2013/14 Budget what it offers small businesses
SAICA’s proposals are well-received by SARS, which promises benefits for small businesses.
The budget process for 2013 commenced late in 2012 when a call was made to interested parties to send in proposals for changes to the Tax Acts. As in previous years, SAICA got actively involved and we presented our proposals to National Treasury in November and December 2012. We are pleased that a number of these proposals received mention in the 2013/2014 budget.
The 2013/2014 budget held some good tax news for businesses. The proposals made by the Minister in this regard include amendments to both the Income Tax and Value-Added Tax Act (VAT Act). Some of these proposals are covered in this article.
Relief for small businesses
The Income Tax Act defines a small business corporation as a company (or close corporation) that meets certain requirements. Qualifying small business corporations can access certain tax benefits, such as accelerated depreciation of assets and a lower rate of tax. At this time one requirement is that the company’s gross income must be less than R14 million. This amount has not been adjusted since 2007 and it is welcomed that the Minister proposed an increase to R20 million.
The Minister also announced that, with effect for years of assessment ending on or after 1 April 2013, the tax-free threshold for small business corporations will increase from R63 556 to R67 111, and its taxable income up to R365 000 will be taxed at 7%. A new
tax bracket of taxable income up to R550 000 will be introduced with the applicable rate being 21%. The normal corporate rate of tax of 28% will then only apply to a taxable income above R550 000.
Fixed property and low cost housing: Relief for low cost employer-provided housing
Some businesses provide their employees with subsidised rental accommodation or home loans. There are also instances where employers build houses for their employees, initially on a rental basis, with the understanding that the house will become the property of the employee over time. Where an employer transfers a house to an employee at a price below market value, a taxable fringe benefit is triggered, which often is unaffordable for low-income employees. To contribute to a more stable workforce and adequate housing, government proposes to provide fringe-benefit tax relief for lower-income earners in such cases.
Incentives for the construction of affordable housing
A tax incentive is under consideration for developers (and employers) to build new housing stock (at least five units in compliance with prescribed standards) for sale below R300 000 per dwelling. This incentive would address challenges faced by households in the ‘gap market’. An exclusion of R60 000 per qualifying house sold is proposed.
Closure of unintended claims for the research and development incentive
The research and development incentive was recently adjusted, but according to the Minister, information has come to light that it is still being misused. This incentive aims to facilitate South Africa’s establishment as an innovation hub by global standards and is not intended to assist in routine upgrades or standard adjustments to match global competition. The criteria for eligibility will be adjusted
to ensure that the incentive is available only as the policy intends.
Employer-provided bursaries to relatives
SAICA made a submission last year to request Treasury to review the rules covering the exemption of fringe benefits when bursaries are given to relatives of employees. Government proposed in the budget to increase the relevant monetary thresholds. The proposal is that differential monetary thresholds for bursaries for students attending tertiary institutions (R30 000 exemption) and for learners at schools (a R10 000 exemption) will be introduced. This tax benefit enables businesses to more actively assist their employees to offer education that may otherwise be unaffordable.
This year the budget includes a number of proposals for amendments to the Value-Added Tax Act 1991 (the VAT Act). Some of these proposals are the following:
Apportionment – non-financial sectors
Where an enterprise makes both taxable and nontaxable (such as exempt supplies) transactions, it must apportion the input tax on dual expenses and may only deduct the portion that relates to taxable supplies. The default apportionment method, which is based on turnover, is inequitable at times because there may not be a direct correlation between expenditure incurred versus turnover generated. SAICA made a stand-alone submission with regard to the current problems experienced by vendors in this regard. It is therefore welcome to see the proposal that the default application of this method be re-evaluated. The proposals referred to above were mentioned under ‘research projects’ in the budget speech. One hopes that this is not an indication that no amendments will be made in this year.
The VAT Act contains a provision that forces a vendor to add back input tax deducted on supplies received by a vendor, if the vendor has not discharged the debt for that supply within a period of 12 months. This clawback is often onerous when debts are relieved to help the debtor avoid potential or actual insolvency. SAICA raised this issue in its submission last year and we are pleased that the Minister said that debt relief to assist distressed debtors (such as business rescue), will be under consideration.
Future supplies of services
A special time-of-supply rule exists for goods supplied under an agreement (excluding rental or installment credit agreements). When the recipient takes possession of those goods and consideration for that supply cannot be determined upfront, the supply is deferred until the earlier of the dates when payments are due or received, or when an invoice is issued. A similar rule for services will be added when the consideration for that service cannot be determined upfront due to a contingent future event (for example,
share price and exchange rate).
The supply of services by a body corporate or a share block company to its members in the course of managing the entity is generally exempt from VAT. However, home-owner associations lack a similar exemption (due to previous differences in how
municipalities billed sectional title bodies corporate versus home-owner associations). The Minister proposed that this unequal treatment be removed.
