1 2012 budget and tax update. 2 2012 budget 3 main tax proposals personal income tax relief of r9.5...

1

2012Budget and Tax

Update

2

2012 BUDGET

3

Main Tax Proposals

• Personal income tax relief of R9.5 billion (2011: R8.1 billion)• Implementing the dividend withholding tax at 15% • An increase in effective capital gains tax rates • Reforms to the tax treatment of contributions to retirement

savings • Further reforms to the tax treatment of medical scheme

contributions• Tax preferred savings and investment vehicles for individuals

are to be introduced• Relief for micro and small businesses

4

Tax Tables - Individuals

2012/2013 2011/2012

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

0 – 160,000 18% 0 – 150,000 18%

160,001 – 250,000 28,800 + 25% 150,001 – 235,000 27,000 + 25%

250,001 – 346,000 51,300 + 30% 235,001 – 325,000 48,250 + 30%

346,001 – 484,000 80,100 + 35% 325,001 – 455,000 75,250 + 35%

484,001 – 617,000 128,400 + 38% 455,001 – 580,000 120,750 + 38%

617,001 and above 178,940 + 40% 580,001 and above 168,250 + 40%

5

Rebates

2013 2012

Rebates for natural persons(R) Rebates for natural persons (R)

Under 65 – Primary 11,440 10,755 Under 65 – Primary

65 and over – Secondary 6,390 6,012 65 and over – Secondary

75 and over - Tertiary 2,130 2,000 75 and over - Tertiary

6

2013 2012

(R) (R)

Under 65 63,556 59,750

65 to 74 99,056 93,150

75 and over 110,889 104,261

Tax Thresholds

7

Interest and Taxable Dividend Exemption

2013 2012

(R) (R)

Under 65 22,800 22,800

Over 65 33,000 33,000

Foreign deleted 3,700

8

Capital Gains Tax Exclusions

2013 2012

(R) (R)

Annual Exclusion 30,000 20,000

Annual exclusion in year of death – gains and losses 300,000 200,000

Disposal of small business by natural person if over age 55 1,800,000 900,000

Max market value of assets to qualify as a small business 10 million 5 million

9

Capital Gains Tax Exemptions

2013 2012

(R) (R)

Primary Residence Exclusion 2.0 million 1.5 million

10

Capital Gains Tax Effective Rates

Disposals after 1 March 2012

Taxpayer InclusionRate (%)

StatutoryRate (%)

EffectiveRate (%)

Individuals 33.3 0 – 40 0 – 13.32TrustsSpecial 33.3 0 – 40 0 – 13.32Other 66.6 40 26.64Companies

Ordinary 66.6 28 18.65Small business corporation 66.6 0 – 28 0 – 18.65Employment company (personal service provider)

66.6 28 18.65

Foreign company (SA branch) 66.6 28 18.65Micro-business subject to turnover tax 0 0 0

11

Travel Allowance Deemed Expenditure Table

• Changed with effect from 1 March 2012

– Page 8 of notes

– Number of bands remain the same

– Limit on cost remains R480,000

• Reimbursive travel allowance where business km’s less than 8,000 p/a increased from R3.05/km to R3.16/km

12

Retirement Fund Lump Sum Withdrawal Benefits

2012/ 2013 rates are unchanged from 2011/ 2012

Taxable lump sum (R) Rate of tax (R)

0 – 22,500 0%

22,501 – 600,000 18%

600,001 – 900,000 103,950 + 27%

900,001 and above 184,950 + 36%

Page 15 of notes

13

Retirement Fund Lump Sum Benefits on Retirement or

Severance 2012/ 2013 rates are unchanged from 2011/ 2012

Taxable lump sum (R) Rate of tax (R)

0 – 315,000 0%

315,001 – 630,000 18%

630,001 – 945,000 56,700 + 27%

945,001 and above 141,750 + 36%

315,001 – 630,000 18%

14

Corporate Tax Rates Years of assessment ending between 1 April and 31 March

2013 2012

Non-mining companies 28% 28%

Close corporations 28% 28%

Employment companies 28% 33%

Non-resident companies (SA branch)

28% 33%

STC: 10% on net amount of dividends declared before 1 April 2012 even if dividends are paid on or after 1 April 2012

15

Dividends Tax

Rate of dividends tax on any dividend declared and paid on or after 1 April 2012

15%

Amongst others, exemptions -

• Company which is a resident

•The Government, a provincial administration or a municipality

• Approved PBO

•Pension, provident, RAF, benefit funds and medical schemes

•Registered micro business to the extent total dividends paid during the y.o.a do not exceed R200,000

16

Small Business Corporations

Years of assessment ending between 1 April and 31 March

2012/2013 2011/2012

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

0 – 63,556 0% 0 – 59,750 0%

63,557 – 350,000 0 + 7% 59,751 – 300,000 0 + 10%


17

Turnover Tax For Micro Businesses

Year of assessment ending 28/2/13 and 29/2/12

2012/2013 2011/2012

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

(R)

