We thank you for affording us the opportunity to contribute to the process of tax legislation and set out our comments on the Draft Revenue Laws Amendment Bill, 2004 ("the Draft RLA Bill") and the Explanatory Memorandum thereon, for your due consideration. The comments are set out under various sections covering the different areas of taxation. We are sure that you would appreciate the significant effort by the members of our National Tax Committee within the very tight deadlines in providing indepth comment and trust that they will be considered by the Honorable Members of the Portfolio Committee on Finance.
The comments are set out under various sections covering the different areas of taxation.
- Annexure 1: Broad-based employee share initiatives
- Section 8B
- We welcome the introduction of a tax concession aimed at encouraging broad-based equity ownership in a company by its employees, and particularly historically disadvantaged individuals ("HDI"). It is also encouraging to note that it is not restricted to listed shares which means that unlisted companies may also empower their employees by taking advantage of the concessions and benefits available under section 8B.
- The definition of ‘broad based employee share plan’ is limited to plans that grant free shares to employees. This is too restrictive and the legislation should also provide the same benefits to plans that grant shares to employees for a consideration less than market value. The Companies Act, 1973 precludes a company from issuing shares for no consideration. The company will, therefore, be obliged to issue the shares at a minimum of its par value, which then means that the provisions of the new proposed section 8B is not available to any company.
We cannot see why the benefits in terms of the proposed section 8B should not apply where the shares are issued at less than market value, and strongly suggest that it be amended if the intention is to benefit the public as opposed to passing legislation that will not have any practical application.
Linked in with the above is the need to exempt the extending of interest-free loans from the employer to its employees to meet their funding contribution required in terms of the Companies Act for the acquisition of the shares.
- The tax concession is not a total exemption from tax but a deferral. The real concession or benefit is that the employer company now obtains an income tax deduction in respect of the market value of the qualifying equity instrument at date of grant. The value of the free shares is ultimately taxed when the employee disposes of the shares. If the disposal is within a period of 5 years from date of grant, then the value is taxed as income. If the disposal is after the 5 year period, the value is taxed as capital gain provided that the share is a share in a listed company Section 9B currently allows a taxpayer to elect the proceeds on disposal of a listed share held for 5 years or more to be treated as a capital receipt and hence subject to CGT as opposed to income tax. This election is not available to taxpayers who dispose of unlisted shares. . We strongly urge you to amend the provisions of section 9B to include a qualifying equity share held for a minimum period of 5 years.
However, there appears to be an anomaly in the taxation of the gain in terms of how such gain is taxed under the Broad-based employee share initiative in terms of the proposed section 8B and the taxation of so-called Executive Equity Schemes in terms of the proposed revised section 8A of the Act.
The broad-based proposal grants an initial deferral of the gain, but then penalises the employee by subjecting the entire gain to income tax whilst it is the practice of SARS to subject a portion of the gain to capital gains tax ("CGT") under the Executive scheme where the executive disposes of the shares before 5 years. This is best illustrated by way of the following example.
Assume Employee Troy is granted free shares in his employer company to the value of R43 000, whilst Executive Sandile acquires shares to the value of R4 000 in his employer company at a cost of R2 000. Sandile is precluded from selling the shares before the end of year one from date of acquisition.
Troy sells the shares in year 4 and receives the sum of R6 000. The full proceeds of R6 000 will be subject to income tax (not CGT) in terms of the proposed section 8B(1) of the Act.
Sandile also sells the shares in year 4 and receives the sum of R6 000. The value of the shares at the end of year 1 is R5 000. Sandile is subject to income tax on the gain of R3 000 (R5 000 less cost paid of R2 000).
Sandile is then subject to CGT on the remaining gain of R1 000 (R6 000 less R5 000 being the market value of the shares at the date that the shares vested in Sandile).
The key difference is that Troy is subject to income tax on the full proceeds whilst Sandile is subject to income tax on part of his gain whilst the balance is subject to CGT.
- We recommend that section 8B(1) be amended to tax as income the value of the shares calculated at date of grant as opposed to date of disposal in the event that the shares are disposed of within a 5 year period. The further gain to date of disposal within 5 years may then be subject to tax on the normal principles either as income or capital. This will bring the broad-based employee share initiative in line with that of the executive equity scheme in respect of the taxation treatment of the full gain.
As an alternative, the basic exclusion of the first R10 000 of net capital gains derived in any tax year by a natural person should be increased to say R15 000 or R20 000.
- The limit of R3 000 placed on the value of shares acquired during any 12 month period is too low, especially having regard to the fact that a minimum of 100 shares should be held to avoid the "odd-lot" problems experienced by companies listed on the JSE Securities Exchange. Given that this is not a total exemption from tax, but merely a deferral, we strongly recommend that the R3 000 limit be increased to R8 000 or higher. Alternatively, the Minister should be allowed to Gazette an amount from time to time to take into account the effects of inflation.
Further, if the above limit is exceeded, only the excess should fall outside these provisions.
- The requirement that 90% of all employees be entitled to participate is onerous and potentially forces employers to go wider than just those that were previously disadvantaged – which is where we assumed this is primarily directed.
The 90% limit currently applies to all permanent employees with 12 months’ of service. Some permanent employees may, however, already participate in other share schemes, thus making the 90% limit more onerous than intended. A possible provision should be that the scheme would qualify for favourable treatment if it includes at least 90% of permanent employees with 12 months of service who do not already participate in any other employee share participation scheme.
- The administration of the scheme would have to be under the control of the employer to enable the employer to meet its reporting requirements in terms of section 69(1)(g) of the Income Tax Act. It may therefore be that a trust would be used to administer the scheme. There are potential tax implications pertaining to the trust if the trust grants the shares to the employees for free in that the beneficiaries will be connected persons in relation to the trust, the provisions of paragraph 38 of the Eighth Schedule will deem the disposal to be at market value. This means that the capital gain deemed to have been made by the Trust will be taxable in the hands of the beneficiaries in terms of paragraph 80 of the Eighth Schedule. This negates the relief that these provisions seek to provide. Consideration should be given to either granting exemption from CGT of such capital gain or alternatively providing that the deeming provisions of paragraph 38 of the Eighth Schedule will not apply to a disposal of a qualifying equity share by a trust to its beneficiaries in these circumstances.
- Section 8B(2)(d)(ii): this subsection provides that, in order for the share scheme to fall within the ambit of "broad-based employee share scheme, the only allowable restriction in respect of the re-acquisition of the relevant shares by the company, is that such acquisition must be at fair market value. However, most schemes provide that, in the case of misconduct by an employee, the employer has a right to re-acquire the shares at cost. The draft legislation does not appear to take this practicality into consideration. Further, it is not clear as to what is meant by "fair market value" as opposed to "market value" as used elsewhere in the section. We suggest that the term "market value" be used consistently in the section.
