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https://www.accountancysa.org.za Home Fri, 05 Mar 2021 10:30:51 +0000 en-US hourly 1 https://wordpress.org/?v=7.1.2 Integritax: Budget Special Feature https://www.accountancysa.org.za/integritax-budget-special-feature/ Fri, 05 Mar 2021 10:20:39 +0000 https://www.accountancysa.org.za/?p=21071

WHAT BUDGET 2021 HAS IN STORE FOR ‘THE WEALTHY’

Author | Patricia Williams, tax partner at Bowmans and SAICA Tax Administration Act committee member

Finance Minister Tito Mboweni delivered his 2021 Budget Speech on Wednesday 24 February 2021. While the news for taxpayers was generally good, with more than inflationary adjustment to personal income tax rates and a 1% reduction in corporate income tax for tax years starting on or after 1 April 2022, there were some indications that life could soon become more difficult for ‘the wealthy’

Restricting tax deductions

According to the budget documentation, the progressivity of our tax system ‘will be enhanced by restricting deductions for the wealthy’. It is unclear which tax deductions are considered to be ‘for the wealthy’.

One tax deduction that has already been capped for higher income taxpayers is retirement contributions. An amendment from 1 March 2016 introduced a ‘cap’ on tax deductions for retirement fund contributions of R350 000. Given that the tax deduction was based on 27,5% of relevant income, this potentially impacted taxpayers earning over R1,27 million per year.

Differentiating between taxpayers does not automatically comprise discrimination, and unlawful discrimination in particular. This is not to say that it may not feel that way to persons who are the recipients of the differentiation. The ‘wealthy’ are certainly being specifically identified for higher effective taxation.

Audits

SARS is in the process of establishing a dedicated unit to focus on ‘individuals with wealth and complex financial arrangements’. According to Minister Mboweni, the ‘first group’ of taxpayers have been identified and will receive communication during April 2021.

If this ‘first group’ were politicians and politically connected persons, in respect of whom there have been numerous public calls for ‘lifestyle audits’, this announcement may be very well received within the market. Absent this, it will simply cause frustration.

There is general consensus that improving the audit capacity at SARS would be a positive development. The issue is that SARS’ tendency to audit ‘easy targets’ and argue about ‘timing differences’ (seeking to shift a tax deduction into a subsequent year) is very frustrating when taxpayers feel that SARS should be ‘catching the criminals’.

Tax evaders are the ones who SARS should be dedicating the most effort to catching. There is indeed place for SARS to audit taxpayers who have filed their returns properly, with all relevant supporting documentation, and where a potential tax dispute relates to legal interpretation of complex tax provisions; but these taxpayers should be treated with respect and not feel that they are being unfairly targeted for their wealth, higher income, or because they are perceived to be ‘soft targets’. And all taxpayers should know that SARS is spending significant time and effort in curbing tax evasion.

Wealth tax is being considered

SARS is going to use third-party information to consolidate ‘wealth data’ for taxpayers. This will be used to assess the feasibility of a wealth tax (as well as for audit purposes, as discussed above). In the circumstances, if taxpayers were celebrating the absence of heavier taxes on ‘the wealthy’, this celebration may be short-lived.

Conclusion

Given the very small pool of higher income taxpayers, the sizeable contribution that these taxpayers make to the tax collections for the whole country, and the economic mobility of many of these taxpayers, it may be beneficial to carefully consider the message that Budget 2021 is sending to this group. Many of us who fall within this group would feel comforted, if reassured, that the intention is to focus on people who have failed to properly file their returns and pay their taxes, or those with asset levels that are inconsistent with their declared earnings.

SARS RECEIVES A FINANCIAL INJECTION

Author | Marelize Loftie-Eaton is the chairperson of the SAICA Tax Administration Act and Tax Technology Committees

In the 2021 Budget Speech, the Minister of Finance allocated an additional R3billion to the South African Revenue Service (SARS) to improve technology, data and machine learning capability and upskill SARS officials to improve the efficiency and effectiveness of SARS

In the last two years, SARS re-established an Illicit Economy Unit that investigates complex illicit fund flow crimes and other corruption cases, including, but not limited to state capture, the illicit tobacco industry, PPE tender fraud and fraud in relation to COVID-19 grants. This unit − which joined forces with the Hawks, the Financial Intelligence Centre (FIC), the National Prosecuting Authority (NPA) and the South African Reserve Bank (SARB) to ensure that there is full disclosure of all information obtained by the different regulators and agencies − has raised considerable assessments and obtained many preservation orders. This collaborative approach will de-risk the criminal networks and have the desired outcome for all these organisations and for the wider taxpayer base in South Africa. In the past, these regulators and agencies worked in silos to meet their own objectives. The current objective is to stop corruption in the public and private sector to ensure a stronger economy and repay the massive state debt. With the success and effectiveness of this unit, I will be surprised if SARS does not add specialised resources to curb the illicit flows and corruption.

