National Treasury recently announced that a number of amendments are to be made to the Draft Taxation Laws Amendment Bill (the Bill) that was released recently pursuant to comments that were made by about 60 organisations. All in all the submissions exceeded 500 pages.
Some of the notable amendments are indicated below.
Taxation of Dividends in respect of Executive Share Schemes
Previously it was proposed that all distributions in respect of restricted equity instruments will be treated as ordinary revenue and thus be included in gross income. However, it was indicated that the proposal would have undermined Black empower transactions as dividends from empowerment ordinary shares are used to finance the purchase of those shares by the empowerment parties. In terms of the amendments, only dividends in respect of restricted non-equity share instruments will be included in gross income. In other words, dividends on ordinary shares will not be subject to tax, but only dividends on, say, preference shares.
Even though the taxation of dividends on preference shares will still amount to a double taxation, SARS has indicated that this is effectively a "no go" area and that no collateral relief will apply in these circumstances.
However, it should be noted that capital distributions will still be subject to income tax.
Anti-Avoidance Rule to Prevent Deduction of Funding Cost in respect of Financial Instruments
National Treasury has initially proposed the introduction of section 23K dealing with the disallowance of certain funding costs. Comments were made that these measures were overly broad and should be withdrawn. It was also indicated that only financial institutions will have the capability of proper tracing. Initially the proposals were amended so as to limit it only to financial institutions (and other regulated entities). However, it has now been decided to withdraw this proposed section.
Effectively, one should appreciate that financial institutions will now receive standard queries in relation to the funding that may have been used to fund preference share and other similar investments. Effectively, the requirement will be whether funding may have been sourced from a pool of funds and whether the funding cost can in fact be said to have been incurred in the production of income. It has been indicated by National Treasury that there are serious concerns that exist in relation to various schemes which effectively rely on the use of deductible financial instrument flows to fund exempt financial instrument receipts and accruals. Policy review can be expected in due course.
We have already seen queries from SARS dealing with the question how preference share and other similar investments have been funded and it is expected that these standard queries will probably be sent to all financial institutions dealing in these instruments.
A number of comments have been made in relation to Islamic finance and most of them have been favourably considered. In particular, it has been indicated that the Islamic finance project will run over a two year period and that other Islamic finance arrangements will be considered in the 2011 legislative cycle.
Devalued Financial Instruments held as Trading Stock
In terms of the current proposals one would not be able to devalue any financial instruments held as trading stock as at year end. Comments were made that this would place taxpayers dealing in these instruments at a disadvantage as a trader holding fixed property will still be able to write down unrealised losses on fixed property. National Treasury has indicated that these comments are not accepted, even though bad debt write-offs will still be allowed in terms of section 11(i).
New Definition of Equity Shares
It is important to appreciate that the new definition of an equity share will be inserted into the income tax legislation to the effect that a share should be able to participate both in profits as well as a distribution in capital to be treated as an equity share. It is no longer an argument that one would be dealing with an equity share if only one of the requirements is met.
More changes to companA number of comments have been made to the effect that the requirements of the Financial Services Board (the FSB) should take precedence in determining deductable reserves. It has been indicated that the objectives of the FSB are different to that of the income tax system. The FSB rules in relation to reserves are being finalised and that the current discretion to make adjustments will accordingly remain in force until the FSB rules are finalised.y car fringe benefits
Introduction of a Withholding Tax on Interest
National Treasury has reconsidered the entire issue in relation to the payment of interest to non-residents. It has now been indicated that, even though a number of tax treaties will have to be renegotiated, a withholding tax of 10% will be introduced in relation to interest payable to non-residents. The effective date of this withholding tax will be 1 January 2013. The withholding tax regime will be worded on the basis of the current withholding tax applicable to royalties. However, the relevant exemptions will still be retained, including South African debt that is listed on foreign exchanges. Interest charges associated with the export credit agency will also be exempt.
A number of comments have been made in relation to transfer pricing and thin capitalisation, but mostly not accepted.
Mineral and Petroleum Resources Royalty
A number of comments have been accepted in relation to this legislation that has caused substantial problems since inception.
Voluntary Disclosure Programme
A number of amendments will be made to the Voluntary Disclosure Programme so as to make it more attractive for taxpayers.
Interest on Underpayment of Provisional Tax
It has been indicated that a discretion will be introduced to cater for circumstances outside the taxpayer's control, similar to the current provisions of the VAT Act. These provisions are very limited. However, it is indicated that the waiver of interest may still be considered in the context of settlement discussions and agreements with SARS.
Emil Brincker, Director, Tax