: Deemed expenditure table with effect from 1 March 2016..............................................................12

Subsistence allowance: Deemed expenditure daily limits............................................................................................13

Pension, provident and retirement annuity contributions.............................................................................................16

RETIREMENT AND PRE-RETIREMENT LUMP SUM BENEFITS 18

Pre-retirement lump sums........................................................................................................................................... 18

Retirement fund lump sum withdrawal benefits – 1 March 2014..................................................................................18

Retirement and death lump sums and severance benefits..........................................................................................18

Retirement fund lump sum benefits table – 1 March 2014...........................................................................................18

CORPORATE TAX RATES 20

Normal tax................................................................................................................................................................... 20

Taxable foreign dividend exemption............................................................................................................................ 20

Tax rates for qualifying small business corporations................................................................................................... 20

Presumptive turnover tax on micro businesses........................................................................................................... 20

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Dividends tax............................................................................................................................................................... 21

Trusts........................................................................................................................................................................... 21

OTHER TAXES 22

Estate duty................................................................................................................................................................... 22

Donations Tax............................................................................................................................................................. 22

Capital Gains Tax (CGT)............................................................................................................................................. 22

The effective CGT rates for disposal of assets in years of assessment commencing on or after 1 March 2016.........22

Transfer duty............................................................................................................................................................... 23

Securities Transfer Tax................................................................................................................................................ 23

BUDGET COMMENTARY 24

Overview...................................................................................................................................................................... 24

Tax proposals 28

Summary of the main tax proposals............................................................................................................................ 28

Retirement reforms...................................................................................................................................................... 29

Business taxes............................................................................................................................................................ 32

International tax........................................................................................................................................................... 34

Value added tax........................................................................................................................................................... 34

Customs and excise duty............................................................................................................................................. 36

Tax on sugar-sweetened beverages............................................................................................................................ 36

Excise duties on tobacco and alcohol.......................................................................................................................... 36

Fuel taxes.................................................................................................................................................................... 37

Tax administration....................................................................................................................................................... 38

Environmental Taxes................................................................................................................................................... 40

Skills development....................................................................................................................................................... 41

Economic growth......................................................................................................................................................... 42

Reducing red tape for small business.......................................................................................................................... 42

PART 2 – TAX UPDATE 43

DEVELOPMENTS OVER THE LAST YEAR 44

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Useful guides issued or revised by SARS during 2015................................................................................................44

Interpretation notes issued or revised during 2015 and early 2016.............................................................................44

Draft documents issued during 2015 and early 2016...................................................................................................45

Binding private rulings issued or revised during 2015 and early 2016.........................................................................46

Binding class rulings issued or revised during 2015.................................................................................................... 47

Binding general rulings issued or revised during 2015................................................................................................47

Interest rate changes................................................................................................................................................... 48

AMENDMENTS TO THE LEGISLATION 49

2015 Amendment Acts................................................................................................................................................ 49

2016 TABLES, RATES AND THRESHOLDS 50

INDIVIDUALS, EMPLOYMENT AND SAVINGS 58

Bursary and scholarship exemption for basic education: grade R to 12......................................................................58

Medical tax credits as part of paye and provisional tax: employees over 65 years......................................................58

Consistent tax treatment on all retirement funds.......................................................................................................... 59

Closing a loophole to avoid estate duty through excessive contributions to retirement funds......................................60

Withdrawal from retirement funds by non residents..................................................................................................... 60

Income and disposals to and from a deceased estate.................................................................................................61

Share incentive trusts, time of disposal rules and attribution of gains to trust beneficiary rules...................................62

CORPORATE 64

Debt-financed acquisitions of controlling share interests.............................................................................................64

Return of capital after a taxpayer has held a share for three years.............................................................................66

Cancellation of contracts............................................................................................................................................. 67

INCOME TAX: BUSINESSES (FINANCIAL INSTITUTIONS AND PRODUCTS) 69

INCOME TAX: INTERNATIONAL 70

Relaxing capital gains tax rules applicable to cross issue of shares............................................................................70

Introducing counter measures for tax-free corporate migrations..................................................................................71

Withdrawal of special foreign tax credit for services sourced in South Africa..............................................................72

Reinstatement of the controlled foreign company diversionary income rules..............................................................73

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Definition of immovable property................................................................................................................................. 74

Definition of interest for withholding tax purposes........................................................................................................ 75

Revisions of definition of foreign partnership............................................................................................................... 76

INCOME TAX: BUSINESSES (INCENTIVES) 77

Urban Development Zones – allowing for the demarcation of additional udz’s per qualifying municipality..................77

Introducing a compliance period for the industrial policy project tax incentive regime..............................................77

Further alignment of the tax treatment of government grants......................................................................................79

Depreciation allowance of transmission lines or cables used for electronic communications outside south africa.....80

Special economic zones anti-profit shifting provision..................................................................................................80

Accelerated capital allowances for manufacturing assets governed by supply agreements........................................81

Depreciation allowances for renewable energy machinery.........................................................................................82

Adjustment of energy savings tax incentive................................................................................................................. 83

VALUE – ADDED TAX 85

Commercial accommodation....................................................................................................................................... 85

Zero rating: goods delivered by a cartage contractor...................................................................................................85

Zero rating of services: vocational training.................................................................................................................. 86

Time of supply: connected persons (undetermined amounts).....................................................................................86

Repealing the zero rating for the national housing programme...................................................................................87

TAX ADMINISTRATION LAWS AMENDMENT ACT 89

Acts amended.............................................................................................................................................................. 89

Self-Assessment.......................................................................................................................................................... 89

Non-resident sellers of immovable property................................................................................................................ 89

Dividend tax return....................................................................................................................................................... 90

Deceased estate and provisional tax........................................................................................................................... 90

Provisional tax estimate, penalty................................................................................................................................. 90

Tax invoices, debit and credit notes............................................................................................................................. 91

International tax standard............................................................................................................................................ 91

Request for information held by non-residents............................................................................................................ 92

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Persons who may be interviewed by SARS................................................................................................................. 92

Information under oath or solemn declaration............................................................................................................. 93

Reduced assessments................................................................................................................................................ 93

Withdrawal of assessments......................................................................................................................................... 94

Extension of prescription period.................................................................................................................................. 95

Liability of a third party for tax debts............................................................................................................................ 96

Voluntary disclosure programme................................................................................................................................. 96

Delivery of notices....................................................................................................................................................... 97

Tax compliance status................................................................................................................................................. 97

Court Cases in 2015 98

High Court (Full Bench)............................................................................................................................................... 98

High Court (Single Judge)........................................................................................................................................... 98

Supreme Court of Appeal............................................................................................................................................ 98

Tax Court..................................................................................................................................................................... 98

Davis Tax Committee (DTC) First Interim Report on Estate Duty 99

Proposals..................................................................................................................................................................... 99

Capital Transfer Tax (CTT).......................................................................................................................................... 99

Annual or periodic Net Wealth Tax (NWT)................................................................................................................. 100

Distributions of foreign trusts..................................................................................................................................... 100

Review of the criminal offence provisions of the Tax Administration Act, 2011.........................................................100

The Inter-Spouse bequest......................................................................................................................................... 100

Donations Tax........................................................................................................................................................... 100

The primary abatement.............................................................................................................................................. 101

Estate duty rate......................................................................................................................................................... 101

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PART 1 -TAX PROPOSALS

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BUDGET 201 6 The notes that follow draw extensively from the National Treasury Budget Review 2016.

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I NDIVIDUALS TAX TABLES 2016/17

Taxable incomeR Rate of tax

0 - 188 000 18%188 001 - 293 600 33 840 + 26% of the excess over R188 000293 601 - 406 400 61 296 + 31% of the excess over R293 600406 401 - 550 100 96 264 + 36% of the excess over R406 400550 101 - 701 300 147 996 + 39% of the excess over R550 100701 301 - 206 964 + 41% of the excess over R701 300

TAX TABLES 2015/16Taxable income

R Rate of tax


REBATES2016/17

R2015/16

R2014/15

RPrimary 13 500 13 257 12 726Secondary (Age 65 and over) 7 407 7 407 7 110Tertiary rebate (Age 75 and over) 2 466 2 466 2 367

TAX THRESHOLD2016/17

R2015/16

R2014/15

RBelow age 65 75 000 73 650 70 700Age 65 to 74 116 150 114 800 110 200Age 75 and over 129 850 128 500 123 350

The proposed changes to the tax tables and rebates partially compensates individuals for the effect of inflation on income tax liabilities. The impacts of these proposals are set below:

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TAX SAVINGS PER ANNUMAge below 65Taxable income RR75 000 – R150 000 -243R200 000 -731R250 000 -731R300 000 -1 206R400 000 -1 546R500 000 and above -1 866

Age above 65 to 74Taxable income RR116 150 -243R150 000 -243R200 000 -731R300 000 -1 206R400 000 -1 546R500 000 and above -1 866

Age above 75 and aboveTaxable income RR129 850 -243R200 000 -731R250 000 -731R300 000 -1 206R400 000 -1 546 R500 000 and above -1 866

LOCAL INTEREST EXEMPTION2016/17

R2015/16

R2014/15

RNatural persons below age 65 23 800 23 800 23 800Age 65 and over 34 500 34 500 34 500

TAXABLE FOREIGN DIVIDEND EXEMPTION2016/17

R2015/16

R2014/15

RNatural persons 26

412641

2540

MONTHLY MEDICAL SCHEME TAX CREDITS2016/17

R2015/16

R2014/15

RTaxpayer and first dependant 286 270 257Each additional dependant 192 181 172

CGT EXCLUSIONS (NATURAL PERSONS)2016/17 2015/16 2014/15

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R R RAnnual exclusion for capital gains or losses 40 000 30 000 30 000Annual exclusion in year of death for capital gains or losses 300 000 300 000 300 000Primary residence exclusion for capital gains or losses 2 000 000 2 000 000 2 000 000Disposal of a small business when a person is over age 55 1 800 000 1 800 000 1 800 000Max assets to qualify as a small business above 10 000 000 10 000 000 10 000 000

TRAVEL ALLOWANCE: DEEMED EXPENDITURE TABLE WITH EFFECT FROM 1 MARCH 2016

Value of the vehicleR

Fixed cost R

Fuel cost c/km

Maintenance cost c/km

0 - 80 000 26 675 82.4 30.880 001 - 160 000 47 644 92.0 38.6160 001 - 240 000 68 684 100.0 42.5240 001 - 320 000 87 223 107.5 46.4320 001 - 400 000 105 822 115.0 54.5400 001 - 480 000 125 303 132.0 64.0480 001 - 560 000 144 784 136.5 79.5560 001 - 144 784 136.5 79.5

Note: 80% of the travelling allowance must be included in the employee’s remuneration for the purposes of calculating PAYE. The

percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the motor vehicle for the tax year will be

for business purposes.

No fuel cost may be claimed if the employee has not borne the full cost of fuel used in the vehicle and no maintenance cost may

be claimed if the employee has not borne the full cost of maintaining the vehicle (e.g. if the vehicle is the subject of a

maintenance plan).

The fixed cost must be reduced on a pro-rata basis if the vehicle is used for business purposes for less than a full year.

The actual distance travelled during a tax year and the distance travelled for business purposes substantiated by a log book are

used to determine the costs which may be claimed against a travelling allowance.

Alternative to the rate table:Where the distance travelled for business purposes does not exceed 8 000 kilometers per annum, no tax is payable on an allowance

paid by an employer to an employee up to the rate of 329 cents per kilometer, regardless of the value of the vehicle.

This alternative is not available if other compensation in the form of an allowance or reimbursement (other than for parking or toll fees)

is received from the employer in respect of the vehicle.

SUBSISTENCE ALLOWANCE: DEEMED EXPENDITURE DAILY LIMITSThe following amounts will be deemed to have been actually expended by a recipient to whom an allowance or advance has been

granted or paid:

2016/17R

2015/16R

2014/15R

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Where the accommodation, to which that allowance or advance relates, is in the Republic and that allowance or advance is paid or granted to defray -

Incidental costs only R115 per day R109 per day R103 per dayThe cost of meals and incidental costs R372 per day R353 per day R335 per day

Where the accommodation, to which that allowance or advance relates, is outside the Republic and that allowance or advance is paid

or granted to defray the cost of meals and incidental costs, an amount per day determined in accordance with the following table for the

country in which that accommodation is located -

Daily amount for travel outside the RepublicCountry Currency Amount 2016/2017 Amount 2015/2016Albania Euro 97 97Algeria Euro 110 110Angola US $ 303 303Antigua and Barbuda US $ 220 220Argentina US $ 133 133Armenia US $ 220 220Austria Euro 131 121Australia Aus $ 230 209Azerbaijani US $ 145 145Bahamas US $ 191 191Bahrain B Dinars 36 36Bangladesh US $ 79 79Barbados US $ 202 202Belarus Euro 62 62Belgium Euro 146 146Belize US $ 152 152Benin Euro 89 89Bolivia US $ 78 78Bosnia-Herzegovina Euro 75 75Botswana Pula 826 826Brazil Reals / US $ 347 347Brunei US $ 88 88Bulgaria Euro 91 91Burkina Faso CFA Francs 58 790 59 107Burundi US$ / Burundian Francy 73 73Cambodia US $ 99 99Cameroon Euro 116 116Canada Can $ 167 167Cape Verde Islands Euro 65 65Central African Republic Euro 94 94Chad Euro 121 121Chile US $ 128 128China (PR of) US $ / Renminbi 127 127Colombia US $ 94 94Comoro Island Euro 122 122Cook Islands NZ $ 211 211Cote D'Ivoire Euro 119 119Costa Rica US $ 116 116Croatia Euro 102 102Cuba US$ 124 124Cyprus Euro 117 120Czech Republic Euro 90 90Democratic Republic of Congo US $ 164 163Denmark Danish Kroner 2 328 2 328Djibouti US $ 99 99Dominican Republic US $ 99 99 Page 12

Country Currency Amount 2016/2017 Amount 2015/2016Ecuador US $ 163 163Egypt US $ 118 117El Salvador US $ 98 98Equatorial Guinea Euro 166 130Eritrea US $ 109 109Estonia Euro 92 100Ethiopia US $ 92 64Fiji US $ 102 102Finland Euro 171 171France Euro 128 128Gabon Euro 172 172Gambia Euro 74 74Georgia US $ 95 95Germany Euro 120 120Ghana US$ 130 130Greece Euro 134 134Grenada US $ 151 151Guatemala US $ 114 114Guinea Euro 78 78Guinea Bissau Euro 59 59Guyana US $ 118 118Haiti US $ 109 109Honduras US $ 186 186Hong Kong HK $ 1 000 1 000Hungary Euro 89 89Iceland ISK 25 466 25 466India Indian Rupee 5 852 5 852Indonesia US $ 86 86Iran US $ 120 120Iraq US $ 125 125Ireland Euro 139 123Israel US $ 209 177Italy Euro 125 125Jamaica US $ 151 151Japan Yen 16 275 16 275Jordan US $ 201 201Kazakhstan US $ 141 141Kenya US $ 138 138Kiribati Aus $ 233 233Korea (See South Korea Republic) US $ - -Kuwait US$ - 172Kuwait Kuwait Dinars 51 -Kyrgyzstan US $ 172 172Laos US $ 92 92Latvia US $o 150 150Lebanon US $ 158 158Lesotho Rand 750 750Liberia US $ 112 112Libya US $ 120 120Lithuania Euro 154 154Macau HK $ 1 196 1 196Macedonia Euro 100 100Madagascar Euro 59 63Madeira Euro 290 290Malawi Malawi Kwacha 31 254 31 254Malaysia Ringgit 382 382Maldives US $ 202 202Mali Euro 178 178Malta Euro 132 132Marshall Islands US $ 255 255Mauritania Euro 97 97

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Country Currency Amount 2016/2017 Amount 2015/2016Mauritius US $ 135 135Mexico Mexican Pesos 1 313 1 313Moldova US $ 117 117Mongolia US $ 69 69Montenegro Euro 94 172Morocco Dirhams 970 970Mozambique US $ 128 128Myanmar (Burma) US $ 123 123Namibia Rand 950 950Nauru Aus $ 278 278Nepal US $ 64 64Netherlands Euro 117 117New Zealand NZ $ 191 191Nicaragua US $ 90 90Niger Euro 75 75Nigeria US $ / Euro 242 242Niue NZ $ 252 252Norway NOK 1 760 1 760Oman Rials Omani 77 75Pakistan Paki Rupees 6 235 6 235Palau US $ 252 252Palestine US $ 147 147Panama US $ 105 105Papa New Guinea Kina 285 285Paraguay US $ 76 76Peru US $ 139 139Philippines US $ 122 122Poland Euro 88 88Portugal Euro 87 87Qatar Qatar Riyals 715 715Republic of Congo Euro 149 149Reunion Euro 164 164Romania Euro 85 85Russia Euro 330 330Rwanda US $ 101 101Samoa Tala 193 193Sao Tome Euro 160 160Saudi Arabia Saudi Riyal 517 517Senegal Euro 113 113Serbia Euro 83 83Seychelles Euro 275 275Sierra Leone US $ 90 90Singapore Singapore $ 232 232Slovakia Euro 102 102Slovenia Euro 106 105Solomon Islands Sol Island $ 1 107 1 107South Korea Republic (see Korea) Korean Won 187 735 184 516South Sudan US $ 265 265Spain Euro 112 112Sri Lanka US $ 100 100St. Kitts & Nevis US $ 227 227St. Lucia US $ 215 215St. Vincent & The Grenadines US $ 187 187Sudan US $ 200 200Suriname US $ 107 107Swaziland Rand 818 818Sweden Sw Krona 1 317 1 317Switzerland S Franc 201 201Syria US $ 185 185Taiwan New Taiwan $ 3 505 3 505Tajikistan US $ 97 97

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Country Currency Amount 2016/2017 Amount 2015/2016Tanzania US $ 129 129Thailand Thai Baht 4 956 4 956Togo CFA Francs / Euro 64 214 64 214Tonga Pa’anga 251 251Trinidad & Tobago US $ 213 213Tunisia Tunisian Dinar 198 198Turkey Euro 101 101Turkmenistan US $ 125 125Tuvalu Aus $ 339 339Uganda US $ 111 111Ukraine Euro 131 131United Arab Emirates Dirhams 699 674United Kingdom Pounds Sterling 102 102Uruguay US $ 144 144USA US $ 146 143Uzbekistan Euro 80 80Vanuatu US $ 166 166Venezuela US $ 294 294Vietnam US $ 146 88Yemen US $ 94 94Zambia US $ 119 119Zimbabwe US $ 123 141Other countries not listed US $ 215 215

PENSION, PROVIDENT AND RETIREMENT ANNUITY CONTRIBUTIONSEffective from 1 March 2016Amounts contributed to pension, provident and retirement annuity funds during a tax year are deductible by members of those funds.

Amounts contributed by employers and taxed as fringe benefits are treated as contributions by the individual employee. The deduction

is limited to 27.5% of the greater of remuneration for PAYE purposes or taxable income (both excluding retirement fund lump sums and

severance benefits).

Furthermore, the deduction is limited to a maximum of R350 000. Any contributions exceeding the limitations are carried forward to the

next tax year and are deemed to be contributed in that following year. The amounts carried forward are reduced by contributions set off

when determining taxable retirement fund lump sums or retirement annuities.

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RETIREMENT AND PRE-RETIREMENT LUMP SUM BENEFITS

PRE-RETIREMENT LUMP SUMS

RETIREMENT FUND LUMP SUM WITHDRAWAL BENEFITS – 1 MARCH 2014Taxable lump sum

RRate of tax

0 - 25 000 0% 25 001 - 660 000 18% of the amount exceeding R 25 000

660 001 - 990 000 114 300 + 27% of the amount exceeding R660 000990 001 - 203 400 + 36% of the amount exceeding R990 000

Retirement fund lump sum withdrawal benefits consist of lump sums from a pension, pension preservation, provident, provident pre -

servation or retirement annuity fund on withdrawal (including assignment in terms of a divorce order). Tax on a specific retirement

fund lump sum withdrawal benefit (X) is equal to –

Tax determined by applying the tax table to the aggregate of that lump sum X plus all other retirement fund lump sum

withdrawal benefits accruing from March 2009 and all retirement fund lump sum benefits accruing from October 2007 and all

severance benefits accruing from March 2011; less

Tax determined by applying the tax table to the aggregate of all retirement fund lump sum withdrawal benefits accruing before

lump sum X from March 2009 and all retirement fund lump sum benefits accruing from October 2007 and all severance

benefits accruing from March 2011.

RETIREMENT AND DEATH LUMP SUMS AND SEVERANCE BENEFITS

RETIREMENT FUND LUMP SUM BENEFITS TABLE – 1 MARCH 2014Taxable lump sum

RRate of tax

0 - 500 000 0% 500 001 - 700 000 R0 + 18% of the amount exceeding R500 000700 001 - 1 050 000 R36 000 + 27% of the amount exceeding R700 000

1 050 001 - and above R130 500 + 36% of the amount exceeding R1 050 000

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Retirement fund lump sum benefits consist of lump sums from a pension, pension preservation, provident, provident preservation or re -

tirement annuity fund on death, retirement or termination of employment due to redundancy or termination of employer’s trade.

Severance benefits consist of lump sums or by arrangement with an employer due to relinquishment, termination, loss, repudiation,

cancellation or variation of a person’s office or employment. Tax on a specific retirement fund lump sum benefit or a severance benefit

(Y) is equal to –

Tax determined by applying the tax table to the aggregate of that lump sum or severance benefit Y plus all other retirement fund

lump sum benefits accruing from October 2007 and all retirement fund lump sum withdrawal benefits accruing from March 2009

and all other severance benefits accruing from March 2011; less

Tax determined by applying the tax table to the aggregate of all retirement fund lump sum benefits accruing before lump sum Y

from October 2007 and all retirement fund lump sum withdrawal benefits accruing from March 2009 and all severance benefits

accruing before severance benefit Y from March 2011.

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CORPORATE TAX RATES Years of assessment ending between 1 April and

31 March

NORMAL TAX 2016/17 2015/16

Non-mining companies 28% 28%Close corporations 28% 28%Employment companies (personal service provider) 28% 28%Taxable income of a non-resident company (SA branch) 28% 28%

TAXABLE FOREIGN DIVIDEND EXEMPTION2016/17

R2015/16

R2014/15

RPersons other than natural persons 13

281328

1328

TAX RATES FOR QUALIFYING SMALL BUSINESS CORPORATIONSYears of assessment ending between 1 April 2016 and 31 March 2017

Taxable incomeR

Rate of tax

0 - 75 000 0%75 001 - 365 000 7% of the amount over R75 000

365 001 - 550 000 R20 300 + 21% of the amount over R365 000550 001 R59 150 + 28% of the amount over R550 000

Years of assessment ending between 1 April 2015 and 31 March 2016Taxable income

RRate of tax

0 - 73 650 0%

73651 - 365 000 7% of the amount over R73 650365 001 - 550 000 R20 395 + 21% of the amount over R365 000550 001 R59 245 + 28% of the amount over R550 000

PRESUMPTIVE TURNOVER TAX ON MICRO BUSINESSES

The turnover tax regime was introduced to limit the compliance burden on micro businesses with annual turnover of up to R1 million.

Years of assessment ending between 1 March 2016 and 28 February 2017Taxable Turnover

RRate of tax

0 - 335 000 0%335 001 - 500 000 1% of the amount over R335 000500 001 - 750 000 R1 650 + 2% of the amount over R500 000750 001 - R6 650 + 3% of the amount over R750 000

Years of assessment ending between 1 March 2015 and 29 February 2016

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Taxable TurnoverR

Rate of tax


DIVIDENDS TAXRate of Dividends tax on dividends declared and paid - On or after 1 April 2012 15%

TRUSTSThe tax rate on trusts (other than special trusts which are taxed at rates applicable to individuals) remains at 41%.

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OTHER TAXES ESTATE DUTY

Rate of estate duty on the dutiable amount of an estate - Death prior to 14 March 1996 15% Death between 15 March 1996 and 30 September 2001 25% Death or after 1 October 2001 20%Primary abatement: R3 500 000 (2016: R3 500 000) plus unused portion of the primary abatement of a pre-deceased spouse

DONATIONS TAX

Payable at a flat rate on the value of property donated by a resident - Prior to 14 March 1996 15% Between 15 March 1996 and 30 September 2007 25% On or after 1 October 2007 20%Annual exemption for natural persons: R100 000 (2016: R100 000)

CAPITAL GAINS TAX (CGT)

THE EFFECTIVE CGT RATES FOR DISPOSAL OF ASSETS IN YEARS OF ASSESSMENT COMMENCING ON OR AFTER 1 MARCH 2016

Taxpayer InclusionRate (%)

StatutoryRate (%)

EffectiveRate (%)

Individuals 40 0 – 41 0 – 16.4TrustsSpecial 40 18 – 41 7.2 – 16.4Other 80 41 32.8CompaniesOrdinary 80 28 22.4Small business corporation 80 0 – 28 0 – 22.4Employment company (personal service provider) 80 28 22.4Foreign company (SA branch) 80 28 22.4Micro-business subject to turnover tax 0 0 0Life assurersIndividual policyholders fund 40 30 12Company policyholders fund 80 28 22.4Untaxed policyholders fund - - -Corporate fund 80 28 22.4

TRANSFER DUTYGovernment proposes to increase the transfer duty rate on property sales above R10 million from 11% to 13%.

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Transfer duty rates applicable to all persons on purchase agreements concluded on or after 1 March 2016Property value

RRate of tax

0 - 750 000 0%750 001 - 1 250 000 3% of the amount over R750 000

1 250 001 - 1 750 000 R15 000 + 6% of the amount over R1 250 0001 750 001 - 2 250 000 R45 000 + 8% of the amount over R1 750 0002 250 001 - 10 000 000 R85 000 + 11% of the amount over R2 250 000

10 000 001 - and above R937 500 + 13% of the amounts over R10 million

Transfer duty rates applicable to all persons on purchase agreements concluded on or after 1 March 2015 and before 1 March 2016

Property valueR

Rate of tax

0 - 750 000 0%750 001 - 1 250 000 3% of the amount over R750 000

1 250 001 - 1 750 000 R15 000 + 6% of the amount over R1 250 0001 750 001 - 2 250 000 R45 000 + 8% of the amount over R1 750 0002 250 001 - and above R85 000 + 11% of the amount over R2 250 000

SECURITIES TRANSFER TAXFrom 1 July 2008, STT replaced stamp duties and uncertificated securities tax on marketable securities. STT is levied at a flat rate of

0,25% on the taxable amount on any transfer of a security (listed and unlisted securities) including member’s interests in close corpora-

tions.

