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2008 Budget & Tax Update

CONTENTS

PART 1 - BUDGET 2008PAGE

2008 BUDGET - TAX PROPOSALSHighlights 6Individuals 6

Tax tables 2008/09 6Tax tables 2007/08 7Rebates 7Tax threshold 7Tax saving per annum 7Interest and taxable dividend exemption 7Monthly monetary caps for tax-free medical scheme contributions 7Annual exclusion for capital gains or losses 7Annual exclusion in year of death for capital gains or losses 8Primary residence exclusion for capital gains or losses 8

Corporate tax rates 8Normal tax (basic rate) 8Tax rates for qualifying small business corporations 8Presumptive turnover tax for very small businesses 9Secondary tax on companies (STC) 9

Trusts 9Other taxes 9

Estate duty 9Donations tax 9Capital gains tax (CGT) 10Transfer duty 10

Commentary 11Headline corporate income tax rate 11Second phase of STC reforms 11Impact of capital distributions 14Learnership allowance for apprenticeships 15Tax incentives to support industrial policy 15Urban development zones 16Housing for low-income workers 16SUPPORT FOR SMALL AND MEDIUM-SIZED BUSINESSES 16

Budget and Tax Update 2008

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A simplified tax regime for very small businesses 16Venture capital tax incentive 17

INDIVIDUALS 18Medical scheme contributions 18Handicapped persons 18Standard income tax on employees 18Bursaries for relatives of employees 18Travelling allowances 18Subsistence allowances 19Residential accommodation for foreign skilled expatriates 19Repayable employee benefits 19

Personal use of cellular phones and laptops 20Reform of the retirement savings regime 20

PUBLIC BENEFIT ORGANISATIONS 20Restrictions on PBOs 20Donations to multilateral humanitarian organisations 20Extending tax-exempt status to PBOs providing student loans 21Cap for PBO-provided housing 21

Biodiversity conservation and management 21Electricity levy 21Fuel taxes 22Road Accident Fund levy 22Alcoholic beverages and tobacco products 22Financing options for provincial and local government 22Other proposed tax amendments 22Business issues 22

Group relief and the de-grouping charge 22Broad-based share incentive schemes 23Share incentive schemes 23Intellectual property arbitrage 23Community association governing bodies (body corporates) 23Consideration for government business licenses 23Water pipelines for electrical power generation 23Depreciation of small business non-manufacturing equipment 24Removal of the municipal market exemption 24Merger of deemed employee regimes 24Increased exemption threshold for the spreading of deductions 24Inward foreign research and development (R&D) investment 24Inward foreign JSE listing 24Repatriations from foreign cooperatives 24Multi-tier controlled foreign companies (CFCs) 25Debt cancellation between offshore group CFCs 25Refinement of share distributions and recapitalisations 25Extended tax-preferred liquidation period 25Reorganisations involving depository receipts 25Intra-group capital distributions 25Shares issued in exchange for assets 25Financial year end 25


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Retirement savings lump sums and provisional tax calculations 25Election for tax-free rollover reorganisation treatment 26

VAT 26VAT compulsory registration threshold 26E-commerce 26Nominal or passive foreign-controlled local activities 26Reforming the VAT treatment of business reorganisations 26Vocational training 26Termination of refunds into third-party bank accounts 27

Revised taxation of public entities 27Long-term insurers – expense and profit transfer formula 27Provisional tax system 27Administrative penalties 27Submission of supporting documents 27Bare dominium financing structures 28Trust distributions to beneficiaries 28Outside contributions added to estate redistributions 28Traditional communities 28Tax reform measures under review 28Tonnage tax 28Private equity transactions 28Protecting the tax base 28Supporting sustainable development 29General anti-avoidance rule to protect the estate duty 29Estate duty assessment 29Life insurance/pension benefits and estate duty 29Stamp duty on leases 30Industrial Development Zones (IDZs) 30Reversing the burden of proof for the intent to evade 302010 FIFA World Cup 30Diamond export levy 30Technical corrections 30Measures to enhance tax and customs administration 31

PART 2 - TAX UPDATE 31DEVELOPMENTS OVER THE LAST YEAR 31

Interpretation notes 31Regulations and government notices 32Retirement notes 33Tax judgments 33Brochures and guides issued by SARS 34Interest rate changes 35UIF threshold 35

AMENDMENTS TO LEGISLATION 35


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Dividends & STC 35STC group relief 37Company reorganisations 38

Definition of “group of companies” 38Sections 42 and 43 combined 39Amalgamation transactions 39Degrouping charge 41

Deemed capital on share sales 41Blocked foreign funds 44Retirement fund lump sum benefits 45

Tax on retirement fund lump sum benefits 45Surplus distributions 46Tax-free payouts relating to membership of public sector funds before 1 March 1998 46

Changes to the definitions of “pension fund” and “retirement annuity fund” 47Employees’ tax withheld from lump sum benefits 48Divorce settlements 48

Occupational death benefits 49Exemption for foreign services 49Deduction for annuities 51Deemed cost rule for connected persons 51Scrapping allowance 52Deduction for commercial buildings 52New capital allowance provisions 53

Rolling stock 53Port assets 53Environmental expenditure 53

Provision of medical services 54Qualifying medical expenses 54Deduction for donations to qualifying entities 54Residential accommodation for expatriates 54Travel benefits 55Intellectual property 55Assets acquired in exchange for shares 57Amalgamation of sporting and professional bodies 59Rebate for foreign taxes paid 59


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Research and development allowance 60Assessed losses 61Foreign exchange transactions 62Withholding of employees’ tax from share scheme gains 62Capital gains tax amendments 63

Extraordinary Dividends 63Capital distributions 64Share buybacks of listed shares 66Base cost of an asset 67Withholding tax on disposals by non-residents 67

Regulations prescribing circumstances under which the Commissioner may write-off or compromise an amount due 68

Monetary limits in the Taxation Laws Amendment Bill, 2008 76


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PART 1 – BUDGET 2008

2008 BUDGET TAX PROPOSALS

HIGHLIGHTS

Personal income tax relief for individuals amounting to R7.7 billion Corporate income tax rate to reduce by one percentage point from 29% to 28% STC to be replaced by a final withholding tax on dividends in 2009 Simplified turnover tax for small businesses with annual turnover up to

R1million Compulsory VAT registration threshold increases to R1million Tax incentives to encourage venture capital equity investments in small and

medium sized businesses R5 billion over the next 3 years in targeted tax incentives to encourage

investment in labour-intensive or strategic sectors Learnership allowances to be expanded to encourage apprenticeships Electricity levy of 2 cents per kilowatt hour to be introduced

The notes that follow draw extensively from the SARS Budget Tax Proposals 2008/9 and Chapter 4 of the 2008 Budget Review published by National Treasury.

INDIVIDUALS

Personal income tax relief of R7.7 billion has been proposed.

Tax tables 2008/9

Taxable incomeR

Rate of tax

0 - 122 000 18%122 001 - 195 000 21 960 + 25%195 001 - 270 000 40 210 + 30%270 001 - 380 000 62 710 + 35%380 001 - 490 000 101 210 + 38%490 001 - 143 010 + 40%

Tax tables 2007/8

Taxable incomeR

Rate of tax

0 - 112 500 18%112 501 - 180 000 20 250 + 25%180 001 - 250 000 37 125 + 30%250 001 - 350 000 58 125 + 35%350 001 - 450 000 93 125 + 38%450 001 - 131 125 + 40%


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Rebates

2008/09R

2007/08R

Primary 8 280 7 740Secondary 5 040 4 680

Tax threshold

2008/09R

2007/08R

Below age 65 46 000 43 000Age 65 and over 74 000 69 000

Tax saving per annum

Taxable income Age below 65R

Age above 65R

R46 000 – R100 000 540 900R120 000 1 065 1 425R150 000 1 205 1 565R200 000 – R250 000 1 955 2 315R300 000 2 955 3 315R400 000 3 855 4 215R500 000 and above 4 655 5 015

Interest and taxable dividend exemption

2008/09R

2007/08R

Natural persons below age 65 19 000 18 000Age 65 and over 27 500 26 000

Of the above, the amount that can be applied to foreign interest and dividends

3 200 3 000

Monthly monetary caps for tax-free medical scheme contributions

2008/09R

2007/08R

First two beneficiaries 570 530Each additional beneficiary 345 320

Annual exclusion for capital gains or losses

2008/09R

2007/08R

Natural persons 16 000 15 000


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Annual exclusion in year of death for capital gains or losses

2008/09R

2007/08R

Natural persons 120 000 120 000

Primary residence exclusion for capital gains or losses

2008/09R

2007/08R

Natural persons 1 500 000 1 500 000

CORPORATE TAX RATES

Years of assessment ending between 1 April and 31 March

Normal tax (basic rate) 2008/09 2007/08Non-mining companies 28% 29%Close corporations 28% 29%Employment companies 33% 34%Other companies 28% 29%Taxable income of a non-resident company 33% 34%Closely held passive investment companies 40% 29%

Tax rates for qualifying small business corporations

Years of assessment ending between 1 April 2008 and 31 March 2009Taxable income

RRate of tax

R0 - 46 000 0%46 001 - 300 000 10% of the amount over R46 000300 000 - R25 400 + 28% of the amount over R300 000

Years of assessment ending between 1 April 2007 and 31 March 2008Taxable income

RRate of tax

R0 - 43 000 0%43 001 - 300 000 10% of the amount over R300 000300 000 - R25 700 + 29% of the amount over R300 000


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Presumptive turnover tax for very small businesses

Years of assessment still to be announcedTurnover

RRate of tax

0 - 100 000 0%100 001 - 300 000 2% of the amount over R100 000300 001 - 500 000 R4 000 + 4% of the amount over R300 000500 001 - 750 000 R12 000 + 5.5% of the amount over R500 000750 001 - 1 000 000 R25 750 + 7.5% of the amount over R750 000

Secondary tax on companies (STC)

Rate of STC on dividends declared - 17 March 1993 – 21 June 1994 15% 22 June 1994 – 13 March 1996 25% 14 March 1996 – 30 September 2007 12.5% On or after 01 October 2007 10%

Trusts

The tax rate on trusts (other than special trusts) remains unchanged at 40%.

OTHER TAXES

Estate duty

Rate of estate duty on the dutiable amount of an estate - Death prior to 14 March 1996 15% Death between 15 March 1996 and 30 September 2007 25% Death or after 01 October 2007 20%Primary abatement: R3 500 000 (2008: R3 500 000)

Donations tax

Payable at a flat rate on the value of property donated by a resident - Prior to 14 March 1996 15% Between 15 March 1996 and 30 September 2007 25% On or after 01 October 2007 20%Annual exemption for natural persons: R100 000 (2008: R100 000)


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Capital gains tax (CGT)

The effective CGT rates are as follows:

Taxpayer InclusionRate (%)

StatutoryRate (%)

EffectiveRate (%)

Individuals 25 0 – 40 0 – 10

TrustsUnit - 28 -Special 25 18 – 40 4.5 – 10Other 50 40 20

CompaniesOrdinary 50 28 14Small business corporation 50 0 – 28 0 – 14Employment company 50 33 16.5Foreign company 50 33 16.5Closely held passive investment companies 50 40 20Small companies subject to turnover tax 0 0 0

Life assurersIndividual policyholders fund 25 30 7.5Company policyholders fund 50 28 14Untaxed policyholders fund - - -Corporate fund 50 28 14

Transfer duty

Transfer duty rates remain unchanged.

Transfer duty rates for individuals 2008/9Property value

RRate of tax

0 – 500 000 0%500 001 – 1 000 000 5%

1000 001 upwards R25 000 + 8%In all other cases the rate is 8% of the consideration.


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Commentary

The tax proposals outlined in the 2008/09 Budget are aimed at stimulating economic growth by reducing the tax rate on business and supporting industrial incentives. New initiatives reduce the cost of doing business by cutting red tape, especially for small businesses. The thresholds in the personal income tax brackets and rebates have been adjusted for inflation to avoid the effects of fiscal drag.

Tax collections continue to increase in real terms as a result of improved compliance and cyclical factors. Gross tax revenue in 2007/08 is expected to amount to R571.1 billion, which is R14.5 billion higher than the amount set in the 2007/8 Budget and R5.0 billion higher than the revised figure indicated in the 2007 Medium Term Budget Policy Statement in October 2007. Tax revenue growth, which has a strong cyclical component, is expected to moderate in line with a slower rate of GDP growth over the medium term.

Headline corporate income tax rate

A broadening of the tax base, reduction in tax rates, strengthening of tax administration and enforcement over the past decade have contributed to a more efficient and equitable tax system. Following the positive results yielded as a result of these reforms, the headline corporate income tax rate is to be reduced from 29% to 28%. The lower rate will apply to years of assessment ending between 1 April 2008 and 31 March 2009.

This measure is also intended to reduce the cost of capital, facilitating an increase in private sector investment and stimulating the supply side of the economy. To limit tax avoidance and/or tax arbitrage, given the gap between the corporate tax rate and top marginal personal income tax rate, it is proposed that closely held (passive) companies will be subject to a 40% tax rate.

Second phase of STC reforms

The Minister of Finance announced a reform of the STC regime in the 2007 Budget Speech. The main purpose of this reform is to switch this tax charge from a company-level tax to a shareholder level tax, consistent with international practice. Under the new regime, all distributions will be treated as dividends unless it is shown that the distribution represents a return of capital.

It is proposed that the new rate remain at 10%, that no dividend withholding tax will be applied to dividends declared to income tax-exempt entities and that all STC credits will expire. A 10% final withholding rate for domestic shareholders will apply, except in cases of income tax-exempt entities, such as retirement funds and public benefit organisations (PBOs). The withholding rate for foreign shareholders may be limited by specific tax treaties.

It is also proposed to provide cascading relief (i.e. taxing dividends only when profits reach individuals or non-domestic company shareholders). As an anti-avoidance measure, dividends paid to closely held (passive) companies used to accumulate passive income will be subject to a 10% tax rate.


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A discussion document was released by National Treasury on 21 February 2008 and is reproduced below:

CONVERSION OF THE SECONDARY TAX ON COMPANIES (“STC”) TO A SHAREHOLDER DIVIDENDS TAX

1. BACKGROUND

In South Africa, the taxation of distributed profits is achieved through the Secondary Tax on Companies (“STC”). The STC liability falls on the company distributing the profits. In most tax systems, tax is imposed on the shareholders receiving a dividend. Unfamiliarity with the STC’s different mechanics seems to be a hurdle for foreign investors according to many commentators. At a more substantive level, the STC liability adversely impacts a South African company’s accounting income statement because the company distributing the dividend must subtract this tax charge from its profits. Arguments have also been raised by the private sector that the STC raises the cost of equity financing.

In the 2007 Budget Review, Government proposed to phase-out the STC in favour of a final withholding tax falling on shareholders receiving dividends. This shift will occur in two phases.

(a) Phase one

In the first phase of reform, the rate of STC was reduced from 12.5 % to 10 % with effect from 1 October 2007. This reduction was coupled with a broadening of the tax base through the closing of commonly exploited loopholes.

A further broadening of the base is planned for 2008 (see the discussion document on “the Secondary Tax on Companies: Revising the Base”).

(b) Phase two

The second phase of reform entails the actual conversion of the STC into a dividend tax on shareholders. As stated in the 2007 Budget Review, the implementation of this second phase is contingent on the revision of international tax treaties that limit withholding tax on dividends to zero per cent.

The tax treaties at issue are Australia, Cyprus, Ireland, Kuwait, The Netherlands, Oman, Seychelles, Sweden and The United Kingdom. Most of these treaties have been renegotiated and are awaiting executive signatures and parliamentary ratification. It is anticipated that this phase will be completed by 2009.

2. PROPOSED DESIGN

(a) General concepts

The new regime will follow the classical system of taxing distributed profits. As a general matter, shareholders will be subject to the new tax. The rate of the new tax will be 10% as is currently the case for STC. This dividend tax will be a separate final withholding tax and dividends will not form part of shareholder income (the latter of which is taxable at marginal rates). As with the STC, the new tax will apply to distributions during the life of the company as well as in liquidation.

(b) Exemptions/deferrals

Non-corporate and non-resident shareholders will generally be subject to tax at a 10 % rate on the full amount of dividends received. However, limited exemptions and deferrals from this withholding tax will be applied as described below. The net effect of these exemptions and deferrals will amount to an estimated loss to the fiscus of R6 billion in the first year.

Distributions to exempt entities – Company distributions to entities that are fully exempt from income tax will similarly be exempt from the new dividend tax. These entities notably include


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pension funds and Government. Entities that are partially subject to income tax will benefit from an exemption on dividends only if these entities are fully exempt in respect of investment (i.e. non-trading) income. Therefore, public benefit organisations will be exempt from dividend tax, but recreational clubs will be taxed on their dividends because clubs are only exempt from tax on investment income up to a monetary limit.

Treaty relief – The dividend tax rate for non-resident shareholders may be limited if a tax treaty exists between South Africa and the shareholder’s country of residence. Depending on the proposed renegotiation of treaty rates, a 5% imit may apply.

Intra-company dividends – As a general rule, underlying company profits should only be subject to one level of tax on distribution. This principle is critical when profits pass through two or more company levels. The STC system achieves this result in two ways. The first is by taxing the first company that declares the underlying profits as dividends while exempting subsequent dividends associated with these profits via the STC credit system. The second is by permitting an election that STC will not apply in the case of certain intra-group distributions. In a classical system, tax applies only on the last company level. The classical system achieves this result by exempting all inter-company dividends between resident companies (regardless of percentage shareholding) with the tax applying only at the level where dividends are declared to persons other than companies or to non-residents.

Example:

Facts. Company A distributes R100 of profits to Company B. Company B distributes those profits to Company C. Company C in turn distributes those profits to Individual.STC result. Under the current paradigm, Company A is subject to the STC when distributing profits to Company B (assuming group relief does not apply). Subsequent distributions from Company B to Company C and from Company C to Individual are exempt via the STC credit system.New dividend tax result. Under the proposed paradigm, no dividend tax applies when Company A declares dividends to Company B nor when Company B declares dividends to Company C (regardless of whether these companies form a group of companies). The dividend tax applies only when Company C declares a dividend to Individual (or to a non-resident).

As shown above, both sets of rules provide cascading relief but in a slightly different way. The new system has an administrative advantage in that it eliminates the tracking required for STC credits. Taxpayers benefit under the new system because the new system allows for substantial deferral. To ensure that this deferral is not excessive, an anti-avoidance measure will be applied


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for closely-held passive holding companies used to accumulate passive dividend income (e.g. as a means for delaying the receipt of dividends by individuals for long periods of time).

(c) Administration

To the extent the new dividend tax applies, the company declaring the dividend will be required to withhold the tax upon declaration. This tax will be payable by the company to the South African Revenue Service (“SARS”) on or before the end of the month following the month in which the dividend was declared. For example, if a company declares the dividend at any time during the month of February, the tax withheld will be payable to SARS on or before 31 March.

