1 2011 budget and tax update. 2 2011 budget 3 main tax proposals personal income tax relief of...

1

2011Budget and Tax

Update

2

2011 BUDGET

3

Main Tax Proposals

• Personal income tax relief of R8.1billion (2010: R6.5 billion)

• A third rebate for individuals 75 years and older

• Conversion of medical deductions to tax credits

• Transfer duty relief

• Taxation of gambling winnings

• Tax treatment of contributions to retirement funds

• Fuel taxes to increase by 18c per litre (2010: 25.5c)

• Increased sin taxes

4

Tax Tables - Individuals

2011/2012 2010/2011

Taxable Income (R) Rate of Tax Taxable Income (R) Rate of Tax

0 - 150,000 18% 0 - 140,000 18%

150,001 - 235,000 R27,000 + 25% 140,001 - 221,000 R25,200 + 25%

235,001 - 325,000 R48,250 + 30% 221,001 - 305,000 R45,450 + 30%

325,001 - 455,000 R75,250 + 35% 305,001 - 431,000 R70,650 + 35%

455,001 - 580,000 R120,750 + 38% 431,001 - 552,000 R114,750 + 38%

580,001 and above R168,250 + 40% 552,001 and above R160,730 + 40%

5

Rebates

2012 2011

Primary Rebate R R

Under 65 10 755 10 260

65 and over 6 012 5 675

75 and over 2 000 -

6

Tax Thresholds

2012 2011

Primary Rebate R R

Under 65 59 750 57 000

65 to 74 93 150 88 528

75 and over 104 261 88 528

7

Interest and Taxable Dividend Exemption

2012 2011

R R

Under 65 22 800 22 300

Over 65 33 000 32 000

Foreign 3 700 3 700

8

Capital Gains Tax Exemptions

2012 2011

R R

Annual Exclusion 20 000 17 500

Annual exclusion in year of death – gains and losses 200 000 120 000

Disposal of small business by natural person if over age 55 900 000 750 000

Capital Gains Tax Exemptions

2012 2011

R R

Primary Residence Exclusion 1,5 m 1,5 m

- disregard gains (not losses) if proceeds do not exceed 2 m 2 m

9

Travel Allowance Deemed Expenditure Table

10

• Changed with effect from 1 March 2011

– and 11 of notes

– Fewer bands now increase by R60 000

– Limit on cost increased to R480k from R400k

• Reimbursive travel allowance where business km’s less than 8 000 p/a increased from R2,92/km to R3,05/km

Retirement Fund Lump Sum Withdrawal Benefits

2011/2012 rates are unchanged from 2010/2011

Taxable lump sum R Rate of Tax

0 – 22 500 0%

22,501 - 600,000 R22,500 + 18%

600,001 - 900,000 R103,950 + 27%

900,001 and above R184,050 + 36%

Refer page 20 and 21 of notes

11

Retirement Fund Lump Sum Benefits on Retirement or Severance

2011/2012 2010/2011

Taxable lump sum

R Rate of TaxTaxable lump sum

R Rate of Tax

0 - 315,000 0% 0 - 300,000 0%

315,001 - 630,000 R0+ 18% 300,001 - 600,000 R0 + 18%

630,001 - 945,000 R56,700 + 27% 600,001 - 900,000 R54,000 + 27%


12

13

Corporate Tax RatesYears of assessment ending between 1/4/11 and 31/3/12

2012 2011

Non-mining companies 28% 28%

Close corporations 28% 28%

Employment companies 33% 33%

Non-resident companies (SA branch) 33% 33%

STC: 10% on net amount of dividends declared

14

Small Business Corporations (Years of assessment ending between 1/4/11 and 31/3/12)

2011/2012 2010/2011

Taxable income R Rate of Tax

Taxable income R Rate of Tax

0 - 59,750 0% 0 - 57,000 0%

59,751 - 300,000 R0 + 10% 57,001 - 300,000 R0 + 10%


15

Turnover Tax For Micro Businesses (year of assessment ending 28/2/11 and 29/2/12)