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BUDGET COMMENTARY (Extracted from Annexure C and Chapter 4 of the National Treasury Budget Review 2016)

OVERVIEWSouth Africa’s tax system remains resilient in a weak economic environment. Nominal tax revenue was R986.3 billion in 2014/15, a 9.6

per cent increase from the prior year.

The 2015 Budget estimated that tax revenues would grow by 10.4 percent in 2015/16. Owing to weaker-than-expected economic con -

ditions, this has been revised to 8.5 per cent.

As part of fiscal measures to narrow the budget deficit and stabilise debt growth, government proposes to raise an additional R18.1 bil -

lion in revenue in 2016/17. Proposals to raise another R15 billion in both 2017/18 and 2018/19 will be put forward in future budgets.

In addition to raising revenues, the 2016 tax proposals are aligned with broader goals of reducing inequality, developing skills

encouraging environmental sustainability and promoting public health.

Government will continue to maintain the tax base by strengthening measures to prevent corporate base erosion and profit shifting.

Reforms will improve the turnover regime for small business and support greater energy efficiency.

When he tabled the October 2015 Medium Term Budget Policy Statement (MTBPS) in Parliament, former Minister of Finance Nhlanhla

Nene cautioned that, “If we do not achieve growth, revenue will not increase. If revenue does not increase, expenditure cannot be ex -

panded.” Since then, the economic growth outlook has deteriorated. Last year’s budget anticipated GDP growth of 2 per cent in 2015,

but growth reached only 1.3 per cent. The economic growth outlook for 2016 has been revised down to 0.9 per cent.

Tax revenues in 2015/16 are projected to be R11.6 billion below the 2015 Budget forecast: corporate income tax collection is estimated

to be R13 billion lower, value-added tax (VAT) R5.7 billion lower and personal income tax R1.9 billion lower. These lower revenue out -

comes will be partially offset by an increase of R4.3 billion from customs duties. Despite difficult economic conditions, the tax system

remains resilient, with tax revenues continuing to grow faster than nominal GDP.

However tax collection projections are vulnerable to the risk of a weaker-than-expected economic performance.

Medium-term tax policy considerations

In line with the fiscal policy objectives set out in Chapter 3, the 2016 Budget proposes action to increase revenue collection by R18.1

billion in 2016/17. A series of interventions will add R15 billion to revenue - over and above baseline forecasts - in each of the sub -

sequent two years. These measures, along with the spending plans and efficiency measures set out in Chapters 5 and 6, are expected

to narrow the budget deficit and stabilise public debt.

The proposals for 2016 are outlined in this chapter. The nature of interventions in the two outer years will be subject to further work and

development. As government reviews its options in this regard, it will consult widely and draw on the work of the Davis Tax Committee.

Key considerations include the need to maintain the progressive nature of South Africa’s fiscal system, and ensure that tax measures

do not unduly prejudice economic growth or poor households.

Maintaining the social compact

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Government’s ability to provide public services depends on its ability to raise revenue. The payment of taxes is enforced by law, but effective tax systems rely on the voluntary adherence of citizens and a culture of tax morality. Maintaining this social compact is an essential component of fiscal sustainability. Government is obliged to ensure that public funds are used effectively, and citizens have an obligation to pay their taxes.

Public compliance with tax obligations remains high. As the tax burden increases, government will strengthen its efforts to ensure that spending is efficient by eliminating waste and corruption. It will also take steps to improve the impact of each rand spent on policy objectives, demonstrating the effective use of limited resources.

Over the past 22 years, South Africa has built one of the most efficient tax authorities in the developing world. Strengthening the South African Revenue Service (SARS), increasing its effectiveness, and reinforcing its commitment to transparency and integrity are important considerations over the period ahead.

Ensuring a sustainable tax burden

To ensure that the fiscal framework is sustainable over the medium-term expenditure framework (MTEF) period, the 2016 Budget proposals will increase the tax-to-GDP ratio from 26.3 per cent in 2015/16 to 27.8 per cent in 2018/19.

The ratio of tax collection to GDP is a standard measure of a country’s overall tax burden. In South Africa, the national tax-to-GDP ratio has averaged just below 25 per cent since 1994. Strong economic growth during the early 2000s led to a peak of 27.6 per cent in 2007/08, after which the ratio dropped to 24.4 per cent in 2009/10.

South Africa’s tax burden sits roughly between the average for developing and developed economies. While personal and corporate income taxes are relatively high, the VAT rate is lower than in most other jurisdictions, especially those with high levels of social spending.

Table 4.1 Tax burden and tax rates in selected countriesTax-to-GDP Personal Corporate Value-added

ratio income tax1 income tax tax2

Sweden 42.7 56.9 22.0 25.0Germany 36.1 47.5 30.2 19.0Russia 34.8 13.0 20.0 18.0Brazil3 33.4 27.5 34.0 17.0 - 19.0Spain 33.2 52.0 28.0 21.0UK 32.6 45.0 20.0 20.0Canada 30.5 49.5 26.3 5.0Turkey 28.7 35.8 20.0 18.0Australia 27.5 46.5 30.0 10.0South Africa4 25.7 41.0 28.0 14.0Chile 19.8 39.5 22.5 19.0China 19.4 45.0 25.0 17.0Kenya 16.2 30.0 30.0 16.0Ghana 16.1 25.0 25.0 15.0Rwanda 13.9 30.0 30.0 18.0

1. Highest marginal rate2. Value-added-tax standard rate3. In Brazil value-added-tax rates differ by subnational states4. The national tax-to-GDP ratio for South Africa is for 2014/15Source: OECD, Avalara VATlive, IMF and national tax authorities. Data is for 2014, or the most recent year if this is not available

Keeping the tax system progressive

South Africa’s tax system is highly progressive. Those below age 65 whose annual taxable income exceeds R1 million pay 31 per cent of such income in tax, while those earning below R250 000 pay less than 15 per cent. Of the 13.7 million registered taxpayers, fewer than 1 million individuals contribute 64 per cent of personal income tax revenue.

Using household survey data, a recent World Bank report concluded that VAT and fuel levies are mildly progressive in South Africa, with poorer households paying a lower share of such taxes than their share of disposable income. Most VAT revenue is contributed by the top 20 per cent of households. Well-targeted expenditure programmes mean that tax revenue mainly benefits poor South Africans through social protection, healthcare, education and other public services.

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Last year, government increased marginal rates of personal income tax. In future, the balance between taxes on income (direct taxes) and consumption (indirect taxes) will be an important consideration in ensuring a diversified, efficient, equitable and sustainable tax system. The current tax mix suggests that there may be greater room to increase indirect taxes, such as VAT. Any proposals along these lines would need to be accompanied by measures to improve the pro-poor character of expenditure programmes so that the fiscal system remains progressive.

Protecting the corporate income tax base

In recent years, greater attention has been paid to multinational companies that avoid or evade tax by shifting taxable income to low-tax regimes or tax havens. Such practices reduce the corporate income tax base and put domestic companies at a disadvantage. Of particular concern are:

Unacceptable transfer-pricing practices, where the value or nature of cross-border transactions is manipulated to reduce overall

tax liability.

Treaty shopping, where related companies in different countries establish a third entity in another location to obtain tax-treaty

benefits.

Highly geared financing structures that reduce companies’ tax liabilities with excessive interest-expense deductions.

The international character of these abuses means that solutions require global cooperation. South Africa has been proactive in taking policy action in this area, and has joined the efforts of the Group of Twenty (G20) and the Organisation for Economic Cooperation and Development (OECD) to examine base erosion and profit shifting. In November 2015, G20 leaders endorsed a series of recommendations to combat these practices. South Africa is working with 93 other governments to develop a multilateral instrument that will enable preventive measures to be incorporated into the existing network of bilateral treaties.

Government has also taken the following steps in this area:

Improving the quality of information firms must provide to SARS, enabling it to identify aggressive or abusive tax-

planning schemes.

Taking action on transfer pricing. Large multinationals will be required to submit reports for each country in which they do

business to the tax authority where their head office is located. Tax authorities will share this information starting in 2018. SARS

will have access to country-by-country information on all large multinationals operating in South Africa.

Enhancing rules on foreign companies controlled by a South African resident, so that a portion of profits earned by a South

African-owned subsidiary operating in another country is taxed in South Africa if no meaningful economic activity took place in

the other country.

Introducing rules that limit excessive interest deductions.

Addressing imbalances associated with earmarked taxes

The National Treasury remains concerned about the imbalances associated with earmarked taxation in the fiscal system. For example, the accumulated surplus of the Unemployment Insurance Fund will increase from R123 billion to R175 billion. At the same time, the Road Accident Fund’s liability will rise from R145 billion to R233 billion in 2018/19.

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South Africa maintains an integrated fiscal framework in which funding is directed where it is needed. To provide more flexibility for spending priorities, the use of earmarked taxes should be limited. Over the past year, there has been greater public interest in the skills development levy and the meaningful use of the revenues collected through this mechanism. Government is examining whether the levy is the best way to support skills development, and whether funds raised can also be used to improve access to on-the-job training and post-school education.

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TAX PROPOSALS The 2016 tax proposals raise additional gross revenue of R18.1 billion in 2016/17 - relative to the baseline - and narrow the budget deficit. The additional amount comprises R9.5 billion through higher excise duties, the general fuel levy and other environmental taxes. In combination, adjustments to capital gains tax and transfer duty raise R2 billion. An amount of R7.6 billion will be raised as a result of limited fiscal drag relief, less R1.1 billion for an increase in medical scheme tax credits.

Fiscal drag relief entails adjusting personal income tax brackets and rebates for inflation so that an individual’s purchasing power remains the same from one year to the next. Such adjustments are not automatic and require an announcement by the Minister of Finance to be legislated. Full fiscal drag relief for 2016/17 would amount to an estimated R13.1 billion. Government proposes partial fiscal drag relief for 2016/17 amounting to R5.5 billion, leaving R7.6 billion as additional revenue.

Table 4.5 shows the net revenue effects of the tax proposals. Using a baseline where no adjustments are made to the personal income tax table, net additional revenue amounting to an estimated R5 billion from all tax proposals will be generated. This comprises R9.5 billion in additional indirect tax revenue (excise duties, general fuel levy, environmental taxes), and R2 billion from capital gains tax and transfer duty increases, less R5.5 billion from partial fiscal drag relief, and R1.1 billion for medical scheme tax credit increases.

Table 4.5 Impact of tax proposals on 2016/17 revenueR million Effect of tax proposalsTotal tax revenue (before tax proposals) 1 169 798Non-tax revenue 26 657

Less: SACU1 payments -39 448National budget revenue 1 157 007Provinces, social security funds and selected 162 343public entities

Budget revenue (before tax proposals) 1 319 349Budget 2016/17 proposals 4 990Taxes on individuals and companies

Personal income tax -5 650Adjustment in personal income tax structure -5 500

Adjustment to medical tax credits -1 100

Capital gains tax 950

Business income tax 1 000Capital gains tax 1 000

Taxes on property 100Transfer duty rate increase 100

Indirect taxes 9 084Increase in general fuel levy 6 800

Increase in excise duties on tobacco products 767

Increase in excise duties on alcoholic beverages 1 517

Other 456Total tax revenue (after tax proposals) 1 174 788Budget revenue (after tax proposals) 1 324 339

1. Southern African Customs UnionSource: National Treasury

SUMMARY OF THE MAIN TAX PROPOSALSA two-year postponement of the annuitisation requirement for provident funds and tax-free transfers from pension to provident funds.

An enhanced SARS and SARB Voluntary Disclosure Programme in respect of offshore assets and income, applicable for the period 1 October 2016 to 31 March 2017.

The capital gains tax inclusion rate for individuals, special trusts and insurers’ individual policyholder funds increases from 33.3% to 40%.

For other taxpayers, the inclusion rate increases from 66.6% to 80%.

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Measures to prevent tax avoidance through trusts – assets transferred via loans to a trust to be included in the estate of the founder (assumed to mean donor/lender) on death and interest-free loans to be categorised as donations.

Increase in transfer duty rate from 11% to 13% in respect of property sales greater than R10 million.

The general fuel levy will increase by 30 cents per litre on 6 April 2016.

A 6% to 8.5% increase in excise duties on alcoholic beverages and tobacco products.

A tyre levy at R2.30 per kilogram is to be introduced on 1 October 2016 and a tax on sugar-sweetened beverages on 1 April 2017.

RETIREMENT REFORMS Implementation date

From 1 March 2016, an important change to the tax treatment of contributions to retirement savings and how they are withdrawn at retirement comes into effect. After further consultation, government proposes to postpone the requirement for provident fund members to annuitise to 1 March 2018.

Allowable deduction for fringe benefit of employer contributions to defined pension funds

Section 11(k)(iii) of the Income Tax Act (the Act) inadvertently limited the allowable deduction for the fringe benefit of employer contributions to retirement funds to the actual value of the employer contribution. However, the fringe benefit value for defined benefit pension funds is determined by a formula per the Seventh Schedule to the Act and may exceed the actual employer contribution.

In this case, the available deduction would not be aligned with the employer contribution’s fringe benefit value and any excess amount would become taxable. This was not the original intention and with effect from 1 March 2016, an amendment will be made to allow a deduction up to the full value of the employer contribution fringe benefit, if valued according to paragraph 12D of the Seventh Schedule

to the Act.

Passive income deduction

Before 1 March 2016, taxpayers were able to deduct retirement annuity contributions against their passive or non-trading income up to a certain limit. The current wording of section 11(k) of the Act does not allow this set off. It is proposed that section 11(k) of the Act be amended to allow for retirement contributions to be deducted against passive income, subject to the available limits.

Rollover of excess contributions prior to 1 March 2016

It is proposed that section 11(k) of the Act be amended to allow for the rollover of excess contributions to retirement annuity funds and pension funds accumulated up to 29 February 2016.

Order of allowable deductions

To correct the ordering rule for calculating allowable deductions in the determination of taxable income, it is proposed that the allowable section 11(k) deduction of the Act be determined before the allowable section 18A deduction.

Removal of the requirement for a tax directive to effect tax-free transfers from pension funds to provident funds

The 2015 retirement reforms made provision for tax-free transfers from pension funds to provident funds. Before this amendment, tax-free transfers from pension funds to provident funds required a tax directive from SARS. It is proposed that this requirement for a tax directive be removed because it is no longer applicable to these transfers.

Valuation of contributions made to defined benefit pension funds

Paragraph 12D of the Seventh Schedule only makes provision for contributions actually made by the employer or employee to certain retirement funds, and excludes contributions made on behalf of the employer or employee (for example, by the retirement fund). It is proposed that paragraph 12D of the Seventh Schedule be amended to include all contributions made for the member’s benefit.

Other technical amendments to paragraph 12D include clarifying that retirement fund income is the full amount used to determine the employer’s contribution, not only remuneration as defined in paragraph 1 of the Fourth Schedule. A potential issue of double counting for retirement funds with a hybrid structure (having both defined benefit and defined contribution elements) will be removed. It will also be made clear when actuaries can provide an updated contribution certificate.

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Vested rights for provident fund members – divorce order settlements

To allocate vested rights (i.e. contributions made pre-1 March 2016) fairly in the case of a divorce, it is proposed that the withdrawal of retirement benefits arising from divorce order settlements be proportionally attributed as a reduction against both the vested right and non-vested right portions of the retirement fund savings.

Vested rights for provident fund members – mandatory transfer

From 1 March 2016, provident fund members over 55 years may continue contributing to that provident fund without being required to purchase an annuity on retirement. However, if they transfer to another retirement fund, any future contributions to that fund would not be exempt from annuitisation.

It is proposed that forced transfers (through the closure of a retirement fund) will not affect the member’s ability to make further contributions, which can be taken as a lump sum. Further technical corrections are required to effect this. Further technical corrections are required to ensure that all contributions to provident funds or pension funds with lump sum benefits made before 1 March 2016 are included in the vested rights provisions, in line with the policy intent. Specifically, the vested rights provision inadvertently excluded transfers made to retirement funds, as defined under paragraph (c) of the definition of pension funds in section 1 of the Income Tax Act, and to preservation provident funds.

Foreign pension contributions, annuities and payouts

When the residence-based taxation system was introduced in 2001, section 10(1)(gC) was added to the Income Tax Act to exempt foreign pensions derived from past employment in a foreign jurisdiction (i.e. from a source outside of South Africa). The question of how contributions to foreign pension funds and the taxation of payments from foreign funds should be dealt with raises a number of issues, which require a review. Sufficient time would be required to determine how to deal with contributions to foreign funds and the taxation of payments from foreign funds, taking into account the tax policy for South African retirement funds.

Fringe benefits

Clarification regarding raising an assessment for re-calculating fringe benefit

Paragraph 3(2) of the Seventh Schedule to the Act allows SARS Commissioner to re-determine the cash equivalent of a fringe benefit and assess either the employer or the employee, in certain circumstances. Uncertainty exists as to the circumstances which would trigger this. To provide clarity, it is proposed that the paragraph 3(2) of the Seventh Schedule be aligned with the wording in paragraph 5(2) of the Fourth Schedule.

Alignment of the definition of private travel

The concept of private travel has been difficult for employers to apply in practice. The difference in the wording of the definition of private travel in section 8 and the Seventh Schedule of the Act adds to the confusion. To correct this, it is proposed that the wording of the two provisions be aligned.

Increasing the incentive for employers to provide bursaries

It is proposed that the income eligibility threshold for employees to access the fringe benefit tax exemption in respect of employer-granted bursaries will increase from R250 000 to R400 000 and there will be an increase in the value of qualifying bursaries, from R10 000 to R15 000 for NQF levels 1 – 4 and from R30 000 to R40 000 for NQF levels 5 to 10.

Tax-free investments

Alignment of estate duty treatment

Tax-free investments were introduced from 1 March 2015 to encourage individuals to save. Government has become aware of this benefit being misused to avoid estate duty and anti-avoidance legislation is proposed to address specific issues identified.

Dividends tax returns in the context of tax-free investments

Investors receiving dividends from tax-free investments are required to submit an exempt dividends tax return to SARS on receipt of dividend payments. It is proposed that an amendment be made to remove this requirement.

Transfers between service providers

The implementation date to allow transfers of tax-free investments between service providers will be postponed from 1 March 2016 to 1 November 2016 to allow further time for service providers to finalise the administrative processes required for these transfers.

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Employee share-based incentive schemes Removal of possible double taxation

If a taxpayer receives a restricted equity instrument having a value, it falls within gross income in year 1, despite the restrictions. Upon vesting, the gain on the instrument needs to be included in gross income in the year of vesting, according to paragraph (n) of the gross income definition read with section 8C. This could result in double taxation and it is proposed that the acquisition of shares subject to the provisions of section 8C of the Act be specifically excluded from paragraph (c) of the definition of gross income.

Addressing circumvention of section 8C rules

Whilst section 8C addresses some tax avoidance identified, the current rules do not deal adequately with some schemes where restricted shares held by employees are liquidated in return for an amount qualifying as a dividend. It is proposed that the current rules be reviewed to deal with this.

Inclusion of certain dividends in the definition of remuneration: Certain dividends received from restricted equity instruments do not qualify for an income tax exemption and are taxable on assessment of the directors and employees. It is proposed that these taxable dividends be specifically included in the definition of remuneration for employees’ tax purposes.

Employees of foreign employers in South Africa designated as provisional taxpayers

If foreign employers in South Africa do not deduct employees’ tax, local employees should pay provisional tax in terms of the Fourth Schedule to the Act. It is proposed that the Commissioner (SARS) notify them of their status through a public notice, instead of issuing individual notices.

Directives to be sought for all employment lump sums

There are exceptions to the rule that employers must ascertain from the Commissioner the correct amount in employees’ tax to be withheld from lump-sum payments before payment is made. It is proposed that the provision for exceptions be removed.

Removal of exclusion from penalty calculation

The penalty for underpaying provisional tax is based on a percentage of normal tax payable after taking into account rebates and tax already paid. Certain once-off amounts, such as retirement lump-sum and severance-benefit payments, are excluded from the calculation of the penalty because they are taxed separately, upfront. Taxpayers are required to pay provisional tax on the other amounts listed in paragraph (d) of the definition of gross income, because these amounts are not taxed under the lump-sum tax tables. However, by excluding these amounts from the penalty calculation, taxpayers are not penalised if they fail to pay the required provisional tax. To correct this, it is proposed that the penalty calculation’s exclusion of the amounts in paragraph (d) not taxed in terms of the special tables be removed.

Date on which estimate for second provisional tax payment must be submitted

A provisional taxpayer is not subject to the underpayment penalty if an estimate for the second provisional tax period is submitted before the due date of the subsequent provisional tax payment. It is proposed that this window period be closed on the date of assessment of the relevant year.

Measures to prevent tax avoidance through trusts

It has been noted that some taxpayers use trusts to avoid paying estate duty and donations tax. For example, if the founder of a trust sells his or her assets to the trust, and grants the trust an interest-free loan as payment, donations tax is not triggered and the assets are not included in his or her estate at death. To limit taxpayers’ ability to transfer wealth without being taxed, government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder (we assume this to mean the lender/donor) at death, and to categorise interest-free loans to trusts as donations. Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered.

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BUSINESS TAXESHybrid debt instruments

It is proposed that a concession be made to exclude debt instruments subject to a subordination agreement from being regarded as section 8F hybrid debt instruments.

Government will implement measures, effective 24 February 2016, to eliminate mismatches associated with hybrid debt instruments where the issuer is not a South African resident taxpayer. Such situations potentially result in double non-taxation. Interest payments on debt and dividend payments on equity are treated differently for tax purposes. Hybrid financial instruments, which exhibit both debt and equity features, have become commonplace. This can result in one party to a transaction deducting the payment while the counterparty receives exempt income. Existing rules reclassify an interest payment as a dividend payment for tax purposes. However, it is only possible to deny interest deductions for a South African resident that issues a debt instrument. This results in a mismatch in tax treatment between two countries, as the South African rules apply a low or zero tax rate to the reclassified dividend payment.

Asset-for-share transactions for natural persons employed by a company

Asset-for-share transactions do not trigger a capital-gains event when the transaction is between a person and a company, and the person either holds a qualifying interest in the company or is a natural person working full time for the company. The qualifying conditions were put in place to ensure that only substantial and long-term transfers of assets for shares benefit from the exemption, and to support the incorporation of professional service firms. However, because some taxpayers have indicated that the limits to the conditions are unclear, it is proposed that section 42 of the Act be amended for clarity.

Avoidance schemes in respect of share disposals

One of the schemes used to avoid the tax consequences of share disposals involves the company buying back the shares from the seller and issuing new shares to the buyer. The seller receives payment in the form of dividends, which may be exempt from normal tax and dividends tax, and the amount paid by the buyer may qualify as contributed tax capital. Such a transaction is, in substance, a share sale that should be subject to tax. The wide-spread use of these arrangements merits a review to determine if additional countermeasures are required.

Tax implications of securities lending arrangements

As a result of a 2015 amendment, there are no income tax and securities transfer tax implications if a listed share is transferred as collateral in a lending arrangement for a limited period of 12 months. Although the tax relief is welcomed, concerns have been raised that the 12-month limitation rule is too restrictive. This condition will be reviewed together with other aspects.

Refinement of third-party-backed share provisions

Pre-2012 legitimate transactions: In 2012, government introduced new rules to deal with avoidance concerns regarding transactions and arrangements that involve preference shares with dividend yields backed by third parties. These dividend yields, under the new rules, are treated as ordinary revenue. Because the rules may affect some legitimate transactions and arrangements, government will consider relaxing them in relation only to those entered into before 2012.

Further, additional measures will be considered to stop the circumvention of anti-avoidance measures which has come to light subsequent to the 2012 amendments.

Transitional tax issues resulting from regulation of hedge funds

There are certain scenarios where the tax relief provided in the Taxation Laws Amendment Act (2015) to assist the hedge fund industry’s transition to a new regulated tax regime is limited and inapplicable to certain hedge fund’s trust structures. This is the case with the tax relief for asset-for-share and amalgamation transactions. It is proposed that provision be made to address these scenarios.

Taxation of real estate investment trusts

Qualifying distribution rule: Because recoupments such as building allowances previously claimed are included in the definition of gross income in the Act, they could affect the 75 per cent rental-income analysis used to determine qualifying distribution applicable to real estate investment trusts (REITs). It is proposed that the provisions relating to the qualifying distribution rule in section 25BB of the Act be reviewed to remove this anomaly.

Interaction between REITs and section 9C: The current provisions of section 9C of the Act are inappropriate for REITs, as dividends

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received from REITs are taxable, but expenditure incurred to produce these taxable dividends is not deductible. To resolve this anomaly, it is proposed that section 9C(5) be amended to exclude shares in REITs.

Solvency assessment and management framework for long-term insurers

The Insurance Bill, which gives effect to the Financial Services Board’s solvency assessment and management (SAM) framework for long-term and short-term insurers, is likely to come into operation in 2017. As a result, Parliament has proposed that the changes to align the tax valuation method for long-term insurers with SAM that were part of the 2015 Tax Laws Amendment Bill be further considered in 2016.

Venture capital funding for small businesses

Funding remains one of the biggest challenges for small businesses. To encourage equity funders to invest in small businesses, the venture capital company regime was introduced in 2008. Currently, 31 venture capital companies are registered. Government is aware that the application of certain provisions on these companies may result in potential investors abandoning plans to take up this incentive. Measures to mitigate this unintended consequence will be explored.

Urban development zones

The urban development zone (UDZ) tax incentive has been successful in promoting urban renewal and therefore, it is proposed that the UDZ tax incentive be made available to more municipalities, subject to the application of a set of strict criteria.

Small business corporations (SBCs) in special economic zones (SEZ)

When the SEZ tax incentive was introduced in 2013, no clarity was provided regarding the tax treatment of SBCs located in SEZs. It is proposed that the legislation be amended to make it clear that SBCs in SEZ are subject to corporate income tax at either the applicable graduated rate or 15%, whichever is lower. To be eligible for the 15% rate, the SBC will still need to comply with the provisions of section 12R of the Act.

Tax treatment of National Housing Finance Corporation (NHFC)

The Department of Human Settlements is consolidating all of its human settlement development finance institutions into the NHFC. It is proposed that a special tax exemption similar to that provided to certain government entities be provided to the NHFC. Further amendments will be considered to ensure the transfer of assets from the department’s current development finance institutions to the NHFC are tax neutral.

Tax treatment of land donated under land-reform initiatives

Currently, tax legislation provides tax relief for land donated for land reform. This tax relief does not extend to all government land-reform initiatives and it is proposed that the legislation be amended to cover those set out in the National Development Plan.

Clarifying the tax treatment of government grants

Government grants that are not listed in the Eleventh Schedule to the Act can still fall outside the definition of gross income if they are of a capital nature. It is proposed that all government grants be included in gross income and the Eleventh Schedule be the sole mechanism for determining whether they are taxable or not.

