Disputing understatement penalties
Tax Court Case (IT14247)
Understatement penalties (USP) are imposed in respect of understatements by a taxpayer. A recent tax court case highlighted the fact that a taxpayer is not necessarily protected from USP on the basis that payments have been made to SARS, without further compliance with tax laws. In addition, this case also illustrated that taxpayers need to carefully consider their own position when deciding whether to dispute USP or not. The tax court may in certain circumstances increase USPs.
| Disputing understatement penalties |
Share incentive schemes: The role of trusts
Binding Private Ruling 277
Share incentives schemes often involve the use of trusts to administer the awards made to employees. Previous rulings indicated that a share incentive trust will dispose of shares acquired for purposes of the scheme when these shares vest and therefore potentially be liable for CGT on this disposal. BPR277, however, suggests that a different position may exist if the trust acquires the shares for the beneficial interest of the employees from the date of initial acquisition.
| Share incentive trusts |
Tax proposals: Debt capitalisation
Draft Taxation Laws Amendment Bill 2017
In difficult economic times, debt capitalisation may afford companies some room to improve their financial position. Currently, debt capitalisation by financially distressed borrowers may result in debt reductions for tax purposes. The National Treasury has proposed that certain transactions to settle debt by issuing shares should be excluded from the debt reduction rules. The proposals have a relatively narrow scope and are accompanied by potentially onerous anti-avoidance provisions.
| TLAB Debt capitalisation |
Tax proposals affecting share disposals
Draft Taxation Laws Amendment Bill 2017
Since the introduction of dividends tax in 2012, in particular the company to company exemption, taxpayers have employed a number of methods to convert taxable proceeds upon the sale of shares into non-taxable dividends. The National Treasury has proposed a broad anti-avoidance provision that is likely to curb such arrangements but also impact many other share disposal transactions.
| TLAB Share disposals |
Tax proposals affecting trusts
Draft Taxation Laws Amendment Bill 2017
A number of amendments proposed by the National Treasury are, if implemented in their current form, likely to significantly impact on trust structures. The first is the expansion of section 7C to loans provided to certain companies. In addition, measures are proposed to incorporate foreign companies held through foreign trusts or foundations into the controlled foreign company regime.
| TLAB Trust Proposals |
Investments funded by venture capital companies
BPR274
It appears as if interest in making use of the venture capital company tax incentive is increasing. BPR274 deals with an investment by a venture capital company in a solar electricity generation business. The ruling deals with some of the matters that are contentious in the area of VCC investments, as evidenced by a number of earlier rulings on the same aspects of the incentive.
| Venture Capital Companies |
Timing of asset disposals and accrual of proceeds
M V C:SARS (Cape Tax Court - Case 14005)
The timing of disposals of assets and the resulting accrual of the proceeds have been contentious aspects over the years. In a recent case decided in the Cape Tax Court it was held that s 24(1) applies to cash transactions. As a result, the date when an agreement for the disposal of certain property is entered into plays an important role in determining the timing of the seller’s tax liability arising from the sale of the property.
| Timing of accrual |
Classification of an arrangement as an interest-bearing instrument
Binding Private Ruling 272
The Income Tax Act contains specific provisions relating to the timing of the accrual or incurral of interest for tax purposes. BPR272 deals with an arrangement that contains deferred payment terms and amounts determined with reference to an interest rate. The ruling however confirms that this arrangement is not an instrument within the scope of section 24J. Determining whether an arrangement is interest-bearing requires a detailed analysis of its overall terms and yield.
| Interest-bearing instruments |
Capital gains tax: Cancellation of disposals
New Adventure Shelf 122 V C:SARS
Capital gains tax is imposed on any amount that a taxpayer becomes entitled to as a result of a disposal of an asset, whether this amount has been received in cash or not. It was confirmed in New Adventure Shelf 122 v C:SARS that a taxpayer does not have grounds to request that the assessment where such capital gains tax was levied if the proceeds become irrecoverable.
| CGT Cancellation of disposals |
Tax effect of fixing errors
Binding Private Ruling 268
BPR268 deals with the tax implications of an arrangement that is aimed at correcting previous errors by a taxpayer. On the face of it, the transaction appears relatively simple but further consideration of the possible uncertainty that warranted requesting a ruling reveals some of the complexities of it in light of the specific requirements of the tax law. The ruling should serve as a reminder to taxpayers not to underestimate the tax complexities that even the simplest transaction may hold.
| Tax of fixing errors |
Bad debts: Effect on exchange gains or losses
Draft Interpretation Note on Exchange Gains and Losses
The tax treatment of unrealised exchange gains or losses poses certain challenging questions when a foreign denominated debt becomes irrecoverable. SARS issued a draft interpretation note that provides their views on, amongst others, the tax effect of such gains or losses when a debt goes bad or is reduced. While the effect of unrealised exchange differences appear to be neutral from a lender perspective, this is not necessarily the case for a borrower whose debts are reduced.
| Bad debts foreign exchange gains or losses |
South African DTAs: Most-favoured-nation clauses relating to tax on dividends
Binding Private Ruling 267
Binding Private Ruling 267 confirms that the applicant, a South African company that is a wholly owned subsidiary of a Swedish company, does not have to withhold dividends tax on proposed dividends to its parent as a result of the application of the most-favoured-nation provision in Article 10(6) of the SA/Sweden treaty in light of the dividend taxing rights in the SA/Kuwait treaty.