2011/2012 2010/2011

Taxable turnover R Rate of Tax Taxable turnover R Rate of Tax

0 - 150,000 0% 0 - 100,000 0%

150,001 - 300,000 R0 + 1% 100,001 - 300,000 R0 + 1%

300,001 - 500,000 R1,500 + 3% 300,001 - 500,000 R2,000 + 3%

500,001 - 750,000 R7,500 + 5% 500,001 - 750,000 R8,000 + 5%


From 1 March 2012 can remain registered for VAT and 3 year bar on voluntary deregistration to be liftedSARS will be able to register an unregistered micro businesses that it detects

16

Medical Aid Contributions

• Monthly caps to increase 1 March 2011

– from R670 to R720 (7,46%) for each of the first two beneficiaries and

– from R410 to R440 (7,31%) for each additional beneficiary

• Proposed conversion to a tax credit system will be introduced on 1 March 2012

• Look out for discussion doc in March 2011

17

Subsistence Allowances • Travel in the Republic

– meals and incidental costs: R286 (was R276) per day

– incidental costs only: R88 (was R85) per day

• Travel outside the Republic

– daily amount per country also changed from 1 March 2011 (pg 12 to 20 of notes)

Transfer Duty

Natural and juristic persons -agreement on or after 23 Feb 2011

Natural persons - agreement pre 23 Feb 2011

Property value R Rate of Tax

Property value R Rate of Tax

0 - 600,000 0% 0 - 500,000 0%

600,001 – 1,000,000 R0 + 3% 500,001 – 1,000,000 R0 + 5%

1,000,001 – 1,500,000 R12,500 + 5% 1,000,001 and above R25,000 + 8%

1,500,001 and above R37,000 + 8%

The rate for juristic persons was a flat 8% of the consideration

18

19

Fuel Levies • To be increased by 18c/l on 6 April 2011

– General fuel levy on petrol and diesel increases by 10c/l

– Road Accident Fund levy on petrol and diesel increases by 8c/l cents per litre

• Total = 261.5 c/l on petrol; 246.51c/l on diesel

20

Sin Taxes• Excise duties on:

– Cigarettes increases from R8.94 per pack of 20 cigarettes to R9.74

– Beer increases from 85c to 91c on a 340ml can

– Wine increases from R2.14 to R2.28 a litre

National Health Insurance

• NHI to be phase in over 14 years

• Considerations for funding:

– Payroll tax (payable by employers)

– Increase in the VAT rate

– Surcharge on individual’s taxable income

• Look out for announcements in 2012 budget

21

Contributions to Retirement Funds• Current tax treatment on contributions to pension, provident and

RAF to be changed from 1 March 2012

• Employer’s contribution will be deemed a taxable benefit. Employee will be allowed to deduct up to 22,5% of taxable income

• Two thresholds will apply

– Minimum annual deduction of R12 000

– Maximum annual deduction of R200 000

• The taxable income on which the deduction (22,5%) is determined will be streamlined

22

Lump Sum Withdrawals From Provident Funds

• Currently 1/3 of the value of a pension or RA fund can be withdrawn on retirement and 2/3 must be used to buy an annuity

• 100% of the value of a Provident fund can be withdrawn on retirement

• Proposal to apply same 1/3 treatment to provident funds

23

Gambling

• Effective 1 April 2012

• Gambling winnings above R25 000

• Subject to 15% final withholding tax

• Includes National Lottery

• Similar to India, Netherlands and USA

24

Business Taxes• Dividends tax

– STC will be replaced 1 April 2012

• Internal company restructuring

– Relief for insolvent debtors if debts cancelled or reduced

• Venture capital companies

– Provisions to be reviewed

• Islamic finance

– Additional products to be addressed this year – ijara (finance lease)

• R&D tax incentive

– Approval process to be introduced before claim can be made

25

Skills Development and Job Creation• Learnership tax incentive

– Set to expire in September 2011

– Incentive to be extended for further 5 years

– Analysis to be undertaken in 2011

• Youth employment subsidy

– In form of tax credit through the PAYE system

• Industrial development zones

– IDZ incentives to be expanded for labour-intensive projects in IDZ’s

26

International Tax

• Headquarter company regime

– Review of problems with current rules leading to double tax and residence-based tax