This would mean that home-owners will then also be making exempt supplies when they supply services to any of their members in the course of the management of the home-owners association. They would then not have to register as vendors even when the value of their supplies exceeds R1 million in a year.
Imported goods – damaged or destroyed
VAT is levied (at the rate of 14%) when goods are imported into South Africa for home consumption. In terms of the Customs and Excise Act, imported goods that are destroyed, damaged or abandoned are considered to have been entered for home consumption, but a rebate of the customs duty then becomes applicable. The VAT Act does not have a similar relief mechanism for goods damaged, destroyed or abandoned, which means that when those goods are entered for home consumption, the importer will have to pay VAT. The proposal is to provide comparable VAT relief for goods that are destroyed, damaged or abandoned.
Streamlining registration and filing for businesses
SAICA has for a number of years pointed out that the current process to register as a VAT vendor is cumbersome, lengthy and problematic and therefore requested that this process be streamlined. The Minister mentioned that a single registration process for multiple tax products will be launched by SARS to simplify registration for all businesses. VAT registration will be streamlined to ease the compliance burden, while guarding against fraud. A new company income tax form will be introduced that requires fewer fields to be completed by smaller businesses. This proposal is most welcome as new businesses wanting to register for VAT are struggling with complex SARS requirements and delayed registrations.
Tax invoices issued in foreign currency
Under current law, a valid tax invoice must be stated in Rand. However, the VAT Act does not prescribe how to deal with a scenario in which the transaction is conducted in foreign currency. It was proposed that this will be addressed by converting foreign currency invoices to Rand at the spot rate agreed upon by the parties. In the absence of an agreement, the spot rate on the date of supply will be used.
Temporary letting of residential fixed property
Last year section 18B became effective and provided some relief from the deemed supply rule where residential property was temporarily let. Developers that want to make use of the temporary relief provisions are required to furnish SARS with a
declaration containing certain information within 30 days of the supply. It was noted in the budget that it would be more practical and appropriate if the vendors retained the information as part of their normal recordkeeping (without being required to file a declaration with SARS).
VAT registration of foreign businesses
VAT is payable when goods and services are consumed. Consequently, exports are zero-rated and imports are subject to VAT. This principle does not lend itself to simple application for imported services or e-commerce. In the case of imported services or digital supplies, such as e-books or music, no border post or post office can perform the function as collecting agent, as is the case with physical goods. The net result is that the local consumer can buy imported digital goods or services without paying VAT. This led to unfair competition where local businesses were supplying similar goods and had to charge VAT.
The Minister announced that government proposes that all foreign businesses supplying e-books, music and other digital goods and services in South Africa be required to register as VAT vendors.
Tax administration and tax avoidance
The Minister made the following statement in this year’s budget: “SARS will continue with efforts to arrest aggressive tax planning, base erosion and profit shifting. One of the areas identified is trusts.”
Reforming the taxation of trusts
To curtail tax avoidance associated with trusts, government will be proposing several legislative measures during 2013/14. According to SARS certain aspects of local and offshore trusts have long been a problem for global tax enforcement due to their
flexibility and flow-through nature. They also have a concern with the use of trusts to avoid estate duty and proposed to review this. It is stated in the budget that the proposals will not apply to trusts established to attend to the legitimate needs of minor children and people with disabilities.
The proposals made in the budget are as follows:
• Discretionary trusts should no longer act as flow through vehicles.
• Trading trusts will similarly be taxable at the entity level, with distributions acting as deductible payments to the extent of current taxable income. Trusts will be viewed as trading trusts if they either conduct a trade or if beneficial ownership interests in these trusts are freely transferrable.
• Distributions from offshore foundations will be treated as ordinary revenue. This amendment targets schemes designed to shield income from global taxation.
Tenders and tax compliance
Last year it was announced that the tax clearance system would be strengthened to ensure that noncompliant taxpayers cannot do business with the state. According to the Minister, SARS is testing an automated tax clearance certificate for implementation later this year. This will enable realtime tracking of tax compliance of the person who tendered. SARS is following up on payments made
by the state to contractors to check whether full tax disclosure was made.
The Tax Administration Act introduced penalties to ensure the widest possible compliance with the provisions of any tax Act. These penalty provisions are currently levied in all instances and do not take into account that the understatement may be the result of a bona fide error. It is welcomed that this will be refined and relief will be provided for bona fide errors.
It must be remembered that these are only proposals and that the relevant Acts will have to be amended to give effect to this. SAICA, through its National Tax Committee, will offer input on the proposed legislation when it is made available for public
comment. Business owners are advised to contact their tax advisors to ensure that they know when these amendments are made and what the effective date of the amendment would be. ❐
Author: Piet Nel CA(SA) is Project Director: Tax at SAICA.
2013/14 Budget: How it affects Individuals
Some insights into how the latest Budget will impact individual taxpayer pockets.