INTERNATIONAL TAXWithdrawal of withholding tax (WHT) on service fees

In an effort to resolve unforeseen issues, including uncertainty on the application of domestic tax law and taxing rights under tax treaties, it is proposed that the WHT on service fees be withdrawn from the Act and dealt with under the provisions of reportable arrangements in the Tax Administration Act.

Foreign companies and collective investment schemes

Section 9D taxes South African owners of foreign-owned entities on amounts equal to that entity’s earned income. This has adverse consequences for collective investment schemes (CIS) that hold shares in foreign CIS’s. There is uncertainty as to whether it is the local fund or the investor in the local fund that should be considered to be the holder of the participation rights in the foreign collective investment scheme. For clarity, it is proposed that CIS’s be excluded from applying section 9D to investments made in foreign companies.

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Bad debt deduction

Section 11(i) provides for a deduction of any debt owing to the taxpayer that has gone bad during the year, provided that this amount is or was included in the taxpayer’s income. Where a taxpayer, not being a money-lender, lends an amount denominated in a foreign currency to another person, any exchange differences arising on such a loan are taken into account in the determination of taxable income as an inclusion in or deduction from income, as the case may be.

However, where such a loan becomes bad, no deduction is available under section 11(a) regarding any exchange gains included in income and the taxpayer is not entitled to tax relief. Amendments to section 11(i) are proposed to address this.

Interest WHT where interest is written off

The Act requires that tax be withheld from interest paid to a foreign person. Interest is deemed to be paid on the date on which the interest becomes due and payable. In situations where interest WHT is paid on interest that becomes due and payable, but the interest is subsequently written off as irrecoverable, there is no mechanism for a refund of interest withholding tax already paid. It is proposed that a mechanism be developed to allow for a refund of interest withholding tax paid.

Tax base protection and hypothetical foreign tax payable due to foreign group tax losses

In 2009, a high-tax exemption was introduced for controlled foreign companies (CFC). As a result, all CFC income is exempt from tax in South Africa in cases where the CFC pays an amount of foreign tax equal to at least 75 per cent of the tax that would have been due and payable in South Africa, had the CFC been a South African tax resident. The high-tax exemption is based on a calculation of hypothetical amount of foreign taxes, by disregarding foreign group company losses.

Government is aware that in applying this calculation, an exemption is granted in situations where no foreign tax is actually payable. In addition, in the absence of the high-tax exemption, no foreign tax rebates would have been granted in this regard to avoid economic double taxation. In order to address the unintended anomaly, it is proposed that the adjustment for foreign group losses in the calculation for high-tax exemption be deleted.

VALUE ADDED TAXNotional input tax on goods containing gold

In 2014, changes were made in the VAT Act to exclude goods containing gold from the definition of second-hand goods. It has come to government’s attention that the exclusion of goods containing gold from this definition is too restrictive, especially in situations where the gold content of such goods is minimal or inconsequential. It is proposed that the 2014 amendment be revised to eliminate this anomaly.

Taxation of non-executive directors’ fees

Under the Income Tax Act and the VAT Act, a non-executive director’s fees may be subject to both employees’ tax and VAT. Views differ on whether to deduct employees’ tax from these fees or if the director should register as a VAT vendor. It is proposed that these issues be investigated to provide clarity.

Grants from the National Skills Fund and sector education and training authorities

The VAT Act zero-rates grants allocated through sector education and training authorities (SETAs), but does not specifically mention those allocated through the National Skills Fund. Aligning the VAT treatment of these two grant allocations will be considered.

Loyalty programmes

There are no provisions in the VAT Act dealing with loyalty programmes and the VAT implications of redeeming loyalty points. It is proposed that loyalty programmes be analysed and legislative amendments be considered to provide clarity on their VAT treatment. The provisions relating to vouchers will also be reviewed to determine if they require amendments.

Determined value of company cars

VAT Regulation 2835 specifies a method for establishing the determined value of a company car for output tax purposes. This method differs from the method prescribed in paragraph 7(1) of the Seventh Schedule of the Income Tax Act. These differences have resulted in employers and payroll managers calculating the determined value of company cars using two methods and maintaining two sets of records, which creates an administrative burden. It is proposed that the provisions of the VAT Regulation 2835 be aligned with the provisions of the Seventh Schedule of the Income Tax Act.

Waivers and cancellations of debt

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Waivers and cancellations are not included in the definition of financial services. Vendors who waive or cancel debts provide a service through the surrender of a right. Debts that are waived or cancelled between connected persons would trigger an output tax liability calculated on the open market value of the amount waived, even though no consideration will be received. Surrendering the right to receive money (surrendering of a debt security) could also be perceived to be a separate supply. It is proposed that the tax implications relating to these supplies be analysed to determine if a legislative amendment is required.

Alignment of prescription periods

A person may deduct an amount from output tax attributable to a later tax period, provided this later period falls within five years from the date of certain events, for example, the date a tax invoice should have been issued. It is proposed that an input tax deduction be limited in certain instances to the tax period in which the time of supply occurred. In addition, it is proposed that the time limit for the payment of refunds be clarified.

Indirect exports

In terms of the VAT Act, a vendor that elected to supply goods at the zero rate for an indirect export may in certain instances be required to account for output tax if the relevant documentary requirements of Regulation 2761 (R 2761) are not met. Provision is made in R 2761 for the vendor to claim an input tax deduction where the relevant documents are subsequently obtained within certain time periods. This section of the VAT Act, however, does not refer to the input tax deduction allowed in R 2761. It is therefore proposed that this right to a deduction be referred to in the Act to align it with R 2761.

Alignment of VAT and customs schedules

Schedule 1 of the VAT Act contains items that are exempt from VAT on importation. According to the Customs and Excise Act, items that are exempt from VAT on importation are identified by heading numbers or rebate items and descriptions as contemplated in Schedules 1 and 4 of the Customs and Excise Act. It is proposed that the notes to the item numbers in Schedule 1 of the VAT Act be aligned with the notes to the item numbers in Schedules 1 and 4 of the Customs and Excise Act.

Goods lost, destroyed or damaged

The VAT Act was amended to include item number 412.07 to exempt goods from VAT on importation if they are unconditionally abandoned to the commissioner or destroyed with the commissioner’s permission. No similar exemption exists for goods proved to have been lost, destroyed or damaged through, for example, natural disasters or such circumstances that the commissioner deems exceptional. It is therefore proposed that the legislation be amended to exempt the above-mentioned goods from VAT.

Payments basis

The VAT Act provides for public authorities and municipalities as defined in section 1 to be registered on the payments basis. In turn, section 15(2A) requires vendors who are registered on the payments basis and makes a supply of goods or services (other than fixed property) for consideration that exceeds R100 000, must account for the VAT payable on an invoice basis. However, public authorities and municipalities do not have to meet this requirement. This dispensation is not extended to municipal entities. It is proposed that a similar dispensation be granted to municipal entities.

Alternative documentary proof

Section 16(2)(g) of the VAT Act determines that a deduction may be allowed where a vendor is in possession of alternative documentary proof that is acceptable to the Commissioner. The Commissioner’s discretion is limited to circumstances where the vendor is unable to obtain the documents prescribed in section 16(2)(a) to (f). It is proposed that scope be provided for the Commissioner to take other considerations into account in accepting alternative documentary proof.

Removal of goods from a customs controlled area located in a SEZ

Businesses that are located in a customs-controlled area (CCA) within a SEZ enjoy certain VAT cash-flow benefits when importing goods into the CCA. To further support the benefits of investing in special economic zones, an amendment is proposed to allow for the VAT-free movement of goods that are imported into a SEZs CCA to a manufacturing duty rebate user, provided there is a sale subject to VAT.

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CUSTOMS AND EXCISE DUTYGeneral anti-avoidance rule

To enhance enforcement and compliance with customs duties and excise taxation, a general anti-avoidance provision will be added to the Customs and Excise Act. The design of the anti-avoidance clause will be in line with similar provisions in other indirect tax legislation and will consolidate anti-avoidance efforts in customs and excise administration.

Cigarette import or manufacturing

Provisions in the Customs and Excise Act on the maximum allowed weight of cigarettes that may be imported or manufactured will be updated to 0.8g per cigarette to more accurately reflect volumes of inputs.

TAX ON SUGAR-SWEETENED BEVERAGESObesity stemming from overconsumption of sugar is a global concern. Over the past 30 years the problem has grown in South Africa, which has the worst obesity ranking in sub-Saharan Africa, and led to greater risk of heart disease, diabetes and cancer. The Department of Health has published a policy paper on the growing problem of obesity. Fiscal interventions such as taxes are increasingly recognised as complementary tools to help tackle this epidemic. Countries such as Denmark, Finland, France, Hungary, Ireland, Mexico and Norway have levied taxes on sugar-sweetened beverages. Government proposes to introduce such a tax on 1 April 2017 to help reduce excessive sugar intake.

EXCISE DUTIES ON TOBACCO AND ALCOHOLIn line with health and fiscal policy objectives, tax rates on alcoholic beverages have been consistently increased beyond inflation since 2002. The 2016 Budget continues this trend, with excise duty rate increases of between 6.7 per cent and 8.5 per cent. Mixtures of grain-fermented beverages (such as beverages made from maize) with an alcohol content ranging from 2.5 per cent to 9 per cent by volume are proposed as an additional excise duty category. These beverages will be taxed at the beer rate based on absolute alcohol content. Government proposes that other fermented beverage mixtures and ciders be taxed per absolute alcohol content.

Historical changes in duty structure and regulatory requirements have led to brandy being at a competitive disadvantage relative to other spirits. To level the playing field, government proposes that a 10 per cent lower excise duty, based on litres of absolute alcohol content, be applied to pot-stilled and vintage brandy, and phased in over the next two years.

The excise duty on sparkling wine has risen well above inflation in recent years, mainly due to the influence of high-priced imports. As a result, the difference between the excise duties on sparkling wine and still wine has increased substantially. It is proposed that the current difference between the excise duties on natural and sparkling wine be maintained by pegging the sparkling wine excise rate at 3.2 times that of natural unfortified wine.

The excise adjustments for cigarettes, cigarette tobacco and pipe tobacco are attributable to inflation-linked price increases for the most popular brands in each category. A review of tobacco product taxation will begin in 2016/17, and will consider both existing and non-traditional tobacco products and their alternatives, such as e-cigarettes.

The proposed adjustments to some of the alcohol and tobacco taxes are as follows:

Traditional African beer – no change.

Malt beer – increases by 11c (8.5%) to R1.35 per 340ml can.

Fortified wine – increases by 36c (6.7%) to R5.82 per litre.

Unfortified wine – increases by 24c (8%) per litre.

Sparkling wine – increases by 78c (8%) per litre.

Spirits – increases by R3.94 (8.2%) to R52.07 per 750ml bottle.

Ciders and alcoholic fruit beverages – increases by 11c (8.5%) per 340ml can.

Cigarettes – increases by 82c (6.7%) to R13.24 per packet of 20.

Pipe tobacco - increases by 27c (7%) to R4.16 per 25g.

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Cigars – increases by R4.32 (6.7%) to R69.28 per 23g.

FUEL TAXESFuel taxes raise general revenue, fund compensation for road accidents, and help to address pollution and congestion. Government proposes to increase the general fuel levy by 30c/litre, effective 6 April 2016.

2014/2015 2015/2016 2016/2017

93 Octane Diesel 93 Octane Diesel 93 Octane Diesel

c / litre Petrol petrol Petrol

General fuel levy 224.50 209.50 255.00 240.00 285.00 270.00

Road Accident Fund Levy 104.00 104.00 154.00 154.00 154.00 154.00

Customs and excise levy 4.00 4.00 4.00 4.00 4.00 4.00

Illuminating paraffin marker 0.00 0.01 0.00 0.01 0.00 0.01

Total 332.50 317.51 413.00 398.01 443.00 428.01

Pump price: Gauteng (as in 1 375.00 1 311.35 1 009.00 926.09 1 215.00 943.17

February)¹

Taxes as % of pump price 24.2% 24.2% 40.9% 43.0% 36.5% 45.4%1. diesel (0.05% sulphur) wholesale price (retail price not regulated)

TAX ADMINISTRATIONExtension of objection and condonation periods

The current period for lodging an objection under the Tax Administration Act (TAA) is 30 business days from the date of assessment. This has been shown to be too short in practice, particularly in complex matters, resulting in a large number of applications for condonation. It is therefore proposed that a longer period for lodging an objection and condonation be considered. Amendments to the dispute resolution rules will also be required to give effect to this proposal, which could result in a change to the rules for failing to comply within the prescribed time periods.

Commercial member to assist presiding officer in tax court

The TAA provides that if a tax appeal relates to the business of mining, the commercial member must be a registered engineer with experience in that field, or a sworn appraiser if it involves the valuation of assets. Because other matters of a technical nature may also require a commercial member with expertise in the relevant field, it is proposed that an amendment be considered to include a more generic provision for this purpose.

Understatement penalty provisions

Amendments to the understatement penalty system of the TAA to enhance clarity with regard to general anti-avoidance matters will be considered.

Legal costs recovered by state attorney

Legal costs recovered by the state attorney on behalf of SARS are paid directly to SARS, not to the National Revenue Fund. It is proposed that all legal costs recovered by the state attorney on behalf of SARS be paid to the National Revenue Fund.

Voluntary Disclosure Programme

A person who is aware of a pending audit or investigation may not apply for voluntary disclosure relief. It is proposed that an amendment be considered to clarify what is meant by pending audit or investigation.

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Special Voluntary Disclosure Programme

South Africa’s voluntary disclosure programme gives non-compliant taxpayers the opportunity to correct their tax affairs. With a new OECD global standard for the automatic exchange of financial information between tax authorities coming into effect from 2017, time is running out for taxpayers who still have undisclosed assets abroad. The National Treasury, SARS and the Reserve Bank have received requests from parties with unauthorised foreign assets who wish to regularise their affairs. Accordingly, government proposes to relax voluntary disclosure rules for a period of six months, from 1 October 2016, to allow non-compliant individuals and firms to disclose assets held and income earned offshore.

Special Voluntary Disclosure Programme - Media Statement issued by National Treasury on 24 February 2016

SARS and the South African Reserve Bank (SARB) are working jointly to ensure that applications for the Special Voluntary Disclosure Programme are assessed through one joint process for both tax non-compliance and exchange control contraventions.

Window period of Special Voluntary Disclosure Programme

Applications for relief under the Special Voluntary Disclosure Programme will apply for a limited window period of six months starting on1 October 2016 and closing on 31 March 2017.

Persons that may apply for the Special Voluntary Disclosure Programme

Individuals and companies may apply for the Special Voluntary Disclosure Programme on the same basis as for the existing Voluntary Disclosure Programme contemplated in Part B of Chapter 16 of the Tax Administration Act, 2011. That is to say, an initial “no-name approach” applications may be made in a representative capacity, etc.

Trusts will not qualify to apply for the Special Voluntary Disclosure Programme.

Settlors, donors, deceased estates or beneficiaries of foreign discretionary trusts may, however, participate in the Special Voluntary Disclosure Programme if they elect to have the trust’s offshore assets and income deemed to be held by them.

Persons may not apply for the Special Voluntary Disclosure Programme if they are aware of a pending audit or investigation in respect of foreign assets or foreign taxes or an audit or investigation in respect of foreign assets or foreign taxes has commenced. However, if the scope of an audit or investigation is in respect of other areas (other than foreign assets or foreign taxes, e.g. in respect of PAYE), persons may still qualify to apply for relief under the Special Voluntary Disclosure Programme.

Amounts in respect of which SARS obtained information under the terms of any international exchange of information procedure will not be eligible for the Special Voluntary Disclosure Programme.

Relief granted under the Special Voluntary Disclosure Programme

Only 50 per cent of the total amount used to fund the acquisition of offshore assets (“seed money”) before 1 March 2015, if the applicant failed to comply with a tax Act administered by SARS, will be included in taxable income and subject to normal tax.

Investment returns in respect of those offshore assets received or accrued only from 1 March 2010 onward will be included in taxable income in full and subject to normal tax.

Investment returns prior to 1 March 2010 will be exempt.

Interest charged in terms of the Special Voluntary Disclosure Programme

Interest on tax debts arising from the disclosure of amounts used to fund the acquisition of offshore assets or investment returns in respect of those offshore assets will commence only from 1 March 2010.

Waiver of penalties under the Special Voluntary Disclosure Programme

No understatement penalties will be levied where an application under the Special Voluntary Disclosure Programme is successful.

Exemption from criminal prosecution under the Special Voluntary Disclosure Programme

As is currently the case in the existing Voluntary Disclosure Programme, SARS will not pursue criminal prosecution for a tax offence where an application under the Special Voluntary Disclosure Programme is successful.

Application process under the Special Voluntary Disclosure Programme

The application process for the existing Voluntary Disclosure Programme will be extended to the Special Voluntary Disclosure Programme. Page 36

Exchange control relief

Disclosure of Exchange Control Contraventions under the Special Voluntary Disclosure Programme

The Financial Surveillance Department of the South African Reserve Bank (FinSurv) will be offering an opportunity to South African residents to regularise their exchange control affairs by applying for relief under the Special Voluntary Disclosure Programme of contraventions of the provisions of the Exchange Control Regulations, 1961 and which contraventions include, inter alia, the ownership of an unauthorised foreign asset(s).

Applications for relief for Exchange Control under the Special Voluntary Disclosure Programme are to be made pursuant to the provisions of Regulation 24 of the Exchange Control Regulations, 1961.

South African residents (individuals and entities) will be allowed to disclose and regularise their exchange control contraventions that occurred prior to 29 February 2016.

South African residents who are the subject of any current and/or pending investigation by FinSurv into their contraventions of the provisions of the Regulations will not qualify for Exchange Control relief under the Special Voluntary Disclosure Programme.

Window period of the Special Voluntary Disclosure Programme

Applications for Exchange Control Relief under the Special Voluntary Disclosure Programme will commence on 1 October 2016 and will continue until 31 March 2017.

Exchange Control Relief under the Special Voluntary Disclosure Programme

Applicants who are granted administrative relief in respect of unauthorised foreign assets and/or structures (of whatever nature, excluding bearer instruments) may have to pay a levy based on the current market value thereof as at 29 February 2016.

The following conditions will apply:

5% of the leviable amount if the regularised assets or the sale proceeds thereof are repatriated to South Africa;

10% of the leviable amount if the regularised assets are kept offshore;

The levy must be paid from foreign-sourced funds. Where insufficient liquid foreign assets are available, an additional 2% will be added, to the extent that local assets are utilised to settle the levy; and

Individuals will not be allowed to deduct their R10 million foreign capital allowance or any remaining portion thereof from any leviable amount and the levy may not be reduced by any fees or commissions.

Exchange Control Relief post the Special Voluntary Disclosure Programme

South African residents who do not apply for Exchange Control Relief under the Special Voluntary Disclosure Programme and voluntarily make a full disclosure directly to FinSurv outside of the Special Voluntary Disclosure Programme shall, at the discretion of FinSurv, have to pay a settlement ranging from 10% to 40% on the current market value of their unauthorised foreign assets. The determination of the final settlement amount will, inter alia, depend on whether the applicant elects to retain the funds abroad or repatriate such funds.

South African residents who neither applied for Exchange Control relief in terms of this Special Voluntary Disclosure Programme nor voluntarily approached the FinSurv for assistance may face the full force of the law. In this regard, the FinSurv is mandated to, where appropriate, recover the full amount of the contravention.

Treatment of disclosure and regularisation

Further information on the treatment of disclosures and declarations in respect of specific transactions conducted by natural persons, corporates and donors of discretionary trusts will be made public in due course.

Tax legislation and exchange control regulations

Provisions regarding tax relief under the Special Voluntary Disclosure Programme will be made available in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2016, the Rates and Monetary Amounts and Amendment of Revenue Laws (Administration Bill), 2016 and under the Exchange Control Regulation 24 of 1961.

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ENVIRONMENTAL TAXESCarbon Tax

The main aim of the carbon tax is to put a price on the environmental and economic damages caused by excessive emissions of greenhouse gases. A secondary aim is to change the behaviour of firms and consumers, encouraging them to use cleaner technology. Given the economic outlook, the carbon tax has been designed to ensure that its overall impact will be revenue neutral up to 2020. The draft carbon tax bill was published in November 2015, with 90 comments received to date. The draft bill will be revised, taking into account public comments and further consultation.

Tyre levy

The tyre levy proposed in the 2015 Budget is intended to reduce waste, while encouraging reuse, recycling and recovery, and discouraging disposal into landfills. This levy will be implemented at a rate of R2.30/kg of tyre, effective 1 October 2016. The levy will replace the current fee arrangements for tyres, as regulated by the Department of Environmental Affairs.

Incandescent globe tax

An environmental levy on incandescent light bulbs was introduced in 2009 to encourage the use of more efficient compact fluorescent bulbs and reduce electricity demand. This levy was last increased in 2013. To take account of inflation, it is proposed that the levy be increased from R4 to R6 per globe, effective 1 April 2016.

Plastic bag levy

This levy, in place for 10 years, aims to counter the dispersion of plastic bags that end up as wind-blown litter or in waste facilities. Overall, it has helped to reduce the production and import of plastic bags. This levy was last increased in 2013. Government proposes to increase the levy from 6 cents to 8 cents per bag, effective 1 April 2016, to account for inflation.

Motor vehicle emissions tax

The motor vehicle emissions tax aims to encourage consumers to use more fuel-efficient, low-carbon-emitting vehicles, and manufacturers to improve fuel efficiency. To maintain this strategy, government proposes that a combined inflationary adjustment based on the 2013–2015 period be implemented, effective 1 April 2016. For passenger vehicles, this will increase the tax rate from R90 to R100 for every gram of emissions/km above 120 gCO2/km and, for double cabs, from R125 to R140 for every gram of emissions/km in excess of 175 gCO2/km.

Encouraging sustainable practices for a cleaner environment

To encourage taxpayers top make more environmentally friendly decisions, capital allowances will be adjusted in certain instances, specifically in relation to refinery upgrades and renewable energy incentives.

Renewable energy incentives

Over the past several years, government has provided incentives to encourage investment in renewable energy through targeted accelerated depreciation allowances. However, capital expenditure that indirectly supports renewable electricity production, such as the

construction of fences and roads, does not qualify for such deductions. To encourage investment in renewable energy, government will consider enhancing existing provisions to include some necessary indirect infrastructure costs.

SKILLS DEVELOPMENTLearnership and employment tax incentives

The learnership tax incentive, introduced in 2002, aims to encourage education and work-based training. The employment tax incentive, introduced in 2014, was designed to promote the employment of young workers. Both incentives will expire towards the end of 2016. SARS has made data on the employment tax incentive available and a review is under way. It is envisaged that results from the review of both incentives will be published and presented to Parliament by the third quarter of 2016. If there are delays in completing these reviews, government may consider extending the incentives by one year.

Increasing the incentive for employers to provide bursaries

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To support skills development, government proposes to increase the fringe benefit tax exemption thresholds for bursaries provided to employees or their relatives. The income eligibility threshold for employees to access the relief will be increased from R250 000 to R400 000. The value of qualifying bursaries will be increased from R10 000 to R15 000 for National Qualifications Framework levels 1 to 4, and from R30 000 to R40 000 for levels 5 to 10.

Education and training-based public benefit activities

Government is considering expanding the list of public-benefit education and training activities to accommodate industry-based training organisations, which would exempt them from tax.

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ECONOMIC GROWTHResearch and development

A task team established by the Minister of Science and Technology is investigating the challenges faced by businesses in trying to access the R&D tax incentive. Its work should be completed in April 2016, after which proposals will be considered to enhance this incentive.

Infrastructure investment in mining communities

The Mining Charter requires companies to invest in communities where they operate. It is typically agreed that a company will build housing, hospitals, schools and recreational facilities to benefit workers and communities. Companies can only deduct such capital expenditure if it relates directly to employees. Government proposes that the same relief be provided for community-related expenditure agreed to in a community-endorsed social and labour plan. The Department of Mineral Resources will improve monitoring and oversight of such plans.

REDUCING RED TAPE FOR SMALL BUSINESSTo support business development, SARS is working to reduce red tape. It has rolled out small business desks, designed a mobile tool to help small firms register at their own premises, and implemented a single registration process, avoiding the need to reregister for different taxes.

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PART 2 – TAX UPDATE These notes cover tax developments over the last year, including SARS’ documentation and regulations released during 2015 and the 2015 Amendment Acts promulgated on 8 January 2016. The list is not exhaustive. You will recognise edited versions of the Explanatory Memoranda which make up the bulk of these notes.

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DEVELOPMENTS OVER THE LAST YEAR USEFUL GUIDES ISSUED OR REVISED BY SARS DURING 2015

Issue date Subject

9 December 2015 Comprehensive Guide to Capital Gains Tax (Issue 5)

18 November 2015 Guide on the determination of medical tax credits and allowances (Issue 6)

22 October 2015 Guide on the taxation of foreigners working in South Africa

18 September 2015 Guide to the taxation of special trusts

22 August 2015 Guide on income tax and the individual

19 August 2015 Guide on valuation of assets for capital gains tax purposes

5 June 2015 Guide on US Foreign Account Tax Compliance (FATCA)

15 April 2015 The ABC for capital gains tax for individuals (Issue 8)

15 April 2015 The ABC for capital gains tax for companies (Issue 6)

27 March 2015 VAT 413 Guide for estates

27 March 2015 Tax guide for small businesses

31 March 2015 VAT 404 Guide for Vendors

23 February 2015 Comprehensive guide on dividend tax

16 February 2015 Electronic Communications Guide (Rules made under section 255)

INTERPRETATION NOTES ISSUED OR REVISED DURING 2015 AND EARLY 2016Issue date No. Subject

09/04/2015 81 (Issue 2) The supply of goods and services by professional hunters and taxidermists to non-residents

25/03/2015 82 Input tax on motor cars

09/04/2015 83 (Issue 2) Application of sections 20(7) and 21(5)

26/03/2015 84 The value-added tax treatment of bets

27/03/2015 85 The Master Currency case and the zero-rating of supplies made to non-resident

18/08/2015 10 (Issue 2) Skills Development Levy Exemption: Public Benefit Organisations

11/02/2015 11 (Issue 3) Trading stock: Assets not used as Trading Stock

26/06/2015 18 (Issue 3) Rebate or Deduction for Foreign Taxes on Income

30/01/2015 20 (Issue 5) Additional Deduction for Learnership Allowance

22/09/2015 22 (Issue 3) Transfer Duty Exemption: Public Benefit Organisations and Statutory Bodies

09/10/2015 53 (Issue 2) Limitation of Allowances Granted to Lessors of Affected Assets

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Issue date No. Subject

12/08/2015 63 (Issue 2) Rules for the translation of amounts measured in foreign currencies other than exchange differences governed by section 24I and the Eighth Schedule

17/08/2015 64 (Issue 3) Income Tax Exemption: Bodies Corporate, Share Block Companies and Associations of persons managing the collective interests common to all members

DRAFT DOCUMENTS ISSUED DURING 2015 AND EARLY 2016Comment date No. Subject

12 February 2016 Draft Guide on the Taxation of Franchisors and Franchisees

19 February 2016 Public Notice listing incidences of non-compliance in respect of the OECD Standard for Automatic Exchange of Financial Account Information in Tax Matters to be promulgated in Regulations under section 257 of the Tax Administration Act, 2011, that are subject to a fixed amount penalty under Chapter 15 of the Act.