It is a step in the right direction that SARS will establish another specialised audit unit that will deal with investigations into the tax affairs of high-net-worth individuals that sail close to the wind with highly complex financial structures to reduce their tax liabilities. SARS has already identified a batch of taxpayers that will receive communications as early as April 2021 and, as suggested by Judge Dennis Davis, these communications will most probably lead to in-depth lifestyle audits. SARS will in all likelihood reap even greater financial benefits if it stops harassing elderly taxpayers with providing proof of medical aid slips, querying the format of a travel logbook, or similar Micky Mouse audits that are time consuming and add pennies to the coffers. It is time that SARS focuses on the big guns and industries where there is a high level of white-collar crime and not on tax-compliant companies and individuals that are audited to death despite getting clean audits every year.

The Minister indicated that SARS would expand specialised audit and investigation skills. This can be interpreted that they will employ more skilled auditors; however, it can mean that SARS will train existing staff. Training is one area that has been neglected for years. It is clear from some assessments and the reasons for disallowing an objection that the assessor or auditor has not considered all the facts, has limited knowledge of the legislation, or uses a sense of humour argument to raise an unfounded liability against a taxpayer that has no means to follow the dispute resolution processes.

The focus on the abuse of transfer pricing, tax base erosion and tax crime will be intensified, and this will come at an increased cost. With the international sharing of information under the Common Reporting Standards of the OECD and Country-by-Country reporting, SARS is in an excellent position to identify the taxpayers that under-declare income or erode the tax base.

All of the reasons the Minister provided to justify the R3 billion boost will yield positive results for SARS and the economy of South Africa; however, it is imperative that SARS improve its debt collection processes and upskill collectors as the increase in assessments raised can also result in more tax debts when taxpayers revolt against paying taxes. It is therefore important that SARS improve the integrity of its data and follow due processes when it collects outstanding debt. In the last couple of months, SARS lost numerous cases where due process was not followed in the collection process. Debt is a constant in any business therefore it is vital to have a robust debt collection process and follow all legal steps to recover amounts owing.

Tax compliance and the payment of taxes is still the responsibility of each taxpayer in South Africa and compliance will increase if there is an improvement in the quality of assessments raised, clarity is provided, and the SARS system constraints are resolved. With improved technology and skilled resources, SARS can become the excellent revenue authority it was, and the R3 billion will assist the organisation to meet its goals.

2021 BUDGET ABOUT BEPS AND TRANSFER PRICING

Author | Christian Wiesener, Associate Director at KPMG and chairperson of the SAICA Transfer Pricing Sub-committee

Base erosion and profit shifting (BEPS), which is often mentioned in the context of transfer pricing, concerns the shifting of profits from one entity within a multinational group to another through strategic tax planning, from a higher tax jurisdiction to a lower one. Specifically in Africa and South Africa, this is said to have a very negative impact on tax collections and BEPS.

Finance Minister Tito Mboweni delivered the 2021 Budget Speech on 24 February 2021 and the immediate feedback by representatives from opposition parties was that the budget contains too little action. However, it was expected that South Africa would face the biggest budget deficit recorded in history, and faced by talk of a tax revolt and broad resentment against the cutting of the public wage bill, combined with the significant financial impact of the pandemic, the Minister was clearly in a position where treading very carefully was the only sensible thing to do. Thus it could be argued that taking little action was the appropriate thing to do. Besides, minor relief for individual taxpayers in terms of a move of the tax brackets has seemingly provided some positive flavour. Additionally, the announcement of a reduction of the corporate tax rate to 27% next year should take the pressure off and hopefully help attract business going forward.

An area in which the Minister did indicate some action is BEPS and transfer pricing. In 2016, the Organisation of Economic Co-operation and Development (OECD) finalised the (first) BEPS initiative, which targeted the abuse of existing international tax rules by creating rules that would not be to the detriment of international trade. The BEPS initiative resulted in 15 action points. The G20 Group of Finance Ministers, which had tasked the OECD with this project, adopted the BEPS Action Plan comprising 15 actions. South Africa, one of the members of the G20 Group, has implemented or is in the process of implementing the actions.

One of the BEPS Actions, Action 4, deals with rules to limit excessive interest deductions. While South Africa has had interest limitation rules, for example in terms of section 23m of the Income Tax Act 58 of 1962, as amended, the South African rules deviated from the recommendations in Action 4. At the time of last year’s budget presentation, however, National Treasury published a discussion document announcing the review of the tax treatment of excessive debt finance, interest deductions and other financial payments. The document discusses a move towards interest limitation rules aligned to BEPS Action 4 as well as a simplification of the existing rules, including an alignment with the existing transfer pricing rules.

Following broad public consultation processes, the Minister has now announced that with the lowering of the corporate income tax rate, the new set of interest limitation rules will be introduced. Thus, the new simplified and enhanced interest limitation rules will, together with the transfer pricing rules, aim at curbing BEPS in South Africa. If both rules are implemented as envisaged, this will have a significant impact on existing intragroup finance arrangements as well as future structures.

A further BEPS and transfer pricing-related announcement by the Minister relates to the taxation of the digital economy, for example companies providing digital services which sell, for example, services to users in South Africa. While Action 1 of the BEPS Action Plan already addresses digital services, it focuses on the indirect tax treatment of such services. South Africa was one of the first countries, and the first in Africa, to introduce VAT legislation addressing the provision of digital services.