The 2013/14 budget presented on 27 February 2013 brought about inflation-adjusted relief of about R7 billion in the form of adjustments to various tax tables contained in the tax pocket guide. For example, the budget increases the minimum taxable bracket for individuals from R0 to R160,000 to R0 to R165,600. This means that an individual earning a taxable income not exceeding R165,600 per year will be taxed at the minimum rate of 18%.
The maximum taxable bracket for individuals increases from R617,001 and above to R638,601 and above. The maximum percentage of tax stays unchanged at 40%.
The tax thresholds for individuals were raised to accommodate the increase in the rate of inflation. The tax threshold is the maximum amount of taxable income that will not attract a tax liability. For individuals below age 65, the tax threshold has been increased from R63,556 to R67,111.
An individual can now earn a taxable income of R5,592.58 per month (R67,111) before paying any tax. In turn, the primary rebate has increased from R11,440 to R12,080. The rebate is always the inverse of the tax threshold. For example, at minimum tax rate of 18%, the primary rebate is 18% x the threshold under age 65 of R67,111 = R12,080. For individuals aged 65 years and older, but below age 75, the tax threshold has increased from R99,056 to R104,611. This means that an individual in this age group can earn a taxable income of R104,611 before paying any taxes. In turn, the secondary rebate has increased from R6,390 to R6,750 per year. Taxpayers in this age group will be entitled to both the primary rebate of R12,080 and the secondary rebate of R6,750 per year, totaling R18,830. The R18,830 total rebate is in turn arrived at by multiplying the minimum tax rate of 18% by the tax threshold in this age group of R104,611.
For individuals aged 75 years and older, the tax threshold has increased from R110,889 to R117,111 per year. This means that an individual in this age group can now earn a taxable income of R117,111 before being liable for income tax. In turn, the tertiary rebate has increased from R2,130 to R2,250. The taxpayers in this age group will be entitled to claim the primary, secondary and the tertiary rebates totalling a combined R21,080. It is worth noting that special trusts will be taxed in the same way as natural persons. However, special trusts do not qualify for the tax rebates as is the case with natural persons.
A natural person becomes liable for registration as a provisional taxpayer under the age of 65 when earning a total taxable income above the tax threshold and out of which the taxable income from the letting of property, interest and foreign dividends exceeds R20,000 per year. An individual at age 65 and older (including age 75 and older) will be liable to register as a provisional taxpayer when earning total taxable income from remuneration, rent, interest and foreign dividends in excess of R120,000 per year.
Exempt portion of interest income
The exempt portion of interest income has increased from R22,800 to R23,800 for taxpayers under the age of 65 years, and from R33,000 to R34,500 for taxpayers aged 65 years and older. Non-residents will be subject to tax on any interest earned in South Africa. This interest may be exempt from tax in the hands of a natural person who is not physically present in South Africa for at least 183 days during the 12 month period before the interest accrues or is paid, and in the case of persons other than natural persons who are not carrying on business through a fixed place of business in South Africa.
Basic foreign dividend and interest exemption had already fallen away in the 2013 year of assessment. Exemptions on foreign dividends will be granted to the extent that at least 10% is held in a foreign company and subject to the criteria laid down in section 10B of the Income Tax Act. Foreign interest will be included in the gross income of a resident without exemption.
Medical aid contributions
From 1 March 2012, members of medical aid schemes were no longer granted a deduction of their contributions to the schemes, but rather a tax credit against their payable tax. The medical tax credit system has entered its second period from 1 March 2013.
An illustrative and comparable example should help to explain the adjustments in the tax credit between 2014 and 2013:
Facts: Terence’s annual cost to company remained unchanged in the 2013 and the 2014 years of assessment. However, his medical scheme will increase his contribution from R4,000 to R4,500 per month in the 2014 year. Terence has registered himself, his wife and two children as dependants on his medical scheme. Terence will have a monthly tax saving of R291.25 (R16,332.42 less R16,623.67) in the 2014 year of assessment.
The excess of the total contributions over the tax credit limits can be claimed as a deduction through a tax return. For example, Terence’s total annual tax credits = R5,808 + R3,888 = R9,696. Terence’s total annual contribution to medical scheme = R4,500 per month x 12 = R54,000. An excess of R54,000 over four times the total annual tax credits of R38,784 (R9,696 x 4) = R15,216. Out-of-pocket medical expenses, together with any other medical expenses that may have been incurred outside South Africa, can be claimed to the extent that it exceeds 7.5% of taxable income (excluding retirement fund lump sums, retirement fund withdrawal lump sums and severance benefits).
If Terence, his spouse or his dependent child were disabled, the excess of the annual contribution over four times the annual credit limit would still be granted as a deduction, while the sum of the non-recoverable expenses, as well as expenses incurred outside South Africa and any expenses that will have been incurred as a consequence of physical disability will be fully
If Terence was aged 65 years or older, he would be granted a full deduction of his medical aid scheme contributions (without tax credit limits), his non-recoverable medical expenses, expenses incurred outside the country and any other expenses that may
have been incurred as a consequence of physical disability, if applicable.