3. TRANSITIONAL ISSUES

(a) STC credits

As discussed above, the STC system allowed for an accumulation of tax credits to avoid cascading. Under the new system, there is no need for credits as the new tax will apply only at the top company level. At issue is the continuing existence of STC credits.

While the new dividend tax system replaces the STC system, the systems are fundamentally different. In terms of the STC, the tax liability falls on the company; whereas the tax liability for the new dividend tax falls on the shareholder (even though the company retains a withholding responsibility). In terms of the base, the STC is calculated with reference to the amount of dividends declared while the new dividend tax will be calculated with reference to the amount of dividends receivable.

Retention of transitional STC credits will give rise to multiple administrative complications. One key advantage of the proposed classical system (and its attendant deferral) is to eliminate STC credit tracing. Taxpayers cannot expect to receive the best of both worlds – a classical system going forward in addition to STC type credit relief. The proposed regime should, therefore, either be a classical model going forward or a credit model should be retained (with the new tax being imposed in all cases when a dividend is first declared).

After careful consideration it has been decided that STC credits accumulated prior to the implementation of the new system will be forfeited. However, given the delayed timing of the change, taxpayers can still utilise STC credits in the interim.

(b) Gold mining companies

The taxation of gold mining companies is based on two regimes. Under the basic regime, gold mining companies are subject to an income tax rate of up to 34 % on gold mining profits with the STC applying when dividends are declared. However, companies may elect to be exempted from STC but at the cost of a higher income tax rate on gold profits of up to 43 %.

The 43 % option for the mining companies will be discontinued with the enactment of the new system. This election was possible under the STC because the incidence of both the income tax and the STC was on the gold mining company. Under the new system, the tax switches to a shareholder level.

Again, the question arises as to what happens to companies that were previously subject to the higher 43 % gold formula.

For reasons discussed above, it has been decided that STC credits will have no place going forward, even in the case of mining. It is noted that much of the perceived unfairness may be more theoretical than real. While many gold mining companies chose the 43 % formula, the formula had no practical impact for companies with taxable losses.

4. REQUEST FOR COMMENT


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While the proposed withholding tax will generally be fairly simple for companies to administer (with the 10% charge being based on the nature of the payee), tracing issues will arise if dividend payments are made to nominees and other parties acting on behalf of other investors. If a payment is made in this fashion, the question arises as to the status of the true economic owner. The distributing company will probably not know the identity nor the tax status of this party. This issue not only arises in the case of agents, brokers and trading intermediaries but also when payments are made to entities, such as collective investment schemes.

The following possible options have been identified and are being studied in this regard:

Option 1: All dividend payments that are made to persons who are not beneficial owners (e.g. to nominees) will be subject to 10 % withholding with an “escape hatch”. Under the escape hatch, the company declaring the dividend to the nominee could reduce or eliminate the withholding if provided with sufficient proof that the economic owner has preferred status. However, any error would mean that liability rests with both the company and the beneficial owner.Option 2: Under this option, the nominee could be granted the authority to withhold the tax because the nominee should know the identity of the economic owner. If empowered, the withholding liability would shift from the company payor to the nominee. The nominee would have to meet certain criteria in order for SARS to be satisfied that the nominee has sufficient substance to stand in for the company.

National Treasury and SARS invite public comment on the contents of this media release, particularly the preferred option for withholding tax where payment is made to a nominee. Comments in this regard should be sent to Thabo Legwaila by email at [email protected] or by fax to 012 315 5516. Please ensure that the comments reach us by 31 March 2008.

Impact of capital distributions

As part of the 2007 effort to close perceived STC loopholes, the taxation of capital distributions was changed to prevent avoidance. Under the change, all capital distributions trigger part-disposal treatment for capital gains purposes. Although this change effectively closed the loophole of concern, other options may have better long-term viability. Depending on time constraints, a short discussion document is anticipated on the subject, followed by possible legislative change.

Learnership allowance for apprenticeships

Learnerships and apprenticeships play an important role in strengthening the skills base of the economy. The learnership tax allowance favours short-term learnerships. It is therefore proposed that the allowance be amended to take into account longer-term apprenticeships, focusing on those of a technical nature, such as electricians, welders, plumbers, mechanics and so on.

Tax incentives to support industrial policy

Carefully designed tax incentives that encourage higher levels of investment in labour intensive or strategic sectors will be considered. However, incentives have to be implemented with circumspection. It is important to identify clearly where the market failures are, consider the costs and benefits of such actions, and explore alternatives. It is proposed that R5 billion be set aside for tax incentives to be used over three years in support of sectors identified as key to the emerging industrial strategy. The design of this programme will be finalised in consultation with the Department of Trade and Industry and other interested parties over the next few months.


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Urban development zones

To rejuvenate decaying inner cities, government introduced the urban development zone tax incentive in 2004. The incentive provides accelerated depreciation for refurbished and new commercial buildings in 15 municipalities, and there is evidence that this measure has made a difference in the pace of development. It is recommended that the incentive be extended for five years, until March 2014. Municipalities will be given an opportunity to apply for extension of the designated zones, and consideration will be given to expanding the number of participating municipalities.

Housing for low-income workers

The provision of adequate and affordable low-income housing (owned or rented) remains a challenge. The obstacles to providing such housing are often of a regulatory nature. While these challenges are being addressed it is proposed that current provisions in the Income Tax Act encouraging employers, developers, PBOs and landlords to increase the supply of houses for low-income households be enhanced and that additional incentives be explored.

The existing monetary threshold limits for low-cost housing allowances, such as the R6 000 deductible limit per dwelling for employer-provided housing, will be revised. The depreciation allowances for the construction of low-cost houses and associated public infrastructure that employers and developers may claim will be reviewed and enhanced.

In the case of employer-provided low-cost housing, further relief with respect to fringe benefit t taxation in the hands of the employee will be considered.

SUPPORT FOR SMALL AND MEDIUM-SIZED BUSINESSES

Over the past several years government has taken steps to reduce the tax liability and tax compliance burden of small businesses. These measures include:

The introduction in 2001 of a (lower) graduated income tax rate structure for incorporated small businesses, with regular subsequent adjustments to monetary thresholds.

An enhanced depreciation regime for incorporated small businesses introduced in 2001 and extended in 2005.

Capital gains relief for small businesses in 2001, increased in 2006 The option to file VAT returns every four months instead of every two months,

introduced in 2005 for very small businesses. Relief from the skills development levy for businesses with a payroll of less than

R500 000 per year from 2005.

Additional relief was announced in the 2008 Budget Speech.

A simplified tax regime for very small businesses

The 2008 Budget proposes a simplified tax system that will reduce paperwork related to income tax and VAT for small sole proprietors, partnerships and incorporated businesses.


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First, the compulsory VAT registration threshold is to increase to R1 million per year, which saves many small businesses from the compliance burden imposed on vendors.

Secondly, a simplified, turnover-based tax system is to be implemented for businesses with turnover up to R1 million per year.

This turnover-based presumptive tax system will be elective. After joining the system, qualifying businesses will be required to remain in this system for a minimum of three years (provided they remain within the monetary threshold). However, once a business has elected to migrate out of the system, it will not be able to migrate back for a period of five years.

To protect the personal income tax base, personal services rendered under employment-like conditions and professional services will be excluded from this tax system.

The turnover-based system is intended to reduce the tax compliance costs for very small businesses, but not necessarily their tax liability. The system will support the practice of regular recordkeeping in small businesses, which in time will migrate to the normal income tax system. The following table will be used to determine the normal tax liability for qualifying small businesses once the new system becomes effective:

TurnoverR

Rate of tax

0 - 100 000 0%100 001 - 300 000 2% of the amount over R100 000300 001 - 500 000 R4 000 + 4% of the amount over R300 000500 001 - 750 000 R12 000 + 5.5% of the amount over R500 000750 001 - 1 000 000 R25 750 + 7.5% of the amount over R750 000

Venture capital tax incentive

Access to equity finance by small and medium-sized businesses has been identified as one of the main challenges to the growth of this sector of the economy.

Tax incentives for investors in qualifying small and start-up enterprises have been proposed in a bid to facilitate access to finance for small businesses.

In general, the targeted enterprises are high growth and high-tech companies with an annual turnover of up to R14 million or gross assets of up to R7 million. For junior mining and exploration companies, a different threshold applies: gross assets of R30 million to R50 million will be considered.

The proposed tax incentives will target individual investors, corporate investors and venture capital funds.

General venture capital investments (non-mining) will qualify for a 30% up-front deduction, with annual deductions to be capped at R500 000 for individuals, R750 000 for corporations and R7.5 million for venture capital funds.


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Junior mining exploration investments would qualify for a 50% upfront deduction, with annual deductions capped at R1 million for individuals and R10 million for corporations and venture capital funds.

INDIVIDUALS

Medical scheme contributions

The monthly monetary caps for tax-free medical scheme contributions will be increased with effect from 1 March 2008 from R530 to R570 (by 7.6 %) for each of the first two beneficiaries and from R320 to R345 (7.8 %) for each additional beneficiary. Measures to ensure more consistent reporting of contributions by employers will be considered.

Handicapped persons

A full deduction of medical expenses is allowed for income tax purposes where the taxpayer, his or her spouse or his or her child is a handicapped person. The definition of “handicapped person” in section 18 of the Income Tax Act is to be reviewed.

Consideration will also be given to limiting the types of expenses that may be deducted where they do not reasonably relate to a disability.

Standard income tax on employees

The “broken period” principle that forms part of the SITE system assumes that a SITE taxpayer will work for a full tax year. This can result in a taxpayer paying income tax, even though he or she may earn below the tax threshold for a given tax year. It is proposed that SITE payments should become refundable in such instances.

Bursaries for relatives of employees

As a rule, if an employer grants a bursary to the relative of an employee, that grant results in a taxable fringe benefit. However, for employees earning up to R60 000 per year, this fringe benefit, up to R3 000 per year, is tax-free. To facilitate employer-sponsored education and training of the dependants of low-and middle-income workers, it is proposed that this tax-free fringe benefit be increased to R10 000 per year for employees earning up to R100 000 per year.

Travelling allowances

The tables for determining the deemed cost of business travel where an individual has been granted a travelling allowance have been updated to take account of inflation, higher interest rates and fuel prices.


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The following table will apply from 1 March 2008:

Value of the vehicle (including VAT)R

Fixed costR p.a.

Fuel cost(c/km)

Maintenance cost (c/km)

0 – 40 000 14 672 58.6 21.7 40 001 – 80 000 29 106 58.6 21.7 80 001 – 120 000 39 928 62.5 24.2120 001 – 160 000 50 749 68.6 28.0160 001 – 200 000 63 424 68.8 41.1200 001 – 240 000 76 041 81.5 46.4240 001 – 280 000 86 211 81.5 46.4280 001 – 320 000 96 260 85.7 49.4320 001 – 360 000 106 367 94.6 56.2360 001 – 400 000 116 012 110.3 75.2exceeding 400 000 116 012 110.3 75.2

Fixed rate where business travelled does not exceed 8 000km and no other travel allowance is paid: 292 c/km.

Subsistence allowances

New daily rates will apply from 1 March 2008.

Where the recipient is obliged to spend at least one night way from his or her usual place of residence on business and the accommodation to which that allowance or advance relates is in the Republic and the allowance or advance is granted to pay for –

meals and incidental costs, an amount of R240 (was R208) per day is deemed to have been expended;

incidental costs only, an amount of R73.50 (was R63.50) for each day which falls within the period is deemed to have been expended.

Where the accommodation to which that allowance or advance relates is outside the Republic, an amount equal to US$215 (was $200) per day is deemed to have been expended.

Residential accommodation for foreign skilled expatriates

In 2007, legislation was enacted to limit tax-free accommodation provided to foreign visiting workers to a period of one year. It is proposed that this period be relaxed to permit tax-free employer-provided accommodation for a maximum of two years to cover the likely cost of carrying two homes for short-term secondments. This tax-free treatment will be subject to a ceiling equal to 25 % of the employee’s salary or R25 000 per month – whichever is lower.

Repayable employee benefits

Employees sometimes receive funds (e.g. maternity payouts, retention payments and performance bonuses) from their employers that may have to be returned if certain conditions are not subsequently fulfilled. In each of these circumstances, the tax law treats


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the initial payment as fully includible as gross income for the employee with the repayment being non-deductible. This failure to allow deductions for these repayments needs to be remedied as a matter of fairness.

Personal use of cellular phones and laptops

Employees are increasingly obtaining home use of employer cellular phones and laptops. This usage is mainly intended to encourage productivity outside the office. However, personal use of these items is ultimately inevitable given home access. In accordance with this trend, it is proposed that incidental private use of cellular phones and laptops should not give rise to fringe benefits taxation.

Reform of the retirement savings regime

As was announced in the 2007 Budget Speech, a comprehensive review of social security and retirement savings is underway. A number of interim reforms related to retirement savings have already been implemented, such as the simplification of the method of taxing lump sum payments on retirement and death, which was introduced from 1 October 2007.

It is proposed to also simplify the taxation of other withdrawals from retirement funds.

The full taxation of benefits upon a member’s death even if the benefit is converted to an annuity for the benefit of the deceased’s beneficiaries will be reviewed.

Divorce settlement payments made by retirement funds, which are taxed in the hands of the member spouse in terms of a 2007 amendment, will instead be taxable in the hands of the non-member spouse.

Consideration will be given to consolidating the various monetary thresholds and percentage contributions that are used in the provisions that provide deductions for contributions to retirement funds by both employees and employers. An overall monetary cap to limit the tax benefits of such contributions will also be considered.

PUBLIC BENEFIT ORGANISATIONS

Restrictions on PBOs

PBOs are required to conduct 85% or more of their activities in South Africa. It is proposed that this restriction on PBOs be dropped.

Donations to multilateral humanitarian organisations

Multilateral humanitarian organisations offering developmental assistance in South Africa are exempt from income tax here. However, donations made to such organisations for activities that otherwise might qualify in terms of section 18A of the Income Tax Act are not deductible for income-tax purposes. The Act requires that an organisation be registered in South Africa in order for donors to be able to deduct donations to such entities. Where it might be impractical for such organisations to register here, a legislative exception will be considered.


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Extending tax-exempt status to PBOs providing student loans

To support the activities of PBOs that provide bursaries and loans to needy students, it is proposed that the provision of student loans by PBOs should be included in the list of public benefit activities.

Cap for PBO-provided housing

The Income Tax Act makes provision for the tax exemption of PBOs that provide housing for the benefit of the poor. In order for a PBO to qualify for this concession, the legislation prescribes that the intended beneficiaries must have a maximum monthly household income of R3 500. It is proposed that this be increased to R7 000 per month.

Biodiversity conservation and management

The 2008 Budget proposes measures to encourage conservation of South Africa’s rich biodiversity. Tax reforms to encourage biodiversity conservation by private landowners will be considered. Landowners will receive an income tax deduction for preserving habitats and biodiversity on their land. The deduction will cover expenses incurred in developing and implementing an approved conservation management plan under either the National Biodiversity Act (2004) or the Protected Areas Act (2003).

The deductions contemplated would be limited to income derived from the land.

The existing PBO framework will be reviewed for impediments to tax deductions for property donated to a PBO or parastatal conservation agency where that property is declared a nature reserve or national park under the Protected Areas Act (2003).

Consideration is also being given to introducing estate duty, transfer duty and donations tax exemptions for properties bequeathed, sold or donated to a PBO for declaration as a protected area under that act.

Electricity levy

A 2 c/kWh tax on electricity generated from non-renewable sources is to be collected at source by the producers or generators of electricity. This measure will serve a dual purpose of helping to manage the current electricity supply shortages and protecting the environment.

Coal-based electricity generation accounts for a significant share of carbon dioxide emissions, contributing to global warming. The introduction of this tax will be complemented by incentives that encourage firms to behave in a more environmentally responsible manner. Tax incentives to encourage the uptake and development of renewable energy, such as accelerated depreciation allowances, are already in place and could be further enhanced.


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Fuel taxes

The general fuel levy on petrol and diesel will be increased by 6 cents per litre to 127 cents per litre and 111 cents per litre respectively with effect from 2 April 2008. This constitutes an increase of 5% for petrol and 5.7% for diesel respectively.

Road Accident Fund levy

The Road Accident Fund (RAF) levy on petrol and diesel will increase by 5 cents per litre from 41.5 cents per litre to 46.5 cents per litre from 2 April 2008.

Alcoholic beverages and tobacco products

Excise duties on alcoholic beverages and tobacco products were increased by between 5% and 11%. For the second year, there was no increase in the excise duty on traditional beer.

Financing options for provincial and local government

Government is studying alternatives to replace the Regional Services Council (RSC) and Joint Services Board (JSB) levies, which were abolished from July 2006, and considering sustainable funding models for municipalities.

One option under consideration is the sharing of revenue from the general fuel levy. A percentage of revenue from the general fuel levy will accrue to category A and B municipalities from 2009/10. The share of each municipality will be based on fuel sales per municipality.

In addition, as a possible alternative to the proposed provincial fuel levy, provinces may receive a share of the general fuel levy revenue based on the fuel sales per province. These revenues will be expressed in terms of cents per litre to ensure greater transparency and provide certainty. The fiscus will receive the balance, about 20% of the total revenue.

Other proposed tax amendments

Business issues

Group relief and the de-grouping chargeThe 2007 legislative agenda contained a number of changes to the company group relief rules. As part of these changes, the legislation narrowed the range of companies eligible for group treatment. This narrowing was not only enacted to prevent avoidance but also to develop a more workable group concept so that further forms of group relief could eventually progress in line with international trends. All 2007 proposed changes were set to become effective as of 1 January 2009. At this stage, the group definition still requires refinement, having been narrowed too much in some respects and not enough in others. Transitional issues also remain an ongoing concern.

Other aspects of the intra-group rollover rules are also of concern. Some taxpayers are misusing group relief to cash out their company interests to independent parties without


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tax. Intra-group transfers involving debt remain a problem. Lastly, the de-grouping charge must be revisited in respect of double gains as well as trapped losses. A similar set of issues will have to be considered in situations where qualifying ownership unwinds in respect of other rollover reorganisations.

Broad-based share incentive schemesIt has come to government’s attention that some requirements for the broad-based employee share plans in terms of section 8B of the Income Tax Act are too stringent, thereby limiting the utilization of this provision. Certain of these restrictions will be relaxed without compromising the broad-based objective of the incentive. Key issues at stake are the tax-free ceiling and the percentage of employees required to participate in the scheme.

Share incentive schemesSeveral years ago, legislation addressing share incentive schemes (section 8C) was significantly tightened to ensure that these executive schemes were fully taxed. These schemes continue to raise issues in terms of avoidance and anomalies that may require either legislative amendment or interpretive clarification.

Intellectual property arbitrageIn 2007, government enacted legislation that seeks to eliminate the deduction for royalty payments to foreign residents if the royalty stemmed from intellectual property initially devised in South Africa. This legislation is based on the premise that taxpayers should not be able to use South African-developed intellectual property to denude the domestic tax base. However, comments from practitioners indicated further discussion was required before implementation. The effective date for the legislation was accordingly delayed until 2009 so that various matters could be addressed.