However, Action 1 does not cover corporate income tax. The first BEPS initiative was soon followed by a second one, BEPS 2.0. The purpose is to develop rules that ensure that digital services providers are taxed, at the appropriate level, in the right jurisdictions. The proposed rules encompass two proposed target areas, also referred to as pillars:

Tax allocation rules in a changed economy, and
Four new rules granting jurisdictions additional taxing rights where other jurisdictions have not exercised their primary taxing rights or income is subject to low rates of tax

While the second BEPS initiative was expected to be finalised by the end of 2020, the COVID-19 pandemic has certainly contributed to the delay experienced. Also, significant disagreement between different role players and the inability to find some reasonable consensus have pushed out finalisation of the initiative. Although South Africa is one of only two African countries participating in the group and would be expected to aim for consensus, the Minister, in his Budget Speech, made it clear that should consensus not be reached soon, South Africa would implement unilateral rules. A unilateral approach may not be in the best interest of flourishing international trade relationships.

The two BEPS and transfer pricing-related actions addressed in the Minister’s Budget Speech tie in with the Commissioner for SARS’ consistent talk about SARS’ focus on countering transfer pricing and the recent increase in transfer pricing reviews and audits in South Africa. SARS’ focus on transfer pricing should be noted and taxpayers should expect further significant activity in this regard.

CORPORATE TAX RATE REDUCTION – NOT AS SWEET AS IT SOUNDS? (CPD 1 Hour)

Corporate tax rates around the world have been reducing in recent years. Consequently, the budget announcement that there will rate reduction in 2022 has been a long time coming, but it may not be as sweet as it sounds

In his Budget Speech on 24 February 2021, Minister Theo Mboweni announced that the corporate income tax rate will be lowered to 27%, with possible further rate decreases in future. The objective is to make the South African tax system more attractive. At first glance, this would appear to be wonderful news, but the Minister’s comment that ‘we will do this in a revenue-neutral manner’ ensures that the fiscus has no intention of giving up this 1% of corporate tax and that it will be recovered elsewhere.

The first point to note is that the proposed reduction will only be effective for corporate years of assessment commencing on or after 1 April 2022. That means that the benefit will only be seen for tax years ending March 2023 and beyond.

Then, scouring the Budget Review, it becomes clear that there are a number of methods that Treasury will use to ‘make up the difference’ of this proposed rate change and it is likely that we will see more in the 2022 Budget, in other words just before the reduced rate becomes effective.

It is also possible that the confidence to make such an announcement may have arisen from the increased collections seen from the mining sector (largely the mining royalties) over the December-January 2020/21 period, which clearly demonstrates that when the mining industry is working well, there is a significant amount of tax money to be collected.

Reference is made in the Budget Review to two large gas finds in Mossel Bay and the fact that a discussion paper will be issued by National Treasury together with the Department of Mineral Resources and Energy on possible tax reforms ‘to move towards a fairer and more certain fiscal and regulatory regime’. Such statements are in themselves concerning and likely to exacerbate the uncertainty that was highlighted by the Davis Tax Committee in its Oil and Gas Report in 2017. Resolution should have been reached before the finds, but better late than never.

Some of the changes to offset the tax rate reduction were set out clearly in the 2020 Budget Speech and Review, being the imposition of limitations to the use of brought-forward assessed losses, limitations to interest deductions, and the removal of various incentives. These proposals need unpacking.

In the 2020 Budget, it was announced that corporates would be limited to setting their assessed loss against only 80% of their taxable income, meaning that the remaining 20% would be taxed in full even if the company’s brought forward assessed loss exceeds the current year’s income. The effect of this would be that corporates which are profitable in the tax year are forced to make a contribution to the fiscus even though they may not have been profitable in the past. The remaining assessed loss would then be carried forward and, provided the company remains profitable, would be used up in future. This, in essence, would simply be to delay the use of the full assessed loss.

The proposal was innovative in that it created the opportunity for cash flow to the fiscus without being overly detrimental to the relevant company. It seems fair as some countries limit the period of carrying forward for assessed losses such that any balance which is, say, five years old is forfeited. Owing to the COVID-19 pandemic and its impact on companies, the proposal didn’t appear in the tax legislation promulgated in January, but it was clearly not off the table.

The Review acknowledges that many corporates will have suffered losses during the pandemic lockdowns. Thus, if the assessed loss proposal is implemented in the form contemplated also in, say, 2022, companies should not be unduly prejudiced by a limitation of this nature.

Cross-border interest limitation provisions are recommended by the Organisation for Economic Co-operation and Development (OECD) in a base erosion profit shifting (BEPS) context. Significant work has been performed, the outcome of which is provided in the OECD BEPS Action 4 Report. This was used as the basis for a discussion document on limiting interest in South Africa that was issued by SARS in February 2020.

Research has shown that, globally, an interest deduction of around 30% of earnings is a reasonable benchmark for corporates. It is this, together with comments given on the discussion document, that has presumably led to the proposal that this ratio will be applied to all corporates in South Africa but that the limitation will only be applied to connected party interest and not total interest. It would seem that interest paid to third parties is to be left out of the limitation as such interest cannot be manipulated by taxpayers and third parties will have ensured that the company is ‘good for the money’ − in other words, the interest rate won’t be excessive if charged by third parties.