0 – 150,000 0% 0 – 150,000 0%

150,001 – 300,000 0 + 1% 150,001 – 300,000 0 + 1%

300,001 – 500,000 1,500 + 2% 300,001 – 500,000 1,500 + 3%

500,001 – 750,000 5,500 + 4% 500,001 – 750,000 7,500 + 5%


Single combined return for turnover tax, VAT and employees’ tax will be

introduced. Numbers of returns and payments will reduce to 2 from 18

18

Subsistence Allowances

• Travel in the Republic

– meals and incidental costs: R303 (was R286) per day

– incidental costs only: R93 (was R88) per day

• Travel outside the Republic

– daily amount per country also changed from 1 March 2012 (pg 9 to 12 of notes)

19

Transfer Duty (No change)Natural and juristic persons – agreement on or after 23 Feb

2011

Property value (R) Rate of Tax (R)

0 – 600,000 0%

600,001 – 1,000,000 0 + 3%

1,000,001 – 1,500000 12,500 + 5%

1,500,001 and above 37,000 + 8%

20

Fuel Levies

• To be increased by 28c/l on 4 April 2012

– General fuel levy on petrol and diesel increases by 20c/l (2011 - 10c/l)

– Road Accident Fund levy on petrol and diesel increases by 8c/l (2011 – 8c/l)

• Total = 289.5 c/l on petrol; 274.51c/l on diesel

• Percentage of pump price at Feb 2012 – Petrol 26,9% Diesel 26,7% compared to Feb 2011 – Petrol 29,6% Diesel 30,3%

21

Sin Taxes

• Excise duties increases:– Cigarettes from R9.74 per pack of 20 cigarettes to R10.32

(6%)

– Traditional beer no increase

– Beer from 91c to 101c on a 340ml can (11%)

– Wine from R2.32 to R2.50 a litre (8%)

– Sparkling wine from R6.97 to R7.53 a litre (8%)

22

National Health Insurance

• NHI to be phase in over 14 years beginning in 2012/13

• Green paper released in 2011

• Detailed discussion in Chapter 6 of budget review

• 3 phases

– First 5 years – strengthening the public sector, pilot projects

– Funded by general taxes

• Considerations for funding longer term

– Payroll tax (payable by employers)

– Increase in the VAT rate

– Surcharge on individual’s taxable income

23

Encouraging Savings

• Tax preferred savings and investment accounts to be introduced

• Target date April 2014

• Alternatives to the current exempt portion of interest

• Returns in the form of interest, dividends and capital gains will be exempt

• Contributions are likely to be limited

– Annual R30,000

– Lifetime R500,000

• Look out for discussion document by May 2012

24

Retirement Reforms

• Changes to be introduced from 1 March 2014

• Employer’s contributions to pension, provident and RA funds will be deemed a taxable benefit

• Employee will be allowed a deduction of

– up to 22,5% if aged below 45 years, or

– up to 27,5% if aged 45 and over

– of the higher of employment or taxable income

– Annual deduction limited to

• R250 000 if aged below 45 years

• R300 000 if aged 45 and over

25

Retirement Reforms

• Above deduction will be subject to a minimum annual threshold of R20,000 to encourage higher saving by low income earners

• Non deductible contributions will be carried forward and exempt on withdrawal whether lump sum or annuity

26

Medical deductions converted to medical tax

credits• 2011 Amendment Act introduced the concept of tax credits in place of

tax deductions

– Monthly deduction caps for contributions removed for 2013 y.o.a

– Conversion to a tax credit system will be introduced on 1 March 2012

– In addition under 65s (including those with disabilities), excess contributions and medical expenses are eligible for tax deduction

– Age 65 and over – no credits, 100% of contributions and expenses can be deducted

27


credits (cont.)• Budget proposals announced following changes -

• Monthly medical scheme tax credits from 1 March 2012

– Taxpayer and first dependant – R230

– Each additional dependant – R154

• 2013 and 2014 will see the hybrid deduction/tax credit system continue

• 1 March 2014 conversion of all taxpayers to tax credit system

28


credits (cont.)• Medical deductions (above 7,5% of TI) will be converted to tax credits

– Under 65s - @ 25% of deductible amount

– Employer contributions to medical schemes for ex-employees will be a fringe benefit and ex-employee can claim tax credit

– Age 65 and older and disabled taxpayer (or with disabled dependant) can convert

• contributions in excess of 3 times the tax credit, plus

• out of pocket expenses

• @ 33,3%

29

Gambling

• Proposal in 2011 budget has been changed

• Now a national gambling tax on gross gambling revenue

• Effective 1 April 2013

• Additional 1% national levy on the provincial gambling tax base

• Similar tax base will be used to tax the national lottery

30

Business Taxes

• Limiting excessive debt in businesses– Rules to deeming certain debt to be shares– 2013 consider ‘across-the-board’ % ceiling on interest

deductions relating to EBITDA• Special economic zones

– Build on the IDZ policy– Focused support for businesses – reduction in tax rate,

exemption for operators, additional deduction for low level employees

31

International Tax

• Rationalisation of withholding tax on foreign payments

– Royalties withholding in place

– Interest from 1 Jan 2013

– Dividends from 1 April 2012

– Co-ordinate procedures, rates and timing for withholding

– Uniform 15% proposed

32

Taxation of luxury goods

• Effective 1 October 2012

• Ad valorem tax

– Aeroplanes and helicopters with mass between 450kg and 5 000kg – 7%

– Motorboats and sailboats longer than 10m – 10%

33

Miscellaneous

• False job terminations

– Resign in order to get access to retirement funds and immediately thereafter rehired, no longer permissible

