SAIPA 2017/18 Annual Tax Update - PowerPoint Presentation

SAIPA 2017/18 Annual Tax Update Presented by: Madodonke Mpetshwa

Agenda Introduction Highlights of the Budget Changes to the ActIndividuals CompaniesEmployment Tax IncentiveCGTTrustsVATTax AdministrationCase Laws

1) Introduction The draft 2016 Taxation Laws Amendment Bill (2016 TLAB) was published by the National Treasury (NT) on 8 July 2016 for public comment. A second batch of the draft 2016 Taxation Laws Amendment Bill (2016 Second Batch TLAB) was published by NT for public comment and it contained: Employment Tax Incentive (ETI) and the Learneship Tax Incentive (LTI)On 26 October 2016, the Minister of Finance tabled the Taxation Laws Amendment Bill [B 17‐2016] (TLAB) which included the additional amendments that were contained in the 2016 Second Batch TLAB

2)Highlights of the 2017 Budget Speech New income tax rate of 45% for those with taxable incomes above R1,5 million Trust rate has also been increased from 41% to 45% Dividends tax increased from 15% to 20%Fuel levy will increase by 30c per litre whilst the Road Accident fund levy will increase by 9c per litreAs soon as the necessary legislation is approved, government will implement a tax on sugary beveragesA revised Carbon Tax Bill will be published for public consultation and tabling in Parliament by mid-2017

3) Changes to the Act INDIVIDUALS .

Tax Tables A new top personal income tax bracket of 45 % for those earning R1.5 million and above. It is estimated that 100 000 taxpayers will be affected by this new bracket. The previous top bracket of 41% was R701 301. These new rates also increase the effective capital gains tax.

Tax Table

Rebates s6 2018 (R) 2017 (R) Under 65 – Primary R13 635 R13,500 65+ - Secondary R7479 R7407 75 + - Tertiary R2493 R 2466 With effect 1 March 2016 section 6(1) is amended to state that rebates under this section must be deducted in determining the normal tax payable of a natural person , instead of deducted from normal tax payable of a taxpayer in order to reduce confusion. This also now has the effect that these rebates should be taken into account in determining underestimation penalties for provisional tax, as the penalty formula refers to normal tax .

Tax thresholds 2018 (R) 2017 (R) Under 65 (primary) R 75 750 R 75 000 65 to 75 (secondary) R 117 300 R 116 150 75 and older (tertiary) R 131 150 R 129 850

Medical Tax Credit s6A & 6B 2017/2018 2016/2017 Dependents Credit (R) Credit (R) Main Member 303 286 1 st Dependent 303 286 Additional Dependents 204 192 With effect from 1 March 2017, the increased rebates apply The medical credit increased is in line with inflation

Interest Exemption s10(1)( i ) 2018(R) 2017 (R) Under 65 23,800 23,800 65 + 34,500 34,500 There will be no more future inflation adjustments to s10(1)(i), as over time it will be replaced by s12T (Exemption of amounts received or accrued in respect of tax free investments ) Interest is exempt where earned by non-residents who are physically absent from South Africa for at least 183 days during the 12 month period before the interest accrues and the debt from which the interest arises is not effectively connected to a fixed place of business in South Africa

TRANSFER DUTY No Transfer duty will be payable on purchases of residential property that costs from R750 000 to R900 000, effective 1 March 2017. No transfer duty is payable if the transaction is subject to VAT.

FRINGE BENEFITS Para 2A of the 7 th Schedule - provides clarity that for the purposes of the application of fringe benefit tax, a partner is deemed to be an employee of a partnership.

DIRECTORS FEES Prior to 1 March 2017, directors of private companies and members of close corporations were deemed to have received a monthly remuneration and subject to PAYE, calculated using the provided formula. However the formula did not apply where at least 75% of their (Directors) remuneration was in the form of fixed monthly payments. As from 1 March 2017, this formula will no longer be applicable and PAYE is calculated on a payment basis. Effective from 1 June 2017 , resident non-executive directors will be regarded as independent contractors , resulting in no PAYE being withheld in respect of directors fees. Where the fees exceed R1 million in a 12 month period, that non-executive director will be required to register for VAT and issue a tax invoice to the company for the directors fees.

FRINGE BENEFITS Para 7(4) of the Seventh Schedule - provides clarity that in addition to private travelling between the employee’s place of residence and his place of employment, it also includes any travelling done for private or domestic purposes.