• CFC’s refinement of rules

– Review of overly complex and unintended loopholes

27

Other Proposals• Capital gain foreign currency rules

– Individuals and non-trading trusts are taxed on realised currency gains

– Must maintain currency pools

– Provisions to be removed due to cost benefit considerations

• Travelling judges

– Home to work is private

– Judges presiding over multiple courts or a court that is located far from home

– Government vehicles are provided for this purposes

– Unusual work travel to be eligible for tax relief as if business

28

Other Proposals

• Foreign dividends received

– Currently subject to exemptions are taxed at marginal rates

– Given changes to taxation of local divs coming in 1 April 2012

– Exemptions and taxation of foreign dividends received will be amended to bring in line with local treatment

• SA branches of foreign companies

– Tax rate 33% with no STC

– On introduction of new div tax the rate might have to be reduced to avoid non-discrimination provisions in DTA’s

29

Other Proposals

• CGT treatment on capital distributions and pre 2001 assets

– Capital distributions should reduce cost and not trigger a gain or loss

– Currently these are subject to gains or losses

– Revised and simplified system to determine base cost of pre 2001 assets to be considered

– Once in place capital distributions can be aligned with international practice (reduce cost)

30

VAT Proposals• Fixed property

– Transfer duty payable by vendor on purchase from non-vendor

– Input tax limited to the transfer duty paid

– Proposal to delink input claim and will be lower of:

• Selling price

• Open-market value

• Municipal value

• VAT inclusive purchase price + improvements, by the non-vendor selling the property

31

VAT Proposals• Exemption for imported services

– Threshold on certain imported goods of R100

– No threshold for imported services

– Proposal to include exemption for services and increase both exemptions to R500

• Relief for unpaid debt between group companies

– Period of 12 months in which to settle debt

– Inter-group debt is often not settled

– Relief to be considered provided no input can be claimed by the seller until the claw back must be made by the purchaser

32

Estate Duty

• Primary abatement

– Unchanged at R3,5mill, plus

– Unused portion of the primary abatement of a pre-deceased spouse

• The effectiveness of estate duty is being reviewed, with several options under consideration

33

34

2010 AMENDMENTS

35

SITE

(Sections 5(1A) and 6(5) and para 11B(2) of the Fourth Schedule)

• SITE introduced in 1988

• Final tax on first R60 000 of net remuneration

• Intended to limit number of tax returns

• Resources required elsewhere

36

SITE

(Sections 5(1A) and 6(5) and para 11B(2) of the Fourth Schedule)

• SITE to be eliminated

• SITE-minimum and SITE-only – gone for y.o.a ending after 28 Feb 2011

• Phase-out relief for SITE-only taxpayers

– 2012: 1/3 of additional tax



37

SITE (Sections 5(1A) and 6(5) and para 11B(2) of the Fourth Schedule)

Mr X & Mr Y earn ‘net remuneration’ as follows:

Mr X

A: R42 000

B: R52 000

C: R54 000

38

SITE (Sections 5(1A) and 6(5) and para 11B(2) of the Fourth Schedule)

• Under SITE rules:

– Mr X’s tax liability was NIL

• Under new rules:

– Mr X’s tax liability is R16 940 (subject to phase-out)

39

Official Rate of Interest(Para 1 of the Seventh Schedule)

• Used for fringe benefit and STC purposes

• Linked to the repurchase or equivalent rate

– Rand denominated loans – SA repurchase rate + 1%

– Foreign loan – equivalent rate + 1% applicable to foreign currency

• Automatically adjusted at beginning of the month following month when the repurchase rate is changed

40

Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule and para 1 of the Fourth Schedule)

• Travel allowances have become more restrictive

• Change to motor vehicle fringe benefits

• Both should now reach similar outcomes

• Change effective 1 March 2011

• Starting point is presumption that use is deemed private and operating expenses are incurred by employer

41


• Value of benefit = 3.5% of determined value

• Determined value =

– Now includes VAT

– Maintenance plan included in purchase price

• At least 3 years or 60 000km

• Inclusion of 3.5% is reduced to 3.25% per month

• Value is reduced by consideration pd by employee for use but not for ongoing license, insurance, maintenance and fuel

• Remuneration = 80% of the 3.5% or 3.25%

42

Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule)

• On assessment employee can reduce the fringe benefit value for business use and private expenses he/she incurred

– Across-the board reduction – ratio of business use over total use x 3.5% (or 3.25%) - logbook

– Reduction for private use to the extent employee pays for insurance, licenses, fuel and maintenance costs

43


• Reduction for private usage insurance, licence and maintenance costs

– Ratio of private use over total use x actual insurance, licence and maintenance costs