This allowance is paid to employees to enable them to cover their daily meals, accommodation and/or incidental expenses when away from home. The daily amount deemed expended on meals and incidental costs in the event where an employee spends at least one night away from his usual place of residence in South Africa has increased from R303 per day to R319 per day from 1 March 2013. Any excess paid over and above the daily R319 deemed amount will result in the PAYE being withheld from the employee. The incidental expenses normally include cost of writing pads, pens, any such out-of-pocket expenditure that the employee may need to incur to carry out their daily duties. The tax-free portion of the incidental cost has increased from R93 to R98 per day from 1 March 2013.
Any excess paid over this tax-free limit will result in PAYE being withheld from the employee. The PAYE in the meals and incidental costs portions will be withheld only on the excess paid over the deemed daily limit. Allowances for travels outside the Republic can be obtained from the SARS website in the section for legal and policy/legislation/regulation and notices/Income Tax Act.
Capital gains tax (CGT)
The annual exclusion on any taxable capital gains made by an individual taxpayer from disposals remains unchanged at R30,000 per year. The exclusion in the event of death remains unchanged at R300,000. The exclusion on the gain made from the disposal of
primary residence remains unchanged at R2,000,000. The inclusion rate for CGT remains unchanged at 33.3% for any disposals made on or after 1 March 2012. This means that the maximum or effective CGT rate for individuals is 13.3%. ❐
Author: Joseph Komape CA(SA) is a Tax Practitioner.
If I were Finance Minister
Offering some pointers to the Minister on how SMEs can be unleashed to drive employment and growth in South Africa.
South Africa has one of the most exciting and positive entrepreneurial cultures in the world. In fact, when our own survey, the Sage Business Index, asked business owners what they like best about doing business in their country, 43% of South African respondents favoured the business culture and entrepreneurial spirit! Following this, 33% of local respondents rated the country’s good business infrastructure.
In spite of all the challenges, small and medium enterprise (SME) owners are ready and enthusiastic to grow but the truth is, many are struggling and government needs to provide a sound framework in which to operate. This year at Budget time, Minister Gordhan definitely showed that SMEs are top of mind. However, many primary concerns still aren’t being addressed. The predictable revisions in tax thresholds were announced and the yearly utterings about expanding funding mechanisms made, but is this enough?
Here are some of the key changes to this year’s Budget that I would make to help grow the small business sector in South Africa.
Make employment easier
If every SME, of which there are now about 650 000 registered in SA, employed five people, the 25% unemployment problem would be a thing of the past. But business owners are reluctant to take on new staff because if they have to downscale for whatever reason, the process of retrenching employees is extremely expensive, time-consuming and most frustrating.
Being scared to employ people also means constrained growth, which in turn means decreased employment opportunities. Small businesses should be able to be flexible and fleet-footed with the ability to react quickly to market changes. This is their very advantage over larger competitors, but it requires being able to use their discretion when making business decisions around human resources. Although this year’s budget contained tax incentives for employment of workers earning less than R60 000 per annum, it does not address the complicated process of hiring and firing.
The Growth Index, which was published by research company SBP the day after the budget, shows that permanent employment within the SME community fell by 6% between 2011 and 2012. What’s needed is an urgent review of employment law and I would co-opt some SMEs onto the review so that the business perspective is clearly understood.
The SME Growth Index shows that 38% of respondents are most concerned about municipal governance. This is a source of great frustration to business owners who need the supportive delivery of basic services to create and maintain successful, thriving businesses. Instead they often feel that their local municipalities are working against them.
At the end of the day it’s about service delivery. Taxpaying businesses are customers and contribute significantly to government revenues. Municipalities must realise that they need to function like service businesses. If businesses weren’t accountable to their customers they would go insolvent. The system automatically takes care of bad service and inefficiency; it’s survival of the fittest out there. Unfortunately this system doesn’t apply to government – but it should. And the only way to get this right is to employ the right people with the right attitudes.
Both Ministers Manuel and Gordhan have sent out strong messages about building a capable and efficient state, and recognised that municipal inefficiency is a barrier to SME growth. The question is: when will this filter down to tangible results?
Reduce red tape
In our own survey, over half the South African respondents said the least favourable aspect of doing business is too much government bureaucracy and legislation. Clearly an indicator that more needs to be done. Admin is a fact of life but it currently consumes between 3% and 6% of enterprise turnovers, according to the SME Growth Index. Respondents also indicated this was their second biggest concern after municipal efficiency.
We’re told that SARS is working on reducing the admin surrounding tax collection but not when or how things will improve. Having said that, SARS is proving to be one of our most service-oriented government departments, so we have every reason to believe they will make significant improvements.