Travel Allowances The 2017/18 table has been adjusted Where an employer reimburses the employee for business kilometres travelled in addition to travel allowance ,the two must be combined for travel allowances purposesIf employer reimburses employees only for business travel that does not exceed 12 000km(increase from 8000KM ) for the year, at a rate no greater than R3.55 per kilometre for the year starting on or after 1 March 2017 (2017: R3.29), the reimbursement will not be included in taxable income ( reported against code 3703 but code 3753 must be used for foreign service income).

Travel Allowances This alternative is not available if other compensation in the form of an allowance or reimbursement (other than for parking or toll fees) is received from the employer in respect of the vehicle However, if the employee receives a travel allowance or the reimbursement is more than 12 000km per year or at a rate greater than R3.55 per km, the reimbursement, currently, is not subject to employees’ tax, but is included in taxable income on assessment (reported against code 3702). Code 3752 must be used for Foreign Service income

2017/18 year travel costs table Value of car (incl. VAT) Fixed costs (R) p.a. Fuel cost c/km Maintenance cost c/km 0 – 85 000 28 492 91.2 32.9 85 001 – 170 000 50 924 101.8 41.2 170 001 – 255 000 73 427 110.6 45.4 255 001 – 340 000 93 267 118.9 49.6 340 001 – 425 000 113 179 127.2 58.2 425 001 – 510 000 134 035 146.0 68.4 510 001 – 595 000 154 879 150.9 84.9 Exceeding 595 000 154 879 150.9 84.9

Subsistence Allowances Travel in the Republic Meals and incidental costs: R397 (2017:R372) per day.Incidental costs only: R122 (2017:R115) per day.Travel outside of the RepublicAs per table in the Act, per country. Details are published on SARS website under Legal and policy

ACCOMMODATION FRINGE BENEFIT Para 9 – “B” in the formula has been increased from R73 650 to R75 000 Effective date: 1March 2016.

Retirement fund contribution deductions s11(k) The wording of section 11(k) previously allowed for a deduction against income from “carrying on a trade”. The unintended consequence was that this excluded allowing a deduction against passive income. An amendment has been made to clarify that deductions for contributions to all retirement funds should be allowed to be set off against passive income. For s11(k) deductions, the passive income does not include taxable capital gains.

Retirement fund contribution deductions s11(k) Clarity has been given that the taxable income per s11(1)(k)(i) is calculated before the s18A deduction of donations to certain organisations. Any taxable capital gain must be added to the taxable income to calculate the amount on which the 27,5% limit is calculated.

s11(k) Deduction 11k( i ) - Current year contributions to all three funds – limited to the lesser of: R350 000 (limit never apportioned); or 27,5% of the higher of the person’s: remuneration as defined in the Fourth Schedule (excluding RTL, RTWL, SB); OR Taxable income (excluding RTL, RTWL, SB) before allowing any deductions in terms of s11(k) and s18A.

SOURCE RULES FOR RAF’’s Section 9(2)( i ) – An amendment has been made to clarify that the exclusion from the South African source rule in the mentioned section does not apply to lump sum or annuities received from retirement annuity funds. 9(3) – has been repealed due to the ambiguity it creates.Effective date – 1 March 2017.

SECTION 10(1)(gC) This exemption will only apply to retirement benefits received from foreign funds This gives clarity that lump sums, pensions or annuity received by any resident from a source outside the Republic for employment outside the Republic: if received from pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund as defined in section (1) of the Act is not exempt Effective date: 1 March 2017

Exemption on foreign employment income Currently, if a South African resident renders employment services in a foreign country for more than 183 days a year , the foreign employment income earned is exempt from tax, subject to certain conditions Section 10(1)(O) exemption widely used by SA residents Treasury feels the exemption is “excessively generous” It is proposed that this exemption be adjusted so that foreign employment income will only be exempt from tax if it is subject to tax in the foreign country Source : Mazars

Bursary Exemption s10(1)(q) Remuneration proxy has been increased from R400 000 to R600 000 Annual exemption limits increased:Grade R – 12 and NQF 1- 4 = R20 000 (from R15 000)NQF 5 – 10 = R60 000 (from R40 000)

DECEASED ESTATES The amendment made clarifies that in addition to the surviving spouse stepping into the shoes of the deceased spouse in regard to the asset inherited, the surviving spouse must be deemed to have claimed the deductions and allowances that the deceased spouse and the deceased estate claimed. Amendment to Section 9HA goes lot further and deems inherited values on farming livestock or trading stock or produce contemplated in the First schedule. The amount that was allowed as a deduction in respect of that asset for the purpose of determining that person’s taxable income , before the inclusion of any taxable Capital gain in respect to the year of assessment ending on the date of that person’s death Any Asset ,the base cost of that asset, as contemplated in paragraph 20 of the Eight Schedule as at the date of that person’s death. Effective date: 1 March 2016 .