• Value of fringe benefits

– A formula is currently prescribed in some cases. Where the employer can determine or obtain the actual cost of providing the benefit, actual cost should be allowed to be used. E.g. Actual business vs. private mileage for a company car and a rental car provided to an employee

34

Miscellaneous

• Learnership allowances

– Requirement to have registered the learner in order to qualify for the deduction will be re-examined. Delays in registration will no longer negatively impact the allowances

• Debt cancellation and restructuring

– In light or weak economic climate, tax consequences will be investigated

35

Miscellaneous

• Company law reform

– New Co’s Act provisions will be reviewed to consider whether the tax reorganisation provisions need updating

• Taxing of Government Grants

– Unless specifically exempt, grants are taxable. A review of which grants should be exempt is being undertaken and an explicit list will be published

• Sale of trading stock to connected person

– Currently tax cost to purchaser is lower of cost to purchaser or cost to seller. Cost manipulation is a concern for CGT but is unlikely to be used for trading stock and this provision will be scrapped for trading stock

36

Miscellaneous

• Share issue mismatch

– Concern that this is being used to shift value. Value of shares issued in excess of consideration received will become taxable

37

Miscellaneous

• UDZ incentive (13quat)

– Set to expire in 2014, extension will be considered and in addition qualifying date is currently date buildings are brought into use, consideration will be given to change this to date of initial construction

• South African investment into Africa

– H Co often funds foreign Subco by way of loans. Transfer pricing is an issue if these loans are interest free. Consideration to be given to treating these loans as share capital.

38

Miscellaneous

• Clarification of the date of liability for VAT registration

– On date of reaching compulsory registration threshold vendor has 21 days to apply for registration. Vat cannot be charged on supplies until registered as a vendor with SARS. Transition rules will be clarified to streamline transition from non-vendor to vendor

39

Miscellaneous

• Tax policy projects for 2012/13

– Reforms to the primary, secondary and tertiary rebates in the context of a review of the means testing for the old age grant with the intention of introducing a child and/or dependant tax rebate/credit

– Taxation of income from capital (interest, dividends, capital gains and rental) to be reviewed to ensure greater equity and minimise opportunity for arbitrage

40

2012 AMENDMENTS

41

Medical Scheme Credits (Sections 6A and 18, para 2(4) of the 4th Schedule and

para 12A(5)(d) of the 7th Schedule )

• Conversion from a deduction to a credit system

• Phased introduction

• 2013 – combination for under 65s and persons with disability

• Age 65 and over

– Not moved to the credit system

– Retained full deduction system

• Longer term – move everyone to only tax credits (refer 2012 budget)

42


para 12A(5)(d) of the 7th Schedule

• ‘Dependant’ definition has been broadened for purposes of the section 18 deduction only and not for purposes of calculating the section 6A tax credit

• Previously ‘dependant’ limited to rules of medical scheme

• New section 18(4A) – ‘dependant’ means

– Spouse

– Child and spouses child

– Member of immediate family if taxpayer is liable for family care and support, and

– Any dependant recognised by the rules of a medical scheme

• Meaning of immediate family?

43



• Section 6A tax rebate has been inserted for 2013

– Medical scheme fees tax credit

• Natural persons under age 65 including those with a disability

• Applies to contributions paid to-

– Registered SA medical aid scheme

– Foreign medical aid scheme

• Amount of the tax credit (irrespective of level of contribution) -

– Taxpayer – R230

– First dependant – R230

– Additional dependants – R154

• The credit is not refundable and cannot exceed the tax payable

44



• Limitation of medical deduction for 2012 (under 65 and no disability)

– Part 1 - Capped amounts relating to contributions

– Part 2 -

• Contributions above the capped amount, plus

• Other qualifying medical expenses,

as exceeds 7.5% of taxable income

– Taxable income

• Excluding lump sum benefits

• Before Part 2 of the medical expenditure deduction

• Age 65 and over and under 65 with disability – no limitations

45



• Limitation of medical deduction for 2013 (under 65 no disability)

– Contributions to medical aid schemes

• In excess of 4 times the tax credits

– Plus

– Sum of other qualifying medical expenses

– As exceeds 7.5% of taxable income

– Taxable income

• Excluding lump sum benefits

• Before this deduction

46



• Limitation of medical deduction for 2013 (under 65 with

disability)

– Contributions to medical aid schemes

• In excess of 4 times the tax credits

– Plus

– Sum of other qualifying medical expenses – no limitation

47



• Medical deduction 2013 - taxpayers aged 65 and over

• No limitation of deduction for-

– Contributions to a medical scheme, plus

– Qualifying medical expenses

48



• 7th Schedule amendments

• Medical scheme contributions made by an employer for the benefit of an employee are regarded as a taxable benefit

• Nil value if

– The employee is retired

– Dependants on death of current or retired employee

– Employee aged 65 and above

• Nil value has been removed

• For PAYE and IPR5 purposes, employer must now account for both the fringe benefit and the deduction

49



• 4th Schedule – 2013

• Employer deducts from remuneration – if employee under 65 and with or without a disability