Finally, the removal of incentives. Here one can see the influence of the Davis Tax Committee − this time in its Corporate Tax Report, which suggests consideration could be given to assessing and removing incentives that are not achieving their goals and rather applying a lower tax rate in order to incentivise business generally. Removing incentives to make room for lower tax rates has been a method adopted by a number of countries such as the UK.

In the 2020 Budget Review, National Treasury proposed a 28 February 2022 sunset date for tax incentives dealing with airport and port assets, rolling stock, and loans for residential units after reviewing each of them to determine whether they should be extended. This year that theme is continued and the proposal is made that the sunset date for the venture capital company incentive will not be extended beyond 30 June 2021 since it allegedly assists wealthy taxpayers to obtain a tax deduction rather than develops small businesses, generates economic activity and creates jobs, as intended. The incentive providing exemptions for films is considered to be equally ineffective. However, a short period, to 31 March 2021, is provided for submissions as to why they should be retained.

The promise is made that urban development zones and learnership tax incentives will also be evaluated but that they will be extended for two years while their reviews are completed.

Even though the initially sweet announcement that corporate tax rates are to be reduced is perhaps not quite as sweet as it may seem, it is considered that it is nevertheless a positive step (albeit initially small) in the right direction to bringing South African corporate taxes more in line with some of its peers.

SOUTH AFRICA FINALLY ON BOARD THE CORPORATE RATES REDUCTION TRAIN

Author | Mikatek Mtsetweni, Accounting member of the Tax Court and member of the SAICA Northern Region Tax Committee

For over a decade, the South African corporate tax rate has remained unchanged at 28%, even in the face of a global trend that saw many countries reduce corporate tax rates. Many commentators have long called for the corporate tax rate to be lowered to boost the country’s competitiveness and attract foreign investment, and for some time now, National Treasury has expressed intentions to restructure the corporate tax system and grow the tax base

The Minister of Finance has finally heeded the call to lower the corporate tax rate and announced in his 2021 Budget that it is proposed that corporate income tax rates will be lowered by 1% from years of assessment commencing from 1 April 2022. This is coming at a time when least expected, especially given the pressures on revenue collections and the massive government debt levels. The revenue shortfall is at a record high and with a debt crisis looming, the timing of the announcement of this rate reduction, although unexpected, may help generate much-needed business confidence.

Corporate income tax stands as the third-largest contributor to tax revenue collected by SARS and in 2019/2020 that translated into R215 billion in revenue collected. Estimates indicate it will remain the third-largest contributor for the year 2020/21 although at a much lower contribution of R159 billion. All else the same, a 1% reduction in the corporate tax rate could see total revenue collected reduce by about R6−8 billion, and therefore it is important that this decrease in the corporate tax rate generates the right taxpayer behaviour and encourage companies to invest and contribute towards resuscitating the South African economy and growing the tax base. This is important especially if we are to see further rate reductions in future.

As a good safety net to manage any potential negative impact on revenue collection, National Treasury will couple this rate reduction with the implementation of measures to limit interest deductions and assessed loss utilisation and a reduction in incentives that are seen as not delivering on their intended objective.

The impact of this rate decrease will only really be felt by most companies in 2023/24. Based on the report by SARS, 33% of companies have a December year-end and 23% have a February year-end − for these companies, the rate reduction will impact profits earned starting January 2023 and March 2023 respectively. Most companies may have preferred a more immediate application of the lower rate, but what will require assessment in the immediate future is the impact this change has on deferred tax balances as reported for accounting purposes in the financials as soon as this change is enacted.

]]> Integritax: The 2020 Trust Amendments (CPD 1 Hour) https://www.accountancysa.org.za/integritax-the-2020-trust-amendments-cpd-1-hour/ Fri, 05 Mar 2021 09:46:44 +0000 https://www.accountancysa.org.za/?p=21066

The Taxation Laws Amendment Act 23 of 2020 contains amendments to section 25B and paragraph 80 of the Eighth Schedule, which on the surface may appear inconsequential but do have important tax implications. These amendments came into operation on the date of promulgation, namely 20 January 2021

AMENDMENTS HAVING CGT CONSEQUENCES (SECTION 25B(1), PARAGRAPHS 80(2) AND (2A))

Section 25B

The heading of section 25B has been changed from ‘Income of trusts and beneficiaries’ to ‘Taxation of trusts and beneficiaries of trusts’. The new heading is more descriptive because section 25B does not deal exclusively with income but also with deductions.

Section 25B(1) has been amended by the insertion of the words ‘(other than an amount of a capital nature which is not included in gross income …)’.

The reason for excluding amounts of a capital nature is best explained with an example.

Example 1 – Attribution of capital gain and multiple discretionary trusts (paragraph 80(2))

Facts

Trust 1 disposes of an asset to a third party and realises a capital gain of R100, which it vests in Trust 2 in the same year of assessment. Trust 2 then on-distributes an amount equal to this capital gain to Jack and Jill in equal shares. All parties are residents.