- Section 8B(2)(d)(iii)(aa): throughout the section, reference is made to "date of grant" as opposed to date of acquisition – this subsection should therefore also refer to "date of grant" for the purpose of consistency.
- In paragraph (d)(iii) of the definition of "broad-based employee share plan" in section 8B(1), we have the following comments:
- The item uses the word "earlier". This is appropriate where there are only two events. Where there are more than two events the word is "earliest".
- Sub-item (cc) is too broad and makes no distinction between someone ceasing employment because of, for example, retirement in the normal course, disability or retrenchment and, on the other hand, for unacceptable reasons, e.g. being fired because of dishonesty. There is no reason why someone whose employment is terminated for anything other than the former reasons should be entitled to have the restriction lifted within five years.
- The definition of "date of grant" refers to the approval by the directors. It is not clear as to whether this refers to the approval of the directors of the employer or the approval of the directors of the actual company issuing the shares?. This requires clarification as there may be a delay between the 2 dates in practice.
The terms "employee" and "employer" are not defined in either section 1 or section 8B, but is defined in the Fourth Schedule to the Income Tax Act. The definition of employee in the Fourth Schedule includes a labour broker, personal service company, etc. Is the intention to include these classes of persons as participants in the broad-based employee share initiative if they meet the other criteria?
- The gain from the qualifying equity shares should not be taxable where the shares are disposed of within 5 years in exchange for another share in the employer or another group company. Such a provision is included in section 8A but not in section 8B. It is accepted that the disposal will not give rise to CGT as a result of paragraph 78(2) of the Eighth Schedule to the Income Tax Act, but this does not exclude the amount from being subject to income tax in terms of section 8B(1).
- Section 10
In section 10(1)(nC) the share itself is exempt but not the grant thereof. We would therefore add after the words "qualifying equity share" a comma and then the words "or a grant thereof,".
- Section 11
- The proposed section 11(lA) grants a deduction equal to the market value of the qualifying equity share granted to the employee of that person. It often happens that an employee acquires shares in a listed company whilst he or she is employed by a group company. Often, the listed company is not the operating company with the employees. Although it is not clear who gets the deduction, it would appear that the deduction is to be granted to the employer, notwithstanding that it may be that the employee has been granted shares in a group company. If this is the intention, we welcome this and suggest that the wording be clarified to give effect to this. If the deduction is granted to the company issuing the shares, the employer should be allowed to recompense the company issuing the shares so that the deduction falls in the correct company.
- Section 69
The proposed section 69(1)(g) of the Act places an onerous administrative burden on the employer in that it is required to report on the amounts received by or accrued to employees and former employees from the disposal of qualifying equity shares. The requirement to report on employees is accepted, but it becomes extremely difficult to monitor the activities of former employees beyond the initial 5 year period. An employee may choose to take total control of his or her shares after the 5 year period and may pledge the shares as security for his or her debts with third parties. The employer will then have to keep track of the share through the share transfer secretaries until ultimately sold. We do appreciate the difficulty that SARS faces in determining when the taxpayer has disposed of the qualifying shares, but ask that this administrative burden not be moved to the employer as it will be impractical to implement.
Further, the employer is not in a position to know what the proceeds on disposal of the qualifying equity share is in respect of former employees where such share is a listed share. The reason being that the transfer secretaries will not have details of the proceeds since this information on dematerialised shares is only available from the stock broker who facilitated the sale. We suggest that the employer merely be required to advise SARS of the date of disposal , number of shares disposed off, the employee’s name and last known address in respect of former employees as this information may be available from the Share Transfer Secretaries.
The point made in the Explanatory Memorandum of many such employees being unaware of their obligations or being SITE taxpayers is a question of taxpayer education and should be the responsibility of SARS not shifted to the employers. The total administrative burden already carried by employers both in respect of taxation, labour law and various other legislation is already extremely onerous and may indirectly discourage formal employment.
- Fourth Schedule
- The proposed amendment of paragraph 1 of the Fourth Schedule refers to the market value of any qualifying equity share contemplated in section 8B to be regarded as remuneration. Section 8B in addition refers to the amount received or accrued from the disposal of any qualifying equity share or any right or interest in a qualifying equity share. The respective paragraph and section require amendment so as to ensure consistency. We suggest that paragraph 1 of the Fourth Schedule makes reference to section 8B(1) as opposed to merely section 8B.
- The proposed amendment refers in paragraph 11A(1)(b) to the market value of any qualifying equity share as defined in section 8B. We assume that the intention is to include in the definition of remuneration the market value of shares granted to employees where they do not fall within the definition of qualifying equity share since a qualifying equity share is exempt in terms of section 10(1)(nC) of the Act and therefore cannot be regarded as remuneration. We suggest that paragraph 11A(1)(b) of the Fourth Schedule or section 8B of the Income Tax Act be suitably revised to ensure that the correct amount is regarded as remuneration.
In addition to the above, section 8B taxes not only the amount received or accrued in relation to any qualifying equity share but also any right or interest in a qualifying equity share. In our view, paragraph 11A would require amendment so as to include this right or interest.
- Subparagraph 11A(5) of the Fourth Schedule to the Act proposes that, where the employer is unable to deduct or withhold the full amount of employees tax during the year of assessment during which the gain arises, the employer must immediately notify the Commissioner of the fact. Previously, the employer was required to obtain a tax directive for the purposes of determining the tax to be withheld or deducted. This requirement has now been removed (subparagraph 11A(4) of the Fourth Schedule). It now appears that the employer has the remaining periods in the year of assessment to deduct the PAYE as opposed to one month. Clarity is required as to whether the balance of PAYE owing by the employee will be treated as an interest free loan where such amount is deducted in instalments during a year of assessment. For example, if the PAYE to be deducted from the gain on disposal of a share is R30 000 and this amount is deducted in instalments over the remaining months in the year of assessment, does this treatment give rise to a taxable fringe benefit?
- Consideration should be given to including a definition of "market value" in section 8B that is similar to the definition as included in the proposed section 8A i.e. "the price which could be obtained upon the sale of that equity instrument between a willing buyer and a willing seller dealing freely at arm’s length in an open market and in the case of a restricted equity instrument had the restriction to which that equity instrument is subject not existed."
This will ensure consistency in regards to what is market value for purposes of the Income Tax Act No. 58 of 1962 ("the Act"). Consideration may be given to including such a definition in section 1 of the Income Tax Act.
- Effective date
Finally, the effective date of the proposed section is not clear, and we suggest that it applies to any equity share granted or issued on or after date of promulgation.
- Explanatory Memorandum
- Example 1
- Annexure 2: Full taxation of executive equity scheme
- While the need for SARS to impose provisions of this nature is understood, this position has been predicated on an assumption that these schemes are a form of conventional remuneration that should be taxed. If this assumption is to prevail, then a corresponding deduction should be granted to the employer company. This is the approach adopted by the new accounting provisions that require share-based payments to be expensed from 2005. Reference is often made by the legislature in the Explanatory Memorandum to the accounting conventions and we are of the view that this is one further aspect where the tax regime should be symmetrical.