2) Changes to the Act b) COMPANIES

COMPANIES Section 1 – gross income definition Sections 8B and 8C removed from para (c) as they are already included under para (n) Para (eA) amended to include reference to provident fundsPara (lC) added and it includes government grants as set out in section 12P, whether capital or revenue in nature.

COMPANIES Government grants Section 12P- local government grants now also included in the exemption granted.

COMPANIES Identical security and identical share definition Section 1 – the definitions above made reference in para(b) to section 44.This reference has been removed. It has been replaced with reference to any other security or share that is substituted for that listed security or share ito an arrangement that is announced and released as a corporate action.Effective date: 1 January 2017

COMPANIES Retirement annuity fund definition Para (b)(x)( dd) – has been amended to include the requirement that an individual must emigrate from the Republic as one of the criteria to be met in order for an individual to be able to withdraw a lump sum from his or her retirement annuity fund.

FOREIGN DIVIDENDS Tax rate on taxable foreign dividends (Section 10B(3)) increases from 15% to 20%, effective for the 2018 year of assessment Section 10B(5) – exemption iro restricted equity instrument does not apply if: The consideration for the buyback or redemption of shares in the company, or received in anticipation of the liquidation of the company. It is a dividend of an equity instrument (as defined in section 8C) that will be subject to section 8C when received Effective date: 1 March 2016 for YOA commencing on or after this date

WITHHOLDING TAX ON SERVICE FEES Section 51A – 51H – the withholding tax on service fees was repealed form the Income Tax Act. Payment of certain service fees by South African residents to non-residents will now be dealt with under the provisions of the Reportable Arrangements in the TAA. Effective date: service fees that are paid or that become due and payable on or after 1 January 2017

PURCHASED ANNUITY Section 10A – exempts a portion of an annuity received from an insurer that is effectively a return of the taxpayer’s capital. The Act requires that the statutory actuary of the insurer calculates the capital portion before first annuity is made. An amendment has been made to state that once the statutory actuary has made the calculation, it shall apply for each year from that time on until a recalculation is necessary.Effective date: 8 January 2016

RESEARCH AND DEVELOPMENT Section 11D(20) has been introduced to allow for reopening of assessments in the event that an income tax return has prescribed due to the approval by the Minister (of the deduction) which has taken longer. A reduced assessment will the be issued by SARS. Effective date: 1 October 2012

SMALL BUSINESS CORPORATION Section 12E – Personal liability companies are now included in the definition of a “small business corporation” per the Income Tax Act. But all the shareholders of the personal liability company may ONLY be natural persons. Effective date: YOA’s ending after 1 May 2011.

LEARNERSHIP ALLOWANCES Operation of section 12H extended to 31 March 2022. For learnership allowances entered on or before 1 October 2016 the following allowances are available:The old rules apply.

LEANERSHIP ALLOWANCES Allowances values have been amended as follows where learnership agreement entered into on or after 1 October 2016 :

INDUSTRIAL POLICY PROJECTS Section 12I – An amendment has been made to state that SARS may recoup the difference in allowance claimed in respect of a project which was approved as a preferred status but changes to a qualifying status by the end of the compliance period. Effective date: Date of promulgation of the Act.

VENTURE CAPITAL COMPANIES Section 12J – Currently allows for investors to obtain a tax deduction iro any expenditure incurred in acquiring shares in a VCC, subject to various limitations. The connected person rule defines any person holding 20% or more of shares in a company at the end of any YOA as connected.

VENTURE CAPITAL COMPANIES No deduction will be granted to taxpayers who acquire shares in a VCC if immediately after the acquisition the taxpayer is a connected person in relation to the VCC. An amendment has been made to state that the connected person test will be first performed 36 months after the first shares are issued by the VCC and thereafter it will be performed at the end of every YOA.

VENTURE CAPITAL COMPANIES Should a taxpayer who is an investor in a VCC be a connected person in relation to that VCC, with effect from the day after the 36 months from the date of the first issue of shares expired and after due notice to the VCC by SARS: The company must withdraw the approval of that company as a VCC if corrective steps acceptable to the Commissioner are not taken by the company within a period stated in the notice; and

VENTURE CAPITAL COMPANIES The VCC must include an amount equal to 125% of the expenditure incurred (which qualified for a deduction) for the issue of those shares held in that VCC in the income of that VCC during the YOA in which approval is withdrawn. Effective date: 1 January 2017

CAPITAL ALLOWANCES ON BUILDINGS Section 13(1)(f) - An amendment has been made to remove reference to the Commissioner's discretion in manufacturing building allowances in order to support self-assessment for Income Tax.