• Reduction for private usage fuel costs

– Private usage x deemed fuel amount per table

• If employer reimburses any part of these costs:

– Above reductions cannot be claimed

– Correct bottom pg 55 of notes – delete second last sentence The across-the-board reduction for business use is not reduced by the amount reimbursed

44


• Example 1: Employer covers all costs

– Cost of vehicle = R300,000 (Incl VAT)

– Logbook = total 40,000km, business 10,000km

– Employer pays all costs

• Gross value of fringe benefit = R300,000 x 3.5% x 12 = R126,000

• Remuneration = R126,000 x 80% = R100,800

• Business reduction on assessment = R126,000 x 10,000/40,000 = R31,500

• Net fringe benefit = R94,500

45


• Example 2: Employee pays private fuel

– Same facts as example 1 except employee pays for fuel relating to private use

– Remuneration = R100,800

– On assessment, claim reductions for business and private use

• Business usage = R31,500

• Fuel cost R0.87 x 30,000km = R26,100

– Net fringe benefit = R126,000 – R31,500 – R26,100 = R68,400

46


• If employee receives both company car and travel allowance

– No deduction can be claimed on assessment

– Normal reductions relating to the fringe benefit on the company car are still applied

47


• Temporary non-use

– If for any reason the vehicle is not used by the employee for private purposes

– No reduction in taxable value

• Use of more than one vehicle

– If all are used primarily for business purposes then taxable value based on vehicle with highest determined value (SARS now has discretion to allow use of another vehicle)

48


• Use of more than one vehicle (cont.)

– If all vehicles are not used primarily for business purposes (e.g. a vehicle is used by a spouse)

– Taxable benefit of all vehicles is included in remuneration and gross income

– 3.5% (or 3.25%) same for all vehicles

49


• Value deemed to be NIL– Pool car

• Is available to and used by employees in general• Private use is infrequent or incidental to business use, and• Not normally kept at home overnight

– 24 hour service vehicles• Nature of duties requires regular use of vehicle outside of

normal working hours• Private use not permitted other than:

– Travel between home and work, or– Infrequent or incidental to business use

Motor Vehicle Fringe Benefits(Para 1 of the Fourth Schedule)

• Remuneration - 80% business use

– NB: Applies to both travel allowance and company cars

– If employer is satisfied that 80% of the use of the vehicle for the full year will be for business purposes

– Only 20% of the allowance or fringe benefit must be included in remuneration (normally 80%)

50

Executive Share Schemes(s 8C)

• Aims to tax as salary when restrictions are lifted

• Distributions received during period of restriction

– Capital distributions and dividends

• Both now taxed as income, with exceptions

• Only dividends received from restricted non-equity share instruments are taxable (e.g. preference shares)

51

Incorrect Value of Fringe Benefit(para 3(2) of Seventh Schedule)

• Vacation Exchanges International v CSARS

– Incorrect determination of employees tax by employer caused by incorrect value of fringe benefit

– Remedied only on assessment of employee

– Amendment allows SARS to raise an assessment on the employer if omission or error in value of fringe benefit

52

53

• Persons exempt from provisional tax could still be provisional taxpayers by definition

• Amended definition of provisional taxpayer includes:

– Person (other than company) deriving non-remuneration income

– Company

– Anyone who is notified as such by SARS

– Excludes:

• Approved PBO

• Approved recreational club

• Tax exempt body or association

• Person exempt from payment of provisional tax (para 18)

Provisional Tax(Para 1 of Fourth Schedule)

54

Provisional Tax(Para 18 of Fourth Schedule)

• Who is exempt from payment of prov tax?

– Natural person, on last day of y.o.a. is below age 65

• No income from business, and

• Taxable income below tax threshold, or

• Taxable income from interest, divs and rental is less than R20,000

– Natural person, 65 or older (not director of pvt company)

• Taxable income

– Below R120,000, and

– None from business, and

– Only from remuneration, interest, dividends or rental

55

Provisional Tax(s 89quat)

• Waiver of section 89quat interest

– Interest charged on unpaid prov tax

– Waiver was permitted if reasonable grounds for taking the position

– Narrowed to circs outside the taxpayer’s control

56

Severance Benefits(s 5(10), s 7A and s 10(1)(x))