– No deduction allowed

• Employer deducts from remuneration – if employee 65 or older

– Medical aid contributions, no limit

• Employer deducts from employees’ tax

– Medical scheme fees tax credit, if

• Employer effects payment, or

• Employee effects payment and provides employer with proof

50



• See page 42 and 43 of notes to work through example

51

Employer Provided Insurance

(Gross income para (d) and (m), section 10(1)(gG), (gH) and 23(p),para 2(4)(cA) of the 4th Schedule, para 2(e), (k) and (12C)

of the 7th Schedule and para 55 of the 8th Schedule)• Types of policies

– Group life and/or disability cover – ‘Approved plan’ (No change in treatment)– Group life and/or disability cover – ‘Unapproved plan’– Income protection policies

• Income capacity• Income protection

– Deferred compensation policies– Key person policies

• 2010 amendments have been removed• 2011 complete overhaul to clarify treatment-

– Contributions– Proceeds– Exit route for existing deferred compensation policies

52


(Section 11(w), 23(m)(iii), para 2(4)(cA) of the 4th Schedule and para 2(k) and (12C) of the 7th Schedule)

• Contributions• Policy relates to death, disablement or severe illness of

employee or director (where proceeds destined for employee)– Explicit rules added for employer to tax as fringe benefit – 1

March 2012– If employee is entitled to a deduction of the contribution

(income protection), employer must take into account for PAYE

– If employee is taxed as a fringe benefit, employer can claim a deduction for contributions

53


(Section 11(w))

• Contributions (cont.)• Policy relates to insurance of employer against loss from death, disablement or

severe illness of employee or director– Following conditions to be satisfied for premiums to be deductible by

employer– Policy is a risk policy with no cash or surrender value– Employer is the policyholder, and– Post 1 March 2012 policies

• Agreement states that premiums are deductible– Pre 1 March 2012 policies

• Addendum to agreement stating that premiums are deductible must in place by 31 Aug 2012

54


(Gross income para (d) and (m), section 10(1)(gG), (gH))

• Proceeds– If funded by post-tax contributions - exempt– If funded with pre-tax contributions – taxable

• General rule– Include proceeds in gross income– Try and find an exemption

• Exemptions– Employer, if proceeds retained– Employee

55


(Gross income para (d) and (m), section 10(1)(gG), (gH))• Exemptions (continued)

– Proceeds received and retained by employer after 1 March 2012• Keyperson policies• Proceeds exempt, unless• Employer has elected in policy agreement that premiums are deductible in which

case proceeds are taxable– Proceeds received by the employee will be exempt if

• Pure risk policy– Premiums after 1 March 2012 taxable as fringe benefit and not deductible

by employee – If premiums are taxable as fringe benefit and deductible then proceeds not

exempt• Other policies

– All premiums were taxable as fringe benefit• Where exemption does not apply employer must withhold PAYE

56


(Gross income para (d) and (m), section 10(1)(gG) and 23(p))• Exit routes for existing deferred compensation policies

– From 1 March 2012 employer contributions are taxable as fringe benefits– Implication - taxable contributions and taxable proceeds on payout– Exit routes provided for pre 1 March 2012 policies

• Cede the policy to the employee – Value on cession deductible by employer (deduction removed

from 1 March 2012)– Value on cession fully taxable in employees hands

• Make policy paid up - employer receives proceeds and pays to employee

– Employer tax neutral – proceeds taxable and payment deductible– Employee fully taxable on proceeds received

57

Motor Vehicle Fringe Benefits

(Para 7(8A) of the Seventh Schedule)

• Judicial commuting– Judges are provided with government cars– Serve various courts and must travel long distances– Home to work is deemed private travel– Judges have been adversely affected by log book

requirement– From 1 March 2011 home to court is deemed business

mileage

58

Retirement Annuity Contributions

(Section 11(n)(i)(aa))

• Severance benefit’

• Added to amounts which cannot be taken into account when calculating permissible deduction for RAF contributions

• Deduction limited to-

– 15% of income from non ‘retirement-funding employment’ (excluding retirement lump benefits and retirement lump sum withdrawal benefits and severance benefits) less

– Deductions or assessed losses admissible against such income

– Excluding this deduction, sec 17A (land let for farming), sec 18 (medical expenses), 18A (donations) and para 12(1)(c) to (i) of the 1st Schedule (farming CDE)

59

Connected Person Definition

(Section 1)

• Focus on voting rights has been introduced

• In relation to a company any group company

• Group company definition threshold -

– At least 70% of the equity shares…

• Connected person definition threshold –

– More than 50% of the equity shares of or voting rights in…

60

Pre Production Interest Deletion of section 11(bA)

• Section 11(bA) – deduction of pre-production interest and related ‘finance charges’.