Now what about the other government departments? So much of the red tape SMEs have to go through for truly insignificant tasks is just unnecessary. If I were Finance Minister, I’d hold a short, sharp red tape review, make considered decisions about what could be abolished or what processes could be merged, and set about getting those changes made quickly. I would also hold my staff and my colleagues in other departments accountable – loudly and frequently.
I hear it from my clients all the time; funds are difficult to come by, regardless of the intended use. Sometimes the money is needed just to get over a financial hump caused by rising input costs like fuel and electricity for example, and sometimes capital is required to really grow the business by investing in more staff, machinery or infrastructure. Either way, no funding means little chance of success.
If I sat in Minister Gordhan’s chair, I would pay attention to what’s happening in the rest of the world. I’ve recently returned from Cyprus where the banks are in lock-down mode, not making any loans to anyone for any reason. Effectively they’re jamming the system and they’ve created a chicken and egg scenario. Banks need to lend so that businesses can grow and people can buy their goods, enabling the businesses to pay back their bank loans… and for the cycle to continue. This is fundamental economics.
What I also hear is that funders, and particularly banks, don’t want to give finance just to get over that hump; they want to see real investment that benefits the business and ultimately the economy. That’s fine; any lender, be it a private institution or government organisation needs to put lending criteria in place. Business owners don’t mind some provisos; they just want to ensure the survival of their businesses.
But rising input costs topped the list as the biggest operational constraint facing SMEs, according to the SME Growth Index. And this year’s Budget spelt even more increases for the future. Additional fuel levies and electricity hikes are becoming a major concern and many businesses will be hard pressed just to get by, let alone being able to think about growth and approaching investors.
Let’s talk about electricity for a minute. I recently read that the municipalities make big mark-ups on Eskom’s charges. We all get our electricity bills through our municipalities but we like to think that the charges are purely for the electricity Eskom provides. Seems they’re not and it seems that the municipal mark-ups would shock us if we knew their full extent.
I personally know of two scrap metal businesses that had to close, each laying off 10 staff, because their electricity bills were so high they couldn’t continue in business. Isn’t it horrific to think that municipal mark-ups are likely to be responsible for this? I think if this sort of gratuitous activity were investigated and stopped, it would go a long way to helping end unemployment. Current funding models exist to grow and provide capital for readily established businesses to expand, but if operating costs are going to continue rising, new mechanisms will have to be created just to help businesses see themselves through each month.
Minister Pravin Gordhan is definitely on to something. Getting government working properly – “wisely, efficiently and effectively” – is the best intervention to overhaul the environment within which business operates. It is a good start and I believe that what I have touched on are the key things that need addressing if South Africa is to unlock its entrepreneurial potential, increase employment rates, and stimulate investment. I think the areas I’ve highlighted will all improve the business environment and I believe they are the first steps to real and necessary progress. ❐
Author: Steven Cohen CA(SA) is MD at Sage Pastel.
Budget tax proposals what was not said…
Most taxpayers would have breathed a collective sigh of relief following the announcement of the tax proposals. As many commentators had speculated, there was a real chance that tax rates for higher-income earners would be hiked to make up for the shortfall in revenues projected for the 2012/13 fiscal year and the lower expected revenues in the medium term.
If there was one recurring theme in the 2013 Budget, it was that it was scant on detail; and the tax proposals were no exception.
Examining the implications behind Budget tax proposals – is “the devil in the detail?”
Most taxpayers would have breathed a collective sigh of relief following the announcement of the tax proposals. As many commentators had speculated, there was a real chance that tax rates for higher-income earners would be hiked to make up for the shortfall in revenues projected for the 2012/13 fiscal year and the lower expected revenues in the medium term. Higher-income earners are a soft target for increased personal income tax rates and can consider themselves to have dodged a bullet (at least for now).
If there was one recurring theme in the 2013 Budget, it was that it was scant on detail; and the tax proposals were no exception. The purpose of this article is to take a closer look at a few of the things affecting individuals that were not said, or which were unclear on what is being proposed. Below we provide some insights into these.
Projected tax revenues
A more in-depth analysis of the revenue estimates reveals just how ambitious these are. For the 2013/14 fiscal year, real GDP growth is projected at 3%, which translates into growth of 9.7% in nominal terms. However, it is projected that tax revenues will grow at a rate of 10.8%, well ahead of nominal GDP growth. While a portion of this growth over GDP can be explained by above-inflation increases in a few taxes such as fuel levies, sin taxes and environmental taxes, these taxes are relatively small contributors to total tax revenues and do not have a substantial impact on total revenues.