Community association governing bodies (body corporates)A variety of organisations pool funds for community needs (such as sectional title bodies, share block companies and other local home associations). The levies raised by these organisations from their members are currently tax-free, but all other income is generally taxable. In order to alleviate administration and compliance, it is proposed that all non-levy investment income be exempt up to R50 000 per organisation.

Consideration for government business licensesCertain business activities require government licenses as a legal prerequisite. Many licenses have traditionally required an upfront cash consideration. More recently, certain licenses have instead required various forms of socially related expenditure in lieu of typical cash consideration. Due to various anomalies in the law, neither the cash nor the socially related expenditure can be deducted when paid or over the period of the license. This aspect is to be reviewed.

Water pipelines for electrical power generationPipelines used to transport raw water to supply power stations are not eligible for tax depreciation despite ongoing wear and tear. Water pipelines will henceforth be eligible for an annual tax write-off. This write-off will roughly approximate annual wear and tear (i.e. 5 %).


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Depreciation of small business non-manufacturing equipmentQualifying small business corporations engaged in non-manufacturing businesses can write-off equipment over three years on a 50:30:20 basis. While this regime acts an incentive, the 50:30:20 write-off is occasionally less favourable than the general depreciation regime available to other parties (such as the 100% rate for small assets).

It is therefore proposed that small business corporations should be eligible for the general depreciation regime if desired.

Removal of the municipal market exemptionAn exemption exists for certain agricultural markets operating under the control of municipalities. This exemption was enacted to assist a particular project, but the proposed project never materialised. Having failed in its stated purpose, the exemption will be removed.

Merger of deemed employee regimesTwo sets of rules exist to prevent employees from avoiding monthly PAYE withholding by artificially characterising themselves as independent contractors. While the objectives at issue are important, the duplicative set of rules creates an unnecessary burden on small business. The two regimes will be merged.

Increased exemption threshold for the spreading of deductionsDeductions for payments relating to goods, services and other benefits must be spread over the economic life that these items are provided in terms of section 23H of the Income Tax Act. A R50 000 de minimis threshold exists. This exemption threshold, set in the year 2000, will be increased to R80 000 in line with inflation.

Inward foreign research and development (R&D) investmentIn 2006, government created a 150% allowance for R&D (refer section 11D of the Income Tax Act). As part of this package, special rules apply in the case of outside funding so that the funding party will obtain the 150%allowance if an independent technical team is performing R&D on the funding party’s behalf. Although this allocation of the 150% allowance is largely preferred by industry in domestic settings, allocation of the 150% allowance to foreign parties engaged in funding is of little value because the foreign funding party generally lacks a meaningful South African tax base. Subject to anti-avoidance concerns, consideration will therefore be given to switching the 150% allowance to the independent domestic technical team in these circumstances.

Inward foreign JSE listing Dividends from a company with foreign shares listed on the JSE are tax exempt as long as South African residents own more than 10% of the foreign company’s shares. It is considered that this 10% threshold unfairly discriminates against smaller listed companies and it will therefore be removed.

Repatriations from foreign cooperativesThe exemption for dividends repatriated back to South Africa from 20%-held foreign subsidiaries will be extended to foreign cooperatives to the extent that the member’s interest effectively mirrors share equity.


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Multi-tier controlled foreign companies (CFCs)South African taxation of CFCs operates on an imputation basis. All imputed CFC income triggers corresponding upward base cost adjustments in the CFC shares. These corresponding adjustments need to be amended to better account for multi-tier situations where less than 100% share ownership exists between CFC tiers.

Debt cancellation between offshore group CFCsThe CFC regime eliminates income and loss for offsetting transactions between CFCs that are part of the same offshore group. This exclusion covers items such as interest and foreign currency adjustments pertaining to intra-group CFC debt. It is proposed that the offsetting tax impact of debt cancellations between intra-group CFC members be eliminated on the same basis.

Refinement of share distributions and recapitalisationsShare distributions and recapitalisations generally enjoy the benefit of rollover treatment for capital gains tax purposes. These rollover rules will be integrated with the Chapter II, Part III reorganisation rollover rules (which include trading stock rollovers).

Extended tax-preferred liquidation periodTaxpayer relief on the liquidation of companies is conditional upon the requirements that the liquidation must start within an automatic six-month period (or a later date upon SARS approval). It is proposed that the automatic period be extended to 18 months given the fact that many larger-scale liquidations take more than six months.

Reorganisations involving depository receiptsThe Part III reorganisation rules provide rollover relief upon the restructuring of equity shares. It is proposed that the definition of equity shares be expanded to accommodate depository receipts (i.e. foreign-listed instruments backed by shares).

Intra-group capital distributionsDividends (i.e. profit distributions) between companies within the same group are tax-free, and sales between these companies are eligible for rollover relief. However, no relief exists if one group company makes a capital distribution to another. Consideration will be given to providing comparable relief in this area as long as the relief amounts to deferral (as opposed to a permanent exemption).

Shares issued in exchange for assetsSpecial rules exist for determining the base cost of assets acquired by a company when that company issues shares in exchange. While the law in this area is fully settled, possible consideration will be given to eliminating unintended anomalies.

Financial year endAs a technical matter, taxpayers may only close their accounts on a specified date (e.g. 30 June) for income tax purposes. Unlike the value-added tax, accounts may not be closed on a specified day (e.g. the last Friday of the month). The flexibility to utilise specified days will be added to the income tax.

Retirement savings lump sums and provisional tax calculationsAs a general matter, provisional tax payments cannot fall below the “basic amount” calculation. This “basic amount” calculation excludes capital gains because capital gains


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are not viewed as recurring amounts. A similar exclusion should exist for retirement lump sums and pre-retirement withdrawals.

Election for tax-free rollover reorganisation treatmentThe Income Tax Act provides tax-free rollover treatment for a variety of company restructurings. Most of this relief is elective. Unfortunately, no formal election procedure exists even though substantive reorganisation relief was enacted some time ago. To alleviate these concerns, reorganisation relief will be made automatic with taxpayers given the option of electing out if desired.

VAT

VAT compulsory registration thresholdThe introduction of the simplified tax package for very small businesses with an annual turnover below R1 million will provide scope to increase the compulsory VAT registration threshold. This threshold is to be increased from an annual turnover of R300 000 to R1 million.

The thresholds applicable to farmers (Category D) who submit VAT returns every six months and small businesses (Category F) that submit VAT returns every four months will be increased from R1.2 million to R1.5 million.

E-commerceIn the 2007 Budget, it was announced that the practical implications of requiring ecommerce suppliers of services to register within South Africa would be considered with regard to international practice. The international research has been completed but administrative and operational systems requirements mean that any legislative amendments providing for the registration of these suppliers may require additional consultation. Hence, legislation on this issue may be introduced in 2008 or 2009 (and may be preceded by a discussion document).

Nominal or passive foreign-controlled local activitiesIn the 2007 Budget, it was announced that the VAT registration for nominal or certain wholly passive activities of foreign persons is impractical when the supply is made to domestic VAT vendors. Consideration has been given to allowing relief in this regard, but administrative and operational system requirements may require additional consultation.

Legislation on this issue may be introduced in 2008 or 2009 (and may be preceded by a discussion document).

Reforming the VAT treatment of business reorganisationsReorganisation rules along the lines of those in Part III of the Income Tax Act will be added to the VAT Act.

Vocational trainingThe VAT Act provides for the supply of vocational training to an employer who is not a resident of the Republic to be zero-rated. The term vocational training needs to be defined in order clarify the intention and to align it with international practice. Legislation on this issue may be introduced in 2008 or 2009 (and may be preceded by a discussion document).


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Termination of refunds into third-party bank accountsThe VAT Act currently allows SARS to make VAT refunds to vendors via bank accounts held by third-party nominees. This practice may be withdrawn or restricted given the risks involved.

Revised taxation of public entities

In 2007, it was announced that the taxation of public entities would be revised.

Current legislation predates the Public Finance Management Act (2000), and a new regime should be enacted that reflects this newer public dispensation. The probable essence of the proposal is to mainly treat business entities as fully taxable and regulatory entities as exempt.

Long-term insurers – expense and profit transfer formula

In 1999 a complex formula was introduced to allow a tax deduction for expenses not directly attributable to taxable investment income of the policyholder funds of an insurer. These expenses are generally selling and administration expenses. The underlying principle of apportionment is to exclude that portion of the expenses attributable to non-taxable income. The formula is also used to determine the tax deduction in the various policyholder funds on transfer of “profits” to the corporate fund for tax purposes.

Although the formula has been adjusted with the introduction of capital gains tax, it gives rise to a number of anomalies, as the economic environment has changed since it has been introduced. It is proposed that this formula be reviewed for possible legislation so that the formula reflects current business practices (for example, investments through collective investment schemes) and tax policy principles.

Provisional tax system

The review of the provisional tax system and associated penalty and interest provisions will continue, with a view to improving the system and underpinning the developments in return filing discussed in more detail above.

Administrative penalties

The current penalty tax regime relating to the imposition and remittance of additional tax and other penalties in the tax acts differs from one act to another, and does not appropriately cater for less serious procedural and administrative non-compliance. It is proposed that the administrative penalty regime be revamped and that a more objective penalty system be introduced which would be administered in accordance with a defined set of criteria.

Submission of supporting documents

The Income Tax Act contains provisions that require supporting documents to be submitted with final and provisional tax returns. This supporting document requirement is now contrary to the administrative drive for electronic filing. The law will accordingly be


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changed to remove this submission requirement. Supporting documentation need only be kept as part of the taxpayer’s records.

Bare dominium financing structures

Certain taxpayers allegedly enter into bare dominium structures designed to claim input credit where none are warranted. Rather than proceed directly to a legislative amendment a short discussion paper on the topic will be issued, to be followed by corrective action.

Trust distributions to beneficiaries

The current regime for the vesting of trust assets potentially triggers a double tax charge. No reason exists for this double charge, which will accordingly be removed.

Outside contributions added to estate redistributions

The Eighth Schedule was recently changed to allow for the tax-free redistribution of inherited assets among heirs. However, these rules need to be adjusted to cover situations where certain heirs supply outside funds (or assets) in order to equalise differences in values among the inherited assets.

Traditional communities

Legally recognised traditional communities established under the Traditional Leadership and Governance Framework Act, 2003, are currently tax-exempt. However, certain traditional communities with more informal structures are taxable even though these structures have a similar purpose. Consideration will be given to restructuring or extending the exemption to these more informal structures.

Tonnage tax

A discussion document on the proposed sea freight tonnage tax will be released at the end of February 2008.

Private equity transactions

There is concern that some private equity deals, particularly highly leveraged buyouts, have the potential to undermine corporate governance and/or the tax system. The deductibility of interest payments in highly geared transactions and the tax treatment of management-carried interest (reward for fund managers in the form of shares/equity) will be investigated.

Protecting the tax base

With the continuing relaxation of exchange controls, complementary measures to protect the tax base from artificial outflows will be taken into account.


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Supporting sustainable development

The National Treasury published a draft policy paper entitled A Framework for Considering Market-based Instruments to Support Environmental Fiscal Reform in South Africa for public comment in April 2006. The draft paper focuses on how taxes, charges and incentives can support regulatory measures to promote environmental protection and biodiversity conservation.

Emission charges and taxesThe National Treasury and the Department of Environmental Affairs and Tourism will explore the introduction of additional emission taxes and charges in 2009.

Tax incentives for cleaner production technologiesThere may be a case to provide incentives to businesses to encourage them to make use of cleaner production techniques. It may be possible to implement targeted tax incentives to encourage the uptake and/or development of “cleaner” competitive technologies.

Vehicle taxesReforms to the existing vehicle tax regime could be used to create incentives for the introduction of vehicles with reduced emissions and increased fuel efficiency. At the national level, reforms to existing vehicle ad valorem excise duties could play an important role, with environmental criteria incorporated into their design. One possibility is the inclusion of engine size as a proxy for the level of emissions and/or fuel consumption.

General anti-avoidance rule to protect the estate duty

Unlike other tax acts, the estate duty does not contain a general anti-avoidance rule to protect against estate duty avoidance. This general anti-avoidance rule will be added as well as specific anti-avoidance rules to prevent the artificial manipulation of estate values through the use of short-term trusts and similar arrangements.

Estate duty assessment

Under current law, SARS can raise an initial assessment for an indefinite time after death. A time limit exists only upon additional assessment occurring after the initial assessment. Measures to limit the open-ended assessment window will be investigated.

Life insurance/pension benefits and estate duty

The estate duty is levied on life insurance payouts, but only if certain structures are used. This disparity creates a premium on sophisticated tax planning (frequently enjoyed by the wealthy) while creating an inadvertent trap for the unwary. To rectify this, an explicit exemption will be added for life insurance up to a specified threshold (as long as that policy is not created shortly before death). As a related matter, disparities also exist for pension benefits on death depending on the structure used. Uniform relief will accordingly be explored that similarly eliminates traps for the unwary.


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Stamp duty on leases

Stamp duty has been mainly repealed except for leases of more than five years. Under consideration is the outright repeal of the remaining aspects of the stamp duty in order to simplify administration and compliance. At issue is whether this repeal could lead to the undermining of the transfer duty, and whether the transfer duty should be legislatively applied to the full range of long-term leases.

Industrial Development Zones (IDZs)

Customs and VAT relief already exist as an incentive for foreign investment into IDZs. At issue is whether IDZ management companies are eligible for tax-free treatment. Other issues of concern are the potential non-deductibility of tenant improvements to leased IDZ improvements and the Stamp Duty on long-term leases.

Reversing the burden of proof for the intent to evade

Various tax acts presently provide that a taxpayer is presumed to have an intent to evade an assessment or taxation if that taxpayer makes a false statement or entry. This presumption can be overcome if the taxpayer provides proof to the contrary. The constitutionality of this presumption will be reviewed.

2010 FIFA World Cup

Parties associated with the 2010 FIFA World Cup are eligible for a variety of tax-relief measures as part of the agreement to attract the World Cup to South Africa. Technical amendments will be added to ensure that these relief measures operate in full as initially intended. Issues slated for legislative change involve the exemption for the host broadcaster, application of employment related taxes and tax-free area adjustments.

Diamond export levy

The Diamond Export Levy Act was promulgated into law in 2007 and is awaiting implementation via ministerial approval. In preparation for this implementation phase, it has been determined that the purchase of diamonds by foreign persons needs to be considered so as to properly regulate the collection and accounting of the levy that may be payable on these diamonds. Administrative implementation issues may also have to be considered.

Technical corrections

In addition to the miscellaneous amendments above, the 2008 legislation will contain various technical corrections. These technical corrections will address non-revenue impact items, such as typing and grammatical errors, incorrect or misleading headings or definitions, misplaced cross-references, differences between the English and Afrikaans texts, obsolete provisions (e.g. updating the tax acts in the light of other non-tax legislative changes), incorporation of regulations into law and problems relating to effective dates.These technical corrections may also occasionally include changes to legislation clearly at odds with legislative intent as well as obvious ambiguities and omissions, especially in


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respect of legislation introduced in 2007. These technical corrections are not intended as a change in policy.

Measures to enhance tax and customs administration

As foreshadowed in the 2007 Budget Review, major changes were introduced in the income tax return process for 2007. Individual income tax returns were rationalised and simplified, the electronic filing facility expanded to handle all income tax returns, and risk management improved through statistical analysis and reliance on third-party data. As a result, a record 3 million taxpayers met the deadline for the manual submission of income tax returns. By the end of January 2008, more than 650 000 income tax returns had been submitted electronically – an increase of more than 1 500 % over 2006.

SARS intends to build on this achievement by moving towards further simplification of classes of individual income tax returns in the medium term. As part of this process, the basis for charging and paying interest on assessed income tax will be reviewed.

International and domestic experience has shown that employers are the leading providers of the third-party information required to simplify income tax returns for their employees. Accordingly, steps will be taken to rationalise employees’ tax returns submitted by employers while improving the returns’ quality and timeliness.

PART 2 - TAX UPDATE

These notes cover amendments to the legislation promulgated during 2007 and early 2008. Information has been sourced mainly from the SARS website and the Explanatory Memoranda, which make up the bulk of these notes. We do not intend this to be an exhaustive reference work.

DEVELOPMENTS OVER THE LAST YEAR

Interpretation Notes issued or revised during 2007 and early 2008

Issue date No. Subject31 Aug 07 44 Public benefit organisations (PBOs): capital gains tax

(CGT)10 Aug 07 43 Circumstances in which amounts received or accrued on

disposal of listed shares are deemed to be of a capital nature

2 Apr 07 42 The supply of goods and/or services by the travel and tourism industry (VAT)

02 Apr 07 41 Application of VAT to the Gambling Industry4 Dec 07 40 VAT treatment of the supply of goods and/or services to

and/or from a customs controlled area of an industrial development zone

4 Dec 07 39 VAT treatment of public authorities, grants and transfer payments


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30 Jan 07 38 Application and cost recovery fees for binding private rulings

24 Jan 07 37 Procedures for requesting binding effect in respect of written statements issued by the Commissioner prior to 1 October 2006

24 Jan 07 36 Scope and impact of section 76I upon written statements issued by the Commissioner prior to 1 October 2006

11 Dec 07 35 (Issue 2) Employees tax: Personal Service Companies, Personal Service Trusts and Labour Brokers

31 Aug 07 24 (Issue 2) Public benefit organisations (PBOs): trading rules – partial taxation of trading receipts

30 Mar 07 20 (Issue 2) Learnership Allowance9 Jan 08 17 (Issue 2) Employee's Tax: Independent Contractors8 Jan 08 14 (Issue 2) Allowances, Advances and Reimbursements

19 Feb 07 9 (Issue 2) Small Business Corporations

Regulations and government notices issued in 2007 and early 2008

Determination of the Daily Allowance in respect of Meals and Incidental Costs for purposes of section 8(1) of the Income Tax Act, No 58/1962 : (2006/07): GG 29649 (21 February 2007).

Determination of the Daily Allowance in respect of Meals and Incidental Costs for purposes of section 8(1) of the Income Tax Act, 58/1962 : (2007/08): GG 29649 (21 February 2007).

Transitional Arrangements for Municipalities Regulation R 270: GG 29741 (28 March 2007). Notice fixing amount of tax in dispute for purposes of appeal to Tax Board in terms

of section 83A of the Income Tax Act, 1962, and section 33A of the Value-Added Tax Act, 1991: GG No 29742 (28 March 2007). The amount of tax in dispute that is referred to a tax board established in terms of section 83A of the Act may not exceed an amount fixed by the Minister by notice in the Gazette. This regulation serves to fix this amount at R500 000 in respect of appeals noted on or after 1 May 2007.

Regulations issued under section 91A of the Income Tax Act, 1962, prescribing the circumstances under which the Commissioner may write-off or compromise any amount of tax, duty, levy, charge, interest, penalty or other amount: GG 29788 (13 April 2007).