• It has been deleted

• We now have to look to section 11A

• Beware not the same provisions

• SARS view that assets must be brought into use before trade has started

61

Learnership Allowances (Section 12H)

• Section 12H has been extended

• Definition of ‘registered learnership agreement’ has been amended-

– Contract of apprenticeship entered into before 1 October 2016,or

– Registered learnership entered into between a learner and an employer before 1 October 2016

62

Micro-Business Turnover Tax

(Sixth Schedule)

• Very poor uptake

• Further steps to attract more taxpayers

• VAT and turnover tax have been delinked

• Three year lock in rule has not been relaxed– Voluntarily exit only after three years– Still cannot re-enter

63

Film Owners (Section 12O and section 24F)

• S 24F accelerated allowance has been removed

• Replaced by s 12O exemption

64

Research & Development (Section 11D, section 12C, section 13 and section 23B)

• The deduction process has been streamlined• Three categories

– Deduction for eligible R&D activities including capital expenditure, no pre approval needed by DST

– 50% uplift only applies to DST approved R&D expenditure– All other R&D expenditure remains eligible for 11(a) deduction

• Accelerated allowance for R&D assets– New and unused R&D machinery and plant and improvements thereto– Owned by taxpayer– Eligible for 40:20:20:20

• Buildings used for R&D are eligible for 5% allowance over 20 years

65

Industrial Policy Projects (Section 12I(2) )

• Renewed effort to encourage development in IDZs

• Amendments to promote capital expenditure

• Industrial projects in IDZs – Allowance for new assets

– Preferred status – 55% up to 100%

– Non-preferred status – 35% up to 75%

66

Urban Development Zones (Section 13quat))

• Developers – economic downturn

• Allowance prohibited if property is used for anything other than sale

• Purchaser also prohibited from claiming allowance

• Relaxation introduced

• Developer can rent the property for up to 3 years

67

Group Relief Provisions (Section 23K and section 10(1)(hA))

• Concern – using s 45 and s 47 provisions

• Create an interest deduction on 3rd party loan to acquire shares

• S 23K now limits the deduction of interest on certain intra-group transactions

• S 45 from 3 June 2011 and s 47 from 3 August 2011

• Directive must be issued by SARS in order to qualify for interest deduction

• To extent interest is not deductible, if holder of debt is a group company interest received by it is exempt

68

Group Relief Provisions (Section 41, section 42, section 44, section 45 and section 47

• S 41 – HQ companies are out

• S 42 – CFCs and CTC of shares issued in exchange for assets

• S 44 - CFCs and numerous other changes

• S 45 – Pref shares now permitted, tax cost NIL

• S 46 – CFCs and election out has changed

• S 47 – CFCs

69

Debt without a set maturity date

(Section 24J)

• Section 24J requires a maturity date for ‘yield to maturity’• 24J is not catching loans with an uncertain maturity date• 24J amended to catch 3 types of debt instruments

– Without a maturity date (Perpetual debt)– Uncertain maturity date– Demand instruments

• Effective for interest incurred/accrued after 1 March 2012

70


(Section 24J)• Uncertain maturity dates

– ‘no fixed terms of repayment’– Specified repayment but this can change– Total uncertainty

• Identify date repayment will most likely apply• Use this date for ‘yield to maturity’ calculation• Annual process and dates and calculations will change

71


(Section 24J)• Demand instruments

– Repayable on demand– Must have a maturity date

• Term is deemed to last 365 days• ‘yield to maturity’ calculation based on PV of amounts payable

over 1 year

72

Dividends Tax (Part VIII of Chapter II of the IT Act)

• Inserted in 2008 and amended every year since• Sections 64D to N• Government Gazette published 20 December 2011 confirmed

effective date will be 1 April 2012• Applicable to any dividend declared and paid on or after 1 April

2012• A dividend is deemed to be paid on the earlier of date of

payment or date it becomes payable• Dividends tax is payable to SARS by end of month following

month during which the dividend was paid

73

Dividend Definition (Section 1)

• Any amount transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied –

– By way of a distribution made by; or

– As consideration for acquisition of any share in,

• that company but does not include any amount so transferred or applied to the extent it-

– Results in a reduction of CTC of the company;

– Constitutes shares in the company; or

– Constitutes an acquisition by the company of its own securities by way of a general repurchase of securities as contemplated by the JSE Listings Requirements, where that acquisition complies with those requirements

74

Contributed Tax Capital definition

(Section 1)• CTC must be determined per class of shares

• CTC = stated capital or share capital + share premium on 31 Dec 2010

– Less any amount included in the above which is ‘tainted’

• Plus consideration received or accrued to the company for the issue of shares in that class on or after 1 Jan 2011

• Reduced by-

– Any amount transferred on or after 1 Jan 2011 for the benefit of any person holding a share in that company of that class in respect of that share, and

– The directors of the company have determined that such amount is transferred out of CTC

• The CTC allocated to an individual shareholder may not exceed that shareholder’s pro-rata share of the total CTC of the class of shares

• CTC received by a shareholder is dealt with under the company distribution provisions of the 8th Schedule

75

Dividends in Specie (Part VIII of Chapter II of the IT Act)

• Withholding mechanism works on payment

• Problems with dividends in specie

– No payment to withhold from

– Valuation of the asset changes over time

• Solution

– Liability is not shifted to the shareholder as with a cash dividend

– Liability is retained by the company

– Company paying the dividend must pay the dividends tax

• All the exemptions will still apply, written declaration needed unless inter group

• Amount is the market value of asset on date dividend is deemed to be paid

• Tax is 10% of the amount of the dividend (increased to 15% in budget)

• STC credits can be used as normal

76

Hybrid Equity Instruments (Section 8E)

