Many Firms To Lose Out Under South African Income Tax Changes

by Robert Lee, Tax-News.com, London

11 November 2003

Firms in South Africa will have to undergo a financial test in order to establish their eligibility for certain tax reliefs under amendments to the Income Tax Act, and many companies undertaking restructuring are set to lose out as a result of the new rules.

The changes are designed to ensure that only ‘real businesses’ receive tax reliefs, and the new regulations will exclude a firm from claiming relief on transactional taxes such as stamp duty, securities tax, and capital gains tax if more than half its value is derived from shares, loans, hedge funds and other derivatives.

Tax experts have criticised the amendment, arguing that many legitimate businesses will be unnecessarily hurt by the changes, particularly firms dealing in intangible assets and intellectual property such as patents and trademarks.

Firms that use finance leases to fund the purchase of assets will also be affected by the new rules, as legal ownership does not pass to the lessee until after the final payment, James Aitchison, a tax expert at PricewaterhouseCoopers told Business Day.

However, SARS (South African Revenue Service) has argued that the changes will be generally favourable. "The legislation might present difficulties for certain taxpayers, but this should be balanced against the broader potential for abuse if the requirements were to be relaxed," Franz Tomasek, law administrator at SARS explained, according to Business Day.

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