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South Africa Introduces Tax Amendment Bills

by Lorys Charalambous, Tax-News.com, Cyprus

11 July 2012


The South African National Treasury has released, for public comment prior to their formal introduction in parliament, the draft 2012 Taxation Laws Amendment Bills which give effect to most of the 2012 Budget’s tax proposals.

With regard to individual income tax, the proposed legislation deals, for example, with the payment of taxes immediately on variable cash remuneration (such as overtime and holiday pay, commission, bonuses and travel reimbursement); and the proposal that taxpayers who do not take out their tax free portion on retirement be taxed only on that portion of their retirement annuity income that would have been taxed had they opted for the tax-free lump sum on retirement.

With many businesses reducing their debt levels in the current economic environment, including through workouts, the proposed regime also streamlines the tax rules so that debt cancellations will not trigger a capital gains tax liability for the debtor.

However, it also clarifies the final disclosure requirements under the anti-avoidance rules within the country’s tax code that were originally introduced to facilitate intra-group transactions, with debt-financed acquisitions being identified as problematic in terms of Section 45 of the Income Tax Act.

The 2011 legislation allowed for such acquisitions to continue under controlled circumstances, with the understanding that the main problems were related to the use of ‘excessive’ borrowings and debt instruments with share-like features. As part of the two-phased approach announced in the 2012 Budget, the proposed legislation seeks to re-characterize ‘artificial debt’ as shares when the debt contains key share-like features, with effect from 2014.

On the other hand, the proposed legislation will allow interest deductions in respect of debt-financed share acquisitions under the same controlled circumstances currently allowed in the case of section 45 debt-financed acquisitions. Rules aimed at controlling excessive interest deductions will therefore remain an issue for 2013.

As international accounting and tax trends are moving away from the realization principle (recognizing gains or losses only upon disposal and realization) and towards an annual mark-to-market fair value principle, the draft legislation accedes to the request of South African banks and insurers and places those institutions on an annual basis of mark-to-market taxation for unrealized gains and losses. Transitional relief will also be in place for the switchover.

Furthermore, it is proposed that listed property loan stock companies and property unit trusts will be subject to the same tax regime, provided they are classified on the stock exchange as real estate investment trusts (REITs). The net effect will be to allow deductible distributions to shareholders of these REITs if at least 75% of the taxable income of the property investment entity stems from rentals or property subsidiaries, and the entities will also be exempt from capital gains tax.

With regard to cross-border restructurings, the participation exemption upon the disposal of foreign equity shares will now apply solely to disposals to independent foreign entities if the non-share consideration (for example, debt instruments and cash) has an equal or greater value than the shares transferred. The proposed narrowing of the participation would prevent the exemption from being misused as a means to undermine the tax base or to facilitate tax-free indirect migrations.

The proposed bills also look to enhance South Africa’s position as a financial centre. Amongst other measures, they provide relief to South African multinationals from double taxation, and provide that foreign-owned investment funds that are managed by South African-based managers are not subject to South African tax merely due to the involvement of local managers.

The tax treatment of the sale of assets when the owner ceases to be a South African resident is aligned with international norms, such that a departing person’s year of assessment will be deemed to have ended immediately a day before that person becomes a resident of another country.

Departing individuals will be deemed to have disposed of all their assets at market value immediately before the end of that year of assessment, while a company, on the other hand, will be deemed to have distributed all of its assets and been liquidated, and then been reconstituted the following day as a new foreign company.

Foreign residency will only start in the new year of assessment. The proposed rules also clarify that a double taxation agreement does not exempt a person from capital gains tax - following the loss by the South African Revenue Service (SARS) in the Tradehold case.

Public comments are requested to be made on the above-mentioned proposals, to either the National Treasury or SARS, by July 31, 2012.

The National Treasury has confirmed that remaining budgetary tax proposals, which have a later implementation date because they require more consultation (for example, the retirement proposals and carbon tax), or require specific legislation (for example, the gambling tax), will be published for comment later this year or next year.

TAGS: individuals | capital gains tax (CGT) | South Africa | tax | investment | business | pensions | real-estate investment | law | real-estate | retirement | investment funds | budget | corporation tax | multinationals | legislation | legislation amendments | individual income tax | Africa

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