22 February 2016 Draft BGR on the VAT treatment of the supply or importation of vegetable oil

26 February 2016 Draft Tax Guide for Microbusinesses 2015/16

8 April 2016 Draft Interpretation Note No. 9 (Issue 6) on small business corporations

15 April 2016 Draft Interpretation Note on the taxation of foreign dividends

5 February 2016 Draft Notice in terms of section 29 of the Tax Administration Act, 2011

29 January 2016 The draft notice proposes the listing of additional considerations in terms of section 80(2) of the Tax Administration Act, 2011.

4 January 2016 Draft Amendments proposed to the Common Reporting Standards in South Africa in terms of TAA, 2011

31 December 2015 Draft IN on contingent liabilities assumed in the acquisition of a going concern

30 November 2015 Draft IN on year of assessment of a company - accounts accepted to a date other than the last day of a company's financial year

13 November 2015 Draft on Revised Third Party Notice

31 October 2015 Draft IN on reduction of debt

16 October 2015 Draft Guide on ETI

18 September 2015 Draft IN on PBOs - The provision of funds, assets or other resources to associations of persons contemplated in Public Benefit Activity 10(iii)

30 June 2015 Draft Public Notice on Reportable Arrangements

31 May 2015 Draft IN - Headquarter companies

31 May 2015 Draft BGR on the VAT treatment of the supply and importation of fruit and vegetables

30 April 2015 Draft IN on whether certain quarrying operations constitute mining operations

27 February 2015 Draft Guide - section 12O - Draft Guide to the exemption from normal tax of income from films

BINDING PRIVATE RULINGS ISSUED OR REVISED DURING 2015 AND EARLY 2016Note: Binding Private Rulings (BPR) are published in terms of section 87 of the Tax Administration Act. A BPR does not have any binding effect upon the Commissioner unless that ruling applies to a person in accordance with section 83 of the Tax Administration Act. Page 43

In addition, a BPR may not be cited in any proceedings before the Commissioner or the courts other than a proceeding involving the applicant or co-applicant for that ruling. Thus, you cannot rely upon a binding private ruling that has been issued to someone else, even if the facts of your own transaction are similar to those described in the published ruling. These rulings are therefore published for general guidance only.

BPR No. SubjectBPR190 Notional Funding Arrangement: The issue and potential repurchase of ordinary shares

BPR191 Refinancing of debt through preference share funding

BPR192 Cross border interest-free loan and withholding tax on interest

BPR193 Debt reduction by way of set-off

BPR194 Disposal of shares through a share buy-back and a donation

BPR195 Securities transfer tax exemption where election has been made that section 42 will not apply

BPR196 Employees' Tax: Monthly pension benefits in respect of foreign services rendered

BPR197 Exemption from donations tax and net value of an estate

BPR198 Distribution of a debit loan account in anticipation of deregistration of a company

BPR199 Exemption from income tax of dividends received by virtue of restricted equity instruments

BPR200 Source of income of commission payable to non-resident junket agents

BPR201 Issue of capitalisation shares

BPR202 Application of section 13quin subsequent to an intra-group transaction under section 45

BPR203 Renunciation of a usufruct over shares

BPR204 Definition of "disposal" for purposes of asset-for-share and amalgamation transactions; "qualifying distribution" upon conversion to a corporate real estate investment trust (REIT)

BPR205 Meaning of “controlled group company” and “equity share”

BPR206 Disposal by a share block company of its sectional title units to its share block holders

BPR207 Merger of two controlled foreign companies (CFCs)

BPR208 Repayment of shareholder’s loan from proceeds of a new share issue

BPR209 Dividends tax: Distribution of dividends to employees through a discretionary trust

BPR210 Liquidation distribution followed by an amalgamation transaction

BPR211 Transfer of exchange items using corporate rules

BPR212 Tax consequences for the issuer and security company of listed credit linked notes

BPR213 Repayment of intercompany loans from proceeds of a new share issue

BPR214 Third-party backed shares

BPR215 Source and nature of satellite capacity fees

BPR216 Tax consequences of the issuing of additional tier 1 capital instruments by a registered bank

BPR217 Estate duty implications for non-resident individual investors

BPR218 Qualifying distributions to be made by a REIT

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BPR No. SubjectBPR219 Corporatisation of a collective investment scheme in property and an amalgamation followed by an asset-for-share

transaction

BPR220 Contribution by a mining company to a trust pursuant to a share incentive scheme

BPR221 Deductibility of the cost of assets to be acquired to construct roads

BPR222 Foreign partnership – Rebate in respect of foreign taxes on income

BPR223 Headquarter companies: Acquisitions of shares and loans

BINDING CLASS RULINGS ISSUED OR REVISED DURING 2015Note: Binding Class Rulings (BCR) are published in terms of section 87 of the Tax Administration Act. A BCR does not have any binding effect upon the Commissioner unless that ruling applies to a class member in accordance with section 83 of the Tax Administration Act. In addition, a BCR may not be cited in any proceedings before the Commissioner or the courts other than a proceeding involving the applicant or a class member for that ruling. Thus, you cannot rely upon a binding class ruling that has been issued to someone else, even if the facts of your own transaction are similar to those described in the published ruling. These rulings are therefore published for general guidance only.

BCR No. SubjectBCR45 Post-retirement medical aid benefits

BCR46 Dividends distributed by foreign companies

BCR47 Limitation of dividend exemption

BCR48 Deductibility of expenditure incurred by a portfolio of a collective investment scheme in securities

BCR49 Deductibility of insurance premiums in respect of an environmental maintenance programme guarantee

BCR50 Tax consequences for unitholders in a REIT of an amalgamation transaction, followed by an asset-for-share transaction

BCR051 Taxation of employees participating in a perpetuity employee share incentive scheme

BINDING GENERAL RULINGS ISSUED OR REVISED DURING 2015Note: Binding General Rulings (BGR) are published in terms of section 89 of the Tax Administration Act regarding interpretation of a tax Act or the application of a tax Act in respect of a particular set of facts and circumstances or transaction as defined in section 75 of the Tax Administration Act.

BGR No. Subject26 VAT treatment of the supply and importation of herbs

27 Application of sections 20(7) and 21(5)

28 Electronic Services

29 Unbundling Transactions: Meaning of "as at the end of the day after that distribution” (New)

30 Allocation of direct and indirect expenses within and between an insurer's funds

INTEREST RATE CHANGESDate of change Prescribed interest rate

payable to SARSPrescribed interest rate payable

by SARSOfficial interest rate for fringe

benefits purposes01.03.2008 14% 10% 12%

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01.07.2008 15% 11%

01.09.2008 13%

01.03.2009 11.5%

01.05.2009 13.5% 9.5%

01.06.2009 9.5%

01.07.2009 12.5% 8.5% 8.5%

01.08.2009 11.5% 7.5%

01.09.2009 10.5% 6.5% 8%

01.07.2010 9.5% 5.5%

01.10.2010 7%

01.03.2011 8.5% 4.5% 6.5%

01.08.2012 6%

01.02.2014 6.5%

01.05.2014 9% 5%

01.08.2014 6.75%

01.11.2014 9.25% 5.25%

01.08.2015 7%

01.11.2015 9.5% 5.5%

01.12.2015 7.25%

01.02.2016 7.75%

01.03.2016 9.75% 5.75%

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AMENDMENTS TO THE LEGISLATION 2015 AMENDMENT ACTS

The Rates and Monetary Amounts and Amendment of Revenue Laws Act No. 13 of 2015 – 17 November 2015

Taxation Laws Amendment Act No. 25 of 2015 – 8 January 2016

Tax Administration Laws Amendment Act No. 23 of 2015 - 8 January 2016

Most of these amendments are explained in the notes below. In the preparation of these notes extensive use has been made of the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2015 and the Memorandum on the Objects of the Tax Administration Laws Amendment Bill, 2015.

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2016 TABLES, RATES AND THRESHOLDS The following tables and thresholds for the 2016 year of assessment were enacted by the Rates and Monetary Amounts and Amendment of Revenue Laws Act No. 13 of 2015 promulgated on 17 November 2015 and the Taxation Laws Amendment Act No. 25 of 2015 promulgated on 8 January 2016.

TABLES

Individuals and special trustsTaxable income

R Rate of tax


TrustsTaxable income Rate of tax All taxable income 41% of taxable income

Companies (other than those dealt with below)Taxable income Rate of taxAll taxable income 28% of the taxable income

Small business corporationsYears of assessment ending between 1 April 2015 and 31 March 2016

Taxable incomeR

Rate of tax

0 - 73 650 0%73 651 - 365 000 7% of the amount over R73 650

365 001 - 550 000 R20 395 + 21% of the amount over R365 000550 001 R59 245 + 28% of the amount over R550 000

Registered micro businessesYears of assessment ending during the period of 12 months ending on 29 February 2016

Taxable TurnoverR

Rate of tax


Gold mining companiesTaxable income Rate of tax On gold mining taxable income Under a formula

On non-gold mining taxable income 28% of the taxable income

PBO company and trustsTaxable income Rate of taxAll taxable income 28% of the taxable income

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Personal Service CompaniesTaxable income Rate of taxAll taxable income 28% of taxable income

Personal Service Trusts Taxable income Rate of taxAll taxable income 41% of taxable income

Long-term insurance companiesTaxable income Rate of taxTaxable income of individual policyholder fund 30% of taxable income

Taxable income of company policyholder fund 28% of taxable income

Taxable income of corporate fund 28% of taxable income

Non-resident companies Taxable income Rate of tax All taxable income from South African source 28% of taxable income

Retirement lump sum withdrawal benefits Taxable income from benefits Rate of taxNot exceeding R25 000 0% of taxable income

Exceeding R25 000 but not exceeding R660 000 18% of taxable income exceeding R25 000

Exceeding R660 000 but not exceeding R990 000 R114 300 plus 27% of taxable income exceeding R660 000

Exceeding R990 000 R203 400 plus 36% of taxable income exceeding R990 000

Retirement lump-sum and severance benefitsTaxable income from benefits Rate of taxNot exceeding R500 000 0% of taxable income

Exceeding R500 000 but not exceeding R700 000 R0 plus 18% of taxable income exceeding R500 000

Exceeding R700 000 but not exceeding R1 050 000 R36 000 plus 27% of taxable income exceeding R700 000

Exceeding R1 050 000 R130 500 plus 36% of taxable income exceeding R1 050 000

Rebates Description AmountPrimary rebate R13 257

Secondary rebate R7 407

Tertiary rebate R2 466

THRESHOLDS

General savings thresholds Description Reference to Income Tax Act Monetary amount Broad-based employee share schemes Maximum exemption for shares received by an employee under a broad-based employee share plan

Definition of a ‘qualifying equity share’ in section 8B(3) R50 000

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Maximum deduction for shares issued by an employer under a broad-based employee share plan

The proviso to section 11(lA) R10 000

Exemption for interest and certain dividends For persons 65 years or older, exemption for interest from a source within South Africa that is not otherwise exempt

Section 10(1)(i)(i) R34 500

For persons younger than 65 years, exemption for interest from a source within South Africa that is not otherwise exempt

Section 10(1)(i)(ii) R23 800

Annual donations tax exemption Exemption for donations made by entities Section 56(2)(a) and the

proviso to it R10 000

Exemption for donations made by individuals Section 56(2)(b) R100 000

Capital gains exclusions Annual exclusion for individuals and special trusts Paragraph 5(1) of the Eighth

Schedule R30 000

Exclusion on death Paragraph 5(2) of the Eighth Schedule

R300 000

Exclusion for disposal of a primary residence (based on amount of capital gain or loss on disposal)

Paragraph 45(1)(a) of the Eighth Schedule R2 million

Exclusion for disposal of primary residence (based on amount of proceeds on disposal)

Paragraph 45(1)(b) of Eighth Schedule R2 million

Maximum market value of all assets allowed within the definition of a ‘small business’ on disposal when the person is over the age of 55 years

Definition of a ‘small business’ in paragraph 57(1) of Eighth Schedule R10 million

Exclusion amount on disposal of a ‘small business’ when the person is over the age of 55 years

Paragraph 57(3) of Eighth Schedule R1.8 million

Maximum market value of all assets in respect of all businesses on disposal of a ‘small business when the person is over the age of 55 years

Paragraph 57(6) of Eighth Schedule

R10 million

Retirement savings thresholds Description Reference to Income Tax Act Monetary amount

Deductible retirement fund contributions (effective only until 29 February 2016)Pension fund monetary ceiling for contributions Proviso to section 11(k)(i) R1 750

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Pension fund monetary ceiling for arrear contributions Paragraph (aa) of proviso to section 11(k)(ii)

R1 800

Retirement annuity fund monetary ceiling for contributions (if also a member of a pension fund)

Section 11(n)(aa)(B) R3 500

Retirement annuity fund monetary ceiling for contributions (if not a member of a pension fund)

Section 11(n)(aa)(C) R1 750

Retirement annuity fund monetary ceiling for arrear contributions

Section 11(n)(bb) R1 800

Deductible business expenses for individualsDescription Reference to Income Tax Act Monetary amount

Car allowance Ceiling on vehicle cost Section 8(1)(b)(iiiA)(bb)(A) R560 000

Ceiling on debt relating to vehicle cost Section 8(1)(b)(iiiA)(bb)(B) R560 000

Employment-related fringe benefitsDescription Reference to Income Tax Act Monetary

amount Exempt scholarships and bursariesAnnual ceiling for employees Paragraph (ii)(aa) of proviso to section 10(1)(q) R250 000

Annual ceiling for employee relatives Paragraph (ii)(bb)(A) of proviso to section 10(1)(q) R10 000

Annual ceiling for employee relatives Paragraph (ii)(bb)(B) of proviso to section 10(1)(q) R30 000

Medical scheme fees tax credit for medical aid contributionsMonthly tax credit for the person Section 6A(2)(b)(i) R270

Monthly tax credit for the person and one dependent Section 6A(2)(b)(ii) R540

Monthly tax credit for each additional dependent Section 6A(2)(b)(iii) R181

Other employment-related fringe benefits

Awards for bravery and long service Paragraphs (a) and (b) of further proviso to paragraph 5(2) of the Seventh Schedule R5 000

Remuneration proxy for immovable property acquired by an employee from an employer

Paragraphs (a) of further proviso to paragraph 5(3A) of the Seventh Schedule R250 000

Market value for immovable property acquired by an employee from an employer

Paragraphs (b) of further proviso to paragraph 5(3A) of the Seventh Schedule R450 000

Employee accommodation Paragraph 9(3)(a)(ii) of the Seventh Schedule R73 650

Accommodation for expatriate employees Paragraph 9(7B)(ii) of the Seventh Schedule R25 000

Exemption for de minimis employee loans Paragraph 11(4)(a) of the Seventh Schedule R3 000

Additional employer deductions for learnerships

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Monetary ceiling of additional deduction for the employer when using a learnership agreement with an employee

Section 12H(2) R30 000

Monetary ceiling of additional deduction for the employer for an employee completing a learnership agreement

Section 12H(3) and (4) R30 000

Monetary ceiling of additional deduction for the employer involving a learnership agreement with an employee with a disability

Section 12H(5)

R20 000

Depreciation Description Reference to Income Tax

ActMonetary amount

Small-scale intellectual property Paragraph (aa) of proviso to section 11(gC)

R5 000

Urban Development Zone incentive Section 13quat(10A) R5 million

Miscellaneous Description Reference to Income Tax

ActMonetary amount

Low-cost housing Maximum cost of residential unit where that residential unit is an apartment in a building

Paragraph (a) of definition of ‘low-cost residential unit’ in section 1

R350 000

Maximum cost of residential unit where that residential unit is a building

Paragraph (b) of definition of ‘low-cost residential unit’ in section 1

R300 000

Industrial policy projects Maximum additional investment allowance for greenfield projects with preferred status

Section 12I(3)(a) R900 million

Maximum additional investment allowance for other greenfield projects

Section 12I(3)(a) R550 million

Maximum additional investment allowance for brownfield projects with preferred status

Section 12I(3)(b) R550 million

Maximum additional investment allowance for other brownfield projects

Section 12I(3)(b) R350 million

Maximum additional training allowance (per employee)

Section 12I(5)(a) R36 000

Maximum additional training allowance for industrial policy projects with preferred status

Section 12I(5)(b)(i) R30 million

Maximum additional training allowance for other industrial policy projects

Section 12I(5)(b)(ii) R20 million

Minimum cost of manufacturing assets for greenfield projects

Section 12I(7)(a)(i)(aa) R50 million

Amounts to be taken into account in determining whether an industrial project constitutes a brownfield

Section 12I(7)(a)(i)(bb)(A) R30 million

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Description Reference to Income Tax Act

Monetary amount

project Section 12I(7)(a)(i)(bb)(B) R50 million

Venture capital companies After 36 months at least 80% of the expenditure incurred by a venture capital company must be incurred for qualifying shares in a junior mining company assets, with assets of which the book value does not exceed the amount indicated immediately after the issue.

Section 12J(6A)(b)(i)

R500 million

After 36 months, at least 80% of the expenditure incurred by a venture capital company must be incurred for qualifying shares in company, other than a junior mining company, with assets of which the book value does not exceed the amount indicated.

Section 12J(6A)(b)(ii) R50 million

Presumptive turnover tax A person qualifies as a micro business for a year of assessment when the qualifying turnover of that person for that year does not exceed the amount indicated

Paragraph 2(1) of the Sixth Schedule

R1 million

Maximum of total receipts from disposal of immovable property and assets of a capital nature by a micro business

Paragraph 3(e) of the Sixth Schedule R1,5 million

Minimum value of individual assets and liabilities for which a micro business is required to retain records

Paragraphs 14(c) and (d) of the Sixth Schedule R10 000

Public benefit organisations PBO trading income exemption Section 10(1)(cN)(ii)(dd)(ii) Greater of 5% or R200 000

Deduction of donations to transfrontier parks Section 18A(1C)(a)(ii) R1 million

Housing provided by a PBO: maximum monthly income of beneficiary household

Paragraph 3(a) of Part I of the Ninth Schedule and paragraph 5(a) of Part II of the Ninth Schedule

R15 000

Recreational clubs Club trading income exemption Section 10(1)(cO)(iv)(bb) Greater of 5% or R120 000

Prepaid expenses Maximum amount of deferral Paragraph (bb) of the

proviso to section 23H(1) R100 000

Small business corporations Maximum gross income Section 12E(4)(a)(i) R20 million

Housing associations Investment income exemption Section 10(1)(e) R50 000

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Administration Description Reference to Income Tax Act Monetary

amount Investment income exempt from provisional tax

For natural persons – an ‘investment’ taxable income Paragraph 18(1)(c)(ii) of the Fourth Schedule R30 000

Threshold at which the tax court may consist of 3 judges or acting judges of the High Court

Section 118(5)(a) of the Tax Administration Act R50 million

Other TaxesValue-added taxDescription Reference to the Value-Added Tax Act Monetary

amountRegistration– Compulsory for supply of electronic services by a person from a place in an export country to a recipient resident in the Republic from 1 March 2014

Section 23(1A) R50 000

– Compulsory Section 23(1)(a) R1 million

– Voluntary Section 23(3)(b) and (c) R50 000

– Commercial accommodation Paragraph (ix) of the definition of ‘enterprise’ in s 1 R120 000

– Payments basis of vat registration Section 15(2)(b)(i) R2,5 million

– Exception to payments basis: for supplies of goods or services made by a vendor

Section 15(2A)R100 000

Tax invoices– Abridged tax invoice Section 20(5) R5 000

– No tax invoice required Section 20(6) R50

Tax periods– Category C (monthly) submission of VAT 201 return Section 27(3)(a)(i) R30 million

– Category D (6-monthly) submission of VAT 201 return Section 27(4)(a)(iii)(aa) R1,5 million

– Category F (4-monthly) submission of VAT 201 return (Category F was deleted for all tax periods commencing on or after 1 July 2015. Vendors that were registered under this category were moved to a 2 monthly VAT period).

Section 27(4B)(a)(i) R1,5 million

Transfer dutyImpositionValue Rate of taxDoes not exceed R750 000 0%

Exceeding R750 000 but not exceeding R1.25 million 3% of the value above R750 000

Exceeding R1.25 million but not exceeding R1.75 million R15 000 plus 6% of the value above R1.25 million

Exceeding R1.75 million but not exceeding R2.25 million R45 000 plus 8% of the value above R1,75 million

Exceeding R2.25 million R85 000 plus 11% of the value above R 2.25 million

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Estate duty Rates, thresholds and abatementDescription Rate or amountImposition of estate duty 20% of the dutiable

amount of the estate

Reduction of duty payable

Reduced as follows if the second dying dies within 10 years of the first dying:

– 2 years 100%

– 2 to 4 years 80%

– 4 to 6 years 60%

– 6 to 8 years 40%

– 8 to 10 years 20%

Exemption

Abatement R3,5 million

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INDIVIDUALS, EMPLOYMENT AND SAVINGS BURSARY AND SCHOLARSHIP EXEMPTION FOR BASIC EDUCATION: GRADE R TO 12

[Applicable provision: Section 10(1)(q)(bb)]

BackgroundIn 1 March 2013, changes were made in section 10(1)(q) to exempt all bona fide bursaries awarded by an employer to an employee from income, subject to certain limitations. Section 10(1)(q)(ii)(bb) sets different limits on the exemptions on bursaries for NQF 1 to 4 and NQF 5 to 10 qualifications as set out in the National Qualifications Framework Act, 2008, in respect of bursaries or scholarships granted to relatives of employees. The intention of the amendment was to increase the level of the exemption and cover both basic and further education.

Reasons for changeItem A of subparagraph (bb) of paragraph (ii) of section 10(1)(q) makes provision for the exemption of the first R10 000 of a bursary or scholarship granted to the relatives of employees in respect of qualifications to which an NQF level 1 up to and including 4 has been allocated by SAQA under the NQF Act. This implies that the exemption applies to qualifications that begin at NQF level 1. Under the NQF Act, NQF level 1 begins at grade 9. Grades R to 8 do not qualify as receiving an NQF level. Effectively, the 2013 amendments inadvertently excluded grades R to 8, which is most of basic education from qualifying for the bursary or scholarship exemption.

AmendmentIn order to remove the anomaly created by the 2013 amendments, the changes made to section 10(1)(q) is to expand the exemption to include grades R to 8 as intended.

Effective dateThe amendments will be deemed to have come into operation from 1 March 2013 and apply in respect of year of assessment commencing on or after the date.

MEDICAL TAX CREDITS AS PART OF PAYE AND PROVISIONAL TAX: EMPLOYEES OVER 65 YEARS

[Applicable provisions: Section 6B (3) and paragraph 9(6) of the Fourth Schedule]

BackgroundFollowing the Minister’s announcement in the 2011 Budget, the incentive regime for medical aid contributions and other qualifying expenses was changed from a deduction method to a tax credit method. This amendment in the tax system was done in phases. Individuals under the age of 65 were migrated to the tax credit system from the 2012/13 year onwards, while individuals aged 65 years and older were only migrated from the 2014/15 year onwards.

Reasons for changeCurrently, the additional medical expenses tax credit from qualifying medical expenses, and fees that exceed three times the credit for those over the age of 65, are not incorporated in the monthly PAYE and provisional tax calculations but rather are claimable on assessment at the end of the year. Employees over the age of 65 are experiencing a decrease in their take-home pay throughout the year as a result of the move to medical tax credits. Although they may claim back some of these amounts on assessment after the end of the tax year, these individuals experience cash flow difficulties through the year.

AmendmentIn order to alleviate this burden medical tax credits related to medical scheme contributions by those over 65 can be taken into account for both monthly PAYE and Provisional tax computations.

Effective dateEffective 1 March 2016.

CONSISTENT TAX TREATMENT ON ALL RETIREMENT FUNDS[Applicable provision: Section 1 of the definition of ‘pension fund’]

Background Page 56

The Taxation Laws Amendment Act, 2013 included amendments to the taxation of contributions to retirement funds and the requirements to purchase an annuity upon retirement for those retirement funds. Members of provident funds and provident preservation funds who are under the age of 55 on 1 March 2016 would be required to purchase an annuity with two-thirds of the value of their pension at retirement for contributions that were made after 1 March 2016, subject to the de-minimis threshold (however there would be no requirement to purchase an annuity on the amounts, and the growth on those amounts, that were in the provident or provident preservation fund as at 1 March 2016). Members over the age of 55 would not be required to purchase an annuity upon retirement.

Reasons for changeExtensive public consultations were held, including dedicated sessions with labour unions before the promulgation of the 2013 Taxation Laws Amendment Act. The retirement related reforms were initially scheduled to be implemented on 1 March 2015. At the request of some members of the Labour Constituency at NEDLAC during 2014, the retirement related reforms in the 2013 Taxation Laws Amendment Act were postponed by a year to 1 March 2016, to allow for further consultations between Government and NEDLAC. The process for consultation had not been concluded in time for the 2015 Taxation Laws Amendment Bill. As a result, after the 2015 Taxation Laws Amendment Bill was tabled in Parliament on 27 October 2015, the Minister of Finance requested that the Standing Committee of Finance consider amendments to the Bill on the retirement reforms.

AmendmentAfter consideration of the comments received, Government decided to proceed with the broader objective of retirement reforms (as approved in the 2013 Taxation Laws Amendment Act) to ensure more equity across income groups. As a result, the following provisions will be effective from 1 March 2016:

Contributions by both employers and employees to pension, provident and retirement annuity funds will qualify for a tax

deduction, capped at a lesser of: 27.5% of the greater of taxable income or remuneration; or R350 000 per annum.

Contributions by employers to pension, provident and retirement annuity funds on behalf of employees will become a taxable

fringe benefit in the hands of the employee.

The requirement to purchase an annuity will apply to all members, including pension, provident and retirement annuity funds.