URBAN DEVELOPMENT ZONES (UDZ’s) Section 13 quat – This section has been amended to allow for more areas to be designated as urban development zone subject to certain conditions.Effective date: On promulgation of the Act

SPECIAL ECONOMIC ZONES Section 12R(2) states that “The rate of tax on taxable income attributable to income derived by a qualifying company within a special economic zone must be 15 cents on each rand of taxable income.” An amendment has been made which states that Small Business Corporations in a Special Economic Zone will be subject to tax at flat rate of 15% or the effective rate determined ito the graduated marginal structure; whichever is lower Effective date: 9 February 2016

RENEWABLE ENERGY Section 12U – Provides an accelerated capital allowance for supporting infrastructure used in producing renewable energy. full deduction of amounts actually incurred in the years incurred is available for renewable energy projects that generate electricity exceeding 5MW Pre-trade expenditure is deducted when the trade commences, if not already deducted.

TRADING STOCK Section 22 – Has been amended to clarify the tax consequences for the surviving spouse regarding allowable deductions and allowances iro those asset, as well as the subsequent capturing of any recoupments in the hands of the surviving spouse. The section no longer states that if trading stock is inherited by a surviving spouse, it should be included in the deceased income at MV This amendment is as a result of the introduction of the new section 9HA

SMALL BUSINESS FUNDING ENTITIES Section 23O - The insertion of the definition of “base cost” in subsection (1) of section 23O to mean a base cost as defined for CGT purposes.

INTEREST DEDUCTIONS S23N – an amendment has been made in this section to the effect that “interest incurred on loans raised to finance the acquisition of shares in an operating company, or to finance the acquisition of an asset ito a section 45 or section 47 transaction is fully deductible if the interest is on a linked unit (subject to certain conditions being met), held by a long-term insurer a pension fund, a provident fund, a REIT or a short-term insurer.”

HYBRID DEBT INSTRUMENTS According to section 8E of the Income Tax Act, dividends received by or accrued to a person in respect of certain shares and “equity instruments”, as defined, must be deemed in relation to that person to be an amount of income if that share or equity instrument constitutes a “hybrid equity instrument” at any time during that year of assessment. The effect of the provisions of section 8E is that, while the recipient is taxed on the deemed interest received, the company may not deduct the payment of the dividend from its taxable income. The dividends received on these shares are deemed to be income.

HYBRID DEBT INSTRUMENT The Definition of “hybrid equity” instrument is inserted into section 8E: To cover any right or interest If the value of that right or interest is determined directly or indirectly with reference to a share or an mount derived from a share.Effective date: YOA ending on or after 1 January 2017

HYBRID DEBT INSTRUMENTS Section 8E –Three new types of hybrid equity instruments have been added as follows: Any “equity instrument”, the value of which is determined with reference to “hybrid equity” instruments as previously defined; Any “equity instrument” the value of which is determined with reference to an amount “derived from” any of shares previously; and

HYBRID DEBT INSTRUMENTS Any other “equity instrument” if it is subject to a right or arrangement that would have been a right or redemption or a security arrangement as previously defined, had the “equity instrument” been the share to which the value is linked. Section 8E(2) has been amended to include both “equity instruments” as well as “shares”.

HYBRID DEBT INSTRUMENTS Section 8F - The re-classification of the interest as a result of the subordination agreement, does not apply where: the issuer that owes an amount to a company that forms part of the same group of companies as the issuer; and Payment iro that amount owing are suspended due to the financial difficulties of the issuer . Relief will be provided so that subornation agreements entered into in respect of debt between connected persons as defined in section 1 of the Income Tax Act. As a condition of this relief, the subordination of the envisaged debt must be subject to a request by a registered auditor, as contemplated in the Auditing Profession Act (Act No. 26 of 2005), who or which has certified that the payment, by a company, of an amount owed in respect of that instrument has been or is to be deferred by reason of the market value of the assets of that company being less than the amount of the liabilities of that company. It is envisaged that the auditor’s certification of the subordination of the related party debt for purposes of this exclusion should be evidenced in a separate letter.

CROSS_BORDER HYBRID INSTRUMENTS Section 8F and 8FA - The anti-avoidance rules should only apply to the following: in instances where the issuer is a resident company; and in instances where the issuer is a non-resident company in respect of the debt instrument that is attributable to a permanent establishment in South Africa or a controlled foreign company whose profits are attributed to a South African resident.