Notice in terms of section 13quat(9) of the Income Tax Act, 1962 prescribing the time period within which a municipality must provide its UDZ report to the Commissioner and the Minister of Finance: GG 30102 (27 July 2007)

Determining of a date on which section 12(1) of the Second Revenue Laws Amendment Act No 34 of 2004 shall come into operation: GG 30338 (28 September 2007): following this Regulation, section 76R of the Act (Binding Class Rulings) became effective from 1 October 2007.

Income Tax 2007: Notice to furnish returns for the 2007 year of assessment: GG No 30384 (18 October 2007)

Recognition of stock exchange in terms of the definition of "recognised exchange" in paragraph 1 of the Eighth Schedule to the Income Tax Act, 1962: GG 30484 (16 November 2007)

Determination of limit on amount of remuneration for purposes of determination of contribution in terms of section 6 of the Unemployment Insurance Contributions Act, 2002: GG 30715 (31 January 2008).

Retirement fund notes issued in 2007


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http://www.sars.gov.za/legislation/Regulations%20and%20Government%20Notices/Other/UI%20Contributions.pdf







http://www.sars.gov.za/legislation/Regulations%20and%20Government%20Notices/Commencement%20dates%20docs/GG%20-%20Section%2076R.pdf




http://www.sars.gov.za/legislation/Regulations%20and%20Government%20Notices/Income%20Tax/2007/GG%2029788%20-%2013%20April%202007.pdf





http://www.sars.gov.za/legislation/Regulations%20and%20Government%20Notices/Income%20Tax/2007/GG%20No%2029742%20-%2028%20March%202007.pdf



http://www.sars.gov.za/legislation/Regulations%20and%20Government%20Notices/VAT/Transitional%20Arrangements%20for%20Municipalities%20Regulation%20R%20270%20GG%2029741%2028%20March%202007.pdf

http://www.sars.gov.za/legislation/Regulations%20and%20Government%20Notices/VAT/Transitional%20Arrangements%20for%20Municipalities%20Regulation%20R%20270%20GG%2029741%2028%20March%202007.pdf

http://www.sars.gov.za/legislation/Regulations%20and%20Government%20Notices/Income%20Tax/2007/Subsistence%20Regul%202008.pdf






Commutation of Small Annuities: General Note 15 (Issue 2) – 12 September 2007 Approval of Funds: General Note 14 (Issue 2) - 12 September 2007 Providing annuities on retirement from employment: General Note 17 (Issue 2) - 12

September 2007 Section 9(1)(g)(ii): General Note 9A - 1 October 2007 Formula B: Maximums: Addendum A General Note 6 - 28 September 2007 Retirement from Employment: Addendum A General Note 3 - 28 September 2007

Tax judgments issued in 2007 and early 2008

SCA Carmel Trading Company Limited v C:SARS [2007] SCA 160 (RSA): Civil

procedure - preservation order - sale of goods in foreign jurisdiction. Shaikh v Standard Bank [2007] SCA 168 (RSA): The erroneous reference to a

statutory provision or failure to refer to the applicable section does not render a notice for recovery of Vat by SARS invalid.

C:SARS v Airworld CC [2007] SCA 147 (RSA): Revenue – Secondary Tax on Companies – when payable where loans made to a discretionary trust – interpretation of the word ‘beneficiary’ in definition of ‘recipients’ in section 64 of the Income Tax Act, 1962 as it read prior to amendment in 2000.

C:SARS v The Baking Tin [2007] SCA 100 (RSA): Tariff determination by Commissioner in respect of aluminium containers confirmed: intention of importer as to use not a determinant of objective characteristics of containers.

C:SARS v Brummeria Renaissance (Pty) Ltd [2007] SCA 99 (RSA): The right to use loans interest-free is “gross income” as defined in section 1 of the Income Tax Act, 1962 which “accrues” to a taxpayer; the effect of sections 79(1), 81(4) and (5) discussed.

MP Finance Group CC v C:SARS [2007] SCA 71 (RSA) Amounts taken by illegal and fraudulent pyramid scheme constitute amounts “received” within the meaning of “gross income” in section 1 of the Income Tax Act, 1962 where the intention of the scheme operator is not to contract with the investors but to appropriate their money to facilitate the fraud.

C:SARS v Trend Finance (Pty) Ltd [2007] SCA 105 (RSA): Costs; provisional order; distinct ground of appeal.

C:SARS, Gauteng West v Levue Investments (Pty) Ltd [2007] SCA 22 RSA: Condonation for late filing of record refused despite good prospects of success.

BPSA (Pty) Ltd v C: SARS [2007] SCA 7 (RSA): Section 11(a) of the Income Tax Act, 1962 Recurrent annual royalty payments - expenditure incurred in the production of income.

High Court Sallies Ltd v C: SARS WLD - Case No A3034/07 - 26 November 2007: Deduction of

interest incurred - sections 11(a) and 23(f) and (g) of the Income Tax Act, 1962. W J Fourie Beleggings CC v C: SARS OPD 27 September 2007 - case A264/2006: Whether an

amount which was paid to the appellant pursuant to a settlement agreement was a capital or revenue receipt – definition of “gross income” in section 1 of the Income Tax Act, 1962.

Gud Holdings (Pty) Limited and CSARS – Case No AR 425/06 – 16/02/2007: Whether certain “settlement discounts” granted by the Appellant during a year of assessment


33

http://www.sars.gov.za/it/Tax%20Judgments/high_court/2007/Gud%20Holdings%20(Pty)%20Limited%20and%20CSARS.pdf

http://www.sars.gov.za/it/Tax%20Judgments/high_court/2007/Gud%20Holdings%20(Pty)%20Limited%20and%20CSARS.pdf

http://www.sars.gov.za/it/Tax%20Judgments/high_court/2007/WJ%20Fourie.pdf

http://www.sars.gov.za/it/Tax%20Judgments/high_court/2007/WJ%20Fourie.pdf

http://www.sars.gov.za/it/Tax%20Judgments/high_court/2007/Case%20No%20A3034-07.pdf

http://www.sars.gov.za/it/Tax%20Judgments/supreme_court/2007/BPSA.pdf

http://www.sars.gov.za/it/Tax%20Judgments/supreme_court/CSARSvLevue.pdf

http://www.sars.gov.za/it/Tax%20Judgments/supreme_court/Trend.pdf

http://www.sars.gov.za/it/Tax%20Judgments/supreme_court/MPFinance.pdf

http://www.sars.gov.za/it/Tax%20Judgments/supreme_court/Brummeria%20SC.pdf

http://www.sars.gov.za/it/Tax%20Judgments/supreme_court/Banking%20Tin.pdf

http://www.sars.gov.za/it/Tax%20Judgments/supreme_court/2007/SCA%20672-06%20-%2026-11-07.pdf

http://www.sars.gov.za/it/Tax%20Judgments/supreme_court/2007/SCA%2027-%2007.pdf

http://www.sars.gov.za/it/Tax%20Judgments/supreme_court/2007/Carmel%20447-%2007.pdf

http://www.sars.gov.za/it/General%20Notes/2007/GN%203%20-%20Addendum%20A.pdf

http://www.sars.gov.za/it/General%20Notes/2007/GN%206%20-%20Addendum%20A.pdf

http://www.sars.gov.za/it/General%20Notes/2007/General%20Note%209A%20-%201%20October%202007.pdf

http://www.sars.gov.za/it/General%20Notes/2007/General%20Notes%2017.pdf





“accrued” to it in terms of the definition of “gross income” in section 1 of the Income Tax Act, 1962.

Tax court TC Case No 12 244 – 21 January 2008 : Whether the awarding of points by the

Appellant to its employees which allowed them to utilise holiday resorts free of charge constituted a fringe benefit or not – paragraph (i) of the definition of “gross income” in section 1 of the Income Tax Act, 1962.

TC Case No 11286 – 26 October 2007: As a result of the change of identities of the beneficiaries and trustees of the trust a new trust came into existence and accordingly transfer duty became payable by the new trust – sections 1, 2 and 5 of the Transfer Duty Act, 1949.

TC Case 11961 – 23 February 2007: Whether two amounts (R19 019 442 and R11 876 660) had been received by or accrued to the Appellant in terms of the definition of “gross income” in section 1 of the Income Tax Act, 1962.

TC Case 11691 – 24 April 2007: Whether the Commissioner was correct in disallowing the payment of interest as a deduction from the income of the Appellant in terms of section 11(a) and 23(g) of the Income Tax Act, 1962 for the 1999, 2000 and 2001 years of assessment.

TC Case 12158 - 8 May 2007: Whether the income (profits) received by the appellant as practicing attorney from a partnership in Lesotho was correctly taxed in South Africa and providing a credit to the appellant for taxes already paid in Lesotho.

TC Case 11283 - 26 October 2007: Whether the sale of certain shares at a loss by the Appellant was deductible – sections 11(a) and 22 the Income Tax Act, 1962.

TC Case No 11773 – 5 October 2007: Whether the Commissioner was correct in contending that the Appellant was not entitled to carry forward the balance of assessed loss for the 2004 year of assessment – section 20(1) and (2) of the Income Tax Act, 1962.

TC case: VAT 616 - 15 November 2007: Whether the Commissioner was correct in disallowing the taxpayer’s notional input tax claim based on the fact that the transaction giving rise to the claim was a scheme as contemplated by section 73 of the Value-Added Tax Act, No 89 of 1991.

Brochures and guides issued by SARS in 2007 and early 2008

March 2008 Tax Guide for Foreigners working in South Africa - 2007/08 (3rd issue)January 2008 Tax Guide for Share Owners (2nd issue)December 2007 Comprehensive Guide to CGTDecember 2007 VAT 414 Guide for Associations not for gain and welfare organisationsNovember 2007 Tax Guide for Small Businesses 2007/08October 2007 Tax Exemption Guide for Public Benefit Oganisations in South Africa

(3rd issue)October 2007 Comprehensive Guide to STC (2nd issue)June 2007 Guideline for provisional taxJune 2007 Tax clearance certificatesApril 2007 Quick reference guide to SDLMarch 2007 Income tax and the individual 2007/08 (4th issue)March 2007 VAT 404 Guide for vendors (updated)March 2007 Income Tax and the Individual 2007-08 (4th issue)


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http://www.sars.gov.za/it/Brochures/2007/Tax%20Guide%20for%20Foreigners%20working%20is%20South%20Africa%20-%202007.pdf

http://www.sars.gov.za/it/Tax%20Judgments/tax_court/2007/VAT%20616.pdf

http://www.sars.gov.za/it/Tax%20Judgments/tax_court/2007/TC%20Case%20No%2011773%20-%205%20October%202007.pdf

http://www.sars.gov.za/it/Tax%20Judgments/tax_court/2007/TC%2011283%20-%20261007w.pdf

http://www.sars.gov.za/it/Tax%20Judgments/tax_court/2007/TC%20-%2012156.pdf

http://www.sars.gov.za/it/Tax%20Judgments/tax_court/2007/TCC%2011691%20-%2024%20April%202007.pdf

http://www.sars.gov.za/it/Tax%20Judgments/tax_court/2007/TCC%2011961-%2023%20February%202007.pdf

http://www.sars.gov.za/it/Tax%20Judgments/tax_court/2007/TC%20Case%20No%2011286.pdf

http://www.sars.gov.za/it/Tax%20Judgments/tax_court/2008/TCC%20No%2012%20244.pdf

February 2007 Tax guide on the deduction of medical expenses

The interpretation notes, regulations, notices and judgments are not covered in these notes but can be obtained from the SARS website (www.sars.gov.za).

Interest rate changes

Date of change Prescribed interest rate payable to

SARS

Prescribed interest rate payable by

SARS

Official interest rate for fringe benefits purposes

01.11.2006 11% 7% 9% (changed 01.09.06)01.03.2007 12% 8% 10%01.09.2007 11%01.11.2007 13% 9% 01.03.2008 14% 10% 12%

UIF threshold

The maximum amount of remuneration on which UIF is payable was increased to R12 478 per month with effect from 1 February 2008.

AMENDMENTS TO LEGISLATION

The Taxation Laws Amendment Act No. 8 of 2007 (TLAA) and the Taxation Laws Second Amendment Act No. 9 of 2007 were promulgated on 8 August 2007. These Acts introduced amendments that included changes to the tax tables, rebates and monetary amounts.

The Revenue Laws Amendment Act No. 35 of 2007 (RLAA) and the Revenue Laws Second Amendment Act No. 36 of 2007 were promulgated on 8 January 2008. These Acts contained the balance of the amendments proposed in the 2007 Budget.

The notes that follow cover the more significant changes in the legislation promulgated in August 2007 and January 2008. Unless otherwise stated, references to “the Act” refer to the Income Tax Act No. 58 of 1962.

Dividends & STC

In the 2007 Budget Speech, Finance Minister Trevor Manuel announced that secondary tax on companies (STC) would be phased out and replaced by a shareholder-level tax on dividends. It was explained that this change would take place in stages, with the first phase aimed at broadening the tax base for STC and simplifying the existing legislation.

The amendments contained in the RLAA achieve the objectives set for the first phase by reducing the STC rate from 12,5% to 10% and broadening the definition of “dividend”, being the base on which STC is levied.

The rate of 10% applies to any dividend declared on or after 1 October 2007. The RLAA was only promulgated on 8 January 2008, which led to some confusion with regard to the


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rate to be applied to dividends declared between 1 October 2007 and the promulgation date. In a Briefing Note issued on 26 November 2007 SARS clarified that companies declaring dividends on or after 1 October 2007 must make their STC payments at the reduced rate of 10%.

The RLAA contains a number of amendments to broaden the dividend tax base and curb ongoing STC avoidance schemes. These amendments can be summarized as follows:

The exclusion from the definition of “dividend” of liquidation dividends, to the extent that those dividends arise from pre-1993 profits or pre-2001 capital profits, has been removed. This amendment will take effect for all distributions on or after 1 January 2009. Once this amendment becomes effective, the only portion of liquidation distributions that will continue to be excluded from the definition of “dividend” will be those profits that accumulated prior to a company becoming a “resident” for tax purposes.

The term “dividend” now includes any profits distributed, whether realised or unrealised and whether or not the profits are reflected in the company’s financial statements. For instance, if a company owns appreciated property and borrows against that property to make a distribution, the dividend calculation should account for the unrealised profits attributable to the property (even though the property remains unsold). Similarly, if an asset is distributed in specie, any unrealised profit associated with that distribution is included as a dividend, regardless of whether the unrealized profit is reflected in the company’s financial statements. This amendment is effective for all amounts distributed on or after 1 October 2007.

Paragraphs (c) and (d) in the dividend definition that provided special rules for redemptions, reconstructions, reductions or any other acquisition by a company of its own shares have been deleted as it is considered that the removal of funds from a company in these circumstances is no different to any other distribution. To the extent any difference exists, the difference occurs at a shareholder level and is fully taken into account in the Eighth Schedule as a disposal for capital gains tax (CGT) purposes.

Subject to rules specifically contained in a company’s articles of incorporation (and isolated rules within company law), share capital (and share premium) can be freely allocated to specific share distributions even if that share capital (and share premium) arose from other sources. SARS notes in the Explanatory Memorandum to the Revenue Laws Amendment Bill, 2007 (EM) that taxpayers are using this free allocation opportunity to disguise shareholder sales in the form of shareholder contributions and distributions. In order to prevent this practice, the first proviso to the definition of “dividend” has been amended so as to limit the amount of share capital and share premium that can be allocated to any class of shares. The share capital or share premium that is apportioned to a particular class of shares may no longer exceed the contribution given in respect of the issue of that class of shares. This amendment is effective for all amounts distributed on or after 1 October 2007.

Example

A company has two classes of ordinary shares – Ordinary Class A shares and Ordinary Class B shares. Shareholders of the Ordinary Class A shares previously contributed share capital and share premium of R30 000. Before the creation of the Ordinary Class B shares, the company has a value of R1 million. The Ordinary Class B shares are then issued in


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exchange for R1 million, bringing the total value of the company to R2 million. Shortly thereafter, the company distributes R1 million to the Ordinary Class A shareholders.

The share capital (and premium) allocated to the Ordinary Class A shares cannot exceed the R30 000 (the initial contribution for those shares). In other words, the new contribution of R1 million cannot be allocated to the Ordinary Class A shares.

STC group relief

An STC exemption exists (section 64B(5)(f)) for dividends declared from one company to another within the same group of companies, which, in this context, requires a 70% shareholding. The exemption is based on the premise that the underlying profits will ultimately become subject to the STC once those profits leave the group as dividends. The principle is therefore that STC is deferred until such time as the profits are declared to shareholders that are not part of the same group of companies. Without this exemption, there would be a “cascading effect” which would result in double taxation.

The amendment to this exemption is two-fold.

First, it tightens the rules on the shares that may be taken into account in determining the 70% ownership requirement needed for group status as the requirement for the exemption now refers to the narrowed definition of “group of companies”, as contained in section 41. (See next slide.)

The rationale for this amendment is explained in the EM as follows:

“All intra-group relief should essentially operate as a deferral regime. Therefore, exemption cannot be allowed in the case of dividends to group companies falling outside the STC (net) because deferral will be effectively converted into exemption. In view of this reality, fully or partially exempt companies will fall outside the intra group definition. The proposal also tightens the rules on the shares counting toward the 70 % ownership criteria needed for group status. More specifically, the group members involved must genuinely have a permanent association with the group. All of these changes will mirror the narrowed group definition to be used for intra-group relief. The narrowed group definition will equally apply for purposes of determining the exemption for intra-group deemed dividends.”

Secondly, it amends the restriction on distributions from pre-acquisition profits. Previously, the exemption did not apply to any intra-group dividends declared from profits that arose before the distributing company and the shareholder were part of the same group of companies. This provision has now been removed, with the result that intra-group (actual and deemed) dividends will qualify for the exemption even if those dividends can be traced to pre-acquisition profits.

A new profit limitation has been added which provides that the intra-group relief for dividends will only be allowed if the shareholder company receiving the dividends takes those dividends into account in determining its profits. An intra-group dividend distributed out of pre-acquisition profits will therefore not qualify for the intra-group STC exemption if the shareholder company reduces the cost of its investment in its subsidiary in accordance with generally accepted accounting practice. However, intra-group dividends distributed


37

out of pre-acquisition profits are now excluded from the definition of “dividend” to the extent that the shareholder reduces the cost of the shares held in the subsidiary company in accordance with generally accepted accounting practice. As such distributions do not constitute a dividend as defined, they will not be subject to STC.

These new provisions must be read in light of the reporting requirements of the International Financial reporting Standards. In terms of IAS 18 (AC 111), dividends received out of pre-acquisition profits are not recognised as income but reduce the cost of investment in a subsidiary’s shares.

Therefore, intra-group dividends distributed out of pre-acquisition profits and accounted for by the shareholder company as a reduction in the cost of the investment in the subsidiary, will not comprise a dividend but will instead be taxed as a capital distribution (see paragraph 76A of the Eighth Schedule, which is discussed later).