This implies that on retirement, members will be required to take one third of their retirement benefit as a lump sum and the two

thirds of their retirement benefit will be paid to them every month as an annuity until they die. (Postponed for a further 2 years)

Vested rights are preserved and those members over 55 years are exempted from the requirement to annuitise.(Postponed for a

further 2 years)

In turn, the de minimis threshold is increased from R75 000 to R247 500. This effectively means that members of pension,

provident and retirement annuity funds who do not have a retirement benefit exceeding R247 500 at retirement will not be

required to annuitise. Only members who have a retirement benefit of R247 500 will be required to annuitise.

In addition to this, the legislation proposes further consultation by the Minister of Finance within two years of the implementation of the retirement reforms. The legislation proposes that the Minister of Finance, after consulting with the relevant stakeholders, review the impact and implementation of the retirement reforms and table the report on the review in Parliament not later than 30 June 2018.

Effective dateEffective 1 March 2016.

CLOSING A LOOPHOLE TO AVOID ESTATE DUTY THROUGH EXCESSIVE CONTRIBUTIONS TO RETIREMENT FUNDS

[Applicable provision: Section 3 of the Estate Duty Act]

BackgroundPrior to 2008 there was a limitation that individuals with a retirement annuity fund would be required to retire (purchase an annuity) before they reached the age of 70, however this was removed in the 2008 Taxation Laws Amendment Act. The intention here was to allow individuals to work beyond the regular retirement age and still contribute to their retirement.

Page 57

In the same year, the Estate Duty Act was amended to exclude lump sum retirement assets from the dutiable portion of the estate upon death (pension annuities were already exempt). The amendment was intended to “alleviate financial difficulties that a family may face upon the death of the family’s income provider” and that the change was “in line with Government’s efforts to promote long-term retirement savings”.

Reasons for changeThese two amendments opened up an opportunity for individuals to use retirement annuity contributions to avoid estate duty. Contributions to retirement annuity funds that did not receive a deduction, since they were above the deductibility limit, could pass to the estate upon death (without being subject to the retirement lump sum tax tables) and could then pass to the beneficiaries of the estate free from estate duty.

Although it would be more difficult to actively plan, the same route for avoidance of estate duty could potentially exist for contributions to provident funds or pension funds that were above the deductibility limits.

AmendmentTo limit the practice of avoiding estate duty through retirement contributions the amendment provides that contributions that were made on or after 1 March 2015 to a retirement fund that did not receive a deduction should be included in the dutiable part of the estate for estate duty purposes.

Contributions that did not receive a deduction which have been included as part of any lump sums payouts to the retirement fund member or that have been used to offset the tax liability for annuity payments to the retirement fund member will not be included in the dutiable value of the estate (to avoid any potential double counting).

Effective dateEffective from 1 January 2016 and apply in respect of the estate of the person who dies on or after that date and apply in respect of contributions made on or after 1 March 2015.

WITHDRAWAL FROM RETIREMENT FUNDS BY NON RESIDENTS[Applicable provision: Paragraph (b)(x)(dd) of the definition of “retirement annuity fund” in section 1]

BackgroundExpatriates who move to South Africa for a fixed term of employment often contribute to a retirement annuity fund to continue saving for retirement in a tax efficient manner. These expatriates may during the term of their fixed employment contract in South Africa, become tax residents in South Africa by application of the physical presence test. Some of the expatriates may stay in South Africa for a short period of time and do not qualify as residents for tax purposes in terms of the physical presence test nor are they regarded as resident by the South African Reserve Bank for exchange control purposes. At the end of the fixed term contract or expiry of the work visa, these expatriates would normally leave South Africa. When these expatriates leave South Africa they intend to withdraw their lump sum contributions from their retirement annuity fund.

Reasons for changeThe current provisions do not allow for expatriates to withdraw a lump sum from their retirement annuity when they cease to be tax resident and leave South Africa or when they leave South Africa at the expiry of the work visa. The definition of “retirement annuity fund” in section 1(b)(x)(dd) provides for a lump sum payment of benefits where the member emigrated from the country and that emigration is recognized by the South African Reserve Bank for the purposes of exchange control.

This definition only caters for South African nationals who emigrate to another country. When expatriates cease to be tax resident and/or leave South Africa after the term of the fixed employment contract, or when they leave South Africa at the expiry of their work visa, they are not regarded as having emigrated by the South African Reserve Bank for the purposes of exchange control. As a result, they are not entitled to receive a lump sum payment from their retirement annuity funds.

AmendmentThe definition of “retirement annuity fund” in section 1(b)(x)(dd) is amended to allow for expatriates to withdraw a lump sum from their retirement annuity fund if one of the two criteria is met:

When the expatriates cease to be tax resident and leave South Africa; or

When the expatriates leave South Africa at the end of their work visa.

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Effective dateEffective from 1 March 2016 and apply in respect of years of assessment commencing on or after that date.

INCOME AND DISPOSALS TO AND FROM A DECEASED ESTATE[Applicable provisions: New section 9HA, sections 22(8)(b), 25, and paragraphs 40, 41 and paragraph 67 of the Eighth Schedule]

BackgroundVarious provisions are contained in the Act that governs the tax treatment of the assets of a natural person upon and subsequent to their death. Section 25 makes provision for any income received or accrued and expenses incurred by the deceased estate for the benefit of ascertained heirs and legatees to be deemed to be income received or accrued or expenses incurred by those heirs and legatees. This approach was adopted in 1961 and was based on the premise that revenue gains and losses would not be triggered for the deceased person upon death, but that such revenue gains and losses could be taxed in the deceased estate or in the hands of an heir or legatee. The result of these provisions is that the deceased estate is treated as a conduit in respect of the income received by it if it has been derived for the immediate or future benefit of an ascertained heir or legatee.

Under this approach, the heir or legatee’s tax consequences are determined with reference to the income received by and accrued to the deceased estate, which can be netted against the related deductible expenses or allowances that would otherwise have been allowed in determining the taxable income of the deceased estate.

Upon the introduction of capital gains tax, a new approach was adopted in 2001. In this regard, paragraph 40 of the Eighth Schedule treats a deceased person as having disposed of all his or her assets (barring some assets such as those bequeathed to a surviving spouse) for a consideration equal to the market value of those assets on the date of death. All capital gains and losses are therefore recognised in the deceased hands. The deceased estate is treated as having acquired those assets at that market value and is subsequently subject to tax as a separate entity in respect of gains and losses from any disposals of assets it may thereafter undertake to persons other than the heirs or legatees of the deceased person.

Reasons for changeThere is a mismatch between the application of the provisions dealing with capital gains tax and section 25 of the Act which results in anomalies and interpretational difficulties. The presence of the earlier provisions in section 25, in effect, allows for an heir or legatee to claim a deduction in respect of expenses not incurred by him or her. This goes against the fundamental principle underlying the Act, which requires a person to have actually borne the expense in order to be able to claim a deduction in respect of that expense. Secondly, section 25 may in some instances be negatively affected by the upfront taxation of accrued income that often does not coincide with the pay-out of monies from the deceased estate.

AmendmentThe amendments seek to align all the rules applying in respect of deceased person and deceased estates with the approach adopted in 2001. This is achieved by moving the relevant rules to the main body of the Act. As such, a new exit charge upon death and a revised version of section 25 will now give effect to the rules currently contained in paragraphs 40 and 41 of the Eighth Schedule and will subject to tax all the gains and losses of the deceased person. In addition, roll over rules is provided for in respect of assets inherited by a deceased person’s spouse that are currently embedded in paragraph 67 of the Eighth Schedule.

In principle, gains and losses of whatever nature will, in terms of the unified rules, be triggered on a person’s death with the current exceptions being preserved. Subsequently, income received by or accrued to the deceased estate will be taxed in the hands of the deceased estate and roll-over relief will be provided in respect of transfers from the deceased estate to any heir or legatee. As a rule, the legislation will allow for the deceased estate to be treated as a “natural person” (as defined in section 1 of the Act) for tax purposes. Some of the exemptions applicable to a natural person, excluding rebates contemplated in section 6, section 6A and section 6B, will apply to the deceased estate.

Effective dateEffective from 1 March 2016 and apply in respect of a person who dies on or after that date.

SHARE INCENTIVE TRUSTS, TIME OF DISPOSAL RULES AND ATTRIBUTION OF GAINS TO TRUST BENEFICIARY RULES

[Applicable provisions: Paragraph 11(2)(j), new paragraph 13 (1)(a)(iiB), new paragraph 64C, paragraph 80(1) and new paragraph 80(2A) of the Eighth schedule ]

Background Page 59

Over the years, a number of changes have been made in the Income Tax Act to accommodate the employee share incentive trusts. These share incentive trusts function as a warehousing vehicle in terms of which the trust acquires shares and hold these shares within the trust for future distribution to qualifying employee beneficiaries.

Reasons for changeThere is an anomaly in the interaction between taxation of share incentive trusts in section 8C and time of disposal as well as attribution of capital gains to beneficiaries in the 8th Schedule. Paragraph 11(2)(j) of the Eighth Schedule has been misinterpreted to mean that there is no disposal event at all by a trust in respect of an equity instrument.

AmendmentThe amendment seeks to address the anomaly that the disposal of an equity instrument by the trust to the qualifying beneficiary constitutes a non-event for capital gains tax purposes in terms of paragraph 11(2)(j) of the 8th Schedule. The clarification sought by the amendment is to defer the recognition of the capital gain in the trust when an employee share trust disposes of shares to an employee until the equity instrument is unrestricted and vests for purposes of section 8C. In particular, five amendments were made in this regard.

The first amendment is the deletion of paragraph 11(2)(j) of the 8th Schedule. The reason for the deletion of this paragraph is to

correct the misinterpretation that there is no disposal event at all by a trust.

The second amendment is the insertion of new paragraph 13 (1)(a)(iiB) of the 8th Schedule which deals with the time of

disposal of an equity instrument by the trust to the qualifying employee beneficiary. The intention of this provision is to ensure

that the granting of the restricted instrument by a trust to a qualifying employee beneficiary constitutes a time of disposal event.

The capital gains tax implications are deferred and/or postponed until such time the equity instrument is free from restrictions

and vests in the hands of a qualifying employee beneficiary for the purposes of section 8C.

The third amendment deals with the insertion of the new paragraph 64C of the 8th Schedule, which makes provision to disregard

any capital gain or capital loss determined in respect of disposal of the restricted instrument by a taxpayer to a connected person

as contemplated in subsection (4)(a), (5)(a) or (5)(c) of section 8C.

The fourth amendment changes paragraph 80(1) of the 8th Schedule to clarify that any gain as a result of this transaction will

remain taxable in the trust and will not be attributed to the qualifying employee beneficiary. However, where a qualifying

employee beneficiary becomes entitled to a cash amount instead of shares, the qualifying employee beneficiary will have a

section 8C gain (on the basis that the beneficial interest in the trust is a section 8C equity instrument). Where the trust then

dispose of shares and vests the profit in the hands of the employee, the capital gain will be attributed to the employee in terms of

paragraph 80(2).

The last amendment is the insertion of the new paragraph 80(2A) of the 8th Schedule which clarifies that where the trust

disposes of shares and vests the profit in the hands of qualifying employee beneficiary, then the provisions of paragraph 80(2)

will not apply if such amount is to be taken into account in the hands of qualifying employee beneficiary for the purposes of

section 8C.

Effective dateThe amendments will come into operation on 1 March 2016 and apply in respect of years of assessment commencing on or after that date.

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CORPORATE DEBT-FINANCED ACQUISITIONS OF CONTROLLING SHARE INTERESTS

[Applicable provision: Section 24O]

BackgroundDebt is often used to fund business acquisitions, which can be achieved by either purchasing the business assets of a target company or by purchasing the shares in that target company. The interest expense incurred by a purchaser when using debt to finance the acquisition of a business can only be deducted from income to the extent that such interest expense is incurred in the production of income.

As a defined term, “income” encompasses those amounts that are received by or are accrued to a person and are not exempt from tax. As such, interest incurred in respect of debt used to fund share acquisitions (as opposed to income producing assets) will not be deductible as the shares produce exempt dividend income. To overcome this preclusion from getting an interest deduction on debt financed share acquisitions, taxpayers often entered into multiple step transactions in order to obtain interest deductions by using debt-push-down structures.

Following the suspension of debt-deferred intra-group transactions in 2012, it was determined by Government that these debt-push-down structures were not a threat to the fiscus. It was concluded that the real danger to the fiscus was the use of excessive debt to fund debt-push-down structures. Further, the fact that interest associated with direct share acquisitions is not deductible while interest associated with indirect debt-financing through the use of tax-deferred debt-push-down structures is deductible created a contradiction in the law. As a result, a special deduction was introduced in 2012 to accommodate these debt-push-down structures. This special deduction provides for an interest deduction in respect of debt used to acquire controlling share interests in operating companies.

Reasons for changeThe introduction of the special interest deduction in respect of debt-financed acquisitions of controlling share interests was aimed at removing the need to implement multiple step debt-push-down structures. These debt-push-down transactions involved:

The acquisition by an acquiring company of all of the shares of a target company using a temporary loan.

Followed by the acquiring company (or a newly established subsidiary of the acquiring company) entering into a tax-deferred

acquisition of the business assets of the target company via a tax-deferred section 45 intra-group transaction. Under this step,

the business assets of the target company were acquired using long-term debt-financing.

Finally, some of the long-term debt proceeds were then used by the acquiring company (or distributed by the newly established

company to the acquiring company) to repay the bridging loan.

As a result, the interest on the long-term debt that was used to acquire the business assets of the target company became deductible.

Currently, the special interest deduction is available when a company acquires the shares in an operating company and at the end of the day of that acquisition the company becomes a controlling group company (i.e. holds more than 70 per cent of the shares) in relation to that operating company. The special deduction may be claimed by the acquiring company only for the period that is remains a controlling group company in relation to the operating company. A company can be an operating company in one of two ways. These are: (1) a company that carries on business continuously, and in the course or furtherance of that business provides goods or services for consideration and (2) a company that is a controlling group company in relation to such a company.

The requirements to qualify for the special interest deduction, seek to mimic the conditions present in a tax-deferred debt-push-down structure. Specifically, it has always been intended that the special deduction should only be available to share acquisitions that would have otherwise qualified for an interest deduction had they been structured by way of a tax-deferred debt-push-down structure. These include:

The requirement that the target company should be a continuously productive company that generates income through its

income producing assets; and

Page 61

The share acquisition should result in the acquirer becoming a controlling group company in relation to the target company, and

such shareholding should remain in place for a foreseeable future as is the case when entering into a tax-deferred section 45

transaction.

However, it has been noted that the policy intention to accommodate these tax-deferred debt-push-down structures is not clearly expressed in the text of the current legislative provisions, which may lead to the abuse of the special deduction. Of great concern is the potential of allowing a full interest deduction on the acquisition of a controlling group company in relation an income producing company that derives a large portion of its value from the non-income producing fellow subsidiaries of an income producing company. In addition, the indirect acquisition of an operating company through its controlling group company can be abused to obtain an interest deduction on the shares acquisition of a minority stake in an operating company.

Debt-drop-down acquisitions in companies that do not generate income and the acquisition of minority shareholdings in income producing operations would not have qualified for the tax-deferred debt-push-down structures that the special interest deduction is intended for. This is because an interest deduction can only be claimed in respect of debt used to acquire income producing assets and section 45 only provides for a tax deferral in instances where the acquirer becomes a controlling group company in relation to the target company at the end of the day of the intra-group transaction.

AmendmentTo align the current special interest deduction in respect of debt used to acquire controlling share interests to the underlying policy objectives the following amendments were made:

Amendment to the definition of an operating company. An operating company should, in providing goods and services, generate

amounts that constitute income in its hands in order to counter schemes where a full interest deduction is claimed for minimal

income producing operations. An operating company’s receipts and accruals in a year of assessment will now be required to

consist of at least 80 per cent income generated from carrying on business continuously through the sale of goods or the

rendering of services. In addition, a controlling group company in relation to an operating company will no longer be

automatically considered as an operating company.

Amendment of the definition of an acquisition transaction. An acquisition transaction for purposes of the special interest

deduction will now encompass the acquisition of an equity share by a company in:

○ An operating company, which thereafter becomes a controlling group company in relation to that operating

company and they form part of the same group of companies as defined in section 41(1); or

○ A controlling group company in relation to an operating company that forms part of the same group of companies

as defined in section 41(1) as that operating company. Similarly, it will also be required that the acquiring

company should as a result of the acquisition transaction, become a controlling group company in relation to that

controlling group company and form part of the same group of companies as defined in section 41(1).

Share interests qualifying for a special interest deduction: In order to limit the special interest deduction to share acquisitions in

income generating operating companies, it is proposed that share interests that qualify for the special interest deduction should

be determined with reference to the effective shareholding of the acquired company in an operating company. In this regard,

share interests that qualify for the special interest deduction will be determined as follows:

○ In the instance of a direct acquisition of equity shares in an operating company, the qualifying share interest will

be those acquired equity shares in that operating company. As such, interest on debt used to fund the direct

acquisition of equity shares in an operating company will be deductible subject to the provisions of section 23N.

○ In the instance of an indirect acquisition of equity shares in an operating company (i.e. the acquisition of the

equity shares in a controlling group company in relation to an operating company), the qualifying interest will be

determined with reference to the value of such equity shares that is derived from the underlying operating

companies with which the controlling group company acquired forms part of the same group of companies as

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defined in section 41(1). In such an instance the interest on only the portion of debt used to fund such a

qualifying share interest will be deductible subject to the provisions of section 23N.

However, as a way to accommodate bona fide and non-erosive indirect acquisitions of largely productive operations, where at least 90 per cent of the value of the equity shares of a holding company that is being acquired is derived from an equity share held by that company in an operating company, 100 per cent of the interest expense will be allowed on debt use to acquire the equity share of such a company.

Redetermination of share interests qualifying for a special interest deduction: Where future reorganisations of any of the

operations that were taken into account in determining the share interests qualifying for a special interest deduction are

undertaken, a redetermination of the share interest qualifying should be done. Only the interest on the portion of debt used to

fund the redetermined qualifying share interest will be deductible as if the acquisition transaction was entered into on the date of

that reorganisation event. In this respect, it is proposed that a redetermination of the qualifying share interest for purposes of the

special interest deduction should be redetermined when:

○ A controlling group company ceases to be a controlling group company in relation to any operating company;

○ An operating company ceases to be an operating company; or

○ Any company ceases to form part of the group of companies as defined in section 41(1) in relation to an

operating company or a controlled group company in relation to an operating company.

Consequential amendments to interest limitation provisions: In order to align the amendments under which an acquisition

transaction may be entered into with the interest limitation provisions that limit the interest deductions arising in respect of

reorganisation and acquisition transactions, amendments in those provisions will be made.

Effective dateThe amendments will come into operation on 1 January 2016 and apply in respect of years of assessment ending on or after that date.

RETURN OF CAPITAL AFTER A TAXPAYER HAS HELD A SHARE FOR THREE YEARS[Applicable provisions: Section 9C(1) of the definition of “qualifying share” and section 9C(2)]

BackgroundPrior to the introduction of section 9C, the gains realised on the sale of equity shares were either taxed as ordinary income or capital gains depending on the facts and circumstances. However, the facts and circumstances test proved problematic and in order to provide a more equitable treatment section 9C was introduced in 2007.

Reasons for changeSection 9C provides that any amount, other than a dividend, received or accrued in respect of a qualifying share will be deemed to be of a capital nature. This provided taxpayers with the certainty that if they hold equity shares for a period of at least three continuous years, the gains and losses on disposal will be of a capital nature regardless of intention.

Disposal: The current policy intent currently requires an equity share to be disposed, including a deemed disposal under paragraph 12 of the Eighth Schedule, before the section can be applied. The section is silent as to what a disposal is or its meaning, leading to possible misinterpretation. It is also argued that the current paragraph 12 reference with regard to a deemed disposal is misplaced since the insertion of section 9H.

Return of capital: It has been submitted to National Treasury that the current legislation does not address the issue of a return of capital, other than cash, received on qualifying shares. The term ‘return of capital’ is not a new concept to the Act e.g. a return of capital by a company by way of a distribution will result in a reduction of base cost of the equity shares held by the shareholder to the extent that the return of capital made by the company is greater than the base cost of the equity shares. On a basic application of the Act, any return of capital, other than cash, on equity shares held by a taxpayer would be subject to facts and circumstances test e.g. any return of capital, other than cash, would be revenue in nature in the hands of a share dealer. However, through the application of section 9C on the underlying equity shares the facts and circumstances test becomes blurred.

Expenses: If a share trader incurs any debt to purchase equity shares with a term longer than three years, the share trader would benefit from an interest deduction even after the equity share is deemed to be capital in nature. This provides the taxpayer with the unintended

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benefit of an allowable expenditure on an equity share that is of a capital nature which is contrary to current tax practice in the Act. The legislation does allow for a recoupment of all expenses upon disposal of the qualifying share but due to the possible timeframe before a qualifying share is disposed it is proposed that the legislation be tightened to close the unintended anomaly against prevailing tax policy.

AmendmentMeaning of the term disposal for purposes of section 9C: The meaning of the term “disposal” in respect of an equity share that has been held for a period of at least three years should be clarified to mean disposal as defined in paragraph 1 of the Eighth Schedule as well as a disposal as contemplated in section 9H.

Removal of the definition of “qualifying share”: To ensure clarity, the definition of “qualifying share” will be removed and relevant consequential amendments will be made in section 9C to more clearly reflect the policy intent that (a) any amount received or accrued (including a return of capital) and (b) that any expenses incurred in respect of an equity share that has been held for a period of at least three years will be deemed to be of a capital nature.

Return of capital or expenses incurred in respect of an equity share: A return of capital on equity shares held for a period of at least three years will be treated as a capital receipt. Any expenditure that is incurred in respect of an equity share that has been held for a period of at least three years will be deemed be of a capital nature and will not be deductible. It is important to note that the tax deductible expenditure incurred in relation to the equity share prior to being held for a period of at least three years will still be subject to recoupment upon disposal.

Effective dateThe amendments come into operation on 1 January 2016 and apply in respect of years of assessment commencing on or after that date.

CANCELLATION OF CONTRACTS[Applicable provisions: Paragraphs 3, 4, 11, 20 and 35 of the Eighth Schedule]

BackgroundThe cancellation of any contract is regarded as a disposal for capital gains tax purposes as contemplated in the Eighth Schedule.

The tax treatment of such cancellation will be determined by a facts and circumstances test to draw a distinction between whether the contract was cancelled in the same year of assessment in which the contract was entered into or if that contract was cancelled in the subsequent year of assessment in which the contract was entered into.

The Eighth Schedule further makes the distinction between the taxpayers involved in the contract and the two distinctive separate tax events – the original owner that initially disposes of an asset to another person and the new owner that obtains the asset from the original owner, but that is deemed to dispose of the asset back to the original owner upon the cancellation of the contract.

Same year cancellation: When a contract is entered into and cancelled in the same year, the Eighth Schedule contains distinct adjustment rules with the intention too effectively from a taxation point of view, put the taxpayers in a zero tax position as if they never entered into the transaction.

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Subsequent year cancellation: However, from a tax event perspective if the cancellation of a contract occurs in a subsequent year to when it was entered into, in summary, based on the application of current legislation, the original owner will have a deemed capital loss equal to the proceeds received in the year of disposal while the base cost in the year of the original disposal is treated as capital gain in the year of cancellation. The intended policy effect was to reverse the previous year’s capital gain on the asset as an aggregate capital loss in the year of cancellation.

Reason for changeAt issue is the anomaly relating to the base cost of the asset in the hands of the original owner that arises when a contract is cancelled in either the current or subsequent year of assessment which can be subject to abuse. This is especially prevalent between connected persons

Same year cancellation: The current adjustment rules as contemplated in the Eighth Schedule is flawed in that it allows a reduction of the proceeds in the hands of the original owner to the value of the amount that has been repaid or has become repayable to the person to whom the asset was sold. This has a netting effect on the amount of proceeds effectively reducing it to nil. However, the base cost of the asset in the hands of the original owner is unaffected resulting in a possible capital loss in the hands of the original owner. The disposal of the asset in the hands of the new owner as a result of the subsequent cancellation of the contract is also subject to the current adjustment rules that would give rise to the same tax effect as the normal disposal rules as contemplated in the Eighth Schedule had they been applied. In lieu of anomalies faced by the original owner it is clear that current adjustment rules need to be amended and streamlined to allow for greater simplification and effectiveness of the legislation.

Subsequent year cancellation: The normal application of the provisions of the Eighth Schedule relating to the disposal (and acquisition) will apply to both parties of the transaction on a cancellation in a subsequent year. The original owner, specifically reacquiring the asset either at the actual amount incurred to obtain or in this case reacquire the asset (the amount refunded) or at the value of the asset exchanged for the re-acquisition of the original asset (market value of the debt asset cancelled). This could give the original owner the unintended benefit of a step-up in base cost purely through the working of the legislation without actually having paid or given up any economic benefit/value in the chain of ownership change as the previous year’s gain is netted off through a capital loss in the original owner’s hands during the year of cancellation. The provisions of the Eighth Schedule that further provides for the capital loss equal to the capital gain in the year of cancellation could also result in decreased capital.

AmendmentSame year cancellation: To amend the anomaly of a capital loss on the disposal and subsequent cancellation of a contract in the hands of the original owner in the same year of assessment the amendment provides that a disposal and subsequent cancellation of a contract in the hands of the original owner be specifically excluded from a disposal as contemplated in the Eighth Schedule. This will have the effect that no capital gain/loss calculation will be required and that the base cost in the hands of the original owner will be the exact same amount as it was prior to entering into the contract.

Subsequent year cancellation: If a contract is cancelled in a subsequent year of assessment to which it was entered into, the amendment provides that certain amendments are made to the Eighth Schedule to ensure a more equitable outcome of the cancellation of the contract within the tax frame.

Base cost: Insertion of a new paragraph that effectively limits the base cost of the asset reacquired in the hands of the original owner to an amount equal to the base cost of that asset prior to entering into the relevant contract on the disposal of the asset that has subsequently been cancelled. To reflect actual economic value / expenses incurred post entering into the contract, the base cost of the asset reacquired will take into account any subsequent expenditure incurred by the new owner as allowed under paragraph 20 of the Eighth Schedule.

Effective dateThe amendments come into operation on 1 January 2016 and apply in respect of disposals made during any year of assessment commencing on or after that date.

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INCOME TAX: BUSINESSES (FINANCIAL INSTITUTIONS AND PRODUCTS)

For a complete summary of these amendments please refer to the explanatory memorandum on the Taxation Laws Amendment Bill, 2015 that was issued on 4 December 2015.