FOREIGN EXCHANGE GAINS AND LOSSES Section 24I(4) - When foreign debt becomes bad: The foreign exchange gains relating to that debt must be deducted from income; and The foreign exchange loss relating to that debt must be included in income.Effective date: YOA ending after 1 January 2017

AMALGAMATION TRANSACTIONS Section 44 – If a foreign company is amalgamated into another foreign company It is allowed to retain sufficient assets to pay normal trade debts and any reasonably anticipated liabilities to any sphere of government of any country and the cost of administration relating to the liquidation or winding up of the amalgamated company.

WITHHOLDING TAX ON INTEREST Section 50D exempts the following withholding tax on interest: African Development Bank Word BankThe African Import and Export BankThe European Investment Bank New Development Bank Effective date: 1 March 2015

WITHHOLDING TAX ON INTEREST Section 50E(2) - The lender must also submit a declaration if the interest paid to the lender is exempt from WHT on interest ito a Double Tax Agreement. Effective date: Date of promulgation of the Act

LAND REFORM INITIATIVES Exemption from donations tax in section 56 of the Income Tax Act be extended to include land reform initiatives under Chapter 6 of the National Development Plan (NDP). Introduction of a new para 64D of the Eight Schedule to the Income Tax Act to cater for exemption from CGT iro land donated ito the land reform initiative under Chapter 6 of the NDP. Effective date: 1 March 2016

LUMP SUM FROM FUNDS The definition of “public sector fund” in para 1 is due to the amendment related to the retirement reforms to include in the definition of “public sector fund” funds referred to in para (d) of the definition of “pension fund” as well as para (b) or (c) of the definition of “provident fund”. Effective date: 1 March 2018.

MICRO BUSINESSES The amendment to paragraph 1 of the Sixth Schedule ensures that amounts received by a micro business from a small business funding entity do not inflate the turnover of the microbusiness beyond the R1 million threshold and disqualify it from benefiting from the micro business regime, and is also excluded from the “taxable turnover” in para 7 of the Sixth Schedule. Effective date: Date of promulgation of the Act

DIVIDEND TAX Dividends Tax rate has been increased to 20% (Effective 22 February 2017) on dividends paid by resident companies and by non-resident companies in respect of shares listed on the JSE. Dividends are tax exempt when the beneficial owner of the dividend is a South African company, retirement fund or other exempt person. Non-resident beneficial owners of dividends may benefit from reduced tax rates based on Double Tax Agreement (DTA). The tax is to be withheld by companies paying the taxable dividends or by regulated intermediaries in the case of dividends on listed shares. The tax on dividends in kind (other than in cash) is payable and is endured(borne) by the company that declares and pays the dividend.

DIVIDEND TAX RETURN Section 64k - Investors receiving dividends from tax free investments (section 12T) are required to submit an exempt dividends tax free return to SARS following the receipt of every dividend payment Section 12T investment annual allowance has been increased from R30 000 to R33000 Section 64 K amendment aims to relieve investors from this obligation TAA

DEFINITION OF PROVISIONAL TAXPAYER Para 1 of the Fourth Schedule - Any person who derives, by way of income, remuneration from an employer that is not registered ito the Fourth Schedule, be included in the definition of “provisional taxpayer”

PROVISIONAL TAX ON DISPOSAL OF IMMOVABLE PROPERTY (Non-Resident) A provisional tax is withheld on behalf of non-resident sellers of immovable property in South Africa to be set off against the normal tax liability of the non-residents. The tax to be withheld from payments to the non-residents is at a rate of 7.5% for a non-resident individual, 10% for a non-resident company and 15% for a non-resident trust that is selling the immovable property.

DEFINITION OF REMUNERATION Para 1 of Fourth Schedule - Certain dividends received from restricted equity instruments do not qualify for an income tax exemption and are taxable on assessment of the directors and employees.The amendment aims to specifically includes these taxable dividends in the definition of “remuneration” for pay as you earn (PAYE) in paragraph 1 of the Fourth schedule TAA

TAX DEDUCTIBLE TABLES Para 9 of the Fourth Schedule - Clarifies the fact that the deduction tables prescribed by the commissioner in terms of the paragraph cannot take into account all the rebates claimable by employees under section 6quat of the Income Tax Act As a result of the amendment, the provision instead states clearly that these tables should be applied to take into account of the rebates applicable in terms of section 6 of Income Tax Act TAA

TAX DEDUCTIBLE TABLES Para 9(3) of the Fourth Schedule - An employer should apply to a commissioner for a directive before paying out any lump sum envisaged in para( d )or (e) of the definition of “gross income ”The exception that was contained in sub para(3)(b) were removedTherefore for employer and fund lump sum directives need to be obtained TAA

PROVISION FOR PAYMENT OF EMPLOYEES TAX Paragraph 11C of the Fourth Schedule - Contained a formula for deduction of employees tax on remuneration paid to the directors Repeals the formula for the calculation of employees tax (PAYE) by directors of private companiesEffective date: YOA commencing on or after 1 March 2017