The two major projected contributors to tax revenue growth ahead of nominal GDP growth are personal income taxes (11.7%) and VAT (12%). Together, these taxes make up 63% of budgeted revenues and are therefore crucial to the targets being met. The projections for growth on personal income taxes and VAT are ambitious and will be a stretch to meet, even if the projected GDP growth is achieved (and some analysts have expressed the view that this is ambitious). To illustrate the point, over the last three years, growth in personal income taxes has averaged around 10% per year against nominal GDP growth of around 9%. In other words, the 2013 Budget predicts a significant increase (nearly double) in the personal income tax/GDP multiplier.
The result is that there is significant risk to revenue collections falling short of the budgeted amounts. This will be even more acute if GDP doesn’t grow at the rate projected. There is therefore still a significant risk that tax hikes will have to be introduced in 2014/15 – despite there being no indication in the Budget of tax hikes in the medium term.
Reform of the taxation of trusts
It was stated that discretionary trusts and trading trusts will no longer act as “flow-through vehicles” and that, instead, taxable income would be calculated at a trust level with distributions by trusts being deductible to the extent of taxable income and taxable in the hands of beneficiaries. It would also seem that where distributions are not deductible by the trust (presumably in the event that they exceed taxable income), these distributions would not be taxable in the hands of the beneficiary.
It is expected that what is intended is that the conduit principle will no longer apply to the taxation of these types of trust, as trusts have long been taxable in their own right. How the introduction of this new deduction regime fundamentally changes the taxation of trust income remains to be seen. Presumably, the immediate effect may be that distributed income will not retain its nature in the hands of the beneficiary on distribution. However, given that the Budget Review refers to distributions rather than vesting, the former not necessarily following the latter, we may also see a move away from vesting to distribution as being the crucial event that determines whether the trust or the beneficiary is liable for tax.
As usual, the devil is expected to be in the detail and we will need to wait for further detail of what is proposed before the likely effects can be determined with certainty.
Employment share schemes
It was indicated in the Budget that a special dispensation for share schemes would be introduced to ensure uniform tax treatment between high income earners and lower-income earners. The way that employers claim deductions will also be examined.
On the issue of uniform treatment, it is expected that what is being mainly alluded to is the use of structures in certain share incentive and share ownership schemes that can result in lower tax rates for participants. Such structures can, in certain circumstances, benefit high-income earners by enabling value to be extracted on shares in the form of dividends at relatively low tax rates. Extraction of value in the form of dividends results in dividends tax at a rate of 15%, as opposed to extraction of value in the form of the market value of an equity instrument at the time of vesting thereof, where tax is levied at rates of up to 40%.
The use of trusts in shares schemes can also result in double tax for employees where, for example, the trust acquires shares and vests these in the hands of an employee beneficiary. In such circumstances, the employee could end up being taxed on both the capital gain of the trust in terms of the capital gains tax rules, as well as the value of the shares in terms of the share scheme rules.
It is expected that these are the primary concerns that are proposed to be remedied. On the issue of employer deductions, it is considered that there is nothing overtly sinister in the statement in the Budget. What is likely being referred to is when, as the law currently stands, an employer issues shares to an employee as remuneration, the employer is not entitled to a deduction. To get
around this problem, employers generally structure their share schemes in various ways that sidestep the employer issuing shares directly to an employee, so that the employer incurs expenditure for tax purposes.
It has been recognised that it is inequitable for an employee to be taxed on shares issued by a company, but for the company not to be entitled to a deduction. This is apparently the primary reason for examining this issue, although it is expected that safeguards will be introduced to ensure that the value and timing of any deductions allowed to the employer
do not result in any significant mismatch. ❐
Author: Kyle Mandy CA(SA) is Head: National Tax Technical at PwC.
Where did the trust go?
What are the potential implications for ‘trusts’, now that Minister Gordhan intends amending their alleged ‘tax avoidance’ aspects?
Regarding trusts, the question most frequently asked by clients these days is this: “Do you think that trusts still have a role to fulfil in estate planning”? I anticipate hearing much more about this topic in the coming weeks as the proposals contained in the 2013 budget speech start siphoning through to all who wish to use trusts as a financial planning tool. We will understand it better if we take a look at recent history and the tax treatment of trusts (excluding special trusts).
I would imagine, when in 1991 it was found that a ‘trust was not a person’ for income tax purposes in the case of the “Trustees of the Philip Frame Will Trust v CIR ”, that many aspiring estate planners couldn’t start utilising trusts soon enough. What I do know is that as a result thereof, the legislature swiftly amended the Income Tax Act to include trusts in the definition of a ‘person’ in relation to
the tax net.
Furthermore, a look at the SARS Guide for Tax Rates/Duties/Levies shows the following:
• Between 1999 and 2011 trusts, excluding special trusts, have consistently paid transfer duty at a higher rate than individuals
• From 1998 to the present, trusts have consistently paid income tax at a higher rate than individuals
• From the inception of capital gains tax (CGT) in 2001, trusts have consistently paid CGT at a higher rate than individuals.