| BPR267 MFN treaty clauses |
South African Budget 2017: Business perspective
Budget Review 2017
The South African corporate tax rate remains unchanged at 28%. The increase in the dividends tax upon distribution of company profits to 20% may however impact on business structures that rely heavily on dividend flows. Business tax related aspects that the National Treasury will review during the 2017 legislative cycle include a number of measures planned to strengthen anti-avoidance rules but also some relief for legitimate transactions currently adversely impacted by tax.
| Budget 2017 - Business perspective |
South African Budget 2017: Wealth and investment perspective
Budget Review 2017
A number of tax rate increases were announced in the 2017 Budget Review on 22 February 2017. These may impact directly on investment yields and re-investment base of investors. Some of these developments, in particular the gradual increase in the trust tax rates, may require investors to reconsider investment holding structures. A number of aspects up for review by the National Treasury in 2017 may significantly impact on structures that house wealth.
| Budget 2017 - Investment and wealth perspective |
Clarification of tax on payments to non-executive directors
Binding General Rulings 40 and 41
There has been uncertainty around the tax treatment of fees paid to non-executive directors. While it is clear that the amounts will be subject to income tax, the question was when and how this tax should be collected. In addition, differing views existed as to whether fees paid to non-executive directors should be subject to VAT. SARS clarified these two questions by issuing two binding general rulings. The rulings indicate that while the payments are not subject to employees tax, it may be subject to VAT.
| Non executive payments |
Tax on profit-sharing loan arrangements
Binding Private Ruling 263
The Income Tax Act contains rules that re-characterize interest on certain loans to be treated as dividends for tax purposes. The effect of these provisions is that the interest is not deductible by the borrower, while the yield may be subject to dividends tax and qualify for the dividend exemptions from normal tax in the hands of the lender. Binding Private Ruling 263 deals with a profit-sharing loan arrangement and provides a good example of payments that the re-characterisation rules apply to.
| Tax on profit-sharing loan arrangements |
Changes to PAYE taking effect from 1 March 2017
Taxation Laws Amendment Act 2016 & 2016 Tax Administration Laws Amendment Act 2016
A number of amendments made at the end of 2016 take effect from 1 March 2017. This includes amendments relating to PAYE. Two such amendments are particularly likely to affect remuneration of directors or executives. The first relates to a requirement to withhold PAYE on deemed remuneration in respect of directors of private companies. The second amendment deals with the taxability of dividends in respect of certain unvested equity instruments and PAYE obligations on certain dividends.
| 2017 PAYE amendments |
Tax on vesting of shares by share incentive trust
Binding Private Ruling 259
Many employee share incentive schemes involve the use of trusts to house the shares until such time as they vest in the employees. Often the planning of the scheme focus on the application of section 8C, which taxes the gains on the shares in the hands of the employees. BPR259 reminds planners of a further aspect to be considered, namely the tax implications of the vesting of the shares for the trust.
| Tax on vesting of shares by share incentive trust |
Purpose of a loan and related interest expenditure
Cape Town Tax Court - Case 13791 & 13792
Interest is only deductible if incurred in the production of income and for purposes of carrying on a trade. This requires that the loan in respect of which the interest is paid and the trade/income should be closely connected. A recent case heard in the tax court illustrates that the original purpose of a loan for a specific purpose plays an important role in this regard, even in the case of a loan with flexible payment terms.
| Purpose of a loan and related interest expenditure |
Contingent liabilities assumed as part of a going concern
Interpretation Note 94
The tax implications of assuming contingent liabilities as part of a sale of business present uncertainties for both sellers and purchasers. The South African Revenue Service issued Interpretation Note 94 during December 2016 to provide guidance in this regard. The approach set out in this note require taxpayers to pay careful attention to, amongst other, the classification of contingent liabilities assumed, values attached and allocation of these items as purchase consideration as these factors have a significant effect.
| Contingent liabilities assumed as part of a going concern |
Tax considerations in respect of loans to trusts
Introdction of Section 7C of the Income Tax Act
From 1 March 2017 onwards, taxpayers have a further consideration in the form of section 7C of the Income Tax Act to take into account when doing estate planning. This provision deals with loans advanced by or at the instance of a natural person to a trust to which that person is connected. This provision may require a careful consideration of the overall benefits, including tax benefits, of housing certain assets in a trust as there may be a recurring tax cost associated to this decision.
| Tax considerations in respect of loans to trusts |
Donations tax effect of shares disposed to BEE shareholders
Binding Private Ruling 253 (BPR 253)
Given the changes in legislation, regulations and codes relating to Black Economic Empowerment (BEE) over the past two years or so, many South African businesses may need to enter into transactions to arrange or re-arrange their affairs in order to ensure that they maintain the necessary BEE scorecard to be able to conduct business. The introduction of BEE shareholders into an ownership structure may involve transactions that do not necessarily take place at consideration that would otherwise be viewed as market related. A recent ruling provides a useful reminder that tax, including donations tax, is an aspect not to be lost sight of in such transactions.
| Donations tax effect of shares disposed to BEE shareholders (BPR253) |
Zero-rating of services to foreign persons
XO Africa Safaris V C:SARS (SCA)
This case deals with the zero-rating of services rendered to foreign persons (tour operators/tourists). The court had to determine whether the recipients of the services rendered were in South Africa at the time of the supply. It was found that the taxpayer undertook to provide services enjoyed by tourists while in South Africa and that such a supply could not be zero-rated. It is submitted that this case highlights the need for taxpayers to take a cautious approach when zero-rating supplies. Certain checks, such as ensuring that the contracts align with the arguments that are critical to the zero-rating and testing the fundamental soundness of the outcome, are advisable.
| Zero-rating of services to foreign persons (XO Africa Safaris v C:SARS) |
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