- In section 8A(3)(b) the word "earlier" should read "earliest".
- Definition of "restricted equity instrument"
- Paragraph (a) of the definition of "restricted equity instrument" is too broad and would include normal pre-emptive provisions in any shareholders’ agreement, or even in the company’s articles. It is accepted that one of the requirements of section 8A(1) is that such equity instrument was acquired "by virtue of his or her employment or as a reward for services rendered or to be rendered or by virtue of his or her office of director of any company. One wants to avoid the debate of whether the shares were acquired quo shareholder or qua employee or director where the individual is both a shareholder and employee or director.
- Paragraph (c) states that it would be a restricted equity instrument if any person has retained the right to impose a restriction on the disposal of the equity instrument. It is a requirement of the JSE Securities Exchange that executive directors obtain the approval of the Chairman or designated Officer before being allowed to dispose of their shares in the employer company or group company. The Chairman may, under certain circumstances, not grant the individual permission to dispose of the shares if, for example the Chairman believes that there is sensitive information which has not become public knowledge as yet. It is not clear if this will also be construed as a restriction with the result that the vesting date will then not be the earlier date when the individual may be "entitled" to dispose of the shares scheme save for such further JSE Securities Exchange restrictions. If shares ordinarily vest in the director on, say 30 March 2005 but the director is still required to obtain formal approval to dispose of any shares at any time after 30 March 2005, when will it be regarded as unrestricted for purposes of section 8A: 30 March 2005 or the actual date that the Chairman grants his approval?
- In terms of the JSE Securities Exchange, there are closed periods during which a company’s shares may not be disposed of, eg from end of financial year to date of release of results; from end of interim financial reporting period to date of release of results; during the existence of any cautionary announcements. What will be the situation where a share vests during the so-called "closed period"? Will the vesting date, for purposes of section 8A, be the date immediately after the closed period, or will the so-called closed period be disregarded in determining the vesting date?
- Consideration should be given to allow a taxpayer to defer payment of the tax to the year in which he or she actually disposes of the shares. Alternatively, in order to provide for equity in the share scenario, the tax should be levied on the basis of "payment and delivery". The gain only materialises when delivery of the shares is taken. Before that any gain is of an unrealised theoretical nature. This is the case in most overseas jurisdictions, for example, United Kingdom, USA and Germany, where tax accrues on payment and delivery of the shares.
- Clarity is required as to whether "grant" means the initial granting of the option even if not accepted and or exercised by date of promulgation? The commencement date refers to where equity instruments are "granted" but section 8A does not use that word.
- The exemption in terms of section 10(1)(nE) has been deleted, but the new section 8A only applies to equity instruments granted on or after date of promulgation of the amending legislation. This means that the old section 8A will continue to apply in respect of all equity instruments granted prior to date of promulagation. The so called "old schemes" could still result in the equity instruments previously acquired by participants being re-acquired by the employer company or share trust at the original acquisition price which may be higher than the then market value (ie stop loss provision).
- The deletion of the exemption under section 10(1)(nE) of the Act will now subject such a repurchase to income tax, which we do not believe is the intention as the legislation will then be retrospective. We recommend that section 10(1)(nE) be amended to state that it would only apply to equity instruments granted prior to date of promulgation of the current amending legislation.
- Explanatory Memorandum
- It must be borne in mind that in terms of current practice there is in fact tax inequity which creates a negative tax arbitrage from the perspective of the taxpayer. In particular while the employee may only have been taxed on a limited amount the company granting the incentive has been denied a deduction. Thus any tax arising as a result of such schemes in the past has been a net gain to the Fiscus. On the other hand where cash is paid to executives as an alternative, the company would have obtained a tax deduction of the expenditure at the rate of 30%.
- Example 5
Result: Fourth line should read: ‘Employee has R1 299 (not R459) ordinary revenue …’.
- Example 6
Facts: Third line should read: ‘However, company X may (not "will") …’.
- Example 7
Facts: Second line should read: ‘Employer (not "employee") unilaterally conceals the contract’.
- Annexure 3: Hybrid financial instruments
- An overall observation is that this section is currently unwieldy and difficult to comprehend, even by tax specialists. It is very difficult to continually patch up a section in order for it to make sense. We recommend a complete rewrite of this provision.
- The amendments to section 24J are based on the concept of a "transaction, operation or scheme". This expression is used in a negative context simply because that is the expression used in section 103 of the Act. The fact is that the words themselves are perfectly ordinary and innocuous, describing ordinary, everyday and innocuous business events. It is simply not enough to attempt to deal with the proposed mischief only by describing it as a "transaction, operation or scheme". The provision must, therefore, be narrowed down by defining what is meant by transaction, operation or scheme as used in section 24J of the Income Tax Act. The words transaction, operation or scheme should be expanded to include only a transaction, operation or scheme that has the effect of avoiding, postponing or reducing a tax liability and that has as its sole or main purpose the avoidance, postponement or reduction of a taxation liability.
- The proposed amendments to section 24J, clauses (d) and (f) could be more easily achieved by splitting convertible instruments into their equity and debt components for tax purposes. Such treatment is already required for accounting purposes.
- Paragraph (i): Inclusion of term ‘lease and leaseback’ in the definition of "interest": This term is not defined in section 24J or in section 1 of the Income Tax Act.
- Proviso to the definition of "yield to maturity"
With reference to the ‘yield to maturity’ definition, the draft mentions an amount that is likely to be payable. This will give rise to disputes with regard to quantification. It is suggested that it be deleted.
- The current proposed legislation seeks to disallow the excess interest in the borrower’s hands and to also tax the difference between the cost of the share conversion rights and the issue value thereof.
- We believe that the amendments should only disallow the so called "excess" interest incurred by the borrower. Essentially a group of companies should only be allowed a deduction on the "net" amount of the loan.
- In the existing section 8E, after paragraph (b)(iii) of the definition of "affected instrument" there must be added the word "or" to cater for the new sub-paragraph (iii).
- Section 8E: definition of "date of issue"
- The word "later" should be "latest".
- Paragraph (c)(i) and (ii) refers to the date on which the company at any time after the share is issued undertakes an obligation to redeem the share in whole or in part or in respect of which the holder obtains the rights to require such redemption.
It may happen that in the course of an ordinary commercial transaction a company which has, say, issued redeemable preference shares, assumes the obligation to redeem the shares as part of the restructuring of the company, e.g. prior to its sale. Thus the agreement might simply state that the issuer undertakes to redeem its redeemable preference shares, say, within seven days of the date of signature of the agreement. This means that the preference share is now deemed to have a date of issue on the date of signature, and because the redemption period is less than three years, it becomes an affected instrument.