One could easily draw the conclusion that trusts are disliked (or maybe liked too much) by the SARS. In his previous budget speech (2012) Minister Pravin Gordhan issued a warning to trustees, advisors and tax practitioners, saying that: “Poor tax compliance
is also apparent in respect of trusts and in parts of the construction sector, and the role of tax practitioners and other intermediaries will come under scrutiny.” I would hazard a guess that it is this poor compliance and SARS’ perception that trusts are used for tax avoidance that is driving its most recent scrutiny of trusts.
The following quote from the judgment of Thorpe v Trittenwein also reveals a growing impatience on the part of the courts with regard to the fast and loose manner in which those using trusts treat this legal form: “Those who choose to conduct business through the medium of trusts of this nature do so no doubt to gain some advantage, whether it be in estate planning or otherwise. But they cannot enjoy the advantage of a trust when it suits them and cry foul when it does not. If the result is unfortunate, Thorpe has himself to blame.” It seems though that the Treasury has decided to put an end to the abuse of the trust form for the purposes of tax avoidance once and for all.
In the Budget Review, 27 February 2013, the following comments in regards to trusts can found:
“To curtail tax avoidance associated with trusts, government is proposing several legislative measures during 2013/14. Certain aspects of local and offshore trusts have long been a problem for global tax enforcement due to their flexibility and flow-through nature. Also of concern is the use of trusts to avoid estate duty, which will be reviewed. The proposals will not apply to trusts established to attend to the legitimate needs of minor children and people with disabilities.” Many people associate good financial planning and estate planning with obtaining a tax saving. What a great pity that the trust concept is being ‘bastardised’ to the extent that many people only consider its tax treatment when deciding whether a trust is a viable financial planning tool. But why is using a trust for tax purposes ’bastardising’ it?
The following characteristics of a trust can be gleaned from the definition of a Trust in the Trust Property Control Act , being the common law and case law. Firstly, it requires you to hand over your assets to the trustees and to fully divest yourself of the ownership thereof. Secondly, the assets handed to the trustees are not to be used by them for their own benefit, but to be administered for the benefit of a beneficiary or group of beneficiaries. Thirdly, the trust is to be administered in accordance with the terms of the trust agreement. To summarise, the trust form is actually intended as a means to care for or benefit persons other than the donor or the so-called ‘financial planner’.
To return then to the original question, if the trust is to be used in an attempt to avoid tax, then it is doubtful that trusts will in future satisfy the planner’s expectations. In the past, one of the main ways in which trusts were used to obtain a tax advantage was through the use of the conduit effect codified by section 25B and Paragraph 80 . This was done by vesting the trust income or capital gain for the tax year in favour of the trust beneficiaries. In so doing, these would be taxed in the hands of the beneficiary rather than the trust. The Treasury intends in future to prevent trusts from acting as conduits in this manner, as stated: “Discretionary trusts should no longer act as flow-through vehicles. Taxable income and loss (including capital gains and losses) should be fully calculated at trust level with distributions acting as deductible payments to the extent of current taxable income. Beneficiaries will be eligible to receive tax-free distributions, except where they give rise to deductible payments (which will be included as ordinary revenue).”
It is of course impossible, at this stage, to know what amendments will be made to the Act in the process of bringing about these changes, but it seems reasonable to assume that both section 25B and Paragraph 80 will be deleted. I’m concerned to hear that – within two days of the budget speech – a broker is advising his clients that to circumvent these changes, they simply need to ensure that the deeming provisions of section 7 and paras 68 – 73 are applicable, thereby ensuring taxation of receipts in the hand of the donor – presumably at a lower tax rate.
Besides the risk that decisions based purely on considerations of tax avoidance may be attacked under the general anti-avoidance provisions, this ‘solution’ is still flawed. It will mostly be too late for tax planners to access this supposed solution for existing trusts as the purpose and intended advantages of these trusts will already be determined. Only when establishing new trusts is it possible to define the trust object in such a way as to place the resulting donation in trust within the ambit of the aforementioned sections.
I would think too that there is a very real chance that, along with the potential removal of section 25B and Paragraph 80, section 7 and paras 68 – 73 may likewise be removed.
This will certainly be in keeping with Treasury’s stated intention of ensuring that trusts’ taxable income and loss are “fully calculated at trust level”. In conclusion, the effectiveness of trusts as a means of reducing your tax liability has largely been curtailed. However, should the planner wish to use the trust for its intended charitable purpose, it is still a useful estate planning tool. It offers the planner a means of benefitting designated beneficiaries, while the trustees who administer the assets on their behalf offer a measure of protection, both from the potential squandering tendencies of beneficiaries, and from potential creditors. In allocating trust income and capital, trustees will continue having much flexibility to adapt to the changing circumstances and needs of beneficiaries, thereby
offering the planner considerable peace of mind. It seems then that the trust form will indeed remain a useful tool. ❐
Author: Francois van Gijsen, CFP, FPSA, BProc, LLM (Tax Law) is Director of Legal Services at Finlac Risk and Legal Management.