PROVISIONAL TAX RETURNS Para 19 of the Fourth Schedule - If an estimate of the second provisional tax is not submitted within 4 months after the end of the relevant YOA, the provisional tax payer is deemed to have submitted an estimate of nil taxable income, therefore triggering a penalty under para 20.TAA

2) Changes to the Act c) EMPLOYMENT TAX INCENTIVE (“ETI”)

ETI The employment tax incentive, was designed to promote the employment of young workers. It operates as cost sharing arrangement between government and the employer. The cost sharing is only for eligible workers aged between 18 and 29 that earn above minimum wages and earn between R2000 and R6000 per month.ETI was meant to expire on 31 December 2016

ETI Amendment: The extension of the ETI regime to 28 February 2019 Administrative and legislative clean-up of the definitional sections to clarify the value of claims and restrictions of back-dated claims and roll-overs.Effective date: 1 March 2017

2) Changes to the Act d) CGT .

CGT Non-disposals PARA 11(2)(N) – no disposals of asset, where a share is transferred in terms of a lending arrangement or collateral arrangements This has been amended to include transfer of bondsEffective date: 1 January 2017

CGT Deemed proceeds Para 38(1) – a new exclusion has been added: The disposal of land from the date on which that land becomes declared land as defined in s37D(1)Section 37D deals with land that is declared a national park or a nature reserve where the owners give the government the free use of the land over 99 years. The granting of the rights to the government for 99 years is a disposal under para 11 and subject to CGT if the exclusion was not introduced. Effective date: 1 March 2015

CGT Primary residence Para 47 and 49 – Clarity has been given that the primary residence exclusion (R2 million) is NOT apportioned and it is the capital gain or loss that should be apportioned. Para 50 – The word “beneficiary” was replaced with the words “special trust” to clarify that the special trust owns the property and NOT the beneficiary.

CGT Foreign assets inherited by surviving spouse Para 43 – Where a foreign asset is inherited by the surviving spouse; the amount deemed to have been paid by the surviving spouse must be in the same currency in which the asset was acquired by the predeceased spouse. Effective date: spouses dying on or after 1 March 2016

CGT Land reform initiatives Para 64A has been amended to exempt the receipt of land contemplated in Chapter 6 of the NDP from CGT. Para 64D has been introduced and it exempts the donation of land contemplated in Chapter 6 of the NDP from CGT.

CGT Replacement assets rollover Para 66 – an amendment has been made to include in the “replacement assets” that may be rolled over in the case of a voluntary disposal. Effective date: backdated for disposals made during the year of assessment commencing on or after 1 January 2012

CGT Reduction in base cost of shares Para 76B(1) – A proviso has been added for listed shares to the effect that the Market value is equal to the ruling price at COB on the last business day before the repayment date of the capital plus the amount of return of capital.

2) Changes to the Act e) TRUSTS

TRUSTS TRUST RATE HAS BEEN INCREASED FROM 41% to 45% FROM 1 MARCH 2017 Effective CGT increase from 32,8% to 36%, effective 2018 year of assessment

TRUSTS Section 7C(1) - Applies to: Any loan, advance or credit made directly or indirectly to a trust by • a natural person ; •Or, at the instance of the natural person, a company with a connected person relationship to the natural person, •Where that natural person or company (or any person that’s a connected person (i. a beneficiary of a trust, any relative of such beneficiary, any other beneficiary of such a trust)) in relation to that natural person or company is a connected person to the trust Effective date: 1 March 2017

TRUSTS That does not charge interest, or charge interest at an interest rate lower than the official rate. (Currently is at 8%) Section 7(3)Where a trust incurs interest at a lower rate than the official rate or the loan is granted interest free; the difference between official interest rate and interest actually incurred is deemed to be a donation. donations tax of 20% will be payable thereon, by the person who granted the loan Donations tax exemptions (R100 000 p.a.) will be applicable though, which might provide some relief.

Example of application of section 7 C Thando made a loan to his trust amounting to R50 million which was utilised by trust to buy shares. He charges interest at 6%, the official rate as defined is 8%Donation is R50 000 000X(8%-6%)= R1 000 000Donations tax:Donation R1 000 000Less annual exemption R 100 000 R 900 000 Donations tax @ 20% = R180 000

TRUSTS TRUST-LOANS BY COMPANIES Section 7C(1)(b) - also applies where company makes a loan to a trust at the instance of a natural person who is a connected person to a company by virtue of shareholding in the company Section 7C(4) - Where loans are made by companies at the instance of more than one natural person, the donation is to be apportioned between the natural person in the ratio of equity shares held by them

TRUSTS EXAMPLE Liso and Lihlo own 51% and 49% respectively of 100 equity shares in issue in L&L Ltd. L&L Ltd granted an interest free loan of R500 000 to a trust that is connected to the company at the instance of both shareholders on 1 March 2017.The loan was outstanding for the full 2018 year of assessment. The official interest rate is 8% at the time of granting the loan.