Furthermore, sub-section (3)(a) states that the dividend will be deemed to be interest in the recipient’s hands in respect of any dividend declared on or after the effective date, and "effective date" is defined as 23 March 1989. This, taken literally, means that all dividends declared in prior years have suddenly been re-ategorised as interest.
- In section 8F the "date of issue" includes in paragraph (b) the date on which the instrument becomes convertible. This makes nonsense in the context of sub-section (2)(a). Applying paragraph (b) of the definition of "date of issue", that subsection effectively states that no deduction will be allowed if the instrument is at the option of the issuer convertible within three years from the date on which it becomes convertible. The Explanatory Memorandum explains paragraph (b) of the definition by stating that it applies where the instrument becomes convertible "if these rights are created subsequent to the actual date of issue". This kind of wording must be included in the definition as well if it is to make any sense.
- The proposed section 8F appears to disallow the interest payments totally where the instrument is convertible within three years. It is suggested that the interest be disallowed only to the extent that the instrument is convertible within 3 years so that equity may prevail. An instrument may be partially convertible within 3 years but the interest on the entire instrument, including that portion that is not convertible within 3 years will be disallowed, in terms of the proposed legislation.
- The amendments to section 8E and the introduction to section 8F are designed to have the effect of re-categorising equity into debt or debt into equity so as to result in the tax treatment corresponding to the economic substance. If that is the case there is no reason to go only halfway. It is punitive to disallow the interest under section 8F and impose STC, but then tax the recipient of the interest in full. That recipient should be treated as receiving a dividend with an STC credit. Likewise, under section 8E, the issuer should be deemed to have paid interest as well. This is the way it is dealt with elsewhere, e.g. the United States of America. If the concern is that interest is being paid on what in essence is equity, then the payment and receipt should be treated as being of a similar nature.
- In terms of section 64C a deemed dividend arises when amounts are incurred in respect of instruments falling within section 8F. Interest is incurred on a day-to-day basis. Is STC triggered on a day-to-day basis or on distribution or at the end of the year of assessment of the payer? This aspect needs to be clarified.
- The three-year period would exclude transactions entered into for periods exceeding three years. This could be subject to manipulation to avoid falling into the ambit of the section.
- The effective date of section 24J, 8E and 8F require further clarification. For example, what will be regarded as the date when the shares are acquired if they were forward purchased prior to promulgation but only issued after date of promulgation? Does this then mean that in terms of a forward purchase of shares, the proposed amendments to section 24J will apply regardless of the fact that the transaction was entered into many years prior to the promulgation of the proposed amendments. This results in retrospective legislation which adversely affects the business climate which requires certainty to be able to make business decisions. The problem here is that the actual shares to be issued will only be issued at the date of settlement of the loan. Section 8F(2) applies to instruments "issued" or acquired after 1 January 2005 – does "issued" refer to the actual date of issue or the defined "date of issue"?
- General comments:
- There appears to be a general paranoia about debt which could be converted into equity which appears to be unfounded. Interest payable on debt will only qualify for deduction for income tax purposes if such interest satisfies the requirements of section 11(a) read with section 23(g) of the Income Tax Act.
- However, interest received by or accrued to the recipient will be included in gross income and be subject to income tax (after the basic interest exemption allowed to natural persons only) without any requirement that such interest be earned in the course of carrying on any trade.
- The deduction of interest paid may be limited if the interest rate is "excessive" in relation to the market rate of interest whilst the excess interest will still be taxable in the hands of the recipient.
- The end result is that there is generally symmetry in that the payer obtains a deduction, provided certain requirements for deduction are met, whilst the recipient is subject to income tax on the interest received or receivable.
- The mere result that the debt may convert to equity within the three year period should not re-classify the interest to a dividend only for the payer but still be treated as interest for the recipient.
- It is commercial practice to use convertible debt to prevent hostile takeovers and bids and their use is not tax driven as is shown above, in that the interest is fully taxable whilst dividends from within South Africa are exempt from income tax and capital gains tax.
- We urge a reconsideration of section 8F of the Income Tax Act or alternatively for the recipient not to be taxed on the receipt of the interest where such interest is deemed not to be deductible by the payer in terms of section 8F(2) and is subject to STC in terms of section 64C(2)(h) of the Income Tax Act.
- Explanatory Memorandum
- Amendment to section 8E
1(b): delete the word ‘with’.
- Introduction of section 8F
3. Types of hybrid instruments covered by section 8F, third line, second sentence, first would should be amended to read "since".
- Annexure 4: Deferred instalment sales
- We welcome the general principles of matching cash flows to taxation for the acquisition or disposal of assets in terms of the proposed section 24M where the full consideration cannot be quantified in the year of acquisition or disposal of the asset.
- We welcome the deletion of the requirement that expenditure could not form part of base cost of an asset if such expenditure was not paid or was not due and payable in a year of assessment as this was not in line with commercial realities of transacting.
- The proposed section 24M deals in sub-paragraph (4) with the specific sections and allowances that are to be impacted. The sub-paragraph does not deal with allowances claimable in terms of section 11(gA) of the Act, or section 15 read together with section 36 of the Act (dealing with mining operations) and allowances claimable in terms of the First Schedule to the Act (dealing with farming operations). Clarification should be provided as to why these allowances are not affected by the proposed section 24M or in the alternative, the proposed section should be amended to include these allowances.
- Explanatory Memorandum
- General comment
The proposed amendments are effective from the commencement of years of assessment ending on or after 1 January 2005, that is, for individuals the first year of assessment in which the proposed provision will have application is 2005. Many of the examples start at the 2004, or earlier years of assessment, which is incorrect.
- Part B (3), first paragraph, second line should read: "… if the total price (i.e. proceeds) is (not ‘are’) contingent upon one or more events".
The last sentence in this paragraph should be reworded so as to be understandable.
- Example 1
Facts: Second sentence date to be changed to ‘March 2004’ (not 2005).
- Example 2
Facts: Second sentence date to be changed to ‘March 2004’ (not 2005).
- Example 3
Facts: Second sentence date to be changed to ‘June 2004’ (not 2005).
- Example 4
Facts: Second sentence date to be changed to ‘December 2004’ (not 2005).
- Example 5
Facts: Second sentence date to be changed to ‘September 2004’ (not 2005).
Result: Should be amended to read ‘The (not "all") R100 000 …’.
- Example 7
- Annexure 5: Relief for interest-bearing investments held by Namibian, Swaziland and Lesotho investors
- Section 10(1)(hA) applied the 183 days or carrying on business tests only effectively to emigrants by referring to people who were at any time resident. Now it applies simply to any non-resident. If the decision has been taken to no longer treat emigrants differently, there appears to be no reason to retain those tests at all. If a natural person is not a resident as defined in section 1 of the Act, especially where he or she is recognised as resident in a treaty country, there is no basis on which to tax that person merely because he or she is here in any one year for more than 183 days (especially if the average of 549 days will not be met)? Either they are non-resident and exempt or not. The reason given that they are likely to have a bank account is, with respect, not good enough as there are many other, more important, sources of interest, e.g. company loan accounts, Government stock, etc.