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INCOME TAX: INTERNATIONAL

RELAXING CAPITAL GAINS TAX RULES APPLICABLE TO CROSS ISSUE OF SHARES [Applicable provisions: Paragraphs 11(2)(b) of the Eighth Schedule]

BackgroundPrior to 2013

Prior to 2013, the issue of shares by a company was not considered to be a disposal for capital gains tax purposes. It was envisaged that this would be tax neutral to encourage company formations and would increase foreign investment in and capitalisation of South African resident companies.

However, it came to Government’s attention that certain types of investments by non-residents could have resulted in the tax-free exit of resident companies. Ultimately, the transactions of concern initially involved a strategy to gain foreign control of a resident company through the tax-free issue of shares by the resident company to a non-resident in exchange for shares in a non-resident company.

Secondary to this step, the resident company would be stripped of its foreign operations free of tax by relying on the participation exemption (under paragraph 64B of the Eighth Schedule) on the disposal by a resident of its shares in its foreign operations (including shares acquired through the preceding tax-free cross-issue of shares). Added to this, the dividends participation exemption (under section 10B(2)(a)) would exempt any foreign dividends being channeled through the resident company in the intervening period from income tax.

Finally, the tax residence of the resident company would in some instances be shifted offshore through a shift in the place of effective management which, in any case, resulting in a much lower exit charge arising at this stage given the preceding asset realisation and low level of unrealised gains in the assets at the time of ceasing to be a South African tax resident.

2013 AmendmentsIn an attempt to counter the abovementioned concerns, in 2013 paragraph 11(2)(b) of the Eighth Schedule was amended. As a result, the issue of shares by a resident company is currently not exempt from capital gains tax where shares are issued to any person in exchange, directly or indirectly, for shares in a foreign company. The introduction of this exception was aimed at dealing with the initial step of these transactions that involved the issue of shares in exchange for shares in a foreign company.

Reasons for changeAs stated previously, the introduction of the exception under paragraph 11(2)(b) of the Eighth Schedule was aimed at preventing the potential tax free corporate migrations that took advantage of the tax free transfer of the control of a resident company and the participation exemptions. However, it has come to the attention of Government that the 2013 amendments to paragraph 11(2)(b) of the Eighth Schedule are too broad and impact on transactions that broaden the South African economy and by implication the tax base through the acquisition of foreign entities in exchange for the issue of shares and undermines the expansion of South African multinationals.

As the current wording of paragraph 11(2)(b) of the Eighth Schedule refers to the direct or indirect acquisition of shares in a foreign company, the application of the provisions of paragraph 11(2)(b) of the Eighth Schedule has unintended consequences on the asset for share transactions covered by section 42. This may result in the company issuing the shares (transferee company) under a section 42 asset-for-share transaction not being able to benefit from the intended capital gains tax relief envisaged under the roll-over provisions.

Finally, it has been identified that the current ambit of the participation exemption in respect of the disposal of shares in a non-resident company by residents is open to abuse. In the 2003 Budget Review, the then Minister of Finance announced the intention to allow the tax free repatriation of foreign dividends back to South Africa. This type of dividend exemption (which is known as the participation exemption) often exists alongside the tax free sale of foreign shares as profits from the sale of shares merely represent retained dividends. It was in this context and for this intention that the participation exemption in respect of the disposal of shares in a non- resident company was introduced.

Whilst it was intended that the disposal of foreign shares should not be subject to tax in order to allow for the envisaged tax free repatriation of capital, it is of concern that non-resident connected persons in relation to South African foreign controlled companies use this exemption to strip resident companies of their holdings in foreign operations and may oftentimes keep the resident company tax Page 67

resident in South Africa while embarking on this base erosion strategy.

AmendmentIn order to reverse the unintended consequences of the 2013 amendments to paragraph 11(2)(b) of the Eighth Schedule, without losing sight of the initial policy intent to counter untaxed corporate migrations out of South Africa, the following were amended:

Reversal of the 2013 amendment: The 2013 amendments to paragraph 11(2)(b) of the Eighth Schedule be reversed. The issue of shares by a South African resident company as consideration for the acquisition of shares in a foreign company will no longer be subject to capital gains tax. For purposes of reversing the unintended consequences of the 2013 amendment, this amendment should be reversed retrospectively from the date of its introduction, i.e. in respect of shares issued on or after 1 April 2014.

Effective dateAmendment applies retrospectively in respect of shares issued on or after 1 April 2014.

INTRODUCING COUNTER MEASURES FOR TAX-FREE CORPORATE MIGRATIONS[Applicable provisions: Section 9H and 64B(1)(b) of the Eighth Schedule]

The old participation exemption in respect of the disposal of shares in a non-resident company by residents was open to abuse. It was of concern that non-resident connected persons in relation to South African foreign controlled companies used this exemption to strip resident companies of their holdings in foreign operations.

A two-pronged approach has been adopted to counter the identified base erosion strategies that use the participation exemption to strip resident companies of unrealised gains in shareholdings in foreign operations. This approach will include:

The denial of participation exemption on disposals to connected persons. As a mechanism to counter tax-free disposals of the

foreign operations of resident companies to their non-resident connected persons, the disposals of foreign shares by South

African residents to connected persons should not benefit from the participation exemption. As a result, any disposal of shares

in a foreign company by a resident to a connected person will be subject to capital gains tax.

The claw-back of participation exemption benefits on a change of tax residence.

○ Claw-back of capital gains benefits:

― Upon a change of tax residence as envisaged in section 9H, any capital gains benefits enjoyed by a

South African resident during the three-year period before ceasing to be a South African tax resident will

be subjected to tax.

― Capital gains disregarded in terms of paragraph 64B of the Eighth Schedule that were determined in

respect of disposals by a resident of its shares in foreign companies during the abovementioned three-

year period will be clawed back. In this regard, the aggregate of such disregarded capital gains will not

be allowed to be taken into account in determining the net capital gain or assessed capital loss of the

resident, but will be included in the taxable income of the resident at the companies’ inclusion rate.

○ Claw-back of participation exemption on foreign dividends:

― The participation exemption on foreign dividends enjoyed by a South African resident during the three-

year period before ceasing to be a South African tax resident will be subjected to tax upon exit.

― Foreign dividends that were exempt in terms of only section 10B(2)(a) during the abovementioned three-

year period will be subject to tax. Such foreign dividends will be subject to tax, as is the current policy on

foreign dividends, at an effective tax rate of 15 per cent.

Effective dateEffective 5 June 2015.

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WITHDRAWAL OF SPECIAL FOREIGN TAX CREDIT FOR SERVICES SOURCED IN SOUTH AFRICA

[Applicable provision: Sections 6quin and 6quat(1C) and (1D)]

BackgroundIn 2011, a special foreign tax credit for service fees was introduced. This foreign tax credit applies to foreign withholding taxes imposed in respect of service fees from a South African source (i.e. services rendered in South Africa by a South African resident to a foreign resident). This special tax credit applies on an income-by-income basis.

The introduction of this special tax credit was intended to operate as some form of a relief from double or potential double taxation on cross-border services for South African multinational companies that render services to their foreign subsidiaries. The concern was that revenue officials in some treaty partner countries that have withholding tax on fees in their domestic law ignored tax treaty provisions when funds were paid by their residents to South African resident companies in respect of services rendered to their residents. Although these countries, in terms of their tax treaties with South Africa, do not have the right to tax service fees, they still imposed withholding tax on services (i.e. management, consultancy and technical fees) rendered by South African residents to their residents.

Reasons for changeThe special tax credit regime is a departure from international tax rules and tax treaty principles in that it indirectly subsidies countries that do not comply with the tax treaties. South Africa is the only country in the world that provides for this kind of tax concession. Effectively, it encourages treaty partners not to abide by the terms of the tax treaty in respect of the taxation of fees and thus give them taxing rights over income that is not sourced in those countries. Consequently, it defeats the whole purpose of the tax treaty.

While the enactment of this relief was well intended, it has resulted in a significant compliance burden on the South African Revenue Service. Some taxpayers are also exploiting this relief by claiming it even for other income such as royalties and interest that are not intended to be covered by this special tax credit.

Further, the Davis Tax Committee Interim Report on Action 6: “Preventing Treaty Abuse” in its discussion of section 6quin “Base erosion resulting from South Africa giving away its tax base” states that “South Africa has effectively eroded its own tax base as it is obliged to give credit for taxes levied in the paying country.

AmendmentThe amendment provides for the withdrawal of the special tax credit for service fees. All tax treaty disputes should be resolved by competent authorities of the respective countries through mutual agreement procedure available in the tax treaties as a mechanism to resolve disputes. As a concession, in order to mitigate double tax faced by South African taxpayers in doing business with the rest of Africa, amendments were made to the current provisions of section 6quat(1C) and (1D) to allow for a deduction in respect of foreign taxes which are paid or proved to be payable without taking into account the option of the mutual agreement procedure under tax treaties.

Effective dateEffective 1 January 2016.

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REINSTATEMENT OF THE CONTROLLED FOREIGN COMPANY DIVERSIONARY INCOME RULES

[Applicable provision: Section 9D]

BackgroundDiversionary income rules prior to 2011Prior to 2011, controlled foreign company (“CFC”) provisions contained three sets of diversionary income rules.

The first set of diversionary rules were known as CFC inbound sales. These rules applied to the sale of goods by the CFC to any connected South African resident. An exemption exists if:

The CFC purchased those goods from an unconnected person in the same country of residence of the CFC; or

The CFC is engaged in the creation, extraction, production, assembly, repair or improvement of goods that involves more than

minor assembly or adjustment, packaging, repackaging and labelling; or

The CFC sells a significant quantity of goods of the same or similar nature to unconnected persons at comparable prices, after

taking into account whether the sales are wholesale or retail, volume discounts and other geographical differences such as

location costs of delivery or the same; or

Similar goods are purchased by the CFC mainly within the country in which the CFC is resident from unconnected persons in

relation to that CFC.

The second set of diversionary rules was known as CFC outbound sales. These rules applied to the sale of goods by the CFC

to a foreign resident or to unconnected South African residents where those goods were initially purchased from connected

South African residents. An exemption exists if:

Those goods purchased by the CFC from a connected South African resident amounts to an insignificant portion of the total

goods; or

The CFC is engaged in the creation, extraction, production, assembly, repair or improvement of goods that involves more than

minor assembly or adjustment, packaging, repacking, and labelling; or

The products are sold by the CFC to unconnected persons for physical delivery to customers’ premises situated in the country in

which the CFC is resident; or

The same or similar products are sold by the CFC mainly to unconnected persons for physical delivery to customers’ premises in

the country in which the CFC is resident.

The third set of diversionary rules was known as CFC connected services rules. These rules applied when the CFC performs services to a connected South African resident. An exemption exists if the services are performed outside South Africa and:

Such services relate directly to the creation, extraction, production, assembly, repair or improvement of goods and the goods

are used outside South Africa; or

Such services relate directly to the sale or marketing of goods of South African connected persons and those goods

are sold to persons who are not connected persons in relation to that CFC for physical delivery to a customer’s premises

situated in the country in which the CFC is resident; or

Such services are rendered mainly in the country of residence of the CFC for the benefit of customers that have premises

situated in that country; or

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No deduction is allowed of any amount paid by that connected person to that CFC in respect of the services.

Diversionary income rules after 2011

In 2011, changes were made to the diversionary income rules. The diversionary rules in respect of the CFC outbound sale of goods were completely abolished. The rationale for removing these rules was that the transfer pricing rules could be applied as an alternative.

In addition, the 2011 amendments narrowed the diversionary rules in respect of the CFC inbound sale of goods. The exemption in respect of income from the CFC inbound sale of goods only applies if:

The CFC is located in a high tax jurisdiction; or

The income from the sale of goods is attributable to the activities of a permanent establishment of the CFC.

However, diversionary rules in respect of CFC connected services rules were retained.

Reasons for changeWhile transfer pricing rules can be applied to prevent the shifting of income offshore through the sale of goods and services, the CFC diversionary rules are more expedient in preventing shifting of profits offshore through these transactions. The removal of diversionary rules in respect of the CFC outbound sale of goods CFC resulted in the CFC rules being less effective in immediately addressing profit shifting by South African resident companies. Transfer pricing auditing processes by their nature often take long to be finalised and therefore relying on transfer pricing solely leaves the South African tax base vulnerable to base erosion practices.

In addition, the narrowing of the diversionary rules in respect of the CFC inbound sale of goods limited the scope of effective application of these rules.

AmendmentThe diversionary rules in respect of the CFC outbound sale of goods that were removed by the 2011 Taxation Laws Amendment Act is reinstated to its pre 2011 form.

The old diversionary rules in respect of the CFC inbound sale of goods that were changed by the 2011 Taxation Laws Amendment Act is reinstated to its pre 2011 form.

Effective dateEffective from 1 January 2016 and applies in respect of foreign tax years of controlled foreign companies ending during years of assessment commencing on or after that date.

DEFINITION OF IMMOVABLE PROPERTY[Applicable provisions: Section 35A; and paragraphs 2(2), 64B (1), (2) and (4) of the Eighth Schedule]

BackgroundThe term “immovable property” is defined in paragraph 2 (2) of the Eighth Schedule to include any interest or right of whatever nature of a person to or in immovable property situated in South Africa. An interest in immovable property includes any equity shares held by a person in a company or ownership or the right to ownership of a person in any other entity or a vested interest of a person in any assets of any trust.

For tax treaty purposes, the term “immovable property” is defined with reference to the definition in the law of the contracting country in which the property is situated (i.e. in terms of the law of the source country).

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According to paragraph 2 of Article 6 of the Organisation of Economic Cooperation and Development (OECD) Model Tax Treaty the term “immovable property” shall include, inter alia, the rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for working of, or the right to work, mineral deposits, sources and other natural resources.

Reasons for changeThe current definition of the term “immovable property” in paragraph 2 (2) of the Eighth Schedule does not include the right to mine or prospecting or right to work mineral deposits and other natural resources. South Africa has over 73 tax treaties in force and it is important that the definition of immovable in paragraph 2(1) of the Eighth Schedule is as closely aligned with the definition of immovable property in the OECD Model Tax Treaty as possible in order to order avoid any possible anomalies.

AmendmentIn order to eliminate anomalies, the definition of the term “immovable property” in paragraph 2 (2) of the Eighth Schedule is aligned with the definition of the term “immovable property” in paragraph 2 of Article 6 of the OECD Model Tax treaty to include the right to variable payments or fixed payment as consideration for the working of or right to work mineral deposits, sources and other natural resources.


DEFINITION OF INTEREST FOR WITHHOLDING TAX PURPOSES[Applicable provision: Section 50A]

BackgroundCurrently, the Act does not contain the general definition of the term ‘interest’. Section 50A, dealing with withholding tax on interest also does not contain a definition of the term ‘interest’. The only definition of interest contained in the Act is found in section 24J and only for the purposes of that section.

For the purposes of section 24J, interest is defined as including, inter alia, the gross amount of any interest or related finance charges, discount or premium payable or receivable in terms of or in respect of a financial arrangement, irrespective of whether or not such amount is calculated with reference to a fixed rate of interest or variable rate of interest, or payable or receivable as a lump sum or unequal installments during the term of the financial arrangement. For the purposes of the source rules (see section 9(2)(b) and hybrid instruments rules (see sections 8F(1) and 8FA(1), the term ‘interest’ is defined with reference to the definition of the term in section 24J.

In terms of common law (see CIR v Genn & Co Ltd 1955 (3) SA 293 (A); ITC 1496 53 SATC 229 and ITC 1588 57 SATC 148), interest is defined as consideration paid for the use of money.

For tax treaty purposes, the term ‘interest’ is defined in Article 11 as income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits and in particular, income from government securities and income from bonds and debentures, including premiums and prizes attaching to such securities, bonds or debentures.

Reasons for changeThe definition of the term ‘interest’ is clear for the purposes of section 24J, hybrid instruments rules and source rules. However, the lack of general definition of the term interest in the Act and in section 50A, withholding tax on interest, creates uncertainty. Part of this uncertainty stems from the fact that it is not clear whether, for withholding tax on interest purposes, the term ‘interest’ means interest as defined in section 24J or common law meaning the term. This lack of definition makes it difficult to determine which amounts are included in the concept of interest for the purposes of the withholding tax on interest.

AmendmentThe amendment provides that the for the purposes of withholding tax on interest, the term ‘interest’ will be defined in section 50A with reference to paragraphs (a) or (b) of the definition of “interest” under section 24J(1).

Effective dateEffective from 1 March 2016 and applies in respect of interest that is paid or that becomes due and payable on or after that date.

REVISIONS OF DEFINITION OF FOREIGN PARTNERSHIP[Applicable provisions: Section 1 of the Income Tax Act]

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BackgroundA number of jurisdictions offer investors the option of using a form of enterprise that combines the benefit, for their members, of limited liability with flow-through treatment for tax purposes. These entities combine, in effect, the characteristics of a partnership and a company. The profits of these entities are taxed in the hands of the members and not that of the entity. The tax treatment being, in essence, similar to that of a limited partnership formed and carried on in South Africa.

In 2010, amendments were made in the Income Tax Act to exclude a “foreign partnership” from the definition of a “company”. The main aim of this amendment was to align the tax treatment in South Africa with the tax dispensation applying in the country of its formation or establishment. According to the 2010 amendments, an entity will in terms of the current Income Tax Act definition of a “foreign partnership” be regarded as being fiscally transparent in its country of origin if tax on income is levied only on its members, and not levied at entity level. The entity will then qualify as a foreign partnership and be taxed in the same manner as a limited partnership irrespective of whether it qualifies, in that jurisdiction, as a separate legal entity.

Reasons for ChangeIt has come to Government’s attention that entities can be fiscally transparent at national level, but such entity is subject to a tax on income at municipal level in respect of a business enterprise carried on by it. Effectively, the entity is subject to tax at entity level only in respect of its income that is subject to the municipal tax. An entity the total income of which is, at national level, subject to tax in the hands of its members only, may therefore fail to qualify as a “foreign partnership” as it will not meet the requirement of not being liable for or subject to any tax on income in its country of origin. The entity may, as a result, be subject to disparate tax dispensations in South Africa and its country of origin. This may give rise to various anomalies and possibilities for cross-border tax arbitrage.

AmendmentThe definition of “foreign partnership” is amended to align the income tax treatment of the entity in South Africa with its income tax treatment, at national level, in its country of origin and exclude any taxes levied at municipal or local authority level or a comparable authority in the country of origin.

Effective dateEffective 31 December 2015 and applies in respect of year of assessment ending on or after that date.

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INCOME TAX: BUSINESSES (INCENTIVES)

URBAN DEVELOPMENT ZONES – ALLOWING FOR THE DEMARCATION OF ADDITIONAL UDZ’S PER QUALIFYING MUNICIPALITY

[Applicable provision: Section 13quat]

BackgroundIn 2003, the Minister of Finance introduced the Urban Development Zone (UDZ) tax incentive for investment in 16 designated inner cities. The UDZ tax incentive was designed to encourage property investment in central business districts and to address dereliction and dilapidation, and to promote investment in urban renewal. The incentive is in the form of an accelerated depreciation allowance applicable on the value of new buildings and improvements to existing buildings in the qualifying municipalities demarcated as UDZs. In 2013 the window period for the UDZ incentive was extended from 31 March 2014 to 31 March 2020.

Reason for ChangeCurrently, the legislation only allows municipalities with a population of more than two million people to demarcate two areas as UDZs. The amalgamation of various municipalities over the years has highlighted the need to extend the demarcation of more UDZ areas per municipality.

AmendmentIn order to make the UDZ incentive more accessible, the amendment provides that municipalities that have a population of at least one million persons or more should be allowed to demarcate more than one UDZ area. Where a municipality has a population of less than one million persons, the Minister of Finance will have discretion by notice in the Gazette to approve a municipality to demarcate more than one UDZ area. Municipalities using this provision will at a minimum still be subject to the demarcation criteria as set out in section 13quat.

Effective DateThe amendments will come into operation on 1 January 2016.

INTRODUCING A COMPLIANCE PERIOD FOR THE INDUSTRIAL POLICY PROJECT TAX INCENTIVE REGIME

[Applicable provision: Section 12I]

BackgroundIn 2008, the Industrial Policy Project (IPP) tax incentive was introduced to support investment in manufacturing assets that would improve the productivity of the manufacturing sector. The incentive is fully available for new industrial policy projects as well as expansion or upgrading of existing projects. The incentive takes the form of an immediate additional allowance for an industrial policy project as determined according to the type (greenfield or brownfield) and status (qualifying or preferred). The incentive offers support for both capital investment and training, with qualification for the incentive based on regulatory criteria reviewed by an adjudication committee constituted in terms of section 12I.

The qualifying criteria for industrial policy projects are stipulated in sections 12I(7) to (10). These criteria will determine whether projects will significantly contribute to South Africa’s Industrial Policy Programme. Section 12I (10) makes provision for the qualifying criteria to be determined by regulations. These regulations may be issued by the Minister of Finance in consultation with the Minister of Trade and Industry. Approved industrial policy projects are also required to report annually to the adjudication committee on the progress of the IPP in terms of the qualifying criteria. A project/company must also report on the progress of spending on training as a percentage of the project’s annual wage bill for a six-year period starting from the date of project approval.

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Since its inception in 2008, there has been a significant uptake for the programme. Data from the Department of Trade and Industry (DTI) indicates that by the end of March 2015, a cumulative 52 projects have been supported and approved with an investment value of R48 billion. In 2014, changes were made in the Income Tax Act to reduce the monetary threshold for greenfield projects from R200 million to R50 million in order to give small businesses opportunity to partake in the programme.

Reason for changeEngagement with relevant stakeholders has revealed that there is uncertainty regarding the timeframes with respect to compliance with all the requirements of section 12I (specifically the scoring criteria), the end date for annual progress reports in terms of section 12I(11) and the additional training allowance benefit period contained in sections 12I(4) and (5).

The current provisions of section 12I compel approved industrial policy projects to comply with all qualifying criteria in every year of the stipulated timeframe. Few, if any, projects are able to comply with all the criteria in every year of assessment. Amendments are therefore necessary to reflect that compliance with the scoring criteria will be assessed only at the end of the compliance period. Subsection (7)(a)(iv) referring to skills development and improved energy efficiency will be deleted as it is duplicated in subsection (8). Skills development and improved energy efficiency remain prerequisites of industrial policy projects for the purposes of section 12I, as reflected in the requirements of subsection (8) and the prescribed regulations [Regulation No. R. 639 (Government Gazette No. 33385 – 23 July 2010)]. In addition, requiring reporting on the training expenditure incurred for six years arguably places an onerous compliance burden on qualifying projects.

After consultation with the DTI and other stakeholders, it was decided to extend the 12I window period to align it to the window period of the Manufacturing Competitiveness Enhancement Programme (MCEP). These two programmes are seen as being complementary, with MCEP for investments up to R50 million and 12I catering for projects above R50 million. With the programmes running concurrently up to 2017, this would avoid periods where there is no incentive available for larger investors.

AmendmentThe inclusion of a specific period to allow projects time to comply with the requirements of section 12I, called a “Compliance Period”, would resolve the issues highlighted above.

The Compliance Period means the period commencing from the year of assessment following the year in which assets have been brought into use, and ends in the third year of assessment. It thus allows a full three-year period for the project/company to comply with the section 12I requirements, and annual progress reports must be submitted from the date of approval until the end of the Compliance Period. It should be clear that compliance with the section 12I requirements will therefore only be evaluated at the end of the Compliance Period.

The compliance period will be aligned with the additional training allowance benefit period so as to reduce the compliance burden in terms of reporting. The training allowance could then be claimed from when the assets are brought into use and would end (along with the reporting requirement) at the end of the Compliance Period. To cater for projects needing to train staff prior to bringing assets into use, these projects would be allowed to claim the allowance from the beginning of the financial year which is one year prior to the assets being brought into use.

The intention of introducing the Compliance Period is not to replace the additional investment allowance benefit period, but to complement it. The four-year additional investment allowance benefit period as defined in the Regulations is left unchanged as it defines the period in which a project/company must bring assets into use.

The objectives and benefits of the Compliance Period are:

To define the timeframe during which the project/company has to comply with each of the conditions/criteria;

To define the end of the period when the project/company is required to submit the last annual progress report.

To define the base period for claiming and reporting in terms of the additional training allowance.

The Compliance Period will coincide with the financial year of the project/company.

The Compliance Period is dynamic according to the date the project/company brings assets into use, while the additional investment allowance benefit period is static.

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Any application for approval of a project must be made before 31 December 2015. Despite this cut-off period, the programme will be extended given the impact it has had since its inception. The window period for IPP is extended from 31 December 2015 to 31 December 2017.

Effective DateThe “Compliance Period” will be deemed to have come into operation on 8 January 2009.

The “Training Allowance Benefit Period” will come into operation on 1 January 2016.

The extension of section 12I window period will come into operation on 1 January 2016.

FURTHER ALIGNMENT OF THE TAX TREATMENT OF GOVERNMENT GRANTS[Applicable provisions: Sections 10(1)(zI) and 12P]

BackgroundIn 2013, a unified system for the tax treatment of government grants was introduced. Under this unified system, a list of government grants was included in the Act under the Eleventh Schedule. This list includes grants provide at the national level as well as those provided at the provincial level pursuant to a provincial budget process. In addition, a specific provision setting out the tax treatment of government grants was introduced in section 12P with reference to the list of government grants in the Eleventh Schedule.

Under section 12P, the listed grants and any other government grants that are identified by the Minister of Finance by notice in the Gazette are exempt from normal tax. In addition, a comprehensive set of anti-double-dipping rules applies to these exempted government grants. The anti-double-dipping rules ensure that the use of exempt government grants are not abused and used as a means of achieving a further net tax reduction that can be used against any other income of the government grant recipient that would otherwise be taxable. The anti-double-dipping rules deny a deduction of any expenditure that is funded by the government grant recipient using an exempt government grant.

Reasons for changeThe tax treatment of government grants provided for Public Private Partnerships (PPP) is not aligned to the specific provision of section 12P. The provisions regulating PPP grants contained their own limitations rules for purposes of an exemption. The specific limitation rule in section 10(1)(zI) currently applicable to PPP grants provides that a PPP grant is only eligible for an exemption to the extent that the PPP grant was expended by the recipient to fund improvements on land or to buildings. This limitation was introduced to support the country’s infrastructure development by curbing any circular reduction of allocated funds back to the fiscus.

The policy position with all government grants is that exempt government grants should not be used to fund expenditure in respect of which a deduction can be claimed against other income of the government grant recipient. In this regard, the anti-double-dipping rules contained in the section 12P regulating the tax treatment of government grants apply. As such, there is a need to subject PPP grants to the anti-double-dipping rules contained in section 12P.

AmendmentThe exemption for PPP grants is moved from section 10(1)(zI) and is included in the provisions of section 12P of the Income Tax Act. As a result, PPP grants will be exempt from tax in terms of section 12P and be subject to the specific anti-double-dipping provisions contained in that section.