Result

Under paragraph 80(2) the trust that disposed of the asset must disregard the capital gain and its beneficiary in whom the gain was vested must take it into account. No provision is made for attribution of the capital gain beyond the beneficiary of the trust that disposed of the asset.

The capital gain of R100 must therefore be brought to account by Trust 2 and not by Jack and Jill because they are not beneficiaries of Trust 1. The result is that Trust 2 will pay CGT of R36 on the capital gain (R100 × 80% inclusion rate) × 45% (flat rate of tax), while had Jack and Jill been taxed on their respective shares of the capital gain, they would have each paid a maximum of R9 (R50 × 40% inclusion rate) × 45% (maximum marginal rate).

Given that the tax burden under paragraph 80(2) is at least double what it would have been had Jack and Jill been taxed on the capital gain, tax planners have for years sought ways in which to get around paragraph 80.

One argument that has been advanced is that the capital gain can flow to Jack and Jill under section 25B.¹ Unlike paragraph 80, section 25B(1) allows income to flow through multiple trusts in the same year of assessment regardless of whether the trusts and their beneficiaries are residents.

The exclusion of amounts of a capital nature puts paid to the argument that proceeds from the disposal of a capital asset fall within section 25B(1) and can accrue to a resident or non-resident beneficiary by distribution through multiple discretionary trusts.

Paragraphs 80(2) and (2A)

Before dealing with the amendments to paragraph 80, it is necessary to distinguish between a capital gain and an amount that would have been a capital gain had a trust been a resident. Under paragraph 2(1)(a) the Eighth Schedule applies to any asset of a resident. By contrast, under paragraph 2(1)(b) non-residents are required to account for CGT only on

Immovable property situated in South Africa or any interest or right of whatever nature to or in such property including rights relating to mineral deposits, sources and other natural resources, or

Any asset effectively connected with a permanent establishment in South Africa

Also included under paragraph 2(1)(b) by virtue of paragraph 2(2) are equity shares in a company, interests in other entities, and vesting trusts holding rights and interests in immovable property in South Africa provided various requirements are met. Paragraph 2(2) was also amended to clarify that the various entities have to hold immovable property in South Africa and not just any immovable property. Simultaneously, the scope of paragraph 2(2) has been extended to include other rights and interests in such property.

After its amendment, paragraph 80(2) now deals with capital gains derived by resident or non-resident trusts. For resident trusts it deals with any asset and for non-resident trusts it deals only with the assets referred to in paragraph 2(1)(b). It has, with slight modification, been restored to its pre-2019 position. In other words, it will give the same result as described in example 1.

Its application to non-resident trusts is illustrated in this example:

Example 2 – Non-resident trust deriving capital gain from immovable property (old and new paragraph 80(2))

Facts

Non-resident discretionary Trust 1 has two beneficiaries, non-resident discretionary Trust 2 and John, a resident. Trust 1 sold an office building in Johannesburg and vested 50% of the resulting capital gain in Trust 2 and 50% in John.

Result

The portion of the capital gain vested in Trust 2 must be accounted for by Trust 1 because no attribution is possible to a non-resident under paragraph 80(2). Trust 1 must disregard the other half of the capital gain and John must account for it.

A new paragraph 80(2A) has been inserted to deal with a non-resident trust deriving an amount which would have constituted a capital gain had it been a resident. In other words, it will apply to any asset of a non-resident trust other than the assets dealt with in paragraph 80(2). It provides as follows:

(2A) (a)  Subject to paragraphs 64E, 68, 69 and 71, this subparagraph applies where −

(i)  a beneficiary who is a resident (other than any person contemplated in paragraph 62(a) to (e)) derives an amount through vesting during a year of assessment from a trust that is not a resident; and

(ii)  that amount was derived directly or indirectly from that trust or another trust which is not a resident in respect of the disposal of an asset during the same year of assessment and that amount would have constituted a capital gain had the trust that disposed of the asset been a resident.

(b)  Where item (a) applies, the amount derived by the beneficiary must be taken into account as a capital gain for the purpose of calculating that beneficiary’s aggregate capital gain or aggregate capital loss for that year of assessment.

Unlike paragraph 80(2), which allows attribution only once to the beneficiary of the discretionary trust that disposed of the asset, paragraph 80(2A) applies the conduit principle in a manner similar to section 25B(1). As a result, an amount that would have been a capital gain had a non-resident trust been a resident can flow through multiple non-resident trusts before reaching a resident beneficiary.

Example 3 – Capital gain flowing through multiple non-resident discretionary trusts in the same year of assessment (paragraph 80(2A))

Facts

On 1 March 2021, non-resident discretionary Trust 1 disposed of listed shares to a third party and realised a capital gain which it immediately vested in non-resident discretionary Trust 2 which immediately vested the same amount in Jane, a resident.

Result

The gain realised by Trust 1 on disposal of the listed shares would have constituted a capital gain had Trust 1 been a resident. The same amount was derived indirectly by Jane from the capital gain realised by Trust 1 and must accordingly be accounted for as a capital gain by her in the 2022 year of assessment.

As with the old paragraph 80(2), neither the new paragraph 80(2) nor (2A) permits the attribution of capital losses. An amount that would have been a capital loss had a trust been a resident falls outside the Eighth Schedule under paragraph 2(1)(b).