These amendments are effective from 1 October 2007 and apply in respect of any dividend declared on or after that date.

Company reorganisations

A. Definition of “group of companies”

A new definition of “group of companies” has been inserted into section 41 of the Act. This definition applies for the purposes of Part III of the Act (the company restructuring rules contained in sections 41 to 47) as well as certain other provisions, including the section 1 definition of “dividend” insofar as it deals with intra-group dividends, the STC intra-group relief (section 64B(5)(f)) and the capital gains tax provision regarding the waiver of a debt (paragraph 12(5) of the Eighth Schedule to the Act).

The new section 41 definition is as follows:

‘“group of companies” means a group of companies as defined in section 1: Provided that for the purposes of this definition –

(i) any company that would, but for the provisions of this definition, form part of a group of companies shall not form part of that group of companies if -

(aa) that company is a company contemplated in paragraph (b), (c), (d) or (e)1

of the definition of “company”;(bb) that company is a company contemplated in section 21 of the Companies

Act, 1973 (Act No. 61 of 1973);(cc) any amount constituting gross income of whatever nature would be

exempt from tax in terms of section 10 were it to be received by or to accrue to that company; or

1 These companies are as follows:(b): companies (including body corporates) incorporated outside South Africa;(c): co-operatives;(d): associations formed in South Africa to serve a specified purpose that is beneficial to the public; and(e): local and foreign collective investment schemes in securities.


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(dd) that company is a public benefit organisation or recreational club that has been approved by the Commissioner in terms of section 30 or 30A; and

(ii) any share that would, but for the provisions of this definition, be an equity share shall be deemed not to be an equity share if –

(aa) that share is held as trading stock; or(bb) any person is under a contractual obligation to sell or purchase that share,

or has an option to sell or purchase that share unless that obligation or option provides for the sale or purchase of that share at its market value at the time of that sale or purchase.’

The section 41 definition becomes effective from various dates, depending on the context in which it applies. Therefore, for purposes of –

(a) the definition of ‘‘dividend’’ in section 1 of the Act, it is deemed to have come into operation on 1 October 2007 and shall apply in respect of any amount distributed on or after that date;

(b) Part III of the Act, it comes into operation on 1 January 2009;(c) Part VII of the Act (the STC provisions), it is deemed to have come into

operation on 1 October 2007 and shall apply in respect of any dividend declared on or after that date; and

(d) paragraph 12 of the Eighth Schedule to the Act (waiving of intra-group debt), it is deemed to have come into operation on 1 October 2007 and shall apply in respect of any disposal on or after that date.

B. Sections 42 and 43 combined

Sections 42 and 43 provided for tax-free rollovers of assets in qualifying intra-group transactions. The provisions were duplicated apart from certain restrictions pertaining to financial instruments. As the financial instrument provisions have now been removed, there is no need to retain two separate provisions.

Section 43 (share-for-share provisions) has therefore been repealed with effect from 1 January 2007. All qualifying transfers of appreciated assets (including shares) will now receive rollover relief under the revised section 42, which has been renamed “Asset-for-share transactions” (previously “company formations”).

C. Amalgamation transactions

Section 44 provides a deferral mechanism where a company (the “amalgamated company”) disposes of all its assets (other than assets used to settle debts incurred in the ordinary course of trade) to another company (the “resultant company”) which is a resident and the existence of the amalgamated company is then terminated.

The transactions may be summarized as follows:

company A (the amalgamated company) disposes of all its assets to company B (the resultant company) in exchange for shares in B;

company A then distributes the shares in company B to its shareholders; and


39

company A is then liquidated or deregistered.

In theory, all assets and tax attributes should roll over from the amalgamated company to the resultant company with the resultant company subsequently bearing these tax benefits and burdens. This same theory holds for STC.

Section 44(9) provides that, where an amalgamated company disposes of shares in a resultant company in terms of an amalgamation transaction, that disposal is deemed not to be a dividend for STC purposes. Thus, the distribution of shares in the resultant company to resident corporate shareholders of effectively amounts to an STC-deferral, while the distribution of these shares to individuals, trusts or non-resident companies results in a permanent exemption from STC. As a result of this potential loss to the fiscus, the Minister of Finance initially announced in the 2007 Budget Speech that section 44(9) would be deleted with effect from 21 February 2007. However, as it was realized that this would have affected legitimate transactions, the TLAA retains s 44(9) and instead introduces a new s 44(9A).

Section 44(9A) deems the resultant company’s equity share capital (and share premium) arising from the amalgamation to be profits not of a capital nature available for distribution to shareholders to the extent of any profits distributed by the amalgamated company in terms of subsection (9). The result is that the amalgamated company’s profits are effectively rolled over to the resultant company, so that STC remains payable when the resultant company makes a subsequent distribution.

This amendment is effective from 21 February 2007 and applies in respect of the reduction or redemption of the capital of a resultant company occurring on or after that date.

In another amendment to section 44, the period in which to complete an amalgamation has been extended because the 6 month date was often found to be impractical due to difficulties in extinguishing the amalgamated company’s debts. Following the amendment, the amalgamated company has 18 months to undertake the liquidation steps under section 41(4) (or a longer period as the Commissioner may allow).

This amendment is effective from the commencement of years of assessment ended on or after 1 January 2008.

D. Degrouping charge

Section 45 of the Act provides rollover relief for transfers of assets between companies that form part of the same group of companies. A de-grouping charge is triggered by way of a deemed disposal if the group companies engaged in the transfer subsequently become severed from one another so that they are no longer part of the same group. This de-grouping charge previously applied without any time restriction, i.e. no matter how many years after the initial intra-group transfer the de-grouping occurs.


40

Under the new rule, the de-grouping charge applies only if the transferor and transferee companies involved in the intra-group transfer become severed from one another (i.e. no longer form part of the same group) within six years after the intra-group transfer.

This amendment is effective from 1 January 2009.

Deemed capital on share sales

The current five-year “safe harbour” rule in terms of section 9B has been replaced with a new three-year rule contained in section 9C with effect from 1 October 2007. Apart from the shorter holding period, section 9C also differs from section 9B in various other respects.

The shares that fall within the scope of section 9C are “qualifying shares”, which includes all equity shares, apart from -

a) any share in a share block company as defined in the Share Blocks Control Act No. 59 of 1980;

b) any share in a company which, at any time during the three-year holding period, was not a resident, unless it was at that time a listed company; and

c) any hybrid equity instrument as defined in section 8E.

Where section 9C applies, the receipts and accruals arising from a sale of shares will be deemed to be capital in nature. This rule applies equally to gains and losses and is mandatory, unlike section 9B which is elective.

A. Recoupment of previous deductions

The effect of section 9C is to deem the proceeds on the sale of qualifying shares to be capital in nature. If the shares were acquired as trading stock, any previous deductions must be recouped in terms section 9C(5).

Example

A taxpayer purchased shares as trading stock four years ago and has claimed as a deduction both the cost of the shares and interest on the funds borrowed to finance their purchase.

Both the cost of the shares and all the interest deducted over the holding period must be recouped when shares are sold.

The section 22(8) recoupment will not apply on the disposal of a qualifying share (section 9C(7)).

B. Deemed disposal rules

Paragraph 12 of the Eighth Schedule contains certain deemed acquisition and disposal events e.g. a resident becoming a non-resident or a trading stock intention


41

to changing to a capital intention. These deemed disposals are also recognised as disposals for the purposes of section 9C.

Example

A taxpayer acquired shares on 1 January 2005 with the intention of keeping the shares as capital assets. The taxpayer’s intention changed on 1 February 2008, which triggered a deemed disposal (and reacquisition) on that date in terms of paragraph 12 of the Eighth Schedule.

In terms of section 9C, the deemed disposal on 1 February 2008 will automatically qualify as a disposal of a capital asset, even though the shares were acquired as trading stock. Any subsequent disposal of those shares by that taxpayer will also be treated as a disposal of a capital asset irrespective of the taxpayer’s intention.

C. FIFO basis

Where a taxpayer acquired shares on different dates, he will be deemed to have disposed of the shares on a first-in-first-out basis in order to determine the holding period of the shares (section 9C(6)). Note that the base cost of the shares must still be determined in accordance with paragraph 32 of the Eighth Schedule to the Act.

Example

A taxpayer acquired shares as follows:• 10 000 shares on 1 February 2002 at a cost of R180 per share;• 5 000 shares on 15 July 2005 at a cost of R200 per share; and• 7 000 shares on 1 August 2006 at a cost of R140 per share.On 1 March 2008, the taxpayer sells 5 000 shares for R210 per share.

The taxpayer is deemed to have disposed 5 000 of the shares purchased on 1 February 2002 i.e. the shares were held for longer than 3 years and the proceeds are therefore deemed to be capital in nature. If the taxpayer uses the specific identification method to determine the base cost of the shares and that base cost is R200 per share, his capital gain is (R210-R200) x 5 000 = R50 000.


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D. Rollover provisions

The three-year holding period required by section 9C generally takes into account various rollover regimes throughout the Income Tax Act, including the Part III rollover dates, the share substitution rollover dates (comparable to paragraph 78 of the Eighth Schedule) and the conversion rollover dates of sections 40A and 40B. The three-year date rollover will, however not apply to section 42 asset-for-share transactions or to section 46 unbundling transactions.

Example

H Co. owns all the shares of S Co, which acquired shares in A Co. on 1 July 2008. S Co. liquidates on 1 November 2009 and distributes all its assets to H Co.

As the distribution of S Co.’s assets to H Co. falls within section 47 of the Act, the rollover of the acquisition date is permitted. H Co. is therefore deemed to have held the A Co. shares since 1 July 2008.

E. Securities lending arrangements

The lending of a share under a securities lending arrangement is deemed not be a disposal by the lender.

Where another share of the same kind and of the same or equivalent quantity and quality to the one lent has been returned by the borrower to the lender, the lent and returned shares are deemed to be one and the same share in the hands of the lender.

(Section 9C(4).)

F. Anti-avoidance provision

There is concern that section 9C could create potential for tax avoidance, particularly with regard to shares in property-holding companies. To counteract any possible abuse, a special anti-avoidance provision in section 9C(3) prevents the three-year deemed capital rule from applying where shareholders have a meaningful level of shares and are able to influence the decision of the company that acquired the immovable property. The anti-avoidance rule therefore provides that section 9C will not apply to any qualifying share disposed of by someone who is a connected person in relation to the company that issued the share if -

(i) more than 50% of the total value of the shares of the company can be directly or indirectly linked to the value of immovable property acquired within three years before disposal of the shares; or

(ii) any other asset acquired within the three years was: (1) encumbered by a lease or license, and (2) the lease or license payments are wholly or partly received or accrued to someone other than that company within the same three year period.


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The definition of “connected person” for this purpose has a lower threshold than the normal connected person definition in section 1 of the Act. Company shareholders will be viewed as connected persons in relation to the company in which they hold 20% of the shares even if another shareholder holds a majority interest.

If this anti-avoidance provision applies, the normal facts and circumstances test will be used to determine whether the proceeds on disposal are capital or revenue in nature.

G. Share schemes

Sections 8B (broad-based employee shares schemes) and 8C (vesting of equity instruments) apply notwithstanding the provisions of section 9C. Therefore, amounts included in income in terms of either of these provisions will not be deemed to be of a capital nature in terms of section 9C, even if the qualifying equity share or equity instrument is disposed of more than three years from the date of grant or issue.

H. Effective date

Section 9C came into effect on 1 October 2007 and applies to qualifying shares disposed of on or after this date. Section 9B no longer applies for disposals occurring from this date.

Blocked foreign funds

Section 9A provides relief for income arising from a foreign country that may not be remitted back to South Africa because of exchange control restrictions or other limitations imposed by the other country (referred to as “frozen funds”). The provision applies to gross income or taxable income of the taxpayer or the net income of a controlled foreign company (CFC) that is included in the taxable income of a resident taxpayer in terms of section 9D. Where the provisions of section 9A apply, the inclusion in gross income or taxable income is deferred until the remission restrictions are removed.

The relief provided by section 9A has been limited because the frozen funds cannot be offset by later losses. Subsequent losses are likely in these situations because of the political instability of the foreign country at issue (especially if that country begins imposing more onerous restrictions on those foreign operations).

Section 9A has now been reworded so that the relief operates in a similar fashion to sections such as section 24C. In essence, the foreign blocked funds are deducted from current income and are deemed to re-arise in the subsequent year. This formulation continues to be rolled over until the foreign blockage is removed. This deduction/re-arising of income effectively allows for subsequent losses to be taken into account. The change will equally apply to South African owned operations held in the form of a foreign branch or a CFC.

The reworded section 9A is effective from 1 January 2007 and applies in respect of any year of assessment ending on or after that date.


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Retirement fund lump sum benefits

A. Tax on retirement fund lump sum benefits

In terms of amendments contained in the Taxation Laws Amendment Act, 2007, the first R300 000 all retirement and death lump sum benefits from pension, provident and retirement annuity funds accruing on or after 1 October 2007 is tax free. This blanket exemption replaces the complex formulae that were previously used to calculate the tax free portion of these lump sums. The R300 000 is a once-per-lifetime tax exemption. In addition to the R300 000 tax-free amount, contributions to funds that were not tax-deductible when contributed (and member benefits accumulated in public sector funds on or before 1 March 1998) will still continue to boost the tax-free amount on retirement.

The tax on the taxable amount of the lump sum, after taking into account the exempt portion, is determined according to a special table:

Taxable amount of the lump sum Rate of taxNot exceeding R300 000 18 % of the taxable incomeExceeding R300 000 but not exceeding R600 000

R54 000 plus 27 % of the taxable income exceeding R300 000

Exceeding R600 000 R135 000 plus 36 % of the taxable income exceeding R600 000

Example(adapted from SARS Guide on the Taxation of Lump Sum Benefits)

T retires from Big (Pty) Ltd on 1 December 2007 after being a member of the company’s pension fund for 30 years. On retirement he receives a lump sum from the pension fund amounting to R900 000. During his membership of the fund, all his contributions were allowed as deductions in terms of section 11(k) of the Act and he had not previously received any lump sum as a result of retirement.

The tax-free portion will be computed in terms of formula B:

Z = C + E – D

In which formula –

Z = the tax free portion of the lump sum C = an amount of R300 000 D = previous deductions allowed as a result of retirement E = own contributions that were not permitted as a deduction plus the value of any pre-1998 rights in a public sector fund.

The tax-free portion of the lump sum will be determined as follows:

Z= R300 000 + 0 + 0 i.e. Z= R300 000


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The taxable portion of the lump sum = R600 000 (R900 000 – R300 000).This amount of R600 000 will be included in gross income in terms of paragraph (e) of the definition of “gross income” in section 1 of the Act.

The tax payable on the R600 000 (determined according to the table above) = R135 000.

Fund administrators are required to withhold the correct amount of tax from any lump sum payments in accordance with the Fourth Schedule to the Act.

It must be noted that retirement and death lump sums are taxed separately using their own rate schedule and are unaffected by deductions, assessed losses and annual rebates. The following provisions have been amended to ensure that the calculation of tax payable on a retirement lump sum benefit is kept separate from the normal tax calculation on other taxable income:

Remuneration from “retirement funding employment” as defined in section 1 of the Act (“RFE income”, which is taken into account for purposes of determining the limitation on the deduction of pension fund contributions in terms of section 11(k)) excludes any retirement fund lump sum benefit.

The primary and secondary rebates (section 6) may not be set off against the normal tax payable on a retirement fund lump sum benefit.

Non-RFE income that is taken into account for the purposes of calculating one of the limitations on the deduction for contributions to a retirement annuity fund (see 11(n)(aa)(A)) excludes any retirement fund lump sum benefit.

The medical deduction (section 18) threshold of 7,5% must be calculated on taxable income excluding any retirement fund lump sum benefit.

The limit on the deduction for donations to qualifying public benefit organisations (PBOs) (section 18A) is 10% of taxable income excluding any retirement fund lump sum benefit.

A new provision, section 23(i) prohibits the deduction of any expenses incurred in the production of a retirement fund lump sum benefit.

The “rating formula” provisions in section 5(10) do not apply to retirement fund lump sum benefits.

B. Surplus distributions

The Pension Funds Second Amendment Act, 2001, prescribes that surplus amounts in pension funds must be apportioned in terms of a surplus apportionment scheme. In terms of these schemes, members (or former members) may receive their surplus distribution either in the form of cash or as a credit to their member accounts.

With effect from 1 January 2006 paragraph 2C of the Second Schedule to the Act exclude surplus distributions in the form of a lump sum from gross income, effectively making the payments free of tax.


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C. Tax-free payouts relating to membership of public sector funds before 1 March 1998

Lump sums payable by public sector funds to which a member was contributing before 1 March 1998 may be paid out partially tax-free by that fund when a member retires or withdraws from that fund.

A problem arises if the public sector fund member transfers a public sector retirement fund interest to a private sector fund. This transfer to the private sector fund is tax-free. However, upon retirement or withdrawal from the private sector fund, no tax relief was provided for the membership of the public sector fund before 1 March 1998.

This has now been rectified to preserve the tax-free portion of membership before 1 March 1998. The tax-free payout of public pension fund interest before 1 March 1998 will apply to both retirement lump sum benefits and withdrawal benefits from a private sector fund provided the fund interest was “rolled over” from a public sector fund. The effective date of these amendments is 1 March 2006.

D. Changes to the definitions of “pension fund” and “retirement annuity fund”

The definitions of “pension fund” and “retirement annuity fund” require that the rules of an approved fund have to limit any lump-sum payout to a maximum of one-third of the total retirement benefit in the fund. The other two-thirds must be converted to an annuity. An exclusion to this rule was permitted if the full retirement interest would result in an annuity of no more than R1 800 per annum. SARS accepted in practice that this equated to a total retirement interest of R25 200 and therefore allowed the full retirement interest to be paid out to the fund member upon retirement if the interest was R25 200 or less.

The rationale behind the R1 800 rule is that fund administration costs on relatively small annuities often outweigh the benefits and it is unfair to forced individuals to purchase annuities if the benefits will be consumed by fees.

During the course of an extensive review of the retirement fund industry, National Treasury determined that R50 000 is the minimum amount required to provide a sustainable annuity. (It was estimated that R50 000 would purchase an annuity of approximately R4 500 per annum.)

The definitions of “pension fund” and “retirement annuity fund” have therefore been amended to the effect that rules of the fund may allow members to withdraw their full retirement interest as a lump sum provided that the total retirement interest in the fund is not more than R75 000. This means that a person with a retirement interest of R75 000 or less in a fund, will be able to withdraw the full amount in the form of a lump sum. Amendments to the definitions of “pension fund” and “retirement annuity fund” in section 1 of the Income Tax Act, 1962, give effect to this proposal.

These amendments are effective from 1 October 2007.


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E. Employees’ tax withheld from lump sum benefits

Pension fund administrators are obliged to withhold tax from a lump sum benefit in accordance with a directive from SARS.

