President Jacob Zuma has signed into law a number of new Bills that will penalise wealthier investors and higher income salary-earners. Trusts, used by individuals as they develop or maintain a sizeable pot of assets, fall into the net as do hybrid instruments. Entrepreneurial employees hoping to share in the growth of the businesses that they work for through tax-free share schemes will now be hit with tax.
And, in a move to promote the hiring younger people – and possibly disincentivise employing older people – employers pay less Pay As You Earn for youthful staff members. The rates and amounts outlined in terms of the Special Voluntary Disclosure Programme add more detail to the project aimed at enhancing disclosure of offshore assets.
However, the provisions are likely to encourage more individuals to emigrate where they can – or spend time outside the country to qualify as being domiciled for tax purposes elsewhere.
In a nutshell, these new laws seem broadly aimed at preventing the rich from getting richer while the state raises more funds. While a nice idea in principle, many will find it hard to feel enthusiastic about complying with laws when the most prominent politicians and government officials are abusing taxpayers’ contributions to state coffers on a grand scale.
Expect more South African business players and wealthy individuals to live between London and Johannesburg or Cape Town and Melbourne as they minimise their tax liabilities. – Jackie Cameron
By Natalie Greve
On January 11, President Jacob Zuma signed several Bills into law, including seven tax and employment-related amendments. He said at the time that he was confident that the amended laws would “enhance government service delivery programmes” and improve the work of the departments and institutions that are custodians of these laws.
We unpack what these amendments mean for you.
1. Taxation Laws Amendment Act
According to Norton Rose Fulbright tax director Dale Cridlan, this Act contains numerous tax amendments with several implications, the most notable being:
Interest-free or low-interest loans to trusts
The focus on the taxation of trusts has recently been considered by the Davis Tax Committee, which has issued a report making certain recommendations to the taxation of trusts.
The Taxation Laws Amendment Act has introduced a new section (section 7C), which aims to limit the ability of taxpayers to transfer wealth to their trusts without being subject to tax.
The section applies where a natural person (or a company which is a ‘connected person’ in relation to that natural person) makes a low-interest or an interest-free loan to a trust in relation to which that natural person is a ‘connected person’.
“The section provides that, as from 1 March 2017, the difference between what is termed the “official rate of interest”, currently at 8%, and the amount of interest actually charged on the loan to the trust must be deemed to be a continuing donation made by the trust.
“This donation will be subject to donations tax of 20%. It is expected that this provision will impact on numerous family trusts, which have historically been funded by way of interest-free or low-interest loans,” Cridlan notes.
Share incentive schemes
Also contained with the Taxation Laws Amendment Act are various amendments that will result in the taxation of employees on the dividend proceeds received from the disposal or redemption of the underlying equity shares in a company.
The purpose of a share incentive scheme is to reward and incentivise employees for good performance.
“Amounts received by the employees (whether in cash or shares) in respect of services provided by employees are taxed as ordinary income (currently up to a maximum marginal rate of 41%).
“Historically, share incentive schemes have been designed to return cash to employees in the form of dividends on a tax free basis, which now changes,” Cridlan explains.
The Income Tax Act currently contains complex rules which seek to recharacterise preference share funding as debt in certain circumstances.
This means that what would normally be a tax-free dividend which is received by a holder of a preference share will be recharacterised and deemed to be income, which will be taxed in the hands of the holder of the shares.
“Numerous transactions have been designed to avoid these rules by, for example, interposing a trust between the holder and the issuer of the preference shares.
“The Taxation Laws Amendment Act has introduced various amendments to provide that the dividends on such arrangements will continue to be taxed in the hands of the recipients of the dividend,” Cridlan cautions.
Employment Tax Incentive Act (ETI)
Also contained within the Taxation Laws Amendment Act, the Employment Tax Incentive (ETI) Act will encourage employers to hire young people by reducing the amount of Pay As You Earn tax payable to the South African Revenue Service (Sars), thereby, reducing the cost of employment to the employer while leaving the employee’s earnings unaffected.
Business Unity South Africa (Busa) has welcomed the passing of amendment, which it believes will make significant strides in youth employment.
2. Finance Act, 2016
Cridlan says this Act does not deal with tax implications for individuals or corporates. The Act seeks to provide provisions for the approval of unauthorised public expenditure, the recovery of unauthorised expenditure and to provide for matters connected therewith.
3. Rates and Monetary Amounts and Amendment of Revenue Laws (Administration) Act, 2016
Cridlan explains that this Act provides that applications made under the Special Voluntary Disclosure Programme (SVDP) must be made on or after 1 October 2016 but by no later than 31 August 2017, thereby extending the original term of the SVDP.
The Act also makes it clear that the SVDP does not apply to trusts that are not permitted to make an application under the SVDP.
4. Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2016
Most importantly, this Act introduces the long-awaited Special Voluntary Disclosure Programme (SVDP) in respect of amounts which have not been disclosed to Sars on an asset situated outside South Africa and held by an individual between 1 March 2010 and 28 February 2015.
The SVDP provides that an amount equal to 40% of the highest amount in respect of the aggregate value of all assets as at the end of each year of assessment ending on or after 1 March 2010 but not ending on or after 1 March 2015 must be included in the taxable income of that person.
The programme includes relief for penalties and against criminal prosecution where the formalities pertaining to the SVDP are complied with.
“Now that the rules pertaining to the SVDP have been promulgated we expect to see an increasing uptake from taxpayers who wish to regularise their affairs. This will be more so with the introduction of the common reporting standards (CRS) which will allow foreign governments to share the financial and other information with Sars and vice versa,” Cridlan comments.
5. Tax Administration Laws Amendment Act, 2016
This Act contains numerous technical corrections pertaining to the administration of various taxing acts.
According to the Presidency, the primary purpose of the Bill is to amend the Income Tax Act, of 1962 to provide for the delegation of power to disclose certain information and to remove an obligation to submit a return for a dividend derived from a tax-free investment, amongst others.
6. Adjustments Appropriation Act, 2016
The bill seeks to effect adjustments to the appropriation of money from the National Revenue Fund for the requirements of the State in respect of the 2016/17 financial year and to provide for incidental matters.
7. Unemployment Insurance Amendment Act, 2016
The primary purpose of the Bill, the Presidency explains, is to amend the Unemployment Insurance Act, 2001, so as to provide for the extension of the unemployment insurance benefits to learners who are undergoing learnership training and civil servants.
The amendments also serve to adjust the accrual rate of a contributor’s entitlement to unemployment insurance benefits and to provide for the process of application for maternity benefits.Fin24's top stories trending on Twitter: Fin24’s top stories