• 2009 amendments allow a lump-sum benefit from a retirement fund, following retrenchment, to be treated as if the taxpayer retired – retirement benefit table and R300,000 lifetime exemption

• Severance benefits received pre 1 March 2011

– R30,000 tax free

– Balance subject to rating formula

• Severance benefits received after 1 March 2011

– R300,000 tax free (cumulative lifetime exemption)

– Balance taxed per the retirement benefit table

57

Company Law ReformAmendments throughout the IT Act

• Companies Act 71 of 2008 – effective 1 April 2011

• Fundamental changes to company law arena

– Capital maintenance provisions replace with market value solvency and liquidity tests

– Reorganisation rules modernised

– Business rescue procedures introduced

• Income Tax Act depends on company law principles and definitions

– Consequential changes throughout the IT Act

58


• New dividend definition effective 1 Jan 2011

• Old capital maintenance provisions gone – profits, reserves, par value and nominal value

• New definition:

– Any amount transferred or applied by a company to a shareholder

– Unless results in a reduction of contributed tax capital

• CTC is only a tax concept, no basis in company law

59


• CTC is the amount contributed to the company for the issue of shares

• Prior to 1 January 2011

– Stated capital (no par value shares), or

– Sum of share capital and share premium (par value shares)

• After 1 January 2011

– Increased by consideration received by company for issue of shares

• Foreign co becoming SA res after 1 Jan 2011:

– Market value of all shares on that date + shares issued thereafter

60

Micro-Business Turnover Tax(Sixth Schedule)

• 1 March 2009, optional substitute for IT, CGT and STC

• Available to sole props, partnerships, co’s, cc’s and co-ops (subject to conditions)

• Changes to:

– Entry criteria

– Turnover calculation

– Transition from normal tax into the turnover tax

– Relationship of turnover tax with VAT

61


• Professional service total prohibition has been removed

• Professional service income cannot exceed 20% of total receipts – natural person

• Professional service and investment income cannot exceed 20% of total receipts - company

• Example - Construction company also doing drafting activities will now qualify if income from drafting and investment income do not exceed 20% of total receipts

• See amended list of professional services – same changes to list of personal services for SBC’s

62


• If registered for VAT cannot qualify as a micro- business

• Taxable turnover

– Reduced by amounts refunded to customers

– In it’s first year micro-business no longer needs to include recoupment of allowances

– Ignore refunds received from suppliers

63

Small Business Corporations (s 12E)

Micro-Business Turnover Tax (Sixth Schedule)

• Anti-multiple shareholder provisions relaxed

• Dormant

– Not carried on a trade in any y.o.a

– Total market value of assets < R5,000

• Winding-up

– Steps taken i.t.o sec 41(4) to liquidate, wind up or deregister

64

Financial Instruments Held as Trading Stock (S 22(1)(a))

• Natural person share dealer could write down the value of closing stock for tax purposes – lower of cost or market value

• Company could not

• Now both treated the same

• Financial instruments held as trading stock cannot be valued at lower than cost

65

Group Relief Provisions(s 41,42,44,45 and47)

• Difficult to trace trading stock regularly transferred under an intra-group transaction

• Election mechanism replaced with an agreement mechanism – in writing both parties agree that sec 45 does not apply

• Trading stock that is regularly and continuously disposed of, has been excluded from the de-grouping charge (6 year tracing required) and 18 month retention periods

66

STC(s 64B(5)(c))

• Winding-up dividend exemption

- Exemption for pre 31 March 1993 profits

- Pre 1 October 2001 capital profits

- Profits derived before it became SA resident

• Removed effective 1 January 2011

67

Dividends Tax(s 64D to H))

• Transitional issues

– STC triggered on declaration

– Div tax triggered on date div accrues

– Potential double tax implications have been addressed

68

Value Extraction Tax(s 64O and Q)

• VET replaces the STC deemed-dividend rules

• Comes into operation on date new dividend tax effective

• Official rate of interest has been replaced by arm’s length rate

69

Regional Headquarter Company(s 20C)

• South Africa – the gateway to Africa

• Obstacles

– CFC provisions

– Charge on outgoing dividends

– Thin-capitalisation provisions

• Tax relief for headquarter companies

– Foreign subs not regarded as CFC’s

– Dividends declared exempt from STC (or div tax)

