Authors: Joon Chong, Partner; Donald Fisher-Jones, Director; Nola Brown, Associate Director, Graham Viljoen, Director; Karen Miller, Consultant (Webber Wentzel)
The Budget Review 2018 (Budget) was released by the National Treasury on 21 February 2018. We discuss significant amendments included in Annexure C and Chapter 4 of the Budget in this article.
All references to "section" below are to sections in the Income Tax Act (ITA), and to "para" are to paragraphs in the Eighth Schedule of the ITA.
Proposed amendments under the heading of "Business (general)" include the following:
- The perceived abuse of share buy-back schemes were targeted in 2017 where "extraordinary dividends" received by a shareholder company holding a "qualifying interest" were deemed to be proceeds for capital gains tax (CGT) purposes, or income on the disposal of the shares. The amended section 22B and para 43A also overrules the corporate rules, resulting in a tax impact to a holding company receiving a liquidation distribution in terms of the corporate rules. National Treasury notes these concerns and proposes to review the interaction between these provisions and the corporate rules. Further, the rules on when preference dividends are "extraordinary dividends" would also be clarified.
- The amended "concession or compromise" provisions in section 19 and para 12A introduced in 2017 were intended to provide relief to companies in financial distress but which provide limited or no relief at all to such debtors. National Treasury has noted concerns about the unintended consequences of these provisions and proposes further amendments to address these concerns.
- Companies using debt funding to acquire a qualifying controlling interest in an operating company are allowed a special interest deduction on the debt in section 24O. An operating company is currently defined as a company where at least 80% of its receipts and accruals are income for tax purposes. National Treasury proposes to clarify when the 80% test should be applied and whether the test should be applied when the operating company transfers its business as a going concern to another company in the same group.
- The tax relief provided to collateral lending arrangements will be reconsidered to prevent the perceived abuse between foreign shareholders using listed shares as collateral for loans with resident companies. The resident companies would be exempt from dividends withholding tax on the dividends distributed by the listed company, and the full amount distributed would then be paid to the foreign shareholders as manufactured dividends. In contrast, the foreign shareholder would only have received an amount net of dividends withholding tax had it not entered into the arrangement.
Proposed amendments under the heading of "Business (incentives)" include the following:
- The venture capital company (VCC) incentive in section 12J will be amended to facilitate easier investments into small and medium-businesses or "qualifying companies". A qualifying company currently should not derive more than 20% of its gross income in that year from investment income. Further, it should also not be a controlled group company in relation to a group of companies. National Treasury proposes to revisit this investment income threshold as well as clarify when the controlled company test should be applied. The connected person test and retroactive withdrawal of VCC status will also be revisited.
Proposed amendments under the heading of "International Tax" include the following:
- The extension of controlled foreign company rules to foreign companies held through foreign trusts and foundations will be revisited in this legislative cycle. The proposed section 25BC in the 2017 legislative cycle was withdrawn due to the wording being overly broad.
- The overlap between the treatment of a dividend in section 1 and under the transfer pricing provisions in section 31 will be clarified. National Treasury proposes to treat an amount as a dividend in specie for purposes of section 31, unless the amount is already a dividend in terms of section 1.
- The interest withholding tax rules for interest paid by a trust to a non-resident beneficiary will be clarified. This is to be welcomed as there was uncertainty as to whether the company paying the interest, or the trust on-distributing the interest to its non-resident beneficiary, should withhold the tax.
- It also appears that an additional relief measure is to be provided where an exchange item is disposed of at a loss as a result of market forces, and not where the debtor is unable to pay.
Proposed amendments to VAT include the following:
- Insertion of the definition of "face value of a debt transferred" to prevent double VAT deduction when written-off debt is sold by a vendor on a non-recourse basis for an amount that is less than the amount owing. The purchaser of such debt then attempts to claim a further VAT deduction in the future if it is unable to recover the debt.
- Clarification that a vendor cancelling an incorrect invoice and issuing a new invoice with correct information is not committing an offence. This vendor will be required to maintain proper supporting documents as part of the audit trail.
- The income tax and VAT treatment on the supply of cryptocurrencies will be clarified.
- Regulations prescribing foreign electronic services which are subject to VAT will also be updated.
Other amendments to tax policy to increase fiscal revenue include the following:
- an increase in the VAT standard rate to 15% effective 1 April 2018;
- no adjustments to the top four income tax brackets, and below-inflation adjustments to the bottom three brackets;
- an increase to estate duty at 25% for estates above ZAR 30 million. Any donations above ZAR 30 million in one tax year will also be taxed at 25%. Both measures are effective from 1 March 2018;
- higher ad valorem (according to value) excise duties for luxury goods; and
- increases in the general fuel levy and Road Accident Fund levy.
In addition, National Treasury proposes to, amongst others, review the tax treatment of excessive debt financing through a discussion paper, revise aspects of section 11D on the research and development incentive to reduce the applications backlog and remove complexity, and to review the employment tax incentive before its expiry on 28 February 2019. Over the next three years, medical tax credits will also be increased at below the inflationary rate to fund the rollout of the national heath insurance.