Lump sum benefits paid to persons earning less than the tax threshold are subject to tax at the minimum rate of 18%. The recipient then has to register as a taxpayer and claim back the tax withheld. SARS acknowledges, in the Explanatory Memorandum to the RLAB, that in many instances these individuals are not familiar with the process and effectively suffer a tax which is not due when they fail to claim back.

An amendment to paragraph 9 of the Fourth Schedule provides that no employees’ tax must be deducted or withheld from a lump sum benefit, other than a retirement fund lump sum benefit, if the recipient’s taxable income (excluding any retirement fund lump sum benefit) did not exceed the tax threshold in the immediately preceding year of assessment.

This amendment becomes effective from 1 January 2009 and applies to any lump sum benefit accrued on or after that date.

F. Divorce settlements

The Pension Funds Amendment Act No. 11 of 2007 came into effect on 13 September 2007. In terms of this Act, certain court orders (including divorce orders and maintenance orders) became payable by a retirement fund, even though the fund member continues to be a member of the fund.

The first problem relates to the recognition of taxable receipts of a retirement fund member. The Second Schedule only recognizes taxable accruals upon the member’s exit from the fund or his retirement. A problem arises in that the fund will have to keep a record of these payments and recover the tax when the member exits the fund or when the member retires.

The fund member will not be able to accurately determine the value of his fund interest because the tax may be significantly more than expected (and may even exceed the member’s total fund interest). A second problem arises should the tax be triggered on the date the court order becomes payable as the fund member may not have the cash to settle the tax liability.

The Pension Funds Amendment Act further provides for a non-member in receipt of an amount awarded in terms of a divorce order to transfer this amount to his/her own retirement fund.

The Second Schedule has been amended to provide that early withdrawal benefits (i.e. the amounts payable in terms of a court order whilst the fund member remains a member of the fund) will be taxable in the hands of the fund member as a withdrawal benefit on the date the amount becomes payable. The retirement fund has to apply for a tax directive and pay PAYE in terms of the directive. The Pension Funds Act has also been amended to allow the fund to additionally release the


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amount of the tax payable by the fund member in order to avoid hardship for that member. These amounts will not be taxable in the hands of the actual recipient of the payment. In the case of a divorce order, the fund member will have a right of recovery of the tax he/she paid on the amount awarded to the non-member spouse in terms of the divorce order. This provision effectively retains the status quo of the right of recovery awarded to the fund member upon full withdrawal or retirement from the fund in terms of paragraph 2B of the Second Schedule.

The amount awarded to a non-member ex-spouse in terms of a divorce order and transferred to that person’s retirement fund will now be recognised in the formula in terms of which that person’s tax-free retirement lump sum is calculated. This amount will remain tax-free.

These amendments are deemed to have come into operation on 13 September 2007 and apply in respect of any lump sum benefit received or accrued on or after that date.

Occupational death benefits

The Compensation Fund established in terms of the Compensation for Occupational Injuries and Diseases Act No. 130 of 1993 (COIDA) (previously the Workmen’s Compensation Act No. 30 of 1941 (WCA)) provides compensation for death or disablement caused by injuries and diseases sustained or contracted by employees during their employment and as a direct result of their occupation. Payments made by the Compensation Fund are exempt from income tax in the hands of the recipient.

The employer of an employee who dies due to an occupational injury (e.g. police officers killed whilst on duty) may pay an additional or “top-up” benefit to the family of the deceased. These benefits were previously taxable, apart from the R30 000 exemption granted in terms of section 10(1)(x).

In terms of the new provision in section 10(1)(gB)(iii), up to R300 000 of any lump-sum benefits payable by an employer as a direct result of an occupational death of an employee will be exempt from normal tax IF the benefit is paid as a top-up of a WCA or COIDA death benefit.

The R300 000 exemption will be reduced by any amount that qualifies for the section 10(1)(x) tax exemption (in other words, total exemptions will be limited to R300 000).

Section 10(1)(gB)(iii) is effective from the commencement of years of assessment ending on or after 1 January 2008.

Exemption for foreign services

Until 28 February 2007, remuneration (as defined in paragraph 1 of the Fourth Schedule) for rendered outside the Republic was exempt in terms of section 10(1)(o)(ii) if the recipient was outside the Republic –

for more than 183 days during any 12-month period that commences or ends during the year of assessment in which the remuneration is included in gross income; and


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for a continuous period exceeding 60 days during that 12-month period.

Difficulties were encountered in applying the section 10(1)(o)(ii) exemption to share incentive arrangements and situations where remuneration received in one year of assessment related to services rendered in more than one year.

In particular, in the case of share schemes, gains included in income in terms of section 8A or 8C (and included in the definition of “remuneration” in paragraph 1 of the Fourth Schedule) often related to a longer-term vesting period (often three - five years). Accordingly, even though the services between the time of granting an option or acquiring an equity instrument and the time of exercise of the option or vesting made have been rendered outside South Africa, only that portion of the gain that related to services in a qualifying 12-month period could qualify for the exemption. Situations arose where the major portion of the services rendered in respect of a share option gain were rendered outside South Africa but as the employee had returned and was in South Africa throughout the year of assessment when the gain accrued, no portion of the accrual was exempt.

The amendments ensure that, to the extent that the requirements of the 183-day and 60-day tests are met in any 12-month period commencing or ending during any year of assessment during which those services were rendered, the income earned outside the Republic will be exempt. The 12-month period no longer has to overlap the year of assessment in which an amount of remuneration is received by or accrues to the taxpayer.

In terms of an amendment to the proviso to section 10(1)(o)(ii), remuneration received or accrued in one year of assessment for services rendered in respect of more than one year, will be deemed to have accrued evenly over the period that the services were rendered.

A further amendment removes the reference in this sub-paragraph, to remuneration “as defined in paragraph 1 of the Fourth Schedule” and replaces the words “any person” with “any employee” (but, again, not specifically an employee as defined in paragraph 1 of the Fourth Schedule). Consequently, the amendment now applies to –

“any form of remuneration … received by or accrued to any employee during any year of assessment”.

The exemption no longer applies to all the types of income included in the definition of “remuneration” in paragraph 1 of the Fourth Schedule. Following the amendment, the sub-section is now limited to specific types of remuneration, being -

“salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument or allowance, including any amount referred to in paragraph (i) of the definition of gross income in section 1 or an amount referred to in section 8, 8B or 8C in respect of services rendered outside the Republic…”.

A specific requirement of the exemption is that the remuneration must be for services rendered while outside the Republic. Therefore, the exemption does not apply to lump sums included in paragraphs (cA) (restraint of trade payments), (d) (termination lump sums) or (e) (lump sums from retirement funds) of the definition of “gross income” in section 1.


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The amendments to section 10(1)(o)(ii), are effective from the commencement of years of assessment ending on or after 1 January 2008 (therefore, effectively, the amendments apply to employees from 1 March 2007).

Deduction for annuities

Section 11(m) allows the deduction of annuities paid by a taxpayer to a former employee, former partner (subject to certain requirements) or dependants of a former, or deceased, employee or partner. The deduction of annuity payments to a dependent of a former employee or partner of the taxpayer was limited to R2 500 in each year of assessment.

This limitation has been removed with effect from the commencement of years of assessment ending on or after 1 January 2008.

Deemed cost rule for connected persons

The Income Tax Act contained a number of identical anti-avoidance provisions dealing with the deemed cost of depreciable property purchased from a connected person in relation to the taxpayer (e.g. sections 11(e)(viii), 12B(4) and 12C(4)). These provisions have now been consolidated into one provision (section 23J), which also contains a new deemed cost rule.

Section 23J applies where a depreciable asset acquired by a taxpayer was held within a period of two years preceding the acquisition by a person who was a connected person in relation to that taxpayer at any time during that period.

A “depreciable asset” is defined in section 1 as –

“an asset as defined in paragraph 1 of the Eighth Schedule (other than any trading stock and any debt), in respect of which a deduction or allowance determined wholly or partly with reference to the cost or value of that asset is allowable in terms of this Act for purposes other than the determination of any capital gain or capital loss”

The old deemed cost rule limited depreciable cost to the lower of the cost of the asset to the seller or the market value of the asset at the time of the connected person sale. The new rule takes account of intervening taxation (on recoupments and capital gains) arising from the connected person sale. Where section 23J applies, the cost or value of the depreciable asset for the purposes of this section and any deduction or allowance claimed by the taxpayer in respect of that asset shall not exceed an amount determined as:

The cost of the depreciable asset to the connected person seller; Less: tax allowances granted to the seller and allowances deemed to have been

granted to the seller because an asset was used for trade during a year of assessment when the taxpayer’s receipts and accruals were either excluded from the definition of “gross income” in section 1 or were fully exempt. (These allowances are provided for in terms of section 11(e)(ix), 12B(4B), 12C(4A), 12D(3A), 12DA(4), 12F(3A), 13(1A), 13bis(3A), 13ter(6A), 13quin(3) and 37B(4).)

Add: taxable recoupments triggered upon the connected person sale;


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Add: any capital gain triggered on the sale by the connected person multiplied by the inclusion rate applicable to the seller (i.e. 25% for natural persons and 50% for companies and trusts).

Section 23J is effective from the commencement of years of assessment ending on or after 1 January 2008.

Scrapping allowance

In a further amendment related to disposals between connected persons, section 11(o), which provides for a scrapping allowance at the election of the taxpayer, has been amended. A second proviso to section 11(o) now provides that no election may be made in terms of this paragraph by a taxpayer if the amount received or accrued from the alienation, loss or destruction of the asset was received or accrued from a person that is a connected person in relation to the taxpayer.

This amendment is effective from the commencement of years of assessment ending on or after 1 January 2008.

Deduction for commercial buildings

Section 13quin provides for an allowance in respect of buildings used by a taxpayer in the production of income, if those buildings do not qualify for any other available depreciation provisions (such as section 11D or 13(1)).

The provision allows for an allowance calculated at 5% per year on the cost of new and unused buildings and improvements that are used by the taxpayer wholly or mainly for the purposes of producing income. Buildings used to provide residential accommodation are, however specifically excluded from the ambit of section 13quin. Therefore, a taxpayer who owns a block of flats which are rented out cannot generally depreciate the building (unless section 13ter applies).

The cost of the building or improvement is the lesser of the cost to the taxpayer or the arm’s length price of the building or improvement at the time of the acquisition (refer also to section 23J with regard to buildings acquired from connected persons).

The allowance does not apply in respect of any building that has been disposed of by the taxpayer during any previous year of assessment (section 13quin (4)).

No allowance is available in respect of the cost of a building or improvement if any of that cost has qualified or will qualify for deduction from the taxpayer’s income as a deduction or an allowance under any other provision of the Act (section 13quin (5)).

The total deductions or deemed deductions that are allowed in terms of this section and any other provision of this Act in respect of the cost of any building or improvement may not in the aggregate exceed the amount of such cost (section 13quin (6)).

Section 13quin applies in respect of buildings or improvements contracted for on or after 1 April 2007 and where the construction, erection or installation of that building or improvement commenced on or after that date.


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New capital allowance provisions

A. Rolling stock

A new allowance has been introduced in respect of rolling stock (e.g. trains and carriages). Section 12DA provides for an allowance calculated at 20% per year on the cost of rolling stock used directly by the taxpayer wholly or mainly for transporting persons, goods or things in the production of income.

Section 12DA comes into operation on 1 January 2008 and applies in respect of any rolling stock brought into use on or after that date.

B. Port assets

Section 12F, which previously applied to airport infrastructure, has been extended to provide for an allowance in respect of new and unused port infrastructure assets and supporting structures that form part of port assets. The allowance is available to taxpayers who carry on business as port or transport operators (even if engaged in other activities).

The rate of depreciation for port assets will accordingly be 5% per year.

The amendments to section 12F come into operation on 1 January 2008 and apply in respect of any asset brought into use on or after that date.

C. Environmental expenditure

With increased environmental concerns, it is a wide-held view that environmental expenditure should be entitled to some sort of tax relief. The new provisions contained in section 37B provide relief for environmental capital expenditure of a permanent nature. Depreciation relief is granted to environmental treatment and recycling assets and to environmental waste disposal assets (and improvements thereto). Both sets of assets must be ancillary to a manufacturing process (or similar process) and utilised for purposes of fulfilling environmental obligations imposed by law.

New and unused environmental treatment and recycling assets (described as air, water and solid waste treatment and recycling plant or pollution control and monitoring equipment) are eligible for a 40:20:20:20 allowance.

The allowance in respect of new and unused environmental waste disposal assets (e.g. dams, reservoirs, evaporation ponds, etc.) that are permanent in nature is calculated at a rate of 5% per annum (i.e. a 20-year straight-line write-off period).

Section 37B applies from the commencement of years of assessment ending on or after 1 January 2008.

Provision of medical services


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Until 2006, all medical assistance provided by employers to their employees and their families or dependants was fully taxable as a fringe benefit in terms of paragraphs 2( j) and 12B of the Seventh Schedule. In 2006, certain exemptions were added to paragraph 12B but this had fairly limited application, with the result that the provision of many medical services and medicines still gave rise to a taxable benefit. The relief has now been extended further so that there is no taxable benefit where medical services or medicines are supplied for purposes of complying with any law of the Republic.


Qualifying medical expenses

Individuals may claim a tax deduction for qualifying medical expenses paid in respect of immediate family members, to the extent that these expenses (plus certain amounts relating to medical aid contributions) exceed 7,5% of taxable income. As the certificates issued annually by the medical schemes automatically include all beneficiaries listed for a particular member, it has been decided to amend the Act to extend the range of persons falling within the scope of qualifying medical expenses. Consequently, with effect from 1 March 2007, medical expenses will qualify if they relate to the immediate family as well as all medical scheme beneficiaries that are listed by the medical scheme as dependants of the taxpayer.

Deduction for donations to qualifying entities

Section 18A of the Income Tax Act allows the deduction of donations to public benefit organisations and certain organizations listed in section 10(1)(cA).

In the Taxation Laws Amendment Act, 2007, section 18A was amended to increase the limit to 10% (previously 5%) of the taxpayer’s taxable income (excluding any retirement fund lump sum benefit) as determined before taking into account either this deduction or the section 18 deduction for medical expenses.

The RLAA amended the heading to section 18A to read “Deduction of donations to certain organisations” (removing the words reference to “public benefit organizations”) to make it clear that the section provides for donations to both public benefit organizations and the other qualifying organisations.

Both amendments are effective from the commencement of years of assessment ending on or after 1 January 2008.

Residential accommodation for expatriates

A taxable fringe benefit arises where an employer provides residential accommodation to an employee, except where the accommodation is provided whilst the employee is required to travel away from his/her usual place of residence for the purposes of performing his/her employment duties (paragraph 9(7) of the Seventh Schedule to the Income Tax Act).


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ITC1807 addressed the question of whether an employee who worked in South Africa for a 32-month period whilst retaining his home in United Kingdom (and continuing to be employed by the UK employer) could still be regarded as having his “usual place of residence” in United Kingdom. The court found in favour of the taxpayer and held that a person’s usual place or residence is synonymous with his/her ‘ordinary residence’ which, in this case, was the United Kingdom.

The amendment places a time restriction on the application of this principle in the case of an employee whose usual place of residence is outside South Africa. The paragraph 9(7) exemption will apply only if such an employee is away from his/her usual place of residence outside South Africa for up to 12 months from the date of arrival in South Africa.

The 12-month limit does not apply to employees whose usual place of residence is in South Africa, nor does it apply to any employee was present within South Africa for more than 30 days during the 12-month period immediately before their date of arrival.

These amendments will come into operation from 1 March 2008 to give employers time to make adjustments to their employee and payroll systems.

Travel benefits

In terms of paragraph 10(2)(d) of the Seventh Schedule, no taxable benefit arises where an employer provides free travel to the spouse or minor child of an employee working away from home, subject to certain requirements.

In tandem with the amendments to paragraph 9 of the Seventh Schedule (residential accommodation to foreign nationals), this paragraph now provides that the tax-free travel benefit is only available to employees whose usual place of residence is in the Republic.

The amendment is effective from 1 March 2008.

Intellectual property

The anti-avoidance provisions in section 23I seek to prevent tax arbitrage resulting from assigning South African intellectual property to entities with a lower effective tax rate and then licensing that intellectual property back to fully taxable South African taxpayers. The amendment targets “affected intellectual property”.

“Intellectual property,” is defined widely and includes all inventions, patents, designs, trade marks and copyrights protected by South African or foreign laws. Property of a similar nature to that described above is also included.

“Affected intellectual property” is intellectual property (or underlying invention or work) that was at any time wholly or partly –

(i) owned by the taxpayer or a resident; or(ii) developed by the taxpayer or a resident who is/was a connected person in relation

to the taxpayer at the time of development or at the time of the royalty/license payment was incurred.


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“Connected person” in this context is a connected person as defined in section 31, which has a lower threshold than the normal connected person definition in section 1. Company shareholders are connected persons in relation to the company in which they hold 20% or more of the shares (even if another shareholder holds a majority interest).

Licensee taxpayers will be denied deductions in respect of royalty expenditure incurred for the use of affected intellectual property to the extent that the royalty receipts do not constitute income in the licensor’s hands, for example where the licensor is tax-exempt in respect of that income or where a foreign person treats that income as falling outside the South African tax net.

If the payment of royalties for the use of affected intellectual property triggers a section 35 withholding tax (currently at 12% apart from any double tax agreement variations), the licensee will be permitted to deduct an amount equal to one-third of the royalty expenditure. This one-third deduction rule will apply as long as the withholding tax is not reduced below 10% after taking into account the provisions of any applicable tax treaty.

A special anti-avoidance rule seeks to prevent taxpayers from circumventing the provisions of section 23I by interposing a third party to convert royalty streams into financial instruments (e.g. promissory notes (PNs) and credit default swaps (CDSs)) and on-routing these payments to entities with lower effective tax rates.

Example

A licence is concluded between two South African entities. The royalties are “evidenced” by way of promissory notes that are discounted by the licensor to a tax exempt entity or fund outside the South African tax net.

Sections 23I(2)(a) and 23I(2)(b) will deny the licensee deductions in respect of all royalties payable to the tax exempt entity or fund. Alternatively, where the royalty payments are structured to accrue first to the licensor before being on-paid to the tax exempt entity, the licensor will be denied corresponding deductions in terms of section 23I(2)(b).

Section 23I will take effect for all intellectual property expenditure incurred from 1 January 2009 onwards.

Intellectual property and transfer pricingThe South African tax system, like most tax systems, contains transfer pricing rules to prevent various cross-border tax avoidance schemes such as selling intellectual property for proceeds below market value and allowing royalty-free (or discounted) usage of South African developed intellectual property. The essence of these rules is to require a recalculation of the transfer at arm’s length prices. Because the problem of transfer pricing most frequently arises between parties not dealing at arm’s length, the South African transfer pricing rules previously applied only between connected persons.