• Equity instruments where the label differs from the substance

• Dividends received (local or foreign) are treated as interest and taxable

• In addition to the other provisions of the definition a new provision has been added to the definition of ‘Hybrid equity instruments’

– A rate of interest or capital amount subscribed is used to calculate the dividend

– Secured by financial instrument that is not an equity share

– No regard to 3 year redemption period

77

Hybrid Equity Instruments (Section 8E)

• 3rd party backed shares

• Holder of preference shares takes security from anyone other than the issuer

• Dividends or foreign dividends received are deemed income and so taxable

• Exemptions apply for funding used to –

– Directly or indirectly purchase shares in an operating company

– Replace bridging loans used to effect above

– To redeem preference shares if they were used to purchase equity shares in an operating company

78

Dividend Cessions (Section 10(1)(k)(i)(ee), (ff), (gg))

• Cession of dividends either before or after declaration

• In past retained their character as a dividend

• Significant change from 1 April 2012

• Only applies to companies (local and foreign) receiving dividends

• Dividend loses its exemption and becomes taxable if

– Receipt by way of a cession

– Received from shares borrowed by the company

79

Dividend Cessions (Section 6sex)

• Tax credits

• New rules apply in 3 scenarios-

– 1. Dividends between domestic companies

– 2. Foreign dividends received by local companies

– 3. Local dividends received by foreign companies

• In 1. above no double tax

• In 2. section 6 quat is available to give tax credit

• In 3. we need a new section to allow a tax credit

• Section 6sex has been introduced for this purpose

80

Value Extraction Tax (Section 64O to R)

• VET was to replace section 64C

• New dividend definition has been expanded

• Covers disguised dividends

• VET provisions have been repealed

• S 64E now deals with low interest loans

• Amount owing to a company by –

– Anyone other than a company

– Resident, and

– Connected to the company

– Loan made by virtue of any share held by above person

– Dividend = Market related interest rate less interest paid

81

Foreign Dividends (Section 1, section 10B, section 10(1)(k)(ii), section 11C and

section 23(q))• Existing treatment – basic rules

– Included in gross income and taxed at marginal rates

– Participation exemption

– Previously taxed income exemption

– Dual listed exemption

– Natural person exemption R3.700 (deleted 1 March 2012)

– S6quat rebate for foreign tax paid

– Deduction for interest incurred

• Disparity between local and foreign dividends has been removed

82

Foreign Dividend Definition (Section 1)

• Any amount that is paid or payable by a foreign company in respect of a share in it where that amount is treated as a dividend or similar payment by it for the purposes of the laws relating to-

– Tax on income on companies of the country in which that foreign company has its place of effective management; or

– If no tax law then company law of the country in which it is incorporated, formed or established;

• But does not include any amount so paid or payable that-

– Constitutes a redemption of a participatory interest in a foreign unit trust; or

– Is deductible by it in determining any tax on income payable by it in the country where it has its place of effective management

83

Foreign Dividends (Section 10B)

• ‘Foreign dividend’ – s 1 definition + dividend paid by a headquarter company

• S 10B exempts a foreign dividend received or accrued if -

– Participation exemption now 10% (other than foreign unit trust)

– Company shareholder and company declaring dividend are situated in the same country

– Shareholder is resident to extent that s 9D attributed income of the foreign company

– Foreign dividend is from a JSE listed share and not a dividend in specie

84

Foreign Dividends (Section 10B)

• If exemptions do not apply then apply the formula –

• If shareholder is a natural person, deceased or insolvent estate or special trust

– Exempt amount = 25/40 = 62.5% x taxable foreign dividend (37.5% x 40% = 15% max) (2012 budget proposal increases rate to 15%)

– Effective date 1 March 2012

• Shareholder is company or trust

– Exempt amount = 13/28 = 46.43% x taxable foreign dividend (53.57% x 28% = 15%)

– Effective date 1 April 2012

• If foreign withholding tax applies, claim section 6quat tax credit

• Deduction for interest incurred has been removed

85

Passive Holding Companies

(Section 9E)• Effective date has been postponed from 1 April 2012 to 1 April 2013 (budget proposal has scrapped altogether)

86

Timing of Rebate for Foreign Taxes on Income

(Section 6quat)

• Current tax credit mismatch on foreign sourced income

– Income recognised in SA on accrual date

– Foreign tax withheld on payment date

– Cannot claim tax credit in SA until payment received

• Changes to allow a better match

– Credit allowed in the year the income accrues

– Mechanism will be to reopen the accrual y.o.a

87

Special Foreign Tax Credit for Management Fees

(Section 6quin)

• S 6quat does not apply to SA sourced income

• African countries withhold tax on all payments for services rendered

• S 6quin now allows for a tax credit if SA have a DTA with that country

• Foreign tax is to be translated into Rand on last day of y.o.a in which the tax is withheld or imposed and converted to Rand at the average exchange rate for that y.o.a

88

Unification of Source Rules (Section 9)

• SA residents taxed on worldwide income with foreign sourced income eligible for tax credits if foreign tax payable

• Non-residents taxed on SA source income

• Subject to DTA

• Previously no definition of ‘source’ in IT Act

• Case law – originating cause, what and where

• Deemed source rules – e.g. interest and capital gains

• Combination of case law and deemed source rules

• Uncertainty has added cost to cross-border business

89

Unification of Source Rules (cont.)