TRUSTS SOLUTION As the loan is made at the instance of both Liso and Lihlo, the donation of interest not charged is treated as have been made by both of them. Liso is deemed to have made a donation in South Africa, during the 2018 year of assessment of R20 400 calculated as follows:R500 000*8%*51% = R20 400Lihlo is deemed to have made a donation in South Africa, during the 2018 year of assessment of R19 600 calculated as follows:R500 000*8%*49% = R19 600 Take note: The exemption of R100 000 per individual is available, if these were the only donations made by Liso and Lihlo, they would be exempt since they are below the R100 000.

TRUSTS LOSS ON LOAN Section 7C(2) - No deduction, loss, allowance or capital loss may be claimed in respect of: A disposal, including by way of a reduction or a waiver; orThe failure ,wholly or partly, of a claim for the payment, of any amount owing in respect of a loan, advance, credit referred to subsection(3)

TRUSTS Section 7C(5) - A loan to a trust referred in s7(1) will not be regarded as a loan if: The trust is a Public Benefit Organisation (PBO) Loan provided by reason or in return for a vested interestSpecial trust as defined Trust used the loan for purposes of funding of “primary residence” Affected transaction as defined in section 31(1) Sharia Complaint Financing Loans subject to provisions of section 64E(4) (deemed dividend for dividends tax )

TRUSTS Loans to companies – It seems from the wording that, the interest free or low interest loan to a company, even if trust owns all the shares, does not form part of the provisions of this section As the legislation stands at the moment, this seems to create a loophole in the provisions of section 7C However it must be noted that the above issue was addressed in the budget speech and indications are that Section 7C will be amended.

TRUSTS Example: Write -off trust loan Libone granted an interest free loan of R2 million to the Libone family trust (“LFB”). 2 years later, he decided to write off the loan payable by the LFB, although the LFB is able to repay the amountWhat are the tax consequences?

TRUSTS Solution: Since the LFB is able to repay the loan, the decision to write off the loan by Libone will definitely be considered to be voluntary and therefore the R2 million will be subject to donations tax Since there are donations tax, there will be no further consequences in terms of para 12ATake note: if the LFB was unable to repay the loan, the decision to write- off the loan by Libone would not regarded as voluntary and therefore the R2 million will not be subject to donations tax

TRUSTS Other existing trust anti-avoidance legislation still in place: Section 7(2) to 7(11) of the Income Tax Act-Income as a result of “donations, settlement or other disposition” Paras 68-73 of the Eighth Schedule-CGT attribution rules in case of "donation, settlement or other disposition”

TRUSTS Alternative for treatment of section 7C loans Charge interests Paying donations taxRepay the loanWrite off the loan

2) Changes to the Act g) VAT

AMENDMENT RELATING TO NOTIONAL INPUT TAX Section 1(1) of the VAT act- proviso(ii) of the definition of ”second –hand goods” has been amended to allow the deduction of notional input tax credit on goods containing gold, provided that the goods are sold in the same or substantially the same state as when those goods were acquired.

VAT ON MUNICIPALITIES Section 15(2A) of VAT Act has been amended to allow municipal entities to account for VAT on the PAYMENT basis in respect of any supply where the consideration is R100 000 or more. Effective date : 1April 2017

ALTERNATIVE DOCUMENTARY PROOF Section 16(2) Vendors can only access this relief as a last resort Vendors must still be able to demonstrate that a sincere effort has been put into obtaining the proper documents and maintain proof of those effortsFurthermore, vendors would have to make an application for a ruling not later than 2 months prior to expiry of the 5 year prescription period and only if and when that ruling is issued, may the amount be deducted as input tax at a later stage Invoking this provision will not allow vendors to backdate the claim to a past tax period that has already been closed TAA

REFUND OF VAT Section 44 The time limit within which a vendor must request a refund of VAT arising from a VAT return were clarified For a refund arising from a VAT return, the VAT return must be submitted within 5 years from the due date of that VAT returnIf the return is later than this, the excess is not refunded but treated as payment to National Revenue Fund TAA