Amendments affecting terminating trusts holding rights to living annuities

This refers to section 25B(1), paragraph (eA) of the definition of ‘living annuity’ in section 1, paragraph 3A of the Second Schedule.

Section 25B(1) has been amended by the insertion of the words ‘(other than … an amount contemplated in paragraph 3B of the Second Schedule)’.

Paragraph 3B has been added to the Second Schedule. The definition of ‘living annuity’ in section 1(1) has been amended by the insertion of a new paragraph (eA). The amendments to section 25B(1) and the insertion of paragraph 3B come into operation on 20 January 2021. Inconsistently, however, the insertion of paragraph (eA) comes into operation on 1 March 2021.

By way of background: an annuitant can nominate a trust as a beneficiary and upon his or her death, the trust will acquire a right to the living annuity. Paragraph (eA) of the definition of ‘living annuity’ provides that in anticipation of the termination of a trust, the value of the assets which funded the annuity must be paid to the trust as a lump sum pursuant to that termination. Paragraph 3B of the Second Schedule then provides that such a lump sum benefit is deemed to have accrued to that trust immediately prior to the date of its termination. The effect of excluding such a lump sum benefit from attribution to beneficiaries under section 25B(1) is to make it taxable in the trust at the rate according to the tax table applicable to retirement fund lump sum benefits.

NOTE

1  SARS addresses this argument in its Comprehensive Guide to Capital Gains Tax (Issue 9) in 14.11.1 (‘Non-applicability of s 25B to capital gains and losses’).

]]> Integritax: Capital Gains Groups of Companies Part 2 (CPD 1 Hour) https://www.accountancysa.org.za/integritax-capital-gains-groups-of-companies-part-2-cpd-1-hour/ Fri, 05 Mar 2021 09:13:19 +0000 https://www.accountancysa.org.za/?p=21049

3d render business concept capital gains tax crossword cubes

This article is the second and final in this series examining the various reliefs and implications which can arise within capital gains groups of companies. Part 1 set out the definition of a capital gains group and how to determine which companies are part of such groups together with some of the potential reliefs available. The rules herein are correct at the time of writing and do not take into account any legislative changes which may be implemented as a result of the end of the EU transition period on 31 December 2020

Pre-entry capital losses

In the past, a company that anticipated a future gain on the disposal of a chargeable asset would seek to acquire another company with capital losses forward often for the benefit of that company’s unused capital losses. The chargeable asset with the latent gain would be transferred before disposal into the newly acquired company with the capital loss carried forward so that this could be used to shelter the future gain.

UK legislation contains anti-avoidance provisions targeted at this type of behaviour by restricting how pre-entry capital losses can be used. The term ‘pre-entry capital loss’ refers to any capital losses which accrue to a company on actual disposals of chargeable assets before they become part of a new capital gains group. There is no restriction on post-entry capital losses.

This rule means that pre-entry capital losses cannot be used subsequently by a capital gains group that had no previous commercial connection with the company when those capital losses originally accrued. However, the company with the capital loss is able to use those losses itself in the same way that it could have had it never entered the group.

Pre-entry capital losses that accrued to the company before it joined the capital gains group can therefore be set against:

Gains on assets disposed of after entry to the capital gains group but which were held by the company before entry

A gain arising on the disposal of an asset acquired from a non-group member which has been used for the purpose of the company’s trade, or

Gains on assets disposed of before joining the group

Rollover relief

Provided certain conditions are fulfilled, a company may claim that a chargeable gain (after indexation allowance, if any) arising on the disposal of a business asset (the ‘old asset’) may be ‘rolled over’ against the cost of acquiring a replacement business asset (the ‘new asset’).

In this scenario, the disposal of the ‘old asset’ is deemed to give rise to neither a gain nor a loss for tax purposes. The cost of the ‘new asset’ is reduced by the gain which would have arisen but for the rollover relief claimed. The gain on the disposal of the ‘old asset’ is therefore deferred until such time as the ‘new asset’ is disposed of (subject to the possibility of a further rollover relief claim being available).

Full rollover relief is available provided all of the disposal proceeds (not just the chargeable gain) from the ‘old asset’ are reinvested by the company in acquiring the “new asset”. Any proceeds not reinvested (that is the excess cash) fall to be taxed immediately as a gain (provided the amount retained is less than the gain itself). Once again, the cost of the ‘new asset’ is reduced by the amount of the gain that was not immediately chargeable due to partial rollover relief.

The conditions to be satisfied in order for a company to make a rollover relief claim are:

Both the ‘old’ and ‘new’ assets must be within one of the qualifying classes of assets but do not need to fall within the same category (see below).

The ‘old’ asset must have been used for trade purposes throughout the period of ownership and the ‘new’ asset must be used for trade purposes (mixed use is acceptable), and

The ‘new’ asset must be acquired during the period beginning one year before and ending three years after the date of disposal of the ‘old’ asset

The classes of assets which qualify for rollover relief include

Land, buildings and fixed plant and machinery

Ships, aircraft and hovercraft, and

Satellites, space stations and spacecraft

However, for companies, neither goodwill nor quotas are qualifying as these assets are within the intangible assets regime (which will feature in the April 2021 issue).