Effective DateThe amendments will come into operation on 1 January 2016 and apply in respect of grants received or expenditure incurred on or after that date.

DEPRECIATION ALLOWANCE OF TRANSMISSION LINES OR CABLES USED FOR ELECTRONIC COMMUNICATIONS OUTSIDE SOUTH AFRICA

[Applicable provisions: Item (B) of the proviso to paragraph (f) of section 11]

BackgroundIn 2009, amendments were made following international precedent in respect of how international submarine telecommunications cables are treated for tax depreciation purposes. Cable systems are often built and owned by a few parties who may grant the right of use to

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this system to a third party through an ‘Indefeasible Right of Use’ (IRU). The IRU provides the grantee with the right to use the capacity of the submarine cable without ownership. IRU holders are generally required to contribute an upfront capital premium and on-going amounts for the operation and maintenance of the cable during its economic life.

In 2014, changes were made to section 12D to reduce the write-off period for telecommunication lines and cables used within South Africa from 20 years to 15 years.

Reason for changeIt has become necessary to review the period over which the right of use of submarine lines or cables used for the transmission of electronic communications are depreciated for two main reasons; namely, improvements in technology and damages to the cables over time. This damage could be caused by commercial fishing trawlers or ship’s anchors, and natural disasters experienced in other parts of the world e.g. earthquakes and sub-sea landslides.

The use of fibre optics in submarine lines is beneficial; however, fibre optic cabling is also not immune to wear and tear. Cable route damage is often inflicted by third parties during activities like fishing, etc. Such damage has a medium to long-term effect, increasing the fibre stress levels and / or bending radius and normally results in the introduction of additional fibre joints that further degrade the cable’s transmission capabilities.

Given the technological advances and shorter economic life of the affected assets, IRUs entered into at present are typically for shorter durations than when this provision was initially enacted. Industry practice is to write off the right of use of submarine lines or cables over approximately 15 years.

AmendmentIn order to align the tax treatment for writing down the right of use of submarine lines or cables with international practice and to move towards the most suitable expected economic life of such assets, the amendment provides that the write-off period should be reduced from 20 years to 15 years.

Effective dateThe amendment will come into operation on 1 April 2016.

SPECIAL ECONOMIC ZONES ANTI-PROFIT SHIFTING PROVISION[Applicable provision: Section 12R]

BackgroundIn 2013, a special tax incentive regime for the new Special Economic Zones (SEZ) was introduced in the Income Tax Act. The SEZ regime was introduced to provide more focused support for businesses operating within designated zones by extending on the value-added tax and customs duty incentives that were already available to enterprises operating within Industrial Development Zones (IDZs) and including income tax incentives and the employment tax incentive.

For income tax purposes, a qualifying company under the new SEZ regime will benefit from an accelerated depreciation allowance on capital structures (buildings) and, in certain circumstances, will be subject to a reduced corporate tax rate of 15 per cent instead of the current 28 per cent.

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To qualify for these income tax incentives, a company should:

Be tax resident in South Africa;

Operate within a designated SEZ;

Carry on business through a fixed place of business situated within a designated SEZ; and

Have not less than 90 per cent of its income being derived from the carrying on of a business or rendering of services within one

or more SEZs.

Reason for changeIn order to qualify for income tax incentives, one of the requirements is that a company should not have less than 90 per cent of its income derived from the carrying on of business or provision of services within SEZ. This requirement is aimed at ensuring that business profits qualifying for the lower business tax rate should arise from the productive activities of the qualifying company.

There is still a risk that profits may be artificially shifted from fully taxable connected persons to the qualifying company.

AmendmentTo counter the potential shift of profits by connected person to benefit from the lower income tax benefits available to companies operating within an SEZ, an anti-avoidance measure is introduced. A company will be disqualified from the SEZ income tax incentives if more than 20 per cent of its deductible expenditure incurred or income arises from transactions with connected persons.

Due to the fact that transactions between resident and non-resident connected persons are subject to transfer pricing rules, in order to ensure that there is no “doubling-up” of anti-avoidance measures, this anti-avoidance measure will only be applicable to transactions with connected persons that are resident or transactions with connected non-residents that are attributable to a permanent establishment of those non-residents in South Africa.

Effective dateThe amendments will come into operation on the date on which the Special Economic Zones Act, 2014 (Act No.16 of 2014) comes into operation. (Promulgated via GG 39667 and effective on date of promulgation of 9 February 2016)

ACCELERATED CAPITAL ALLOWANCES FOR MANUFACTURING ASSETS GOVERNED BY SUPPLY AGREEMENTS

[Applicable provisions: Sections 12C and insertion on new paragraph (bA) to sub-section (1) of section 12C]

BackgroundAs part of Government’s plans to diversify the South African economy through, inter alia, increased productivity in the South African manufacturing sector, an accelerated wear and tear allowance is available to support investment in manufacturing assets.

The allowance is available for machinery and plant used in the process of manufacture in the instance that (1) the taxpayer that owns the machinery and plant uses such machinery and plant himself in a process of manufacture and (2) in the instance that the taxpayer that owns the machinery and plant leases out the machinery and plant to another person who then uses such machinery and plant in a process of manufacture.

Subsequent to the introduction of the accelerated capital allowances, it was commonplace for taxpayers to acquire machinery and plant for the purpose of leasing them out at very low rentals. The resulting accelerated capital allowances on these leased assets generated large assessed losses, which were used to shield other non-related taxable income from taxation. To curb such abuse, limitations were introduced 1984 to limit these deductions for lessors of assets for which accelerated capital allowances are granted.

As a result, currently the accelerated capital allowances that a lessor may claim in respect of leased assets are limited to the rental income generated by those assets. Any excess of the capital allowances not allowed because of the limitation is carried forward to the next year of assessment where, subject to again to the limitation in the next year.

Reason for change

Manufacturers sometimes outsource parts of their manufacturing operations in order to secure the supply of components used in the

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assembly process of manufactured products. In addition, these arrangements help manufacturers to establish and maintain the supply of spare parts over the life of the manufactured products.

The arrangements are governed by a supply agreement between the manufacturer and the component supplier who in substance acts as agent for the manufacturer. Under the supply agreement:

The manufacturer supplies the manufacturing assets necessary to manufacture the components and/or spare parts to the

components supplier by delivering these manufacturing assets to the premises of the components supplier;

The components supplier undertakes to use the manufacturing assets to manufacture the components and/or spare parts for the

manufacturer;

Ownership of the manufacturing assets is all times reserved to the manufacturer;

A rental is not payable by the component supplier to the manufacturer for the use of the manufacturing assets; and

The component supplier is compensated by the manufacturer for the production of the necessary components and/or spare

parts.

Given that no rental is received by the manufacturer under these arrangements, it may be argued that the impact on the manufacturer is that the incentive that was intended to promote its investment in manufacturing assets is not available as a result of the limitation rule.

Conversely, it may be argued that no lease arrangement exists under such supply agreements as the manufacturer makes the manufacturing assets available to the components supplier without requiring payment from the component supplier for the use of the manufacturing assets. Under this argument, the manufacturer is again precluded from benefiting from the incentive as the manufacturer would neither be letting the manufacturing assets to the components supplier nor be directly using those manufacturing assets in a process of manufacture.

AmendmentIn order to adapt the accelerated capital allowances requirements to accommodate this type of business model, the amendment provides that the accelerated capital allowances should be granted where manufacturing assets that are owned by a taxpayer are made available to a components supplier under a supply agreement for no consideration for the benefit of the manufacturer’s processes. In order not to nullify the current provisions of section 23A, which governs the limitation of section 12C allowances in respect of rental manufacturing assets, the incentive will only be for the benefit of taxpayers in the Automotive Industry who receive grants as contemplated in the Eleventh Schedule.

Effective dateThe proposed amendments will come into operation on 1 January 2016 and apply in respect of years of assessment ending on or after that date.

DEPRECIATION ALLOWANCES FOR RENEWABLE ENERGY MACHINERY[Applicable provisions: Sections 12B(1)(h)(ii) and new section 12B(2)]

BackgroundThe current and projected national shortage of electricity in the foreseeable future will inconvenience South Africans and constrain economic activity. Government is working on short-term interventions to limit the impact of electricity shortages on the economy, to ensure scarce supply can be directed to economic sectors that drive growth and job creation. Initiatives include efforts to encourage investment in cleaner energy forms to reduce our greenhouse gas (GHG) emissions and to broaden our energy sources.

Current legislation does allow for accelerated depreciation allowances for renewable energy in the forms of solar, wind, biomass and hydro of less than 30 MW.

Reason for changeSolar is however classified as a single concept within the current legislation without delineating it into its different forms e.g. solar photovoltaic (solar PV) or concentrated solar power (solar CSP). To accelerate and incentivise development of solar PV, there is

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consideration to further enhance the accelerated depreciation allowance for solar PV. Solar PV is favoured because of its low environmental and water consumption impact, economies of scale and efficiencies of learning accumulated over time within the South African solar PV renewable energy industry. This has led to an increase in the number of applications within the Renewable Energy Independent Power Producers Procurement Programme for solar PV which also led to a decrease in the average bidding price whilst the average size of projects has also been increasing with each bidding round.

Embedded solar PVConsultations with representatives of Industry indicated that the proposed enhanced accelerated depreciation impact would be minimal on large-scale projects with a generation capacity of over 1 000 kW or 1 MW compared to the small-scale embedded solar PV projects. This is because large-scale solar PV projects require supporting infrastructure like roads, transmission lines etc. which can be excluded from the asset base for taxation purposes. However, embedded solar PV generation does not require such infrastructure hence is better placed to benefit from the accelerated depreciation incentive. Therefore, it is proposed to improve the current incentive to increase uptake of small-scale embedded solar PVs to ease the pressure off the national electricity grid as the embedded solar PV generators become energy self-sufficient.

AmendmentTo enhance the accelerated depreciation incentive for small scale embedded solar PV renewable energy with a generation capacity not exceeding 1 000 kW or 1 MW from the current 3-year period (50% allowance in year 1; 30% allowance in year 2 and 20% allowance in year 3) to a 1-year period of 100% allowance.

Effective dateThe proposed amendments will come into operation on 1 January 2016 and will apply in respect of the years of assessment commenc -

ing on or after that date.

ADJUSTMENT OF ENERGY SAVINGS TAX INCENTIVE[Applicable provision: Section 12L]

BackgroundIn 2009, Government announced the energy efficiency savings tax incentive and implementation took place in November 2013 following promulgation of the relevant regulations. Section 12L makes provision for taxpayers to claim an allowance for energy efficiency savings resulting from investments in energy efficiency measures and process adjustments deemed to be in the production of income.

The main aim of this incentive is to encourage the uptake of energy efficiency measures that result in improvements in energy use and contribute towards reduced greenhouse gas emissions.

The monetary value of the allowance that can be claimed by taxpayers is calculated at 45 cents per kilowatt hour or kilowatt hour equivalent of energy efficiency savings.

Reasons for changeGiven the current energy challenge and to further address the need to improve energy consumption, it has become necessary to revisit the energy efficiency savings rates.

Industry has raised concerns regarding the actual benefit value of the incentive in the first year of operation as it relates to both the high upfront costs of capital and, possibly, compliance costs incurred in the measurement and verification of savings to obtain an energy efficiency savings certificate as described in the relevant regulation. Also, since the introduction of the incentive in 2009, the rate of 45 c/kWh has not been adjusted and is deemed insufficient to incentivise energy efficiency projects.

AmendmentThe amount of the allowance to be claimed by taxpayers in respect of energy efficiency savings is increased from 45 cents per kilowatt hour to 95 cents per kilowatt hour or kilowatt hour equivalent of energy efficiency savings.

Effective dateThe proposed amendments will be deemed to come into operation on 1 March 2015 and applies in respect of years of assessment commencing on or after that date.

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VALUE – ADDED TAX COMMERCIAL ACCOMMODATION

[Applicable provisions: Section 1(1): Definition of “commercial accommodation” and proviso (ix) to the definition of “enterprise”]

BackgroundUnder current law, the definition of commercial accommodation in section 1 of the Value Added Tax Act (VAT Act) contains a monetary threshold of R60 000. In terms of the definition, where the annual total receipts from the supply of commercial accommodation exceeds or is reasonably expected to exceed R60 000 in a period of 12 months, then the supplies will be deemed to be that of commercial accommodation. This monetary threshold distinguishes between the supply of a dwelling and the supply of commercial accommodation.

In turn, proviso (ix) to the definition of enterprise states that where these supplies do not exceed the R60 000 threshold or cannot be reasonably expected to exceed the threshold in any 12-month period, then the supplies will not be deemed to have been made in the course of an enterprise.

Reasons for changeThe monetary threshold available in the definition of commercial accommodation is similar to the monetary threshold available in the definition of enterprise. This creates a misunderstanding in the interaction of the two definitions. In addition, this monetary threshold was last adjusted in 2003 from R48 000 to R60 0000.

ProposalIn order to remove the misunderstanding, it is proposed that the monetary threshold should be contained in one definition, that is, in proviso (ix) of the definition of “enterprise” in section 1 of the VAT Act and be removed from the definition of “commercial accommodation” in section 1 of the VAT Act. In addition, it is proposed that the monetary threshold be adjusted from R60 000 to R120 000.

Effective dateThe proposed amendments will come into operation on 1 April 2016.

ZERO RATING: GOODS DELIVERED BY A CARTAGE CONTRACTOR [Applicable provision: Section 11(1)(m)(ii)]BackgroundThe South African Value Added Tax (VAT) system is destination based, which means that only the consumption of goods and services in the Republic is taxed at the standard rate. VAT is therefore levied at the standard rate on the supply of goods or services in the Republic as well as on the importation of goods into the Republic unless an exemption or exception applies. Subject to certain requirements, VAT may be levied at the zero rate. Based on the above, the supply of movable goods in terms of a sale or instalment credit agreement to a customs controlled area enterprise or an Industrial Development Zone (IDZ) operator is subject to VAT at the zero rate, subject to, amongst others, the goods being delivered by a registered cartage contractor whose “main activity” is that of transporting of goods.

Reasons for changeSARS Interpretation Note 30 (Issue 3) provides for the requirements that need to be adhered to and prescribes the documentary proof that must be obtained and retained by a vendor in order to levy VAT at the zero rate on a supply of movable goods under a sale or instalment credit agreement where those goods are consigned or delivered to a recipient at an address in an export country. According to the Interpretation Note, the term “cartage contractor” is defined as a person whose “activities include” the transportation of goods. This has a wider application than the VAT Act’s current requirement. In addition, the Act requires that a cartage contractor be registered for VAT but the SARS Interpretation Note 30 (Issue 3) does not have this requirement.

ProposalIn order to align the VAT Act with the SARS Interpretation Note 30 (Issue 3), it is proposed that the word “main activity” in section 11(1)(m)(ii) be changed to “activities include” to allow for the zero rating of goods delivered by a registered contractor whose activities include that of transportation of goods.

Further section 11(1)(m)(ii) of the VAT Act will be amended to remove the requirement for the cartage contractor to be registered for VAT.

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Effective dateThe proposed amendments will come into operation from 1 April 2016.

ZERO RATING OF SERVICES: VOCATIONAL TRAINING [Applicable provision: Section 11(2)(r)]

BackgroundCurrently, the VAT system makes provision for zero rating of vocational training of employees in South Africa if certain requirements are met. These requirements include, inter alia, that the vocational training must be provided to an employee of a non-resident employer, the non-resident employer must have its place of business outside the Republic, and the non-resident employer must not be registered as vendor in terms of the VAT Act. Although the training occurs in South Africa, the services are only consumed once the employee utilises the newly acquired skills at the employer’s place of business outside South Africa.

Reasons for changeOne of the requirements for zero rating of vocational training in section 11(2)(r) is that such training must be supplied to employees in respect of an employer who is not resident in South Africa. The words “for an employer who is not resident” implies that for zero rating to apply, a contractual relationship must exist between the person supplying the vocational training services and the employer. As a result, this section does not cater for a situation where the vocational training is subcontracted by a non-resident supplier to a third party vendor in South Africa.

AmendmentSection 11(2)(r) is amended to ensure that vocational training is zero rated to include instances where the training is provided through a third party vendor for the benefit of an employer who is not resident in South Africa. In order to clarify the policy intent a proviso has been introduced in section 11(2)(r) to exclude situations where the employer contracts with a vendor or resident to provide the training and this vendor or resident further sub-contracts the services to another vendor.

Effective dateEffective 1 April 2016.

TIME OF SUPPLY: CONNECTED PERSONS (UNDETERMINED AMOUNTS)[Applicable provisions: New proviso to Section 9(2)(a) and Section 10(4)(a)]

BackgroundSection 9(4) of the VAT Act provides that where goods are supplied (other than in terms of an installment credit agreement or a rental agreement) and the consideration for the supply of such goods is not determined at the time the goods are appropriated, the supply of the goods is deemed to take place at the time when payment for the supply is due or is received, or an invoice relating to the supply of goods is issued, whichever is the earlier. However, this rule does not apply to connected persons. With regard to connected persons, a special time of supply rule available in section 9(2)(a) applies. Where the supplies are made between connected persons and the consideration for the supply cannot be determined when the goods are appropriated, VAT is payable when the goods are removed or are made available or when the services are performed, whichever is the earlier.

Reasons for changeIf the supply is between connected persons, then the provisions of section 9(2)(a) apply. These rules trigger output tax when the goods are removed or when the services are rendered. Where the value of goods cannot be determined when the goods are removed or services rendered, then the amount of the output tax payable cannot be calculated. This leads to an impractical situation of making the provisions of the VAT Act difficult to implement.

AmendmentThe following amendments were made in the VAT Act to make provision for the time of supply between connected persons in instances where the recipient vendor is fully taxable and where the recipient is partially taxable.

Recipient vendor fully taxable: A new proviso is inserted to section 9(2)(a) of the VAT Act that renders the provisions of section

9(2)(a) not to apply to connected persons who are fully taxable and where the consideration cannot be determined at the time

the supply is deemed to be made.

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Recipient vendor partially taxable: An amendment is made to section 10(4)(a) to deem the consideration to be the open market

value in instances where the supply is between connected persons and the consideration cannot be determined at the time of

the supply. In instances where the open market value is difficult to quantify at the time of supply, the taxpayer may make an

application to the Commissioner in terms of Section 3(4) for approval of an alternative method of determination.

Effective dateEffective 1 April 2016.

REPEALING THE ZERO RATING FOR THE NATIONAL HOUSING PROGRAMME[Applicable provisions: Sections 8(23) and 11(2)(s)]

BackgroundThe current section 11(2)(s), read together with section 8(23), makes provision for the zero-rating of services supplied to a public authority or municipality to the extent of any payment made to or on behalf of that vendor in terms of a national housing programme contemplated in the Housing Act, 1997 (Act No. 107 of 1997).

The Housing Act, 1997, specifically section 4(3)(g), empowers the Minister of Human Settlements (then Housing) to institute and finance national housing programmes. Further, in terms of section 4(3)(d), the Minister of Finance may allocate funds for national housing programmes to provincial governments, including funds for national housing programmes administered by municipalities. The Housing Act, 107 of 1997 defines national housing programmes as any national policy framework to facilitate housing development, including, but not limited to, any housing assistance measures referred to in section 3(5) or any other measure or arrangement to:

Assist persons who cannot independently provide for their own housing needs;

Facilitate housing delivery; or

Rehabilitate and upgrade existing housing stock, including municipal services and infrastructure;

In section 3(5)(a) the Housing Act provides for the Housing Subsidy Scheme as one of the housing assistance measures deemed to be national housing programmes instituted by the Minister. There are also a variety of housing programmes to provide housing assistance to poor households in a variety of forms. The department was responsible for identifying the projects that qualified for zero-rating under the Housing Subsidy Scheme. To this effect, vendors would be informed of the zero-rated status of the projects and on that basis zero-rate the supplies of services to any public authority or local authority to the extent of any payment in terms of the Housing Subsidy Scheme. However, it has been administratively difficult to implement the VAT provision effectively due to the variations in the programmes and the legislative interpretation by various role-players involved in the implementation of the housing programme.

As a consequence, the VAT Act was amended in 2010 to provide for the Minister of Finance to issue Regulations specifying the projects that will qualify for the zero rated status. It was anticipated that the development of regulations would remedy the administrative difficulties identified previously by providing clarity and simplifying the application of the VAT concessions. To the contrary, it was not as simple as anticipated and it would have not resolved all the problems being experienced with the administration of the zero-rating provision. The main difficulty was that the national housing programme had a number of variations which were going to create practical difficulties relating to administration and implementation of the zero-rating provision. The variations were largely due to the fact that programmes were more holistic programmes which include rental stock (i.e. exempt supply of dwellings), community developments and many other facilities. The Regulations were therefore not promulgated.

Reasons for changeThough the policy was well intended, the administrative complexities of applying the zero-rate provision to the various housing programmes has made it difficult for all the stakeholders to have a common understanding and application of the provision.

AmendmentThe current provisions of zero-rating for the supply of goods and services in terms of the national housing programme contemplated in the Housing Act, 1997 is abolished.

Effective dateEffective 1 April 2017. Page 83

TAX ADMINISTRATION LAWS AMENDMENT ACT The Tax Administration Laws Amendment Act No. 25 of 2015 was promulgated on 8 January 2016.

ACTS AMENDEDThe Tax Administration Laws Amendment Act No. 25 of 2015 amends administrative provisions of the following Acts:

Income Tax Act, 1962, the Customs and Excise Act, 1964, the Excise Duty Act, 1964, the Value-Added Tax Act, 1991, the Skills Development Levies Act, 1999, the Taxation Laws Second Amendment Act, 2008, the Mineral and Petroleum Resources Royalty (Administration) Act, 2008, the Tax Administration Act, 2011, the Customs Duty Act, 2014, the Customs Control Act, 2014 and the Tax Administration Laws Amendment Act, 2014.

SELF-ASSESSMENT [Income Tax Act, 1962: Section 3]

International research done as part of the study on the transition to income tax self-assessment, confirms that the international trend is to move away from administrative income tax assessment towards self-assessment and voluntary compliance. According to the 2015 OECD comparative information series, just over half of the 56 revenue bodies surveyed, confirmed that their PIT system is designed and based on self-assessment principles. Various developed countries (e.g. Australia, New Zealand, Canada, UK and USA) and developing countries (e.g. Brazil and Chile) have already successfully implemented an income tax system based on self-assessment and voluntary compliance. Some African countries that have adopted self-assessment systems are Zambia, Nigeria, Kenia and Malawi.

The countries that have replaced administrative assessment procedures with self-assessment systems have done so with the objective of improving revenue performance through better compliance and more efficient administration. The added benefit of a move to self-assessment is the reduction of compliance costs to help promote business sector growth.

Various developments in the South African tax administration system have already taken place which effectively brought South Africa to the point where it, in practice, has a system of self-assessment. Examples of these reforms are the automatic processing of tax returns submitted by taxpayers, the introduction of a system of advance tax rulings, a new dispute resolution process and a revised penalty regime for administrative non-compliance. Hence, to a great extent the South African income tax assessment system may already be regarded as a self-assessment system based upon voluntary compliance.

The legislative framework of South Africa’s income tax self-assessment system still contains remnants of administrative assessment. These remnants include the various discretionary powers to be exercised by the Commissioner in the context of assessment contained in the Income Tax Act. To formalise income tax self-assessment in South Africa, thereby complying with international best practice, the remnants of administrative assessment must be removed.

Effective dateEffective on a date determined by the Minister of Finance by notice in the Gazette.

NON-RESIDENT SELLERS OF IMMOVABLE PROPERTY[Income Tax Act, 1962: Amendment of section 35A]

This amendment seeks to resolve an impasse under the current wording of section 35A where the non-resident does not submit a return. For example:

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Mr. X (non-resident seller) sells his property in Hermanus in July 2015. SARS determines that R50 000

‘‘advance’’ payment must be made in terms of section 35A, which Mr. X then pays into SARS’s bank account.

The payment is allocated to the provisional account of Mr. X. The legislation requires that the amount withheld

from any payment to the seller, Mr. X, is an advance in respect of his liability for normal tax for the year of

assessment during which that property is disposed of by him. However, Mr. X does not submit a return for that

year. Accordingly, the amount stays in the provisional account as section 35A is silent on what happens to

this amount if no return is submitted.

In practice, this apparently happens in the majority of such transactions.

The amendment provides that if the seller does not submit a return within 12 months after the end of the year of assessment, the payment of that amount is deemed to be a self-assessment in terms of section 95(3) of the Tax Administration Act, 2011.


DIVIDEND TAX RETURN[Income Tax Act, 1962: Amendment of section 64K]

The amendment to section 64K(1A)(b) provides that recipients of foreign dividends, paid by foreign companies, that are exempt from dividends tax need not submit a return.


DECEASED ESTATE AND PROVISIONAL TAX[Income Tax Act, 1962: Amendment of paragraph 1 of Fourth Schedule]

The deceased estate of a person who dies on or after 1 March 2016 will, in terms of the amendments in the Taxation Laws Amendment Act, 2015, be taxable in respect of all income and capital gains and losses realised in the estate with no attribution to heirs or legatees. The deceased estate will, with some exceptions, be taxed as a natural person. Various issues arise regarding the application, to a deceased estate, of the provisions governing the payment of provisional tax. A deceased estate exists for a relatively short period. The imposition of a liability for the payment of provisional tax will impose an additional administrative burden on executors. A deceased estate would also be exposed to the risk of underestimation penalties, e.g. if an income-producing asset comes to light at a later stage of the winding up process. The amendment provides that a deceased estate be exempt from the payment of provisional tax.

Effective dateThe effective date of this amendment is 1 March 2016.

PROVISIONAL TAX ESTIMATE, PENALTY[Income Tax Act, 1962: Amendment of paragraph 20 of Fourth Schedule]

The liability to pay provisional tax (the ‘‘charging provision’’) is contained in paragraph 17. Liability to pay under paragraph 17 is premised on the amount of taxable income estimated by such taxpayer in terms of paragraph 19(1). Paragraph 19(1)(a) and (b) are the paragraphs that dictate that provisional taxpayers must submit estimates of taxable income. These estimates are therefore a pre-requisite before liability to pay under paragraph 17 can arise. Liability to pay provisional tax is thus premised on a taxpayer first submitting to SARS an estimate of taxable income.

The recently promulgated paragraph 20(2A) deems a provisional taxpayer who has failed to submit a second provisional tax estimate to have submitted a NIL estimate. This paragraph is silent as to the extent of its operation (it does not limit its operation to paragraph 20 only) and therefore the NIL submission must be considered to be a NIL submission for all purposes that estimates are submitted under the Fourth Schedule.