VAT exemption on imported goods Section 13(3) of VAT Act exempt certain imported goods from VAT; these are set out in schedule 1 of the VAT ActAn exemption is applicable , where those goods are lost, destroyed or damaged through natural disasters or under such circumstances as the commissioner deems exceptional , as contemplated in the Customs and Excise Act, provided that such goods have not yet been entered for home consumptionThe customs duty together with the fuel levy on such goods must be more R2500 for this exemption to apply

VAT ON NON- EXECUTIVE DIRECTOR’s Fees SARS has confirmed the interpretation of the VAT laws that requires Non Executive Directors (NEDs) of companies to register for and charge VAT in respect of directors fees earned for service rendered as non executive directors Two Bindings General Ruling 40 and 41 were issued on 10 February 2017 confirming the above as of 1 June 2017

VAT ON NON- EXECUTIVE DIRECTOR’s Fees REGISTRATION REQUIREMENTS The value of the fees must exceed compulsory VAT registration threshold of R1M in any 12-month consecutive period. Non Executives Directors can voluntary register for VAT as wellNon Executive directors receiving director’s fees that exceeds R1M are required to register as VAT vendor effective from 1 June 2017 However ,NED’s will not be required to account for VAT in respect of directors fees received prior to the 1 June 2017 ,provided such was subject to PAYE

2) Changes to the Act h) TAX ADMIN ACT (TAA)

DEFINITION OF “SARS OFFICIAL” Section 1 An external legal practitioner briefed to represent SARS in legal matters has been excluded from the definition of a “SARS official”.

LEGAL COSTS Such costs recovered by the state attorney on behalf of the SARS must be paid to the National Revenue Fund and not to the SARS.

“RECORD” OF AN ASSESSMENT Section 97(4) - The “record” of an assessment includes the return and the documents in support thereof provided to SARS for purposes of an audit or verification. The retention period of a “record of an assessment” is extended from 5 years to 7 years in order to align it with the maximum period of extension of prescription.

ADDITIONAL ASSESSMENT Section 100 - Clarity has been given that only in exceptional circumstances should SARS be allowed to “reopen” the tax period, audit and issue an additional assessment after prescription – fraud, misrepresentation and non-disclosure.

UNDERSTATEMENT PENALTIES Understatement Penalties percentages have been adjusted for all assessments issued on or after 19 January 2017 Where the taxpayer can prove that the understatement resulted from a bona fide inadvertent error, SARS will not raise any understatement penalties. In the case of a substantial understatement SARS may waive the penalty if the taxpayer is in possession of an opinion provided by an independent registered tax practitioner/professional before the return was due (unless that return was due before 1 October 2012) and the practitioner/professional had been given all the material facts and concluded that the taxpayer was more than likely correct in the tax treatment of the transaction.

USP Table NB :Section 221 – Impermissible avoidance arrangements are now subject to an understatement penalty.

Lodging an objection Section 104 – The period for condonation of a late objection not based on exceptional circumstances has been extended from 21 days to a period now up to 30 days. If there are exceptional circumstances, SARS may further extend the condonation period.

TAX COURT Section 118 – If a tax appeal relates to the business of mining, the commercial member must be a registered engineer with experience in that field, or a sworn appraiser if it involves the valuation of assets. This provision is now extended to include other complex matters.

Definition of a “taxpayer” Section 151 – “relevant material” may be obtained in respect of a person subject to criminal investigation, and all information gathering powers and other relevant provisions where the word “taxpayer” is used, apply to such suspect.

VDP A requirement that a person seeking voluntary disclosure MUST BE GIVEN NOTICE of the commencement of an audit or criminal investigation into the affairs of such person.

Section 3(5) of Income Tax Act and Section 69(8) of TAA Amendment made to allow the FSB to disclose the income tax approval status of pension, pension preservation, provident, provident preservation and retirement annuity funds to a third party. The amendment in turn allows the FSB to publish details of funds mentioned above approved for income tax purposes on their website.

Case Law Please note that cases can be accessed via the SARS website: http://www.sars.gov.za/Legal/DR-Judgments/ In 2016 there were:6 High Court Cases11 Tax Court Cases9 Supreme Court of Appeal Cases

Case Law Please note that cases can be accessed via the SARS website: http://www.sars.gov.za/Legal/DR-Judgments/ In 2015 there were:7 High Court Cases7 Tax Court Cases6 Supreme Court of Appeal Cases

References 2) Taxation Laws Amendment Act, 2016 ​Act No. 15 ​Explanatory Memorandum on the Taxation Laws Amendment Bill 17B of 2016 3) Tax Administration Laws Amendment Act, 2016 ​Act No. 16 of 2016 Memorandum on the Objects of Tax Administration Laws Amendment Bill 18 of 2016

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