Holdover relief

Where the ‘new’ asset is a depreciating asset (an asset with an expected life of 60 years or less at the time of its acquisition), the chargeable gain arising on the disposal of the ‘old asset’ cannot be rolled over and is not deducted from the cost of the ‘new asset’. Instead, the chargeable gain is ‘held over’ or temporarily deferred.

It becomes chargeable to tax (crystallises) on the earliest of the following three dates:

The date on which the ‘new asset’ is disposed of

The date on which the ‘new asset’ ceases to be used in the trade, or

The 10th anniversary of the acquisition of the ‘new asset’

The most common types of depreciating assets are fixed plant and machinery, and leases where the lease term is 60 years or less.

It should be noted that if a company were to purchase a non-depreciating asset (within the relevant class) prior to the expiration of the earliest of the above three dates, then the ‘held-over’ gain can be converted into a ‘rolled-over’ gain by making a claim for rollover relief.

Rollover and holdover relief within capital gains groups

Rollover relief is also available within a capital gains group. If a group member disposes of an asset which is eligible for rollover relief or holdover relief, then it is possible to treat all the capital gains group members as a single entity for claiming relief, providing that all the remaining conditions are met.

Thus, if another capital gains group member acquires a relevant asset within the qualifying period then the company making the disposal may match this with the acquisition by that other company for rollover/holdover relief purposes. Both the acquiring and disposing company must make the claim.

It should be noted that assets transferred intragroup on a no gain/no loss basis under Section 171 TCGA 1992 (see Part 1 of this series) cannot be matched for group rollover/holdover relief purposes.

Chargeable asset disposed outside the group

If there is a disposal of an asset by a member of a capital gains group to a third party outside the group, and that asset had been acquired from another capital gains group member, then the period of ownership when calculating indexation allowance is arrived at by reference to the length of time the asset was owned by the group as a whole (but up to 31 December 2017 only).

Anti-avoidance and leaving the capital gains group

Where a company ceases to be a member of a capital gains group of companies within six years of an intragroup transfer under Section 171 TCGA 1992, and at that time still owns that asset, a capital gain or loss may arise known as a degrouping charge. Where a gain arises, rollover relief cannot be claimed on such degrouping charges. The base cost of the future disposal of the asset in question by the company leaving the group is the market value attributed to the earlier transfer used when calculating the degrouping charge.

The degrouping chargeable gain or capital loss is calculated by deeming that the asset was sold and immediately reacquired by the company leaving the group at its market value at the time of its original acquisition from the other member of the group − that is, the gain (or loss) arising on the original transfer between the group members is triggered, after deducting indexation up to the time of its intragroup transfer.

Although the degrouping charge is calculated as at the date of the original intragroup transfer, it is not charged on the company leaving the group, but on the company selling the shares in the accounting period in which the company leaves the group.

Where a company leaves a group as a result of a disposal of shares by a fellow capital gains group company, any degrouping charge which arises is treated as an adjustment to the consideration taken into account for calculating the gain/loss on the share disposal, that is, as additional proceeds. A consequence of this is that any exemption or relief which may apply to the share disposal, such as the substantial shareholdings exemption (SSE), will also apply to the degrouping charge.

No degrouping charge is made in respect of an asset that has been transferred between two companies belonging to the same sub-group, if those companies leave the capital gains group together.

Section 171A TCGA 1992 (election to re-allocate gain or loss to another member of the capital gains group) can however be used to remove any degrouping gain or loss which arises, if this has not been exempted by the SSE.

]]> Integritax: SARS Update https://www.accountancysa.org.za/integritax-sars-update/ Fri, 05 Mar 2021 09:00:48 +0000 https://www.accountancysa.org.za/?p=21038

We highlight below some of SARS’ operational and tax administration matters that have been addressed recently

Author | Somaya Khaki, Project Director: Tax (Member Services)

SARS’ use of Adobe Flash

As noted in the February issue of ASA, following the discontinuation of Adobe Flash Player and the subsequent challenges that taxpayers experienced, SARS released its browser as a temporary solution to allow taxpayers to complete and submit the Flash-based forms that have not yet been migrated to HTML5 format.

SARS confirmed on 12 February that a version for Mac users will be made available soon.

SARS also communicated to SAICA that the newly introduced browser is approved software that is being implemented in partnership with Adobe’s service provider partners. SARS reiterated that the security of users’ eFiling experience is paramount to SARS and therefore the SARS browser has been limited to allow access to the SARS websites only − general browsing is not permitted. To enhance security, SARS has suggested that existing security software or antivirus programmes be kept updated by users.

It is important to note that the SARS browser is not a requirement for all forms and activity on eFiling. eFilers will still be able to complete their other interactions with SARS regarding forms and processes that are unrelated to Adobe Flash Player with their browser of choice or via the Mobi-App.