(Section 9)• New s 9 introduced

• Consistent with DTA principles (OECD)

• Deemed source has been eliminated

• Source categories

– Dividends – Share register concept removed, now where is company resident

– Interest – 2 part test, residence of debtor who pays the interest, or place where loan funds are used (new 10% withholding tax only applies to SA sourced interest payable to non-resident persons)

90

Unification of Source Rules (cont.)

(Section 9)• Source categories (cont.)

– Royalties – Residence of party paying the royalty or if it relates to use of IP within SA

– Ancillary services – Know-how, similar to above

– Services, pensions/annuities – Unchanged based on where the service is rendered which gives rise to the payment

– Government service and pensions – Unchanged, no matter where service rendered will be SA sourced

– Gains from sale of assets – Where immovable property is situated, movable property is where person disposing is resident

– Exchange differences – Depends where the person is resident

– Other – Default to originating cause, what and where

91

CFCs (Section 9D)

• Foreign company in which SA residents own > 50% equity or votes

• Tainted income – Passive income and diversionary income

• Passive income – interest, dividends, royalties, rentals, annuities, exchange differences, insurance premiums and associates capital gains

• Diversionary income – derived from suspect transactions between a CFC and SA resident, transfer pricing risk

• Attribution rules subject to exemptions - Foreign business establishment and high foreign tax exemption, amongst others

• Overly rigid and too complex

• Core calculations have been simplified

• Stronger focus on transfer pricing

92

Single Charge for Company Emigration

(Section 9H)• Place of effective management moves offshore

• In past deemed disposal of all assets at market value and deemed dividend of reserves

• Move to single level of company tax on emigration

• Either capital gain or revenue, no deemed dividend

• Deemed disposal day before change of residence and immediate re-acquired

• All assets deemed to be sold and re-acquired at market value

• Resulting tax consequences

• This will apply to SA companies that become headquarter companies

93

CFC Restructuring (Section 42 to section 47)

• Local company group relief rules have been extended to allow for restructure of foreign group companies

• Asset for share transactions - Transfer of foreign company equity shares to CFCs.

• Amalgamations – Foreign company into certain resultant foreign companies

• Unbundling – Foreign holding company can be unbundled to another foreign company

• Liquidation transaction – Liquidation of a foreign company into a foreign holding company

94

Headquarter Companies (Section 9I)

• Introduced in 2010

• Encourage using SA as a base to invest into Africa

• Changes

– Must elect to be a HQ company

– Annual report to be submitted to the Minister

– Reduced minimum participation by shareholders – 20% to 10% (max 10)

– Relaxation of 80-20 asset test – now 80% of assets (excluding cash in bank) must comprise investments in companies which are at least 10% held

– Relaxation of the 80-20 receipt and accruals test – now 50% of gross income (not total receipts and accruals) must come from the 10% held companies

• Safe haven for small companies, gross income below R5million

• Gross income does not include exchange differences

95

Transfer Pricing (Section 31)

• 2010 amendments deleted, so never happened

• New changes introduced

• Deemed dividend rule stemming from a transfer price adjustment has been deleted

• A transfer price adjustment is now treated as a low interest loan until the loan has been repaid.

• Market related interest rate will be applied to the deemed loan

96

Withholding Tax on Interest (Section 37 I to N)

• Introduced in 2010

• Withholding tax on interest paid to non residents

• Interest must be from a SA source

• Effective date 1 January 2013

• Changes

• Nature of the liability – clarity that the beneficial owner is liable if tax is not paid by the person withholding

• Payment due dates – end of month after month during which the interest was paid

• Provision for refund – 3 year time limit for amounts wrongfully withheld

97

Capital Gains Tax

8th Schedule

98

Foreign Currency Rules (Para 84 to 96)

• Part VIII of the 8th Schedule has been repealed

• Effective for years of assessment commencing on or after 1 March 2011

• In future calculate the gain or loss in foreign currency and translate into Rand

99

Disposal of Equity Shares in Foreign Companies

(Para 64B)• Disregard any gain or loss

• Must not be a ‘foreign financial instrument holding company’

• Participation exemption has been reduced from 20% to 10%

• 10% must have been held for 18 months

• Additional conditions

– Must be sold to a non resident

– Will apply on emigration

– Can be sold to that persons CFC but not to any other CFC

– Will apply if sold by a HQ company

100

Company Distributions (Para 74, 75, 76, 76A, 76B, 77 and 78)

• Old rules

– 1. Pre 1 Oct 2001 - reduced pre 2001 cost

– 2. After 1 Oct 2001 and pre 1 Oct 2007 added to proceeds on disposal

– 3. After 1 Oct 2001 and pre 1 Oct 2007 and using weighted average method to calc cost – reduce base cost (could go negative)

– 4. After 1 Oct 2007 part disposal treatment

• All proceeds in 2. above trigger part disposal if shares have not been sold by 1 July 2011

• All negative base costs in 3. above trigger a capital gain if shares not sold by 1 July 2011

101

Company Distributions (cont.)