- Moreover, if they are to be taxed on interest because they carry on business through a permanent establishment, it should only be interest effectively connected with that permanent establishment and not any and all interest – this is consistent with our treaties.
- Annexure 6: Public private partnerships
Section 11(g) of the Act is to be amended to cater for public private partnerships by lifting the restriction that the recipient need not be tax exempt. Is it not appropriate to amend section 11(f) in this regard as well?
- Annexure 8: Stamp Duties amendments
- Amendment of item 14 of schedule 1: sub-clause (d): Section 5(1) of the Stamp Duties Act No. 77 of 1968 is to be amended to provide for payment of any stamp duty, interest, penalty or additional duty in aggregate of R100 or more to no longer be permitted to be made by way of adhesive stamps.
It is submitted that it cannot be administratively efficient, either for the taxpayer or for SARS, to collect such insignificant amounts. We therefore suggest that the exemption be extended to cases where the duty does not exceed R250 or a higher amount.
- The removal of the limit in respect of rentals (previously, the rental for stamp duty purposes was limited to the market price of the immoveable property in question) is prejudicial in cases of long-term leases, for example 99 year leases. There is no basis for stamp duty to exceed the previous limit. Alternatively, the stamp duty should be subject to the maximum amount of transfer duty that would have been payable had the lessee acquired the immoveable property at that date of commencement of the lease at the market price.
- Various amendments to the Stamp Duties Act provide for interest at the rate of 10% per annum to be paid for late payment of duty. We suggest that the rate be linked to a rate in the Public Finance Management Act to prevent the Stamp Duties Act having to be amended regularly merely as a result of changes to interest rates in the market.
- Annexure 9: Transfer duty
- Various amendments to the Transfer Duty Act provide for interest at the rate of 10% per annum to be paid for late payment of duty. We suggest that the rate be linked to a rate in the Public Finance Management Act to prevent the Transfer Duty Act having to be amended regularly merely as a result of changes to interest rates in the market.
- Section 20C (3)(b) of the proposed insertion requires the Commissioner to inform the person against whom the complaint is to be made prior to lodging the complaint with the professional body.
Section 20C(3) (b) provides that the person’s client or any other person may object to the lodging of the complaint within 30 days of the written notification. However the Commissioner may still lodge the complaint if he/she is not satisfied that it should be sustained.
The proposed legislation is silent as to whether the Commissioner is obliged to supply reasons to the client or the other person as to why he did not sustain the objection and whether the Commissioner’s decision is subject to objection and appeal.
Section 20C(4) provides that the controlling body must consider the complaint. It is not clear as to whether the controlling body is to supply any information to the Commissioner to evidence that it has considered the complaint. Should the controlling body consider the complaint, but decide not to take any disciplinary measures, it is not clear whether it will be obliged to give reasons for this to the Commissioner and whether the Commissioner can object to this.
- Annexure 11: Measures to enhance tax administration
- Regulation of tax practitioners
- The proposed section 67A merely seeks to require certain persons to register with the Commissioner of SARS so that SARS has a register of tax practitioners. The legislation does not provide as to what the qualifications, sanctions, penalties for misconduct or transgression, etc as there is no code of conduct or rules, etc, currently applicable to tax practitioners.
- The section to regulate tax practitioners applies only to tax consultants who practice for their own account or in partnership. In the case of firms of accountants and lawyers which are incorporated (i.e. practicing as a so-called "Inc") the relevant natural person does not provide advice for reward to another person – the reward comes from the Inc in the form of salary and the advice is to a client of the Inc. Subsection 67A(2)(c) of the proposed amendment excludes all employees and directors of incorporated practices since these persons will be advising clients of their employer, the Incorporated Practice. The Incorporated Practice is not a natural person and, therefore, not required to register as a tax practitioner. This could not have been the intention of the legislature as it prejudices those persons who practice in partnership or individually. Similarly, there might be tax consultants who operate through private companies or close corporations. This deficiency should be rectified.
- Subsection 67A(2)(b) is in our opinion very vague in that it is not clear as to how one determines if a person provides tax advice as an "incidental or subordinate part of providing goods or other services". Will this be determined in relation to fees earned for the provision of tax advice and assistance as a proportion of the total fees earned by a person? What if a person renders tax advice and assistance for no more than 5% of their time (for reward) whilst rendering legal or other advice for the remaining 95% of his or her time, will such a person be required to register with the Commissioner? Clarity on this aspect is required in the legislation.
A number of potential grey areas exist around the provision of advice which is incidental to the provision of other goods or services. For example, is a bank employee who provides tax advice related to a loan transaction a tax adviser as defined?
It could be argued that all Chartered Accountants in public practice provide tax advice as incidental or subordinate to their accounting and audit mandate. Insurance brokers could argue that they complete some hundreds of tax returns and provide tax advice as incidental or subordinate part of their main business as insurance brokers.
Further, there is no reason why insurance brokers/consultants or other persons who provide tax advice should be specifically excluded.
- While it is appropriate to exclude lawyers who provide advice in anticipation of litigation, the fact is that most tax counsel at the Bar provides general tax advice and not only in anticipation of litigation.
The provision excluding advocates and lawyers who provide advice or assistance during or in anticipation of litigation is unfair. Accountants also assist clients in preparing for litigation, for example with regard to objections to tax assessments. The legislation should not be discriminatory so as to grant one sector an unfair advantage by not requiring them to register.
- The following questions need to be addressed:
a) What information SARS requires and for what purpose?
b) Whether SARS will be allowed to refuse registration and if so on what grounds?
c) Whether SARS may use the information in assessing tax returns (i.e. risk profiling of taxpayers)?
d) How long will it take SARS to register the practitioner?
e) Is it only SARS that will have access to this register?
- While the concept of the regulation of Tax Practitioners through an independent board is supported it is completely inappropriate to register such practitioners with SARS. The Explanatory Memorandum refers, somewhat vaguely, to SARS obtaining valuable information through this process. The exact information SARS wish to obtain and the purposes for which it will be used should be clearly stated.
- We are concerned at the level of legislation which seems to be enacted by way of regulations as opposed to statutory legislation passed by Parliament and trust that this very important aspect of regulating tax practitioners is not left to governance by regulations outside of Parliament.
- The introductory paragraph of the Explanatory Memorandum refers to "appropriate sanctions in the event of non-compliance with tax legislation." The meaning of this phrase should be clarified as the issue of responsibility between the taxpayer and tax advisor is also important in determining who has not complied with the tax legislation.