SARS contends that taxpayers are entering into intellectual property structures that defeat the transfer pricing rules by ensuring that both parties to the intellectual property transaction are not technically “connected persons.” For instance, some structures are arranged so that the South African developer of intellectual property transfers that property at artificially low levels to a 49% controlled foreign entity. The other 51% is owned by an


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outsider, but a side agreement exists so that the South African developer largely retains the benefits of the intellectual property transferred.

In order to remedy these types of structures, the transfer pricing provisions have been tightened where any goods or services are supplied in relation to intellectual property as contemplated in section 23I. In this context, “connected person” means a connected person as defined in section 1, but where the taxpayer is a company, any other company holding at least 20% of that company’s equity share capital will be a connected person to that company, even if no shareholder holds the majority voting rights of such company.

Assets acquired in exchange for shares

Companies that issue their own shares in exchange for assets are subject to three sets of rules in terms of the assets acquired.

1. As a general matter, the base cost of the asset (or a section 11(a) expenditure) is equal to the market value of the asset (section 24B(1)). However, this rule is subject to two exceptions:

2. Companies issuing their own shares for assets pursuant to a section 42 rollover will only inherit a base cost (or section 11(a) expenditure) in the asset acquired equal to the cost (or expenditure) in the hands of the former transferor.

3. A company that issues its own shares in exchange for shares issued by another company will receive a zero base cost (or section 11(a) expenditure) in the newly issued shares acquired (section 24B(2)).

All three sets of rules essentially provide the issuing company with a base cost (or section 11(a) expenditure) in the asset acquired equal to the tax cost (or expenditure) of the asset in the hands of the former transferor with upward adjustments for any income or gain realised by the transferor as a result of the transaction.

The zero base cost (or expenditure) rule of section 24B(2) can create some harsh results in a South African context, especially given the difficulties that certain parties have in obtaining third party financing. In view of these difficulties, certain cross-issue structures have emerged that essentially allow certain investors to obtain financing to acquire a target company without resort to third party lending.

One such structure involves the issue of shares by an operating company in exchange for redeemable preference shares issued by an investor company. The preference shares have a value equal to the value of the operating company shares issued in exchange (but the operating company shares have more growth potential). The investor company then obtains funds via dividends from the operating company or by selling the investor company shares after those shares have appreciated (partly due to the involvement of the investor company). Once the investor company has sufficient funds, the investor company redeems the preference shares, leaving the investor company as an unencumbered holder of operating company shares.

At issue is the redemption of the redeemable preference shares. Under current law, the operating company recognises as gain the full value of the redeemable preference shares. This result is seemingly problematic because the redemption of the preferences shares is said to be economically akin to the return of principal on a loan (which should not, as a


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theoretical matter, give rise to tax). In other words, restoration of deemed lending finance is not an item that should be viewed as taxable gain for the operating company.

The proposal seeks to provide tax relief for operating companies that are essentially receiving repayment of principal on the self-financing of their shares. However, the proposed exception to the zero base cost (or section 11(a) expenditure) rule will be narrowly tailored because the cross-issue of shares can easily give rise to potential tax avoidance. In view of the above, the exception will apply only if the following three conditions are met:

1. The (operating) company must issue ordinary shares (or preference shares convertible into ordinary shares at the option of the holder) in exchange for the issue of redeemable preference shares by another (investor) company;

2. The preference shares must be held for a period of not less than 5 years; and3. The triggering event is a redemption (as opposed to other forms of disposition).

If the exception applies, the (operating) company is deemed to have expenditure in the redeemable preference shares equal to the lesser of the market value of those preference shares on the date of initial issue or the amount received or accrued on redemption. The “lesser of” test effectively limits the gain triggered on redemption without allowing for any loss.

Example 1

Operating Company has 4 million ordinary shares outstanding. Investor Company seeks to obtain a slightly greater than 25% interest in Operating Company. Operating Company accordingly issues 1 000 001 ordinary shares to Investor Company. Investor Company issues redeemable preference shares in exchange. The ordinary shares and the preference shares are each worth roughly R2 million. Operating Company redeems the preference shares 10 years later for a price of R2,5 million.

Operating Company is deemed to have expenditure of (roughly) R2 million by virtue of the proposal. The gain on redemption is therefore limited to R500 000. Without the proposed amendment, Operating Company would have been taxable on the full R2,5 million amount.

Example 2

The facts are the same as Example 1, except that the preference shares are redeemed for only R1,5 million. No gain or loss results from the redemption because the expenditure is limited to R1,5 million (the amount received or accrued).

Other aspects of the rule relate to intra-group transfers. If a holder of the redeemable preference share (i.e. the operating company) transfers the redeemable preference share to another group company via a section 45 intra-group rollover, the recipient group company will be viewed as one and the same as the transferor for purposes of this rule. Hence, the five year rule can be satisfied by taking into account the holding periods of both the transferor and transferee group companies.

Amalgamation of professional and amateur sporting bodies


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Some national sporting organizations previously split their professional and amateur arms into separate entities so that the amateur arm would enjoy public benefit organisation (PBO) status. This, however, resulted in the professional arms’ sponsorship income being taxed, whilst the expenses incurred by the amateur arms in developing and promoting amateur sport to serve as a feeder for future fans and professional players could not be deducted.

The RLAA contains special rules that will assist with the re-integration of the separate entities by providing relief for amalgamation transactions between the professional and amateur arms.

The rules allow the professional arm to dispose of all its assets to the amateur arm on a tax neutral basis. The professional arm will then cease to exist. The unified entity will be a taxable entity as it no longer complies with the requirements of section 10(1)(cN).

The relief is available for a limited window-period of two years between 1 January 2008 and 31 December 2009.

A special deduction has been introduced in section 11E, which allows the unified entity to deduct from its income all expenditure (not of a capital nature) incurred by it on the development and promotion of qualifying amateur sport falling under the same code of sport as the professional sport it carries on. Payments to other entities for the development and promotion of amateur sport will not qualify for the special deduction.

Rebate for foreign taxes paid

Section 6quat grants relief to a resident for foreign taxes paid on income from a foreign source, in order to prevent double taxation. The relief is in the form of a rebate (i.e. tax credit) in respect of foreign taxes paid.

SARS explains, in the Explanatory Memorandum, that some foreign countries incorrectly claim source jurisdiction in respect of services rendered within South Africa and these countries then impose withholding tax on the resulting income. Such foreign taxes will not qualify for the section 6quat rebate because the source of the income is in South Africa.

The amendment to section 6quat allows for these foreign taxes to be treated as a deductible expense incurred in the production of income. The deduction applies to foreign taxes proved to be payable to a foreign government, but limited to the taxable income giving rise to the foreign tax.

In light of the amendments to section 6quat, section 11C (deductions in respect of foreign dividends) has also been amended to the effect that the recipient of a foreign dividend may no longer elect to deduct foreign withholding taxes from those foreign dividends.

The amendments are effective from the commencement of years of assessment ending on or after 1 January 2008.

Research and development allowance


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Section 11D, which allows a 150% deduction of operating expenditure incurred and a 50/30/20 write-off of assets used for purposes of qualifying research and development (R&D), was introduced in the Revenue Laws Amendment Act, 2006 and became effective from 2 November 2006. A number of amendments have been made to this allowance in 2007, mainly to correct oversights in the original provisions. The main amendments are summarized as follows:

The expenditure must not only be directly related to the R&D activity, but the R&D activity must also be directly related to the discovery, devising or development of scientific and technological intellectual property.

Any expenditure incurred in the development of knowledge will qualify only if that knowledge is “essential to” the use of an invention, design or computer program.

The deduction of R&D expenditure and the capital allowance are granted only if the intellectual property is to be used by the taxpayer in the production of income.

The allowance in respect of capital assets will be granted only in respect of assets “owned” by the taxpayer or “acquired by the taxpayer in terms of an instalment credit agreement” (consistent with other capital allowances).

To qualify for the allowance, the asset must be used “solely and directly” for qualifying R&D, it must never have been previously used by the taxpayer for R&D purposes and it must never have been previously used by any other person for any other purpose.

Part of a building may be used exclusively for R&D purposes. In such a case, the taxpayer will have to allocate the cost of the building between the part used for R&D and the part used for other purposes.

Anti-avoidance measures have been introduced to prevent the artificial inflation of the R&D allowance via transfers between connected persons (refer section 23J).

Limited rollover relief has been introduced for damaged or destroyed R&D depreciable assets.

If expenditure qualifies for both the 150% deduction and the 50/30/20 capital allowance, the capital allowance takes precedence.

Taxpayers defraying the expense of another party are eligible for the 150% deduction just as if they engaged in the R&D directly. However, if the other party is a connected person, the 150% deduction is granted only to the extent that the connected person recipient of the funding has incurred expenditure in respect of activities undertaken by that connected person for research and development purposes. Furthermore, rental and interest deductions will be limited to 100% of the actual expenditure.

Section 8(4)(a) has been amended to make it clear that this general recoupment provision does not apply to any 150% deduction claimed under section 11D(1). Section 11D has its own internal recoupment provision in this regard.

The section 11(o) scrapping allowance applies to assets that qualified for the section 11D allowance.

Pre-trade research and development expenditure that would otherwise qualify for the section 11D allowance is now included in the scope of section 11A, with the result that the expenditure may be deducted when trade commences, subject to a loss-limitation rule.

Section 23D, which limits certain capital allowances in respect of sale-and-leaseback transactions, has been amended to specify that the provisions also apply to assets that qualified for the section 11D allowance.


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The wording of section 11D has been revised to make it clear that the deduction may give rise to or increase an assessed loss.

The taxpayer may elect out of the 50/30/20 R&D allowance in favour of another capital allowance (to the extent the asset is eligible). However, once a taxpayer has elected out for a particular asset, that asset can subsequently be brought back within section 11D.

If a taxpayer ceases to use a building (or part thereof) for purposes of carrying on qualifying R&D, this will no longer trigger a recoupment.

Taxpayers carrying on banking, financial services or insurance businesses are not entitled to the 150% deduction in respect of R&D expenditure.

These amendments to section 11D come into operation on 2 November 2006 and apply in respect of activities undertaken or assets brought into use on or after that date.

Section 23H, which effectively limits the deduction of pre-paid expenses, has been amended to the effect that qualifying R&D operating expenditure that qualifies for the 11D(1) deduction will be allowed as a deduction only to the extent that the underlying research and development activities have been executed.

The proviso to section 23H, which provides that the apportionment does not apply if the benefit connected to the expenditure will be enjoyed by the taxpayer within six months after the end of the year during which the expenditure was incurred, has been amended to the effect that this exclusion does not apply to expenditure that is allowable as a deduction in terms of 11D(1).

The amendments to section 23H are effective from the commencement of years of assessment ending on or after 1 January 2008.

Assessed losses

Section 20(1)(a)(ii) provides that a balance of assessed loss must be reduced by the amount or value of any benefit received by or accruing to a person resulting from a concession granted by or compromise made with his creditors whereby his liabilities to them, which arose in the ordinary course of trade, have been reduced or extinguished.

It has been argued that this provision applies only if the concession is granted by or the compromise is made with the general body of creditors and not merely by or with one or some of them. It has also been argued that liabilities that are incurred prior to the commencement of trade (e.g. for funding the erection of a factory) do not arise in the ordinary course of that trade and that a concession or compromise in respect of those liabilities need not be taken into account in terms of this provision. Another issue relates to the question whether the liability must be linked to expenditure in respect of which a deduction or allowance was allowed.

Amendments to section 20(1)(a)(ii) are aimed at clarifying these aspects by providing that -

the sub-section applies where a concession is granted or a compromise is made with “any creditor of such person”;


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instead of requiring that the liability arose in the ordinary course of trade, the provision now applies to the extent that the amount advanced by the creditor was used, directly or indirectly, to fund expenditure or the acquisition of an asset; and

the provision now applies to the extent that a deduction was allowed in terms of section 11 in respect of the expenditure incurred or the asset acquired.

These amendments are effective from the commencement of years of assessment ending on or after 1 January 2008.

Foreign exchange transactions

Section 24I(7A) provides that mark-to-market gains and losses on foreign currency loans between connected persons are spread over a 10-year period if the exchange difference arises from loans or advances obtained or granted during any year of assessment ending before 8 November 2005.

This provision was effectively replaced by section 24I(10), which allows for the deferral of tax on an exchange difference until the underlying loan is realised when the loan is between connected persons and other similar parties. Section 24I(10) came into operation for years of assessment ending on or after 8 November 2005.

It was unclear whether loans granted during any year of assessment ending before 8 November 2005, and therefore falling under section 24I(7A), can benefit from the deferral under section 24I(10).

An amendment to section 24I(10) makes it clear that this section applies “subject to the provisions of subsection (7A)”. Therefore, loans benefiting from the spreading of exchange differences over a 10 year period in terms of section 24I(7A) cannot obtain the further benefit of section 24I(10).

This amendment is deemed to have come into effect on 8 November 2005 and applies in respect of any year of assessment ending on or after that date.

Withholding of employees’ tax from share scheme gains

Paragraph 11A of the Fourth Schedule requires employees’ tax to be withheld from gains arising in terms of sections 8A (share options), 8B (broad-based employee share schemes) and 8C (vesting of equity instruments). Such gains are deemed to be remuneration payable by the employer granting the right, equity share or equity instrument.

Problems arise in practice, however, where the rights, equity shares or equity instruments are granted by trusts established by employers to provide these benefits. These trusts only provide benefits in the form of gains; they do employ the employees and do not pay any cash remuneration. The same position occurs where the employees are employed by a subsidiary of an international company and the shares are granted or awarded by a foreign company or trust.

The amendment to paragraph 11A provides that


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where the entity granting the right to acquire a marketable security or from whom the employee acquired the qualifying equity share or equity instrument is an “associated institution” in relation to an employer of the employee; and

the associated institution granting the benefit does not pay remuneration from which the employees’ tax on the gain can be withheld;

the associated institution and the employer are jointly and severally liable for that employees’ tax and they must, between them, withhold the correct amount of employees’ tax on the gain from the remuneration payable to the employee.

In effect, the employer will have to withhold the employees’ tax on the gain from other remuneration paid to the employee.


Capital gains tax amendments

A. Extraordinary Dividends

Paragraph 19 of the Eighth Schedule is an anti-avoidance provision that requires an affected taxpayer to disregard any capital loss on the sale of a share sold following the receipt or accrual of an extraordinary dividend (in other words, after a dividend-stripping operation has occurred).

An “extraordinary dividend” means the amount of any dividends received or accrued within a specified two-year period that exceeds an amount calculated as 15% of the proceeds received or accrued from the disposal of the share.

Paragraph 19 has now been amended as follows:

Whereas, previously, paragraph 19 did not apply to intra-group dividends if both companies were residents, this exclusion has now been removed. Consequently, all extraordinary dividends (including those dividends that are exempt from STC by virtue of the intra-group relief provisions or otherwise) will now trigger the anti-avoidance rule; and

Prior to the amendment, paragraph 19 applied to shares disposed of within two years from the date of acquisition and capital losses up to the amount of any extraordinary dividends received or accrued within that period. Following the amendment, the paragraph now applies to capital losses up to the amount of any extraordinary dividend received or accrued within two years before disposal of the share. Dividends to be taken into account for purposes of determining the amount of any extraordinary dividend include amounts distributed at the time of the disposal, e.g. liquidation dividends.

Example

H Co. purchased all the ordinary shares of S Co. for R20 million on 1 February 2000. Since that date, S Co. has increased in value to R35 million.


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On 15 March 2008, S Co. distributes R20 million to H Co., which is exempt from STC in terms of section 64B(5)(f). On 31 July 2008, H Co. sells the S Co. shares for R15 million (resulting in a R5 million loss against the purchase price).

The dividend of R20 million, although exempt from STC, is an extraordinary dividend to the extent that it exceeds 15% of the R15 million proceeds. The amount of the extraordinary dividend is therefore R17,75 million (R20 million – (R15 million x 15%)).

H Co. must disregard the full R5 million loss as this loss does not exceed the amount of the extraordinary dividend.

The amendment tom paragraph 19 is effective from 1 October 2007 and applies in respect of any share disposed of on or after that date.

B. Capital distributions

A capital distribution is defined in paragraph 74 of the Eighth Schedule as any distribution (or portion thereof) by a company that -

is not a “dividend” as defined in section 1 of the Act; or that is a dividend, but the dividend is exempt from STC in terms of section

64B(5)(c) (certain liquidation dividends).

Prior to the current amendments, capital distributions received by or accrued to shareholders on or after 1 October 2001 were simply recorded by the shareholder and then added to proceeds upon the eventual disposal of shares. Capital distributions received or accrued before 1 October 2001 reduced the base cost of the share, which could even result in a “negative” base cost in some cases. (Paragraph 76 of the Eighth Schedule refers.)

In terms of the amendments contained in the RLAA, paragraph 76 applies only to capital distributions made before 1 October 2007.

Capital distributions made on or after 1 October 2007 will trigger a part-disposal of the share in terms of the new paragraph 76A. Accordingly, a taxpayer in receipt of a capital distribution is now treated as having disposed of part of his investment on the date of receipt or accrual of the capital distribution.

Paragraph 33(1) of the Eighth Schedule provides that, where part of an asset has been disposed of and the base cost cannot be specifically identified, the base cost of the part that has been disposed of is determined in accordance with the following formula:

Market value of part disposed ofX

Expenditure determined in terms of paragraph 20 or market value determined in terms of paragraph 29(4) in respect of entire asset

Market value of entire asset immediately before disposal


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Paragraph 76A(3) provides that the market value of the part disposed of is equal to the amount of the cash or the market value of any asset in specie received or accrued by way of a capital distribution.

Therefore, in the case of capital distributions made on or after 1 October 2007, the base cost of the part-disposal will be calculated according to the ratio between the amount of the distribution (i.e. the cash or the market value of any property distributed in specie) and the total market value of the share on the date of the distribution. The proceeds on the part disposal are equal to the amount of the distribution and the capital gain or loss will be calculated accordingly.

Paragraph 76A contains a transitional provision regarding capital distributions received or accrued between 1 October 2001 and 30 September 2007. Such capital distributions will be added to proceeds when the share is sold but, if the share remains unsold on 1 July 2011, any remaining distributions will trigger a part disposal on that date.

Example

A Co. purchased shares in Z Co. on 1 June 2002 for R18 million. Between 1 June 2002 and 30 September 2007, A Co. received capital distributions from Z Co. amounting to R6 million. A Co. still holds the shares in Z Co. on 1 July 2011 and the market value of the shares on that date is R50 million.