The amendment clarifies that this paragraph will apply for purposes of paragraphs 19 and 20.

Paragraph 27 (the penalty for late payment of provisional tax) may only be levied when a provisional taxpayer fails to

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pay an amount of provisional tax for which he or she is liable. Thus, in order for the late payment penalty to be capable of being levied, there must be a liability to pay provisional tax. The liability to pay provisional tax is premised on the estimate. If the taxpayer submits the estimate late, that estimate is deemed to be a NIL estimate. As the estimate is NIL, there is no resulting liability to pay provisional tax. Consequently, if there is no liability to pay, there can be no failure to pay on time, and thus no late payment penalty can be charged. The amendment addresses this situation by replacing the words ‘‘nil submission’’ with ‘‘an estimate of an amount of nil taxable income’’.

This provision has, furthermore, also been amended to insert a time period to indicate by when a taxpayer will be considered as having submitted an estimate of an amount of nil taxable income i.e. where the estimate in respect of the relevant provisional payment is submitted prior to the date of the subsequent provisional payment under paragraph 21, 23 or 23A, the deeming provision in terms of this paragraph will not apply.


TAX INVOICES, DEBIT AND CREDIT NOTES[Value-Added Tax Act, 1991: Amendment of section 20 and 21]

The amendment relaxes the particulars required for a tax invoice, debit note and credit note without compromising the audit trail or policy intent for the requirements of the section.

Tax invoice: The words “VAT invoice” or “invoice” is now acceptable for a valid tax invoice. The requirement that “tax invoice”, “VAT invoice” or “invoice” be “in a prominent place” is now removed.

Debit note and credit note: The requirement that “debit note” and “credit note” be “in a prominent place” is now removed.


INTERNATIONAL TAX STANDARD[Tax Administration Act, 2011: Amendment of section 1]

Greater transparency and the automatic exchange of information between tax administrations are important steps in countering cross border tax evasion, aggressive tax avoidance and base erosion and profit shifting (BEPS) through, for example, inappropriate transfer pricing arrangements.

Paragraph (a) of the proposed new definition is required to implement a scheme under which SARS may require South African financial institutions to collect information under an international tax standard, such as the OECD Standard for Automatic Exchange of Financial Account Information in Tax Matters, which encompasses the Common Reporting Standard (CRS), that was endorsed by G20 Finance Ministers in 2014. In order to implement the standard on a consistent and efficient basis, certain financial institutions must report on all account holders and controlling persons, irrespective of whether South Africa has an international tax agreement with their jurisdiction of residence or whether the jurisdiction is currently a CRS participating jurisdiction. This will substantially ease the compliance burden on reporting financial institutions as they would otherwise have to effect system changes and collect historical information each time a jurisdiction is added to the CRS or South Africa concludes a new international tax agreement. The reporting financial institutions will, pursuant to this amendment, be obliged by statute to obtain the information and provide it to SARS.

Paragraph (b) of the proposed new definition of ‘‘international tax standard’’ includes the country-by-country reporting standard for multinational enterprises. This originates from a report in September 2014 by the countries involved in the OECD/G20

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BEPS Project titled ‘‘Guidance on Transfer Pricing Documentation and Country-by-Country Reporting’’. This report described a three-tiered standardised approach to transfer pricing documentation that consists of a master file, a local file and a country-by-country (CbC) Report. Its inclusion is part of establishing the framework for obtaining CbC Reports, irrespective of whether South Africa has international tax agreements with all the jurisdictions in which a group does business or whether the jurisdictions are currently CbC participating jurisdictions.

Effective dateThis amendment will come into operation on the date of promulgation of this Act.

REQUEST FOR INFORMATION HELD BY NON-RESIDENTS[Tax Administration Act, 2011: Amendment of section 46]

This amendment deals with foreign information requests. During the course of an audit of a South African member of a multinational group it may be necessary to obtain relevant material that is held by other members of the group located outside South Africa. While the South African members of some groups are willing to obtain and furnish such material to SARS, others assert that they are not in a position to do so.

In Practice Note 6 of 1999 SARS noted that ‘‘taxpayers may face diffıculties obtaining information from foreign connected persons’’. Such difficulties would not be encountered if taxpayers were required to produce only their own documents. However, due to the relationship between the parties the Commissioner considers it reasonable to expect taxpayers to obtain such information where necessary.

The amendment provides to ensure that taxpayers do not assert that they are unable to obtain and provide relevant material, only to provide it at a later stage, for tactical reasons. A minimum period for requesting relevant material held by a group member that is not in South Africa is now applicable (i.e. 90 days from the date of the request unless reasonable grounds for an extension are submitted), together with a prohibition of a taxpayer’s subsequent production of that material if it was not produced when requested.

If SARS is able to obtain the information under an international tax agreement or standard, which is a more protracted process, both parties may use it subject to the conditions of confidentiality imposed under the treaty.

The prohibition against producing the documents at a later stage may be relaxed by a competent court on the basis of circumstances outside the control of the taxpayer and any connected person in relation to the taxpayer.

The amendment clarifies that a request by SARS for relevant material from third parties is limited to information maintained or kept or that should reasonably be maintained or kept by the person in relation to the taxpayer.


PERSONS WHO MAY BE INTERVIEWED BY SARS[Tax Administration Act, 2011: Amendment of section 47]

The amendment clarifies which persons may be interviewed or requested to submit relevant material where the person whose tax affairs is under verification or audit is a company or other legal entity. A legal entity comprises of people and if they have knowledge of the tax affairs of the legal entity that employs them, they are the people that SARS must interview for purposes of the verification or audit. It is the function of SARS auditors to evaluate the various sources of information which are placed before them to ascertain the correct tax liability. SARS auditors are regularly confronted by discrepancies between documents, statements and other information available to them which they must reconcile in order to clarify issues of concern regarding the tax liability of the taxpayer. Hence, the proposed amendment provides that a senior SARS official may require:

A current employee of the entity; or

A person who holds an office in that entity,

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to attend in person at a time and place designated in the notice for the purpose of being interviewed by a SARS official concerning the tax affairs of the relevant taxpayer, where the interview is intended to clarify issues of concern to SARS to render further verification or audit unnecessary or to expedite the completion of a current audit or verification. The person so interviewed may also be required to submit relevant material under his or her control.


INFORMATION UNDER OATH OR SOLEMN DECLARATION[Tax Administration Act, 2011: Amendment of section 49]

This amendment allows SARS to request a person being questioned during a field audit to provide information under oath or solemn declaration, similar to SARS’s power to do so under section 46(7). The obtaining and use of information under oath or solemn declaration is common practice in most civil and criminal investigations, including in comparable jurisdictions (see, for example, the Australian Tax Office’s audit manual which provides for obtaining information in this manner). Providing information under oath or solemn declaration also protects a person by adding evidentiary value to what was said and protects the person from allegations that he or she provided different information. In the context of criminal matters, the person is protected under section 44, which obliges SARS to conduct the investigation with due recognition of the taxpayer’s constitutional rights as a suspect in a criminal investigation.


REDUCED ASSESSMENTS[Tax Administration Act, 2011: Amendment of section 93]

Section 93(1)(d) of the Tax Administration Act was inserted to allow taxpayers a less formal mechanism to request corrections to their returns and so reduced assessments, without having to follow the objection and appeal route to do so. However, taxpayers have attempted to use these requests for correction to raise substantive issues that would more properly be the subject of an objection under section 104, so as to bypass the timeframes and procedures for an objection. Furthermore, taxpayers and unregistered tax practitioners have also attempted to use the requests for correction to obtain fraudulent refunds for multiple years. For these reasons, the wording has been amended to provide that SARS must be satisfied that there is a ‘‘readily apparent’’ error to clarify the nature of the errors anticipated here.

The purpose of section 98 was a prescription override remedy for the taxpayer in specified circumstances. However, the outcome of exercising the remedy will not necessarily result in a withdrawal of the assessment but rather the issue of a reduced assessment. Hence this remedy should not have been included in section 98 but in the section that provides for reduced assessments i.e. section 93. The remedy provided under section 98(1)(d) has now been included under the taxpayer’s actual remedy in the case of readily apparent errors i.e. to request a reduced assessment (see new section 93(1)(e)). In addition, section 99(2) was amended to allow for the circumstances in the new section 93(1)(e) to constitute an exception to prescription, hence prescription does not apply. In addition, section 99(2)(d)(iii) was also amended to cater for the circumstances where SARS becomes aware of the problem but is unable to issue the reduced assessment before expiry of the period for the issue of reduced assessments under section 99(1).


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WITHDRAWAL OF ASSESSMENTS[Tax Administration Act, 2011: Amendment of section 98]

Finality in a tax assessment is important for both taxpayers and SARS, which is why there is a period within which a SARS may revise an assessment to the benefit or otherwise of a taxpayer. This period, which is commonly known as the prescription period, is either three years for taxes assessed by SARS or five years for taxes that are self-assessed by taxpayers. Limited exceptions to prescription apply where fraud, misrepresentation or material non-disclosure exists in a tax return, in order to give effect to the outcome of a dispute resolution process, such as an objection or appeal to a court.

The original purpose of the insertion of section 98(1)(d) was to address problems with erroneous assessments which are often only discovered after all prescription periods and remedies have expired and it becomes apparent that it would be inequitable to recover the tax due under such assessments. An example would be that of a retiree who was assessed in error based on incorrect information supplied by an employer or a retirement fund, who fell below the tax threshold after retirement and thus ceased to submit returns to SARS and was only traced some years later in order to recover the outstanding tax debt as a result of the incorrect assessment. The insertion of the new paragraph aimed to address this problem by allowing for the withdrawal of assessments in specified narrow circumstances, which were the following:

The assessment must be based on a readily apparent factual error by the taxpayer in a return; a processing

error by SARS; or a return fraudulently submitted by a person not authorised by the taxpayer;

The assessment imposes an unintended tax debt in respect of an amount that the taxpayer should not have

been taxed on;

The recovery of the tax debt under the assessment would produce an anomalous or inequitable result;

There is no other remedy available to the taxpayer; and

It is in the interest of the good management of the tax system.

However, it immediately became apparent that taxpayers interpreted the section as a general mechanism to address their ‘‘old mistakes’’ in assessments that were final, where the taxpayer could no longer request a reduced assessment or where the objection process as well as appeals to the tax and higher courts had been exhausted. In respect of most of these matters there was no unintended tax debt the recovery of which would be inequitable. In actual fact, if most of the assessments sought to be withdrawn were given effect to, SARS would have had to pay refunds.

The insertion of section 98(1)(d) was not intended as a substitute to the above procedures nor as a ‘‘post-appeal appeal’’ remedy, including in one memorable case an attempt to reverse an adverse judgment by the Supreme Court of Appeal. The true intention was to address adverse assessments resulting from factors beyond the control of the taxpayer, for example the failure to submit a return or submission of an incorrect return by a third party under section 26 or by an employer under a tax Act, where the right of the taxpayer to object or seek an extension within the period referred to in section 104(3) has expired. This happens where a taxpayer only becomes aware of the problem after three years and can no longer object against the assessment, which has become final.

Accordingly, section 98(1)(d) is deleted in order to avoid the problems discussed and moved to a new section 93(1)(e), in an amended form.


EXTENSION OF PRESCRIPTION PERIOD[Tax Administration Act, 2011: Amendment of section 99]

Too many of SARS’s resources are currently spent on information entitlement disputes, as opposed to conducting the audit within the period that additional assessments, if required, may be issued. This results in insufficient time to ensure SARS has all relevant information at its disposal to make correct assessment. In some cases, taxpayers, particularly large corporates, take more than six months to provide information required by SARS by simply failing to Page

do so, disputing SARS’s right to obtain the information, attempting to impose conditions on access to the information and attempting to require specific mechanisms for accessing the information. Information entitlement disputes, particularly if pursued in the High Court, can take more than one year to resolve. These failures to provide information or information entitlement disputes are often tactical or even vexatious, given the fact that taxpayers are very much aware of the period within which SARS must finalise the audit and issue additional assessments, if required.

Information entitlement disputes based on often convoluted or strained interpretations of the relevant provisions of the Tax Administration Act, have led to legislative changes over the past few years. As an example last year the Tax Administration Laws Amendment Act, 2014, had to clarify that a taxpayer cannot unilaterally decide the relevance of ‘‘relevant material’’ and refuse to even show it to SARS.

Additionally, some matters subject to audit may be so complex that it is impossible to meet the prescription deadline, particularly in the context of audits requiring SARS to consider the application of a general anti-avoidance rule (GAAR), or transfer pricing audits. Transfer pricing audits are fundamental to counteracting the erosion of the South African tax base and the shifting of profits to other jurisdictions, generally referred to as BEPS.

The prescription is now extended, by prior notice of at least 30 days to the taxpayer, by a period appropriate to a delay arising from:

Failure by a taxpayer to provide all the relevant material requested within the period under section 46(1) or the

extended period under section 46(5);

Resolving information entitlement disputes, including all legal proceedings.

Furthermore, the Commissioner may also, by prior notice of at least 60 days to the taxpayer, extend prescription by three years in the case of assessment by SARS and two years in the case of self-assessment where the audit or investigation relates to:

The application of the doctrine of substance over form;

The application of the GAAR (Part IIA of Chapter III of the Income Tax Act, 1962, section 73 of the Value-

Added Tax Act, 1991, or any other general anti-avoidance provision under a tax Act);

The taxation of hybrid entities or instruments;

Transfer pricing matters (section 31 of the Income Tax Act, 1962).

The extension must take place before the existing prescription period has come to an end. The requirement of prior notice before extension of prescription is to allow the taxpayer to make representations why it should not be extended. The grounds for the extension will be included to demonstrate that the jurisdictional requirements for the extension have been met.


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LIABILITY OF A THIRD PARTY FOR TAX DEBTS[Tax Administration Act, 2011: Amendment of section 179]

Section 179 provides that SARS may by notice to a person who holds or owes (or will hold or owe) money for or to a taxpayer, require that person to pay the money to SARS in satisfaction of the taxpayer’s tax debt. The current wording requires a senior SARS official to issue notices of third party appointments (Form AA88). In line with other amendments, a senior SARS official can now approve the issue of the notices. In view of SARS’s substantial debt book, the issue of these notices may be automated. The amendment provides that if a senior SARS official has approved the system criteria for issuing the notices their issue may be automated. This only occurs under prescribed circumstances, in particular where there is an outstanding tax debt and letters of demand have been issued.

The amendment provides that SARS may only issue the notice after delivery to the tax debtor of:

A final demand for payment which must be delivered at the latest 10 business days before the issue of the

notice. The letter of demand must set out all the recovery steps that SARS may take if the tax debt is not paid

and the available debt relief mechanisms under the Act; and

Where the recovery steps relate to section 179 the notice must in addition also set out the following:

○ If the tax debtor is a natural person, that the tax debtor may within five business days of

receiving the demand apply to SARS for a reduction of the amount to be paid to SARS based

on the basic living expenses of the tax debtor and his or her dependants; and

○ If the tax debtor is not a natural person, that the tax debtor may within five business days of

receiving the demand apply to SARS for a reduction of the amount to be paid to SARS based

on serious financial hardship.

SARS need not issue a demand in terms of this section if a senior SARS official is satisfied that to do so would prejudice the collection of the tax debt.


VOLUNTARY DISCLOSURE PROGRAMME[Tax Administration Act, 2011: Amendment of section 226, 227 and 229]

The amendment provides that an audit, unrelated to the default being disclosed by an applicant, will not disqualify an applicant for full voluntary disclosure relief. As an example, an audit of a taxpayer related to a PAYE issue is in progress. The same taxpayer may wish to submit a disclosure for an amount of VAT. There may be no correlation between these two tax issues and, as such, the enforcement action on the PAYE issue may not be a cause to restrict the relief in respect of the VAT disclosure.

The amendment provides that the audit or investigation must be related to the default the person seeks to disclose. Currently one of the requirements for a valid voluntary disclosure is that the disclosure must involve a ‘‘default’’ which has not previously been disclosed by the applicant. The amendment now requires that the ‘‘default’’ must not be a default that occurred within five years of the disclosure of a similar ‘‘default’’ by the applicant, thereby widening the scope of the voluntary disclosure regime.

Furthermore, the potential imposition of an understatement penalty as a requirement for a valid voluntary disclosure has been interpreted by SARS as meaning that in the absence of voluntary disclosure relief, an understatement penalty would be leviable. On this interpretation, a bona fide inadvertent error as contemplated in section 222(1) does not qualify for voluntary disclosure relief. A default that does not constitute a substantial understatement and where the other behaviours contemplated in section 223 are also not present would also not qualify for voluntary disclosure relief, notwithstanding that SARS may take a contrary view with regard to the assessment of the relevant behaviour.

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The amendment aims to resolve this issue by amending the requirement to rather refer to the behaviour in Column 2 of the understatement penalty percentage table in section 223, as opposed to involving the potential imposition of an understatement penalty in respect of the ‘‘default’’.

The proposed amendment is of a textual nature and furthermore broadens the voluntary disclosure relief to include 100% relief in respect of administrative non-compliance penalties imposed under Chapter 15 of the Tax Administration Act or another tax Act for the late payment of a tax.


DELIVERY OF NOTICES[Tax Administration Act, 2011: Amendment of section 251]

The amendment clarifies that a delivery may also be made to a registered user’s electronic filing page. A registered user is a person who has registered for a SARS electronic filing service such as eFiling, e@syFile, a third party data submission channel or such like and their electronic filing page is akin to a web based e-mail used exclusively by SARS and the person to whom the page belongs.

Effective dateThe amendment is effective from the date that the electronic communication rules issued under section 255 were published, i.e. 25 August 2014.

TAX COMPLIANCE STATUS[Tax Administration Act, 2011: Amendment of section 256]

SARS is often approached to verify the Tax Compliance Status of an entity for periods before the current date of the request. The amendment enables SARS to provide the tax compliance status of a taxpayer irrespective of the period to which the request relates in order to assist in the review of past transactions by the taxpayer’s auditors and regulatory authorities.


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COURT CASES IN 2015HIGH COURT (FULL BENCH)

South Atlantic Jazz Festival (Pty) Ltd - HC A129/2014 WC - 6 February 2015

HIGH COURT (SINGLE JUDGE) TCIT 13285 JHB November 2015

Gavin Cecil Gainsford NO (Joint Trustees of Tannenbaum Estate) - HC 55517-2014 NG - 26 August 2015

Fastjet Holdings (Pty) Ltd - HC 64901-2013 NG - 25 June 2015

Mark Lifman and Others - HC 5861-2015 WC - 17 June 2015

Alan George Marshall NO & Others (SA Red Cross Air Mercy) - HC 39219-2014 NG - 6 May 2015

Auto Haus Car Hire and Tours (PVT) Ltd - HC 18077/2015 NG - 11 March 2015

Ackermans Limited - HC 16408-2013 NG - 20 February 2015

SUPREME COURT OF APPEAL Anglo Platinum Management Services - SCA 20725/2014 [2015] ZASCA 180 - 30 November 2015

Stephney Investments - SCA 20192/14 [2015] ZASCA 138 - 30 September 2015

Mark Krok and Jucool Enterprises - 20230-2014 and 20232-2014 [2015] ZASCA 107 - 20 August 2015

Miles Plant Hire (Pty) Ltd - SCA 20430-2014 [2015] ZASCA 98 - 1 June 2015

Candice-Jean vd Merwe - SCA 20152-2014 [2015] ZASCA 86 - 28 May 2015

Medox Limited - SCA 20059-2014 [2015] ZASCA 74 - 27 May 2015

TAX COURT TC-VAT 1129 SG - 5 August 2015

TC-VAT 867 BFN - 26 June 2015

TC-IT 13276 JHB - 15 May 2015

TC-IT 13276 JHB - 15 May 2015

TC-IT 13541 CTN 20 April 2015

TC-IT 13512 JHB - 30 March 2015

TC-VAT 969 CTN - 30 March 2015

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DAVIS TAX COMMITTEE (DTC)FIRST INTERIM REPORT ON ESTATE DUTY

PROPOSALSThe DTC recommends that the many deficiencies of the current estate duty system be addressed by way of the following simple yet fundamental amendments to the existing legislation:

The flat rate of tax for trusts should be maintained at its existing levels

The deeming provisions of sections 7 and 25B should be repealed insofar as they apply to RSA resident trusts

The deeming provisions of sections 7 and 25B should be retained insofar as they apply to non-resident trusts

Trusts should be taxed as separate taxpayers

The only relief to the rule should be the “special trust”. The definition should be revisited

No attempt should be made to implement transfer pricing adjustments in the event of financial assistance or interest-

free loans being advanced to trusts

All distributions of foreign trusts be taxed as income

The principle of inter-spouse exemptions and roll-overs should be either withdrawn completely, or subjected to a

specified limit

Inter-spouse donations tax exemptions should be retained, subject to the exemption being amended to exclude all

interest in either fixed property or companies

The primary abatement be increased to R6 million per taxpayer

The current estate duty flat rate of 20% should be retained

Taxpayers must be allowed to make use of trusts when it makes sound sense to do so in the pursuit of a commercial benefit, as opposed to an estate duty benefit.

CAPITAL TRANSFER TAX (CTT)Various countries have implemented Capital Transfer Tax (CTT), a more advanced and sophisticated form of inheritance tax than estate duty that seeks to impose taxation periodically instead of only on death. In particular, CTT seeks to recover lost estate duty collections where assets have been transferred into trusts.

The implementation of CTT in South Africa would place an enormous burden on the resources of both SARS and the taxpayer as was evident, for example, when CGT was implemented in 2001. The resultant gain in revenue collections cannot be assured. Thus the DTC is of the opinion that CTT implementation should be postponed, at least until such time as more substantial research justifying its implementation is conducted.

2016 Budget and Tax Update

ANNUAL OR PERIODIC NET WEALTH TAX (NWT)The experiences within the European Union demonstrate that the actual collections of NWT are disappointing. As in the case of CTT, the complexity of a NWT and the uncertainty of a successful implementation prompt the exercise of caution as regards such a proposal without further careful investigation.

The DTC is of the opinion that by addressing the income tax regime for trusts (as outlined above) a substantial deterrent against estate planning will have been created without the necessity of devoting substantial resources towards the implementation of CTT or NWT. In so doing a combination of increased estate duty and CGT collections may have the potential of making a most useful contribution to overall tax collections.

Taxpayers who pursue the postponement of estate duty through the use of trusts will remain at liberty to do so. But upon sale of the assets of a trust a higher rate of tax will be imposed, thus compensating for the estate duty loss.

DISTRIBUTIONS OF FOREIGN TRUSTSOwing to the difficulties of identifying the components of income distributed to a beneficiary it is recommended that all distributions of foreign trusts be taxed as income. This will discourage offshore trust formation and can be justified on the grounds of the deferral of the tax that a beneficiary obtains through the use of an offshore trust.

REVIEW OF THE CRIMINAL OFFENCE PROVISIONS OF THE TAX ADMINISTRATION ACT, 2011

The DTC recommends that the criminal offence provisions of the Tax Administration Act, 2011, be reviewed pursuant to the possible inclusion of separate criminal charges that can be brought against taxpayers who fail to disclose their direct or indirect interests in foreign trust arrangements.

THE INTER-SPOUSE BEQUESTThe Katz Commission recommended that bequests in favour of surviving spouses remain exempt from estate duty in spite of there being no intellectual justification for the retention of the exemption and it being potentially in breach of the provisions of the Constitution. The recommendation was made entirely on “pragmatic grounds.”

The DTC suggests that the simple justification for an exemption based on “pragmatic grounds” is entirely insufficient. No amount of refinement to the definition of spouse within the Income Tax Act can cater for the diverse circumstances and challenges facing South African families today. Thus, it is recommended that the principle of inter-spouse exemptions and roll-overs should be either withdrawn completely, or subjected to a specified limit.

DONATIONS TAXDonations tax is levied at the rate of 20% on the value of any property disposed of by a taxpayer, other than a trust or public company.

It is simply impossible to determine a reasonable level of exemption for inter-spouse donations. For this reason alone the DTC recommends that the inter-spouse donations tax exemptions contained in section 56(1)(a) & (b) be retained, subject to the section 56(1)(b) exemption being amended to exclude all interests in either fixed property or companies.

Of particular concern is the practice of the donation of substantial amounts of cash in anticipation of death. Such donations are specifically exempt as a “donatio mortis causa” from donations tax in terms of section 56(1)(c).

It is suggested that in order to prevent the diminution of estates in anticipation of death the section 56 (1)(c) exemption be removed.

Donations tax is not payable if the property is donated by a person prior to becoming a South African resident, or if the property was inherited or donated to a South African resident by a non-resident taxpayer.

The DTC recommends that section 56(1)(g) be re-examined in the light of South Africa’s change to residence-based taxation in 2001.

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2016 Budget and Tax Update

Section 56(2)(c) exempts any bona fide contribution made by the donor towards the maintenance of any person as the Commissioner considers to be reasonable. This remains an open and obvious loophole for the taxpayer to diminish an estate, which cannot be contained by SARS without the deployment of substantial resources.

The extent of the “reasonable maintenance” exemption contained in section 56(2)(c) should accordingly be refined by making it subject to various categories of expenditure. For example, food, clothing, medical, education and cost-of-living expenses and possibly even the cost of a small motor vehicle could be included. This would act as a deterrent to substantial abuse. The provision should go further and specifically exclude the donation of assets such as interests in fixed property and financial instruments.

THE PRIMARY ABATEMENTThe primary estate duty abatement was increased to R2,5 million with effect from 1 March 2005 and to R3,5 million from 1 March 2007. It is noted that the estate duty basic abatement has not been increased for 7 years.

In order to re-establish the primary abatement to exclude the effects of fiscal drag between 2007 and 2015, calculations by the DTC reflect that the abatement would be increased to R5,7 million by October 2014.

The DTC is of the opinion that, save for the primary residence, no distinction should be made regarding asset classes in the determination of estate duty liability.

Thus the DTC favours a single universally applied abatement followed by a progressive estate duty rate.

It is thus recommended that the primary abatement be increased to R6 million per taxpayer. It is noted that a surviving spouse will be in a position to increase the total abatement to R12 million by electing to use the primary abatement in the computation of the estate duty of the first dying spouse.

ESTATE DUTY RATEThe estate duty rate was reduced from 25% to 20% with effect from 1 October 2001 to coincide with the implementation of CGT.

To this end, the DTC recommends that the current flat rate of 20% should not be increased, particularly in the light of the retention of both CGT and estate duty/donations tax being levied on capital transfers.

The DTC expects a substantial increase in estate duty collections will result from the implementation of the above proposals, although it is difficult to quantify with any precision.

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Good morning ladies and gentleman and thank you for ...€¦ · Web view2016 Budget and Tax...

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