- Advance rulings
- We are concerned that most of the points raised in our submission of 27 February 2004 addressed to the Commissioner of SARS on the draft discussion paper that was released for comment previously have been ignored. The points raised in this letter apply equally here and we therefore attach hereto a copy of that letter.
- Section 76E(2)(h): We cannot see why the applicant should furnish reasons as to why the applicant believes that the proposed ruling should be issued since a ruling is merely a written statement issued by the Commissioner regarding the interpretation or application of the Act. The Commissioner has the right to issue the ruling in the negative or positive based on his interpretation of the Act.
- We are surprised no rulings will be granted on Transfer Pricing transactions (section 76G(1)(a)(iii)). This is an area, which is open to uncertainty, and any moves to reduce the uncertainty would be welcomed especially given that SARS will have to make a determination at some point in time in assessing the taxpayer.
- The proposal in section 76G(2)(a) that the Commissioner may reject an application to give a ruling on section 103 severely dilutes the benefit of an advance ruling. That section is a discretionary section so if the transaction has already taken place he would, even under the current law, be bound to issue the ruling because he has to exercise his discretion and indicate how that discretion has been exercised. Why should he not wish to exercise his discretion in advance based on a given set of facts, subject to the safeguard, of course, that the given set of facts conforms to the actual facts when the transaction is completed. On the assumption that the assumed facts and the actual facts are sufficiently similar, the only difference as far as the Commissioner’s exercise of his discretion is concerned is one of timing, and why should the SARS refuse to exercise their discretion in advance with a view to the taxpayer obtaining certainty to the transaction.
- Section 76G(2)(c) has the further exclusion that a ruling will not be issued if" a matter the resolution of which would be unduly time-consuming or resource intensive". We cannot understand why this exclusion is necessary given that the taxpayer will be paying for such a ruling. It must be accepted that the majority of ruling requests will be for complex issues and to, therefore, have this exclusion limits the application and benefits of this entire initiative of SARS. There are sufficient checks and balances in the proposed legislation to deal with other issues and we cannot agree with the need for this limitation.
- Our main concerns relate to the ability of SARS to retrospectively withdraw the binding private or class ruling in terms of section 76N(3). As we had stated in our letter of 27 February 2004 this undermines the very canons of certainty, which the Advance Tax Ruling system is meant to introduce. We implore you to withdraw this subsection.
- We are concerned that SARS may withdraw a ruling if made in error and the applicant has not yet commenced the transaction. What happens if the transaction is a public transaction, where scheme documentation has been prepared based on the ruling and then the ruling is withdrawn? This creates significant commercial embarrassment to the taxpayer. With respect, we are concerned that such a withdrawal goes against providing taxpayers with certainty. It is conceivable that a ruling today may not materially erode the South African tax base but at a future date it may. In these circumstances it seems very harsh to withdraw such a ruling retrospectively to the date of issue. Also who determines whether it has the effect of materially eroding the South African tax base and what is meant by "materially"? Further given that the taxpayer has paid for such a ruling will the fee be refundable and will SARS be liable to re-imburse the taxpayer for costs incurred in transacting or planning to transact based on the advance ruling?
- It is not clear whether the taxpayer can influence the format and content of the publication. It is also not clear what happens in cases where the taxpayer disagrees with SARS on the content of the publication, which disagreement cannot be resolved. In our view the taxpayer’s view should prevail (section 76O).
- We believe that SARS should be required by law to process rulings within a specified time period. We would suggest a maximum of 90 days, allowing for complex matters and having regard to the fact that taxpayers will be paying for such rulings.
- We would question whether an additional category of private rulings could not be introduced which would not be made public. Such non-published rulings would protect the intellectual property of the applicant for the ruling. The idea of such non-public rulings is not to assist in developing tax avoidance schemes but to protect the intellectual capital (i.e. financial engineering skills) and competitiveness of the developers. For example a consultant may develop a unique empowerment structure. The consultant should be able to obtain an advance ruling on the application of tax law to that structure without having to expose its competitive advantage in respect of the structure, albeit that the structure has no tax advantages.
- The stated exclusion (section 76G(1)(b)) of rulings in respect of independent contractors, labour brokers, personal service companies or personal service trusts is disappointing.
We cannot see why SARS is not willing to grant rulings on whether a person is an independent contractor, labour broker, personal service company or personal service trust. SARS has the right to obtain whatever information it requires from any person and is best placed to determine whether a person is one of the above.
We believe it incorrect to put the onus on a third party to determine if a person is one of the above, given the penal provisions in the event that the wrong determination is made by such third party.
This exclusion should, therefore, be removed given that the taxpayer will be paying for such a service to obtain finality to determine his obligations when making payment to the above persons.
- It is not understood why, in the case of "binding private rulings" SARS states "These rulings may not be relied upon or cited as precedent by any other taxpayer." Particularly if the circumstances are the same then why not let these rulings be used as precedent.
- Any ruling given by SARS for which a taxpayer has made payment will in effect be of no value if such ruling does not consider the general or specific anti-avoidance provisions of the Act based on the information provided by the taxpayer. SARS has the right to limit the applicability of the ruling to the facts and information as disclosed by the taxpayer. This means that the ruling will be invalid if the taxpayer has not disclosed any material facts which may have a bearing on the issuing of the opinion.
This restriction or limitation in terms of section 76G(1)(b) should be removed in light of the above.
- Annexure 12: Share for property transfers
- We welcome the introduction of section 24B as it will provide tax relief for commercial transactions structured in the manner envisaged in the proposed section 24B.
- The mischief which is sought to be prevented in subsections (2) and (3) however, is extremely far fetched.
- We struggle to understand the cross issue concerns as we are not aware of this occurring in practice. In any event, would an issue of shares in exchange for debt not be void in terms of section 38 of the Companies Act? Our only concern here is whether this can be applied far more widely than intended.
- The new proposed section 24B grants a company a "deemed expenditure actually incurred" on the acquisition of any asset from a non-connected person. With respect, we cannot see why this provision is not extended to the acquisition of goods and services where the acquiring company issues shares as consideration for such acquisition.
The acquirer is currently subject to income tax on the value of the shares in terms of the definition of "gross income", and there appears to be no symmetry where the company acquiring the goods or services is not entitled to any deduction for the issue of such shares.
- The provisions of the proposed section 24B(2) refer to the scenario where a company acquires any share or debt instrument which is issued to the company directly or indirectly in exchange for shares issued by that company or any connected person in relation to that company as part of a transaction, operation or scheme. In such a scenario, the company is deemed not to have incurred expenditure in relation to that share or debt instrument so acquired.
The wording "transaction, operation or scheme" should be extended to include only transactions, operations or schemes that have the effect of avoiding, postponing or reducing a tax liability and that have as their sole or main purpose the avoidance, postponement or reduction of tax liabilities. If this is not the intention, then the section should state that expenditure would not be incurred where shares or debt instruments are acquired for shares issued. In other words, the phrase "transaction, operation or scheme" is meaningless.