(Para 74, 75, 76, 76A, 76B, 77 and 78)• Changes to ‘date of distribution’ which is –

• Date of payment, or

– If an LDR date is given then LDR date, or

– If no formal declaration then date of entitlement

– In liquidation, the date of entitlement

• New rules – next slide

102


(Para 74, 75, 76, 76A, 76B, 77 and 78)• Capital distribution in cash or assets, received

– 1. Pre 1 Oct 2001 – reduces pre 1 Oct 2001 cost

– 2. After 1 Oct 2001 and pre 1 Oct 2007 and share sold pre 31 Dec 2011 – treat as proceeds when share sold

– 3. After 1 Oct 2001 and pre 1 Oct 2007 and using weighted average method to calc cost – reduce base cost (could go negative)

– 4. On or after 1 Oct 2007 but before 1 April 2012 – treat as proceeds and part disposal

• If the share has not been disposed of by 1 April 2012 then

– Treat proceeds in 2. above as a distribution on 1 April 2012

– If 3. above treat negative base cost as capital gain on 31 March 2012

103


(Para 74, 75, 76, 76A, 76B, 77 and 78)

• Capital distribution in cash or assets, received

• On or after 1 April 2012 and prior to disposal of the share

• If a pre 1 Oct 2001 share

– Deemed sale immediately prior = market value of share

– Immediately re-acquired the share @ market value less any capital gain or plus any capital loss

– Effect is to peg the base cost of the pre 1 Oct 2001 share

• Reduce full base cost by amount of the capital distribution

• To extent this results in negative base cost, gain is triggered

104

Transfer of Residence from Company or Trust

(Para 51A)• Exemption from CGT, STC and transfer duty

• No relief from donations tax

• Window open to 31 December 2012

• Changes

– Person acquiring the residence must be a connected person to the company or trust

– Those connected persons must have mainly used the property for domestic purposes

– Relief has been extended to holiday houses used mainly for domestic purposes

• Beware many pitfalls in this process

105

VAT

106

Delinking VAT from Transfer Duty

(Section 1, section 16(3) and section 18(4))• Second hand fixed property purchased by a vendor from a non-vendor

• Previously

– Notional input tax based on lesser of purchase price or market value

– Limited to the transfer duty payable

• The change

– Notional input tax based on lesser of purchase price or the market value

– No claim until property has been transferred in the deed registry

– Can only claim to the extent payment has been made

107

Temporary relief for the rental of residential property

by developers (Section 10(7) and section 18B)

• The weak property market has forced developers to rent properties that cannot sell

• Temporary rentals to funds extended carrying costs

• Change in use was triggered immediately creating a deemed supply

• Deemed supply at market value

• Short-term solution – sunset 1 January 2015

• Grace period of max 36 months to rent residential properties before sale

• If rented beyond the 36 months deemed output is triggered

• In order to qualify must be a ‘developer’ and intention to sell must remain

• If intention changes deemed supply is triggered

108

VAT exemption for imported service (Section 14(5))

• VAT is payable on importation of goods into SA

• Minimum threshold for exemption of goods is R100

• VAT is also payable in importation of services by a non-vendor into SA

• No minimum threshold existed for services

• Minimum threshold has been introduced of R100 per invoice

• Beware online purchases

109

Unpaid group member debt (Section 22)

• If debts which resulted in an input tax claim are not paid within 12 months a deemed supply is triggered for the debtor

• The creditor can claim input tax on bad debts written off

• Group companies often run loan accounts via journal entry and these loans are not settled

• The pay-back provisions no longer apply within wholly owned groups

• But the creditor cannot claim input tax on a bad debt written off as long as both companies remain in the group (wholly owned)

110

Tax Administration Bill No. 11B of 2011

• Approved by Parliament on 24 November 2011

• Should be promulgated during 2012

• Runs to 201 pages

• Page 1 to 92 – The TAB with 272 sections

• Page 93 to 177 – Schedule 1 amends all the underlying tax Acts covered by the Bill

• Page 178 to 201 – Memorandum on the objects of the TAB

111

Tax Administration Bill No. 11B of 2011

• Attempt to incorporate and align the administration provisions of all the following Acts into one TAA

– Transfer Duty Act

– Estate Duty Act

– Income Tax Act

– Value-Added Tax Act

– Skills Development Act

– Unemployment Insurance Contributions Act

– Diamond Export Levy (Administration) Act

– Securities Transfer Tax Administration Act

– Mineral and Petroleum Resources Royalty (Administration) Act

112

Critical Areas

• If TAB and principal Act clash then principal Act prevails

• Some administrative provisions have been left in the principal Act

• Will need to refer to both TAB and principal Act

• ‘Self-assessment’ – new concept, date a return is submitted or if no return required the date payment is made. Move to self assessment process

• Powers of SARS – information gathering has been extended but taxpayers have also been given rights

• Tax debt now prescribes in 15yrs not 30yrs

• Non compliance penalties are strictly codified

• Tax Ombud

• Permanent VDP (Recent VDP applications captured - 17 938)

113

Thank-you

Fasset Call Centre

086 101 0001

www.fasset.org.za

1 2012 budget and tax update. 2 2012 budget 3 main tax proposals personal income tax relief of r9.5...

Documents

tax update slide

tax thresholds

budget slide

tertiary slide

tax treatment of contributions

capital gains tax exemptions

capital gains tax exclusions

tax tables individuals