Widening the tax net in 2013
The 2013/14 budget reveals that the tax net can be widened without fundamental new taxes.
While Finance Minister, Pravin Gordhan’s, 2013/2014 budget speech presentation held no real surprises from a tax perspective, it did reveal some interesting developments around how tax authorities intend to deal with corruption and tax avoidance. In addressing these areas of concerns, tax authorities will be able to increase collections without having to introduce any major changes in the tax legislation.
The announcement by the Minister that National Treasury intends announcing the name of a Chief Procurement Officer is informed by the need for government to increase the value on the money it spends. The Minister reported that National Treasury is
scrutinising 76 business entities with contracts worth R8,4 billion that are likely to have infringed the procurement rules. The South African Revenue Services (SARS) is also performing an audit of over 300 entities and scrutinising an additional 700 entities. SARS has managed to raise tax of R480 million on 216 cases concluded. If one takes a simplistic view and extrapolates this R480 million to 1 000 potential cases, it seems SARS can collect approximately R2,2 billion by simply working on government’s procurement processes.
Also notable is the announcement that SARS, following several years of work to trace transactions through multiple jurisdictions and entities, is currently pursuing several schemes identified under the revised general anti-avoidance rules. This announcement
interestingly comes within weeks of a local listed company reporting via its SENS document that SARS has raised an assessment of more than R1 billion by using general anti-avoidance rules. It is certainly an interesting development as tax authorities have in the past been reluctant to invoke general anti-avoidance rules, instead opting to introduce additional specific provisions in the Income Tax Act, 1962, which further complicated tax legislation.
The Minister is of the view that the benefits of some of these schemes accrue to advisors and pre-existing shareholders rather than new shareholders, who were introduced as the ostensible beneficiaries of the transactions. The point made by the Minister is to some extent true – in particular when BEE partners are introduced using corporate rules. These transactions often result in BEE partners carrying a deferred tax liability that may have not been factored in their purchase price.
The introduction of the permanent voluntary disclosure programme as from 1 October 2012 is encouraging. Following the success of the initial voluntary disclosure programme in 2010 which is now reported to have generated more than R3 billion in undeclared taxes, it makes sense to have introduced a permanent voluntary disclosure programme. The programme included in the Tax Administration Act, 2011, has already generated more than R200 million in taxes to date. Another positive, which is long overdue, is SARS’ intention to introduce a link between tax clearance certificates issued and tax revenue collected from people who tendered for work from the state.
The Minister’s proposal in favour of discretionary trusts no longer acting as flow-through vehicles is pertinent. Instead of the income received by these trusts will be taxed at a trust level, with beneficiaries receiving a tax-free distribution. This prevents beneficiaries of these discretionary trusts off-setting income against tax losses, while avoiding tax in the hands of the trust. Foreign businesses supplying e-books, music and other digital goods and services in South Africa came under the spotlight as government announced its intention of registering these as VAT vendors.
However, foreign taxpayers who provide services to South Africans will also find themselves liable for withholding taxes on management fees they receive from South Africa. These businesses can, however, breathe easier at this time, as they have been granted a period of grace on this withholding tax (which will also apply on interest and royalties) until 1 March 2014. While the VAT announcement will certainly be seen as largely negative for digital goods and services not currently VAT on imported services or digital supplies, a small reprieve is the fact that the withholding tax regime that is proposed on interest and royalties will be subject to double
taxation relief, hence the postponement of its implementation until next year.
In addition, government seems to be targeting instances where local companies are incurring expenses from foreign connected individuals. Although section 31 was recently amended, the government is now seeking to introduce deferral of expenditure incurred by certain connected persons until such expenditure is paid.
Another industry under the spotlight was that of ‘captive insurers’. The National Treasury intends to amend the treatment of captive insurers by extending the provisions that deny deductions for payments of insurance premiums to short-term insurers (under certain circumstances) to long-term insurance policyholders. These provisions will affect re-insurers whose reinsurance transactions lack a significant element of risk transfer. Furthermore, the National Treasury will reconsider the research and development (R&D) incentives by adjusting their eligibility criteria.
National Treasury will also consult on the cross-border services where South African residents provide long-term services offshore for at least 183 days per year. It seems National Treasury is looking at extending this period, in particular where a South African employer is involved.
Although the Minister announced his intention for the tax authorities to work with the Department of Home Affairs and other agencies in registering small and micro businesses (including those operated by foreigners), this will be a challenge. Although this will also work towards widening the tax net, the challenge here is that some of the small businesses targeted by SARS operate in remote rural areas, where SARS offices aren’t sited. This raises the question as to where these taxpayers will go if they need guidance. ❐
Author: Zweli Mabhoza CA(SA) is Head of Tax Services at SizweNtsalubaGobodo.