This amendment i.e. the expansion of the definition would deal with the artificiality referred to in the Explanatory Memorandum.
The general anti-avoidance provisions of section 103 of the Act are sufficient to apply to section 24B and we, therefore, do not see the need to bring in the words "transaction, operation or scheme" into section 24B.
- Shares issued in exchange for shares or debt are excluded from the proposed section 24B as it is considered that this provides an easy opportunity to artificially inflate the value of both sets of shares. As it would be practically impossible to inflate the price of listed shares the exclusion of shares should exempt listed shares. Provided that one set of shares is listed a price discovery mechanism is created. The same principle should apply to listed debt instruments in respect of a debt for debt transfer.
- Annexure 13: Technical and textual amendments
- The Explanatory Memorandum indicates that the fear is that income of an offshore trust will not be attributed to a donor if it is not "income" as defined, which, in the case of a non-resident trust, requires the gross income to be from a South African source. But this is not the correct interpretation of "income". In CIR v Simpson, 16 SATC 268, the Appellate Division (as it then was) held that, in relation to (what is now) section 7(2), the word "income" must not be given its defined meaning but rather it means profits or gains.
- It is a principle of statutory interpretation that where a word or expression has been given a meaning, it must be given the same meaning elsewhere in the section unless a contrary indication is clearly evident. There is no such contrary indication.
- The reason why Watermeyer JA (as he then was) gave that interpretation was that to give "income" its defined meaning caused difficulties, principally that there was no provision for the husband (in the case of section 7(2)) or the donor (in the case of section 7(8)) to get a deduction for expenses.
- Based on Simpson's case there is thus no reason to amend section 7(8) because the word "income" means profits or gains, without reference to source, and that is exactly what SARS wishes to have attributable to the donor. But if it insists on making the amendment, then a further amendment has to be introduced to deal with expenses, as has been done, for example, in section 25B(3).
- The stated aim of this section is to prevent tax avoidance by the shifting by South African residents of assets offshore via foreign trusts. Following the latest circulars by the Exchange Control Department of the Reserve Bank dealing with so-called looping structures, it is effectively impossible for a foreign trust funded by a South African resident to derive South African sourced income without contravening the Exchange Control Regulations. Accordingly it is very unlikely that a South African court will favour an interpretation of this section that will result in the section only applying to attribute income earned in contravention of South African law.
- Section 11B(1)(c) refers to "any that" in the first line. The line should read as follows: "… where any building, machinery, plant, implement …".
- In terms of the proposed legislation, interest incurred in the production of income from foreign dividends will only be allowed as a deduction if the taxpayer carries on a trade.
Consideration should be given to allowing the deduction of interest against local dividends in situations where the borrowings were effected in order to fund a BEE deal, in terms of an approved BEE charter.
- The rationale given for the proposed amendments to section 25B is the same as that given for the amendments to section 7(8). Furthermore, the same solution, involving the alteration of references to "income" to references to "an amount", is proposed.
- Accordingly, the same risk arises, namely that capital receipts in the hands of the trust will be converted to revenue receipts in the hands of the beneficiary.
- This risk is dealt with in the amendments to section 25B(1) and (2) by the trigger for the attribution (inter alia the receipt of an amount by a trust) matching the attribution imposed (the deemed accrual of the amount by the beneficiary). The capital or revenue nature of the amount is unaffected by the attribution, and so it remains to be determined whether the deemed accrual is to be taxed as capital proceeds in the beneficiary’s hands, or as a direct inclusion in the beneficiary’s gross income.
- The amendments proposed to section 25B(2A) provides that a vested right to capital in a trust is an income receipt in the hands of a resident beneficiary if, inter alia, the capital arose from an amount received by or accruing to the trust where the beneficiary had a contingent right to that amount. The change in terminology between the trigger for the attribution (an amount accrues to the Trust), and the attribution imposed (that the amount must be included in the income of the beneficiary) results in the risk that a capital receipt by the trust which is retained by an offshore trust over the end of the financial year will at best be converted into a revenue receipt in the hands of the beneficiary in whom it subsequently vests. At worst, the receipt by the beneficiary of the vested right is subject to income tax under section 25B (as amended), and is subject to CGT under paragraph 80(3) of the Eighth Schedule. In this regard, the relief normally offered under paragraph 35(3)(a) of the Eighth Schedule does not appear to be available, as paragraph 80 does not operate to transfer the proceeds and the base cost from the trust to the beneficiary, but rather the (potentially notional) capital gain of the trust. Accordingly there are no proceeds which could be reduced by operation of the paragraph 35(3)(a) relief. With a push, the provisions of paragraph 80(3) may provide an entrance for the paragraph 35(3)(a) relief.
- The potential conversion of a capital receipt by the trust into a revenue receipt in the hands of the beneficiary warrants comment. The stated aims of the amendment could be as easily achieved by deleting sub-section (2A)(a)(i), and leaving references to "income" as they stand.
- Section 24B(4): Shares can also be issued in terms of section 45, yet mention is only made of sections 42 and 43.
- In relation to section 30 of the Act, the necessary regulations relating to clubs have still not been issued by the Minister, and yet the deadline for application remains 31 December 2004. We suggest that consideration be given to extending this deadline.
- Section 45(4)(a): the anti-avoidance provision should only apply if the parties to the transaction cease to form part of the same group within a period of 18 months.
- The proposed amendment to sub-section 45(4)(b) refers to "… that transferee company must be deemed to have disposed of that asset to a connected person on the day immediately before the date on which that transferee company ceased to form part of that group of companies and as having immediately reacquired that asset from that person for expenditure equal to the base cost of that asset immediately prior to that disposal".
The proposed amendment leaves open the value at which the deemed disposal is to have taken place. Is one to assume that because the transferee is deemed to have disposed of the asset to a connected party that this means the asset is deemed to have been disposed of at market value in terms of either paragraph 38 of the Eighth Schedule or section 8(4)(k) of the Act? It is suggested that it be stated that the assets are deemed to have been disposed of at market value.
In addition, the assets are deemed to have been reacquired at their base cost immediately prior to that disposal. This means that the transferee company will have been taxed on recoupments and capital gains, but there will be no step-up for base cost for depreciation purposes. This is extremely prejudicial and punitive. Surely it should be deemed to have acquired the asset at the market value.
- Paragraph 56(2) proposes to allow the creditor, who sells a debt owed by a connected person, to deduct any capital loss on sale if the person acquiring the debt has included the corresponding gain in his or her aggregate capital gain or aggregate capital loss.