– Back-to-back loans not subject to thin-cap

– Foreign creditors exempt from withholding tax on interest

70

Regional Headquarter Company (s 20C)

• Definition of a headquarter company

– All shareholders must hold at least 20% of its equity shares

– Investment in foreign subs

• 80% of tax value of HQ must be made up of equity, debt or intellectual property in foreign subs

• For sub to qualify the HQ must hold at least 20% of its equity shares

– Receipts and accruals from subs

• 80% of total receipts must be from foreign subs – Fees, interest, royalties, divs and sale proceeds

71


• CFC impact on foreign subs

– HQ is deemed to be non-resident

– Only if more than 50% of HQ shareholders are SA will foreign subs be CFC’s in relation to SA shareholders

• Example

– 70% of HQ owned by non-resident 30% by resident

– HQ owns all shares in foreign-sub 1 which in turn owns all shares in foreign-sub 2

– Neither of the subs is a CFC in relation to the 30% resident shareholder

72


• Dividend distributions

– Deemed non-res when making distributions

• Example

– HQ is owned 70% by non-res and 30% by resident

– HQ’s receipts and accruals are R10 mill

• R2mill local interest

• R7mill divs and R1mill man fee from wholly-owned foreign sub

– HQ declares a div to its shareholders

– Div not subject to STC (or div tax)

– Both foreign and local shareholder qualify for participation exemption on dividend received

73


• Transfer pricing rule

– HQ is subject to transfer-pricing provisions including thin-cap

– No thin-cap rules are applied on foreign loans borrowed if their proceeds are on-lent to a foreign company

– No transfer pricing rules are applied to loans made by HQ to a 20% owned foreign company

– Price of this exclusion:

• Interest incurred on loans introduced by non-residents is ring-fenced against interest earned on those funds

• Unused losses are carried forward and used in following years

Foreign Dividends(s 10(1)(k)(ii)(aa))

• Now includes a div from a HQ

• Participation exemption (at least 20%):

– No longer applies to a dividend received from a foreign financial instrument holding company

– Limits exemption to active businesses

74

Cross-Border Interest Exemption(Part 1A - s 37I to M)

• Interest accrued to a non-resident after 31 December 2012

• 10% withholding tax on interest

• Exemption:

– Government debt instrument

– Listed debt instrument or unit trust

– Debt owed by a bank or the SARB

– Trade debt

– Interest paid by a HQ

75

Capital Gains TaxPrimary Residence Exclusion

(para 45 of Eighth Schedule)

• No gain or loss resulted if the total sale proceeds below R2mill

• Loss aspect has been removed

• Now even if proceeds below R2mill, a capital loss in excess of R1.5mill can be set-off against capital gains

76

Transfer of Residence From Co. or Trust

(para 51A of Eighth Schedule)

• Opportunity to simplify structures

• 2002, 2 year window period granted

• 2009, similar relief granted, para 51

• Para 51 relief has been amended and applies to disposals to 30 Sept 2010

• Para 51A introduced, disposals from 1 Oct 2010 to 31 Dec 2012

77



Company structures

• Residence must be used mainly for domestic purposes by individual shareholders or their relatives who ordinarily resided therein from 11 Feb 2009 to date of disposal

• Residence must be disposed of in anticipation of winding up

• Steps to wind up must be taken within 6 months of disposal

• Disposal can be in form of a sale or distribution in specie

• Sale to any shareholder, distribution must generally be in shareholding ratio (Beware sale - no STC relief)

• No transfer duty or taxable capital gain or loss to company for residence

• NB: Other assets disposed of get no tax relief

• STC exemption subject to distribution in specie

78



• Company structures (cont.)

– Base cost in hands of recipients:

• If disposed of to persons who acquired all shares in co. after it acquired the residence, and

• Value of residence makes up 90% or more of market value of co’s assets during window period

– Base cost = cost and date shares acquired by shareholder (cannot use M/V @ 1 Oct 2001) + improvements post acquisition of shares

• If above does not apply,

– Base cost = base cost of residence to company

79



Example 1• Couple formed a company in 1995 – 50/50 shareholding

• Company then purchased a house in 1995 for R360,000, couple live in the house with their children

• Bank loan funded original purchase

• In Dec 2010 co. owed bank R200,000 and R420,000 to couple

• Market value of house is R920,000

• Improvements to house over 15 years cost R50,000

• In Dec 2010 co. is liquidated and house distributed to couple

80



Example 1 (cont.)