Interim browser

The forms listed below require users to download the interim browser:

Form code	Title
RAV01	Registration, Amendments and Verification Form
TDC01	Transfer Duty
IT3-01	Financial Certificate Information
IT3-02	Financial Declaration
DTR01	Dividends Tax Transactions Information
WTI	Withholding Tax on Interest

Delays in finalisation of verifications

Members are experiencing delays with respect to finalisation of SARS verifications. At a recent regional SARS meeting, SARS acknowledged that there is a backlog nationally, specifically with respect to personal income tax verifications. To address this backlog, SARS has allocated additional capacity on a national level.

SARS further acknowledged that it was unable to maintain the turnaround times in terms of the service charter until the backlog had been cleared. Following the intervention by SARS head office, we were advised that there has been a significant improvement in finalisation of verifications related to individual taxpayers. Within the last two weeks alone the backlog has been reduced by almost 50% and SARS will aim to ensure that the backlog is cleared and related refunds paid by the end of the financial year, where these are finalised timeously.

This matter and other SARS operational matters have been noted in the feedback summary which may address issues that you are experiencing in relation to your clients.

SARS’ non-compliance with sections 42 and 96 of the TAA

On 9 November 2020, SAICA made a submission to SARS to address SARS’ non-compliance with sections 42 and 96 of the Tax Administration Act 2011 (the TAA), as well as the lack of a legislated/defined process for ‘verifications’. The concerns raised were in respect of non-compliance with the TAA read with the Promotion of Administrative Justice Act (PAJA). We encourage members to read the full submission.

The practical aspects of the non-compliance have been addressed with SARS via SARS/RCB national stakeholder meetings over the last few years and the requirement for a legislated verification process has been addressed as part of Annexure C submissions to National Treasury. Following the submission, SARS initiated a meeting on 6 February to better understand the issue and to provide insights regarding the concerns raised.

Section 42 relates to SARS’ obligation to issue letters of findings on completion of audits allowing taxpayers an opportunity to respond to such findings before an additional assessment is issued. Section 96 deals with SARS’ obligation to issue a notice of assessment − such assessment complying with specific requirements. In other words, in the case of an estimated assessment or ‘an assessment that is not fully based on a return submitted by the taxpayer’ SARS must give the taxpayer ‘a statement of the grounds for the assessment’.

The submission and discussions revolved around the fact that members have experienced cases where SARS has not complied with one or both of the above provisions. Further to this, SARS’ distinction between a ‘formal audit’ and a ‘verification’ was discussed with the need for a process to be defined for verifications to ensure consistency in approach and timelines to finalise.

For more details, members are referred to the feedback summary.

SAICA Member Portal

Should you require assistance with a specific SARS operational matter, please log your query on the SAICA Member Portal under the SARS Operational category. Ensure that you have first used one of the SARS escalation channels and allowed SARS 21 days to resolve the issue prior to logging the query on the system. A SARS case reference number must be disclosed in the description of the issue.

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]]> Integritax: November 2019 https://www.accountancysa.org.za/integritax-november-2019/ Mon, 11 Nov 2019 10:58:11 +0000 https://www.accountancysa.org.za/?p=16289

READ NOW

]]> Special Report: Budget 2019 https://www.accountancysa.org.za/special-report-budget-2019/ Mon, 04 Mar 2019 08:58:17 +0000 https://www.accountancysa.org.za/?p=13483

To avoid the risks and negative consequences of ethical gaps, there needs to be an alignment between what is said and done within the organisation. Saying and doing need to be focused on what’s right for the business, its people and its stakeholders

Read the full report here

]]> Integritax: Tax administration = sleepless nights? − Part 1 https://www.accountancysa.org.za/integritax-tax-administration-sleepless-nights-%e2%88%92-part-1/ Mon, 02 Jul 2018 22:24:55 +0000 https://www.accountancysa.org.za/?p=11960

Ask many an accountant, be it a tax practitioner or a member in business, and they will tell you that tax administration and tax operational issues feature highly on the list of issues keeping them awake at night, more so than the tax technical issues these days.

Some concerns hinge around whether the Tax Administration Act 2011 (TAA), effective since 1 October 2012, has actually created further prejudice rather than fairness to the taxpayer. Issues regarding fairness are dealt with by way of proposing legislative amendments where the view is that certain provisions lean more on the side of prejudice to the taxpayer rather than fairness to all parties.

Read the full article here.

]]> Integritax: The ping pong residency conundrum https://www.accountancysa.org.za/integritax-the-ping-pong-residency-conundrum/ Mon, 02 Jul 2018 22:09:26 +0000 https://www.accountancysa.org.za/?p=11953

Employers sending South African employees on extended foreign secondments face various practical challenges and tax residency is one of them.

The year 2017 saw National Treasury relooking the foreign remuneration exemption in section 10(1)(o)(ii) of the Income Tax Act 58 of 1962 (ITA) for the first time since the year 2000 when South Africa migrated to a residency-based tax system. It, however, became quickly evident that historical challenges and practices raised as much concern as the future proposals. National Treasury and SARS have purposefully postponed the effective date of the new legislative proposals to 2020 so that they can address practical challenges identified in this period. However, as was evident in the parliamentary debate on the matter, it was not merely the exemption itself that was controversial, but even more so the consequences and procedures for residents becoming non-resident in terms of double taxation agreements (DTA) or otherwise and the challenges posed by the non-alignment with exchange control residency.

Read the full article here.

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