Whilst this new proviso is welcomed to ensure symmetry, the problem is not entirely addressed in that if the acquiring person has the gain included in income as opposed to aggregate capital gain or aggregate capital loss, the creditor will still be denied the deduction of the capital loss. Where the debt is discounted by the creditor with a Bank, the Bank will have the discount included in its income as opposed to treating the gain as a capital gain.
This anomaly should be addressed by stating that the amount "must be or was included in the income or in the determination of the aggregate capital gain…".
- In relation to the amendments to section 64B, the Explanatory Memorandum once again, and correctly, points out that secondary tax on companies (STC) is a corporate tax. On this basis it is inconceivable that a foreign dividend that is exempt where more than 25% of the equity is held should not also qualify for an STC credit. This means that, in effect, any dividend so-received when on-declared will be subject to corporate tax in South Africa, i.e. STC, which is contrary to the stated intention.
- What is more, when added to the corporate tax payable by the foreign subsidiary in its country of residence and the foreign withholding tax on the dividend (which is not even creditable against the STC), the tax cost of investing abroad becomes extremely high. And this adds to the cost of investing in other African countries, which is part of this country’s New Partnership for Africa’s Development (NEPAD) obligations.
- Section 64B, paragraph (b) of the amendment, which refers to the newly proposed section 64B(3A) refers. We specifically refer to the comment in the Explanatory Memorandum which deals with dividends from collective investment schemes, which we reproduce for ease of reference:
Sub-clause (c): Currently section 64B(5)(d) provides for an exemption from secondary tax in companies (STC) of a dividend declared by a portfolio of a collective scheme referred to in paragraph (e)(i) of the definition of "company", to the extent that the dividend represents a distribution of dividends received by or accrued to that portfolio which are deductible under section 11(s). On the other hand, section 64B(5)(f) is much wider and grants an exemption from STC of any dividend declared by a company contemplated in paragraph (e)(i) of the definition of "company". It is therefore proposed that the more limited provision contained in section 64(5)(d) be deleted.
This statement made in the Explanatory Memorandum is not correct. Section 64B(5)(f) deals with group companies. It is assumed that the reference should have been made to section 64B(5)(j).
- Section 64B(3A) further limits the South African resident taxpayer from claiming an STC credit in respect of foreign dividends, which profits were originally taxed in South Africa. It now limits the STC credit regarding the foreign dividend to shareholding structures in which a South African company holds a foreign company which holds a South African company, provided the top South African company’s indirect interest in the other South African company is at least 10%. This severely reduces the scope for South African companies to claim an STC credit in respect of foreign dividends received from previously taxed South African sources.
For instance, there are a number of foreign multinationals in South Africa, which via their shareholding structures above South Africa, pay a dividend declared from their top South African holding company to its foreign shareholder, which in turn via a number of other group companies may pay a dividend back into South Africa via a preference share. This foreign dividend, although coming from South Africa, carries no STC credits. This is untenable and subjects SA taxed income to double STC. There is a concern that this will be seen as a real deterrent to multinationals remitting these dividends back to South Africa.
If there is concern as to the ability to track that the foreign dividend comes from previously taxed SA sources, then SARS could either require the taxpayer to prove this to SARS satisfaction or to require the auditors to certify that the foreign dividend comes from previously taxed SA sources.
- The amendments to section 64B(5)(f) are very poorly worded. It is not clear in terms of the wording whether in order for the subsidiary company to qualify for the exemption under (f) the holding company must undertake not to apply the exemption itself in on-declaring the dividend. That is, the provision is seen as more than a test in determining whether the subsidiary company qualifies for the STC exemption in respect of its dividend. This then prejudices the intermediate holding company which on-declares the dividend to its holding company.
We assume that the section 64B(5)(f) exemption would still be available if the shareholder on-declares that dividend, but elects that the exemption contained in section 64B(5)(f) apply. If this is however, not the case it will mean that the bottom company in a multi-tier structure would qualify for the section 64B(5)(f) exemption, but that the rest of the companies in the structure would not be allowed to make use of the provisions of section 64B(5)(f) and would therefore have to pay STC upfront. It is thus hereby assumed that the reference to the exemption merely serves to clarify the fact that, should the shareholder declare a dividend, that dividend would, unless the shareholder elects section 64B(5)(f), be subject to STC.
We would propose that this matter be clarified in the proposed legislation and Explanatory Memorandum.
- The deletion in section 64C(4) of paragraphs (g) and (j) compounds a problem that arose out of the 2003 amendments, and this problem is not solved by the rewording of paragraph (k)(ii). The law allows interest-free loans within members of the same group without triggering STC, but the requirement that the exemption is limited to profits and reserves "that arose" while the shareholder and relevant company were members of the same group is going to cause significant practical problems in relation to a group’s treasury operations. The fact is that when a new company joins the group it is inevitable that it will be integrated into the group and it is impractical and, indeed, impossible, to dissect intra-group loans between those representing reserves which arose prior to acquisition and those which arose thereafter.
- Moreover, there might be a loan within a group that is five years old, a portion of which was made out of pre-acquisition reserves. Prior to 2003 such a loan was exempt under the provisions of section 64C(4) as they then read. Under a current reading, there appears to be a deemed dividend. The argument may be raised that there can be no dividend this year if the loan was made five years ago, because the event was five years ago. But loans do change from year to year and it is not impossible that, in the ordinary course, a loan will be repaid and re-advanced, so that the problem is real.
- In our view, once a company has joined a group, from a purely practical point of view all intra-group loans should be exempt, irrespective of the source of those loans.
- It is also noted that in subsection (4)(d) a loan is only exempt if the interest rate is not less than the official rate of interest. It used to be that if the loan was not denominated in SA Rand, the interest rate had to be market-related in relation to the currency in which the loan has been granted, but this appears to have been dropped. This could cause problems in groups where the loan is designed in, say, US Dollars, because the current official rate of interest is far too large in relation to what is appropriate for a US Dollar loan.
- The proposed amendment creates uncertainty. Section 67 requires the person to register when he or she becomes liable for taxation, whereas section 66 requires any person in receipt of gross income to submit a return. Where that person, for example, then earns gross income that will be exempt or the final taxable income is less than the threshold, he or she must submit a return, but has no duty to register. Section 66(1B) should contain the following exemptions:
- if the gross income consists solely of dividends exempt under section 10(1)(k).
- if that person is not required to register under the provisions of section 67.
- Annexure 14: Value-Added Tax (VAT)
- Amendment to section 1 of the VAT Act, paragraph (k), definition of "welfare organisation"
It must be appreciated that whilst an enormous effort has been made by us in identifying areas of concern both for the taxpayer and the Fiscus, the severe time constraints within which we have had to comment on the draft legislation has prevented us from considering all practical situations and transactions which may be affected by the proposed legislation. It may well be necessary to enact further amendments to this legislation as further problems or limitations are identified by taxpayers. We have seen this trend over the past few years in amending legislation given the volume and complexity of tax legislation that has and is being passed annually.