• Liquidation does not give rise to CGT, transfer duty or STC

• R360,000 + R50,000 deemed to be spent by couple and at same dates

• Base cost rules applied to above as normal

81



Example 2• Same facts at 1 but couple sell the company in 2004 for

R650,000 to Mr B and he lives in the house

• Improvements costing R25,000 incurred before 2004 and R25,000 in 2008

• Dec 2010 market value of house = R920,000

• Dec 2010 company is liquidated and house distributed to shareholder

82


(para 51A of Eighth Schedule) Example 2 (cont.)

• Liquidation does not give rise to CGT, transfer duty or STC

• Base cost to Mr B is R650,000 + R25,000 improvement in 2008

• Beware – If Mr B acquired the loan account at a discount, para 12(5)(cc) CGT exemption does not apply to the discount when he waives the loan

– Say loan stood at R800,000 when shares and loans were purchased for R650,000. This resulted in a R150,000 discount on purchase of the loan. If the loan is now waived, the discount will not qualify for the 12(5)(cc) CGT relief and the company must include this as a capital gain

83


(para 51A of Eighth Schedule) Trust structures

• Residence must be used mainly for domestic purposes by individual s connected to the trust who ordinarily resided therein from 11 Feb 2009 to date of disposal

• Residence must be disposed of in anticipation of termination

• Agreement or application to terminate must be made within 6 months of disposal of residence

• Disposal can be in form of a sale to anyone or distribution to one or more beneficiaries

• Trust will enjoy no transfer duty and no CGT with roll-over relief on disposal of residence

• NB: Other assets disposed of get no tax relief

• Base cost in recipients hands = Base cost to trust

84



Example 1

• Couple formed a trust in1995 – both are trustees and beneficiaries

• Trust purchased a house in 1995 for R360,000, couple live in the house with their children

• Couple lent trust R60,000 and bank loan funded balance of the original purchase

• In Dec 2010 bank loan is settled and trust owed the couple R450,000

• Market value of house is R920,000

• Improvements to house over 15 years cost R50,000

• In Dec 2010 the house is distributed to the couple and trust is terminated

85


(para 51A of Eighth Schedule) Example 1 (cont.)

• Termination does not give rise to CGT or transfer duty

• R360,000 + R50,000 deemed to be spent by couple and at same dates as incurred by trust

• Base cost rules applied to above as normal

• Beware – how to deal with loan owing to couple?

– Possibly sell house for market value and discharge loan, or

– Sell house for value of loan and distribute the balance up to market value?

86



Example 2 (Multi-tier structure)

• Couple formed a trust in1995 – both are trustees and beneficiaries

• Trust owns all the shares in a company

• In 1998 the company purchased a house that is occupied by the couple

• In January 2011 the company is liquidated and the house is distributed to the trust

• The trust then distributes the house to the couple in March 2011

• In April 2011 the couple make an application to the court for the revocation of the trust

87



Example 2 (cont.)

• Transfer of house from company to trust qualifies for relief

• Transfer of house from trust to the couple qualifies for the relief

• Beware – how to deal with loans owing to the couple on revocation of the trust?! Possibly sell the house out of the trust?!

88

Advanced Tax Rulings(s 76E)

• ATR in place since 2006

• Now only available to compliant taxpayers

89

Islamic Financing(s 24JA of IT Act, s 3A of Transfer Duty Act, s 8A of the VAT Act and s 8A

of the STT Act)

• Involves financial transactions and instruments that comply with Islamic law

• Principles

– Prohibition of interest

– Removal of asymmetrical info and encouragement of full disclosure in contracts

– Risk-sharing (sharing profit and loss), and

– Financial transactions must be linked to a real economic transaction

90

Islamic Financing(s 24JA IT Act, s 3A of Transfer Duty Act, s 8A of the VAT Act and s 8A of

the STT Act)

• Provisions added to the various tax Acts to place Islamic finance on equal footing with traditional western finance

• Three arrangements with banks have been covered:

– Mudaraba (Investment or transactional account )

– Murabaha (Asset finance similar to instalment sale)

– Diminishing Musharaka (Partnership arrangement for project financing)

91

Estate Duty(s 4A(6) of the Estate Duty Act)