A Co. is deemed to have made a part disposal of Z Co. shares on 1 July 2011. The capital gain on the deemed disposal is calculated as follows:

Proceeds (being the amount of the capital distributions received between 1 June 2002 and 30 September 2007)

=R6 000 000

Base cost = R2 160 000Market value of part disposed of

X Total base costMarket value of entire asset immediately before disposal= R6 million/R50 million X R18 million = R2,16 million

Capital gain deemed to arise on 1 July 2011 = R3 840 000

Where a shareholder uses the weighted average method to determine the base cost of identical shares, any capital distributions received or accrued between 1 October 2001 and 30 September 2007 (excluding any capital distribution of shares in an unbundled company) were required to be deducted from the base cost of those shares. If this deduction resulted in a negative base cost and the shares are still held on 31 December 2010, the shareholder is treated as having a capital gain equal to that negative base cost and this capital gain is deemed to arise on 1 July 2011. The shares are then deemed to have a base cost of Nil on 31 December 2010. (Paragraph 76A(2).)


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C. Share buybacks of listed shares

Prior to the 2007 amendments, the sale of shares at a profit gave to a taxable capital gain, even if the identical number of shares in the same company was repurchased shortly after the disposal. On the other hand, the sale of shares at a loss in similar circumstances did not give rise to an immediate tax loss due to the application of the “bed and breakfast” anti-avoidance rules in paragraph 42 of the Eighth Schedule, which deferred the loss until the repurchased shares were subsequently sold.

In certain circumstances, taxpayers are essentially forced to dispose of their shares, even though they have no desire to ultimately reduce their long-term share investment profile. For instance, shareholders may be forced to surrender their shares via a court order under section 311 of the Companies Act. Then, in order to restore their initial level of desired investment, these shareholders immediately purchase other shares in the company from other remaining shareholders. Without relief, these involuntary sellers were subject to tax on their capital gains arising on the short-term cash-out even though they ultimately maintained the same level of investment.

The amendment, in the form of paragraph 42A of the Eighth Schedule, provides for the deferral of a capital gain if a taxpayer is forced to undertake an involuntary interim sale and then seeks to restore the same investor profile. The deferral rules apply if all of the following requirements are met:

1. A taxpayer is forced to dispose of shares pursuant to a court order in terms of section 311 of the Companies Act No. 61 of 1973;

2. The shares disposed of are listed shares; and3. The taxpayer acquires shares of the same kind and of the same or equivalent

quality within 90 days after the forced disposal.

To the extent that the deferral rules apply, the shares disposed of pursuant to the forced sale are deemed to have been sold at cost (i.e. there is no capital gain on the forced sale); however, the actual capital gain is effectively rolled over to the replacement share.

If the replacement shares have a cost equal to or greater than the deferred capital gain on the forced disposal of the shares, the cost of acquiring the replacement shares is deemed to be the actual cost of the replacement shares less the deferred capital gain.

If the cost of the replacement shares is less than the capital gain on the initial disposal, the replacement shares are deemed to have been acquired at no cost and the excess of the capital gain on the initial disposal over the replacement cost is immediately recognised as a capital gain.

The acquisition date of the initial shares rolls over to the replacement share (paragraph 42A(d)).


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Example 1

A taxpayer owns 2 000 ordinary shares in Co. X, which is on the JSE. The taxpayer is forced to dispose of 25% (i.e. 500) of the Co. X shares pursuant to a section 311 court order. The base cost of the shares disposed of is R90 000 and the shareholder sells the shares for R110 000.40 days after the forced disposal, the taxpayer repurchases 500 ordinary shares in Co. X on the open market for R135 000.

The taxpayer does not have any capital gain on the disposal of the 500 ordinary shares as the sale occurred pursuant to a section 311 court order, the shares are listed and the repurchase occurred within 90 days. The capital gain of R20 000 (R110 000 less R90 000) is deferred in terms of paragraph 42A.However, the base cost of the replacement Co. X shares is R115 000 (R135 000 less the R20 000 deferred capital gain on the initial disposal.

Example 2

The facts are the same as Example 1, except that the Co. X ordinary shares are repurchased for R15 000.

Because the purchase price of the replacement shares (R15 000) is less than the capital gain of R20 000 on the initial disposal, the base cost of the replacement shares is deemed to be nil and the taxpayer must recognise a capital gain of R5 000.

D. Base cost of an asset

Paragraph 20(1)(h)(ii) determines the base cost of an asset that has been subject to fringe benefits tax under paragraph (i) of the definition of “gross income” in section 1, read with the Seventh Schedule. It provides that the amount to be added to the base cost of the employee’s asset is the value that was included in the employee’s gross income In this way double taxation is prevented in that the amount that was included in gross income will not again be subjected to CGT.

In terms of paragraph 16(1)(b) of the Seventh Schedule an amount will also be included in an employee’s gross income if the employer confers a benefit on a person other than the employee, whether directly or indirectly. This could happen, for example, if the employer transferred an asset to the employee’s family trust or a relative. Under the present wording of paragraph 20(1)(h)(ii)(bb) there is no mechanism by which the other person can achieve a step-up in base cost as this is only granted to an employee acquiring the asset.

The amendment to paragraph 20(1)(h)(ii)(bb) will enable the other person to obtain the required increase in base cost.


E. Withholding tax on disposals by non-residents


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Section 35A imposes a CGT withholding tax on disposals of South Africa property by non-residents. The section was inserted into the Act by section 30 of the Revenue Laws Amendment Act, 2004 and was originally to come into operation on a date to be proclaimed by the President.

The Taxation Laws Amendment Act, 2007 provides that section 35A came into operation on 1 September 2007 and applies to any disposal on or after that date.

Regulations prescribing circumstances under which the Commissioner may write-off or compromise an amount due

In terms of section 91A of the Act, the Minister of Finance may prescribe by regulation the circumstances under which the Commissioner may waive, write off or compromise in whole or in part the amount of any tax, duty, levy, charge or other amount payable by any person in terms of any Act administered by the Commissioner, where that waiver, write-off or compromise would be to the best advantage of the State.

The regulations were published in Gazette 29788 dated 13 April 2007. The purpose of these regulations is not to relieve taxpayers from financial hardship, but to establish a process whereby SARS can write off a tax debt which is irrecoverable, or where the costs of attempted recovery would probably exceed the amount recovered. The taxpayer’s hardship, or any other reasons why a waiver of tax would be “fair” to the taxpayer, for example, to preserve jobs, would are irrelevant.

The full content of the regulations is reproduced below:

SCHEDULE

INDEX

PART 1

General provisions

1. Definitions2. Purpose3. Application of regulations

PART 2

Temporary write off of tax debt

4. Temporary write off of tax debt5. Tax debts uneconomical to pursue

PART 3

Permanent write off of tax debt


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6. Permanent write-off of tax debt

Irrecoverable at law

7. Tax debts irrecoverable at law

PART 4

Procedures for write-off

8. Procedure for writing off tax debt on a temporary or permanent basis

PART 5

Compromise of tax debt

9. Compromise of tax debt10. Request by debtor for compromise11. Consideration of request to compromise tax debt12. Circumstances where not appropriate to compromise tax debt13. Procedure for compromise of tax debt14. Commissioner not bound by compromise

PART 6

Records and reporting

15. Records of tax debts written off or compromised16. Reporting by Commissioner of tax debts written off or compromised

PART 7

Exercise of power to write off or compromise

17. Exercise of power to write off or compromise tax debt18. No relationship between debtor and Commissioner or delegated official

Part 1

General provisions

Definitions

1. For purposes of these regulations, any word or expression to which a meaning has been assigned in any Act administered by the Commissioner must, unless the context otherwise indicates, bear the meaning so assigned, and -

“asset” includes –


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(a) property of whatever nature, whether movable or immovable, corporeal or incorporeal; and

(b) a right or interest of whatever nature to or in such property;“Companies Act” means the Companies Act No. 61 of 1973;“compromise” means an agreement entered into between the Commissioner and a debtor in terms of which -

(a) the debtor undertakes to pay an amount (whether as a single payment or in instalments) which is less than the full amount of the tax debt due by that debtor in full satisfaction of that tax debt; and

(b) the Commissioner undertakes not to pursue the recovery of the remaining portion of that tax debt on the condition that the debtor complies with the undertaking Contemplated in paragraph (a) and any further conditions as may be imposed by the Commissioner;

“tax debt” means any tax, duty, levy, charge, additional tax, interest, penalty or other amount due by a debtor in terms of any Act administered by the Commissioner; and“write off” means to reverse a tax debt either in whole or in part.

Purpose

2.(1) The basic principle in law is that it is the duty of the Commissioner to assess and collect all tax debts according to the laws administered by or assigned to the Commissioner and not to forgo any such tax debts. (2) Circumstances may, however, require that the strictness and rigidity of the basic principle be tempered where it would be to the best advantage of the State.(3) The purpose of these regulations is to prescribe the circumstances under which the basic rule may be tempered and where the Commissioner may take a decision to write off a tax debt on a temporary or permanent basis.

Application of regulations

3. These regulations apply only in respect of a tax debt owed by a debtor where the liability to pay that tax debt is not disputed by the debtor.

Part 2

Temporary write-off of tax debt4.(1) The Commissioner may temporarily write off an amount of tax debt if the Commissioner is satisfied that the tax debt is uneconomical to pursue as contemplated in paragraph 5 at that time.(2) A decision by the Commissioner to temporarily write off an amount of tax debt does not absolve the debtor from the liability of that tax debt.(3) If the Commissioner at any stage pursues the collection of any amount of tax debt which was temporarily written off under this paragraph, the Commissioner must determine interest for the period from the date that the tax debt was so written off to the date of payment at the interest rate applicable during the period that the tax debt was outstanding.

Tax debts uneconomical to pursue


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5.(1) A tax debt is uneconomical to pursue if the Commissioner is satisfied that the total cost of recovery of that tax debt will in all likelihood exceed the anticipated amount to be recovered in respect of the outstanding tax debt.(2) In determining whether the cost of recovery is likely to exceed the anticipated amount to be recovered as contemplated in subparagraph (l), the Commissioner must have regard to –

(a) the amount of the tax debt;(b) the length of time that the tax debt has been outstanding; (c) the steps taken to date to recover the tax debt and the costs involved in those

steps, including steps taken to locate or trace a debtor;(d) the likely costs of continuing action to recover the tax debt and the anticipated

return from that action, including any likely recovery of costs that may be awarded to the Commissioner;

(e) the financial position of the debtor, including that debtor's assets and liabilities, cash flow and possible future income streams of that debtor; and

(f) any other information available with regard to the recoverability of the tax debt.

Part 3

Permanent write-off of tax debt6. (1) The Commissioner may permanently write off an amount of tax debt -

(a) to the extent that the Commissioner is satisfied, at that time, that the tax debt is irrecoverable at law as contemplated in paragraph 7; or

(b) if the Commissioner compromised a tax debt in terms of Part 5.(2) The Commissioner must notify the debtor, in writing, of any amount of tax debt permanently written off.

Irrecoverable at law

Tax debts irrecoverable at law7. (1) Subject to subsection (2), a debt is irrecoverable at law if –

(a) it cannot be recovered by action and judgment of a court; or(b) it is owed by a debtor that has been liquidated or sequestrated and it represents

the balance outstanding –

i. after notice was given by the liquidator or trustee that no further dividend is to be paid or a final dividend has been paid to the creditors of the estate: or

ii. following the termination of a compromise or arrangement as contemplated in section 311 of the Companies Act, with the debtor's creditors, which has been sanctioned by a court.

(2) A tax debt is not irrecoverable at law if the debtor is a company or a trust and the Commissioner has not first explored action against or recovery from the personal assets of any director, shareholder, trustee or persons acting in the management of that debtor.

Part 4


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Procedures for write-off

Procedure for writing off a tax debt on a temporary or permanent basis8. (1) Before deciding to write off any tax debt, the Commissioner must –

(a) determine whether there are any other tax debts owing to the Commissioner by the debtor;

(b) reconcile all amounts owed by and to the debtor, including penalties, interest and costs;

(c) obtain a breakdown of the tax debt and the periods to which the outstanding amounts relate; and

(d) document the history of the recovery process and the reasons for deciding to write-off the tax debt on a temporary or permanent basis.

(2) In deciding whether to support an offer of compromise made to creditors in terms of section 311 of the Companies Act the Commissioner must, in addition to considering the information as contemplated in section 312 of that Act, consider the provisions of paragraph 9, 10(1) and 11 mutatis mutandis.

Part 5

Compromise of tax debt9. The Commissioner may compromise a portion of a tax debt upon written request by a debtor, which complies with the requirements of paragraph 10, if the purpose of that compromise is to secure the highest net return from the recovery of that tax debt taking into account considerations of good management of the tax system and administrative efficiency.

Request by debtor for compromise10(1) A request by a debtor for a tax debt to be compromised by the Commissioner must be signed by the debtor and be supported by a detailed statement setting out –

(a) all assets and liabilities of the debtor reflecting the current market value of those assets;

(b) all amounts received by or accrued to and expenditure incurred by the debtor during the 12 months immediately preceding the request;

(c) all assets which have been disposed of in the preceding three years, or such longer period as the Commissioner deems appropriate;

(d) the value of all assets so disposed of, the consideration received or accrued, the identity of the person who acquired the assets and the relationship between the debtor and the person who acquired the assets (if any);

(e) the debtor’s future interests in any assets, whether certain or contingent or subject to the exercise of a discretionary power by any other person;

(f) all assets over which the debtor, either alone or with other persons, has any direct or indirect power of appointment or disposal, whether as trustee or otherwise;

(g) details of any connected persons in relation to that debtor;(h) the debtor’s present sources and level of income and the anticipated sources and

level of income for the next three years, with an outline of the debtor’s financial plans for the future; and

(i) the debtor’s reasons for seeking a compromise.


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The request must be accompanied by the evidence supporting the debtor’s claims for not being able to make payment of the full amount of that tax debt.(3) The debtor must warrant that the information provided in the application is accurate and complete.(4) The Commissioner may require that the application be supplemented by such further information as may be required.

Consideration of request to compromise tax debt11. (1) In considering a request for a compromise, the Commissioner must have regard to the extent that the compromise may result in –

(a) savings in the costs of collection;(b) collection at an earlier date than would otherwise be the case without the

compromise;(c) collection of a greater sum than would otherwise have been recovered; and(d) the abandonment by the debtor of some claim or right, that has a monetary value,

arising under any Act administered by the Commissioner, including any right to carry forward any assessed loss or assessed capital loss.

(2) In determining the position without the compromise, the Commissioner must have regard to –

(a) the value of the debtor’s present assets;(b) future prospects of the debtor, including any arrangements which have been

implemented or are proposed which may have the effect of diverting income or assets that may otherwise accrue to or be acquired by the debtor or any connected person in relation to the debtor;

(c) past transactions of the debtor; and(d) the position of any connected person in relation to the debtor.

Circumstances where not appropriate to compromise tax debt12. Notwithstanding paragraph 9, the Commissioner may not compromise any amount of tax debt if –

(a) the amount payable by the debtor in terms of the agreement to compromise will be less than the market value of the total assets of the debtor, which can be applied to reduce the tax debt, after deducting the liabilities of that debtor other than the tax debt;

(b) the compromise will prejudice other creditors (unless the affected creditors consent to the compromise) or where other creditors will be placed in a position of advantage relative to the Commissioner;

(c) any other creditor has communicated its intention to initiate or has initiated liquidation or sequestration proceedings;

(d) the tax affairs of the debtor (other than the outstanding tax debt) are not up to date;

(e) the only reason to support the request to compromise is the debtor’s claim of hardship in paying the tax debt, including the need to sell a home or business;

(f) the purpose of the decision to compromise is –

i. to assist a debtor who has become overcommitted;


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ii. to save a business from failure or closure, regardless of whether or not a large number of people depend on the business for employment or the activities of the business serve a national interest;

iii. to alleviate harsh or unfair operation of a tax law in particular circumstances; or

iv. to further a charitable objective or to create a benevolent public image for the Commissioner;

(g) there will be no benefit for the Commissioner in the compromise other than collecting an amount equal to the return that would flow from the sequestration or liquidation of the debtor;

(h) it may adversely affect broader taxpayer compliance;(i) the debtor within the period of five years immediately before the request for the

compromise was –

i. a party to an earlier agreement with the Commissioner to compromise an amount of tax debt;

ii. sequestrated or liquidated; oriii. a party to a compromise or arrangement with the debtor’s creditors, as

contemplated in section 31 1 of the Companies Act, which was sanctioned by the Court;

(j) the debtor is a company or a trust and any director, trustee or person acting in the management of the debtor –

i. has been involved in fraud or tax evasion; or ii. has a past history of being involved in failed companies or trusts; and the

Commissioner has not first explored action against or recovery from the personal assets of those directors, trustees or persons.

Procedure for compromise of tax debt13. (1) If the Commissioner compromises a tax debt, the Commissioner anddebtor must sign an agreement setting out –

(a) the amount payable by the debtor in full satisfaction of the debt;(b) the undertaking by the Commissioner not to pursue recovery of the balance of the

tax debt; and(c) all other conditions subject to which the tax debt is compromised by the

Commissioner, which may include a requirement that the debtor must comply with subsequent obligations imposed in terms of any Act administered by the Commissioner.

Commissioner not bound by compromiseThe Commissioner will not be bound by the compromise if –

(a) the debtor failed to make full disclosure of all material facts to which the compromise relates;

(b) the debtor supplied any materially incorrect information to which the compromise relates;

(c) the debtor fails to comply with any provision or condition contained in the agreement contemplated in paragraph 13; or


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(d) the debtor is liquidated or his or her estate is sequestrated before that debtor has fully complied with all conditions contained in the agreement as contemplated in paragraph 13.

Part 6

Records and reporting

Records of tax debts written off or compromised15.(1) The Commissioner must maintain a register of all tax debts written off or compromised in terms of these regulations.(2) The register contemplated in subparagraph (1) must contain –

(a) the details of the debtor, including name, address and tax reference numbers;(b) the amount of the tax debt written off or compromised and the periods to which the

tax debts relate; and(c) the reason for writing off or compromising the tax debt.

Reporting by Commissioner of tax debts written-off or compromised16.(1) The amount of tax debts written off or compromised during any financial year must be disclosed in the annual financial statements of the South African Revenue Service relating to administered revenue for that year.(2) The Commissioner must on an annual basis provide to the Auditor- General and to the Minister of Finance a summary of all tax debts which were written off or compromised in whole or in part during the period covered by that summary, which must –

(a) be in such format which, subject to section 4(l)(b) of the Income Tax Act, 1962, does not disclose the identity of the debtor concerned;

(b) be submitted at such time as may be agreed between the Commissioner and the Auditor-General or Minister of Finance, as the case may be; and

(c) contain details of the number of tax debts written off or compromised, the amount of revenue forgone and the estimated amount of savings in costs of recovery, which must be reflected in respect of main classes of taxpayers or sections of the public.

Exercise of power to write off or compromise tax debt17. The power to write off or compromise any amount of tax debt in terms of these regulations may be exercised by the Commissioner personally or by any official delegated by the Commissioner for that purpose.

No relationship between debtor and Commissioner or delegated official18. The Commissioner or relevant delegated official may not exercise any power to write off or compromise any tax debt, if he or she has, or at any stage had a personal, family, social, business, professional, employment or financial relationship with the debtor concerned.


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Monetary limits in the Draft Taxation Laws Amendment Bill, 2008


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