• Portable spousal abatement

• S 4A(6) added to clarify how to deal with simultaneous death

– The person with the smallest net value of the estate is deemed to die first

– Any unused portable spousal deduction then shifts to the other deceased spouse

92

VAT(s 10(5A) and s 18(4))

• Micro businesses

– Vendor opting into the turnover tax system must first deregister for VAT

– Deregistration triggers output VAT on assets

– To ease cash-flow R100,000 of the deemed supply can be excluded, clarity now that this is a max amount

– R100,000 (VAT portion = R12,280) claw-back of input VAT claimed on re-entry into the VAT system has been deleted

93

VAT(s 8(2) and 22(3))

• Debt-burdened assets on cessation of an enterprise

– Deemed supply of all assets- s8(2)

– Deemed supply of unpaid debts- s22(3)

– Double charge removed for debt-burdened assets

– Only s22(3) will apply

94

VAT(s 8(2) and 22(3))

• Example

– Vendor purchases an asset for R114,000 on credit on 1 Oct 2011

– Claimed input tax of R14,000

– 1 May 2012 he closes down his business not having paid the debt of R114,000

95

VAT(s 8(2) and 22(3))

• Example (cont.)

– The vendor is not liable for s8(2) output VAT for the asset on cessation the business

– He is liable for output VAT only in terms of the s22(3) ‘claw-back’ provision on unpaid debts (14/114 x R114,000 = R14,000)

96

VDP

• Programme to encourage taxpayers to disclose defaults and regularise their tax affairs

• Open 5 Nov 2010 to 31 Oct 2011

• Only penalties and interest will be waived

• Full amount of tax will remain payable

97

VDP• Person can apply (s3(1)), unless

– He is aware of a pending audit or investigation into his affairs, or

– An audit or investigation has commenced but has not yet been concluded

• But Commissioner may still allow application (s3(2))

– The default for which voluntary disclosure will be made would not have been detected during the audit or investigation, and

– App would be in interest of good management of the tax system and best use of his resources

98

VDP• Requirements for valid voluntary disclosure

– Voluntary

– Involve a default

– Be full and complete in all respects

– Involve the potential application of a penalty or additional tax for the default

– Must not result in a refund

– Application must be made on the prescribed form

– Must be made between 5 Nov 2010 and 31 Oct 2011

– Be for a default that occurred prior to 17 February 2010

99

VDP• No-name voluntary disclosure

– Commissioner may issue a non-binding private opinion on a person’s eligibility for relief.

– Application can be made on a no-name basis

• Relief

– Commissioner will not pursue criminal prosecution

– 100% relief for penalty and additional tax (excluding: s75B admin penalty for late submission and a late payment penalty imposed in terms of any other provision of the Act)

– Interest relief

• 100% for s3(1) applicant

• 50% for s3(2) applicant

100

VDP• Voluntary disclosure agreement

– Relief evidence in a written agreement

– Details in agreement

• Material facts of the default

• Tax payable and interest payable

• Arrangements and dates of payment

• Treatment of the issue in future years

• Relevant undertaking by the parties

• Withdrawal of relief

– Failure to make a material disclosure

• Assessment to give effect to agreement

– SARS will issue an assessment on conclusion of agreement

– This assessment is not subject or objection or appeal

101

Tax Administration Bill (TAB)

• First announced in 2005

• Duplication of generic administrative provisions contained in all the Acts administered by SARS

• Project to incorporate into one piece of legislation these administrative provisions

• TAB prelim step to re-writing the entire IT Act

102

Tax Administration Bill (TAB)A few highlights

• New framework of decision making – serious powers only dealt with at a senior level and limit discretion at lower levels of administration

• Tax Ombud’s office created to remedy failure by SARS to respect taxpayer rights

• Single taxpayer registration for all taxes

• Single taxpayer account with a rolling-balance

• Extended 3rd party info gathering powers for pre-population

• Penalty provisions standardised across the Acts, additional tax of up to 200% now clearly prescribed

• Permanent VDP with relief from penalties

103

104

Thank-you

Fasset Call Centre

086 101 0001

www.fasset.org.za

1 2011 budget and tax update. 2 2011 budget 3 main tax proposals personal income tax relief of...

Documents

turnover tax

tax update

tax tables individuals

taxable lump sum r rate

disregard gains

year of death gains

disposal of small business

business kms