The proposed amendments to tax legislation will have a far- reaching impact on many business and individual taxpayers. This article provides an overview of the draft legislation and highlights some of the key announcements. The due date for comments is 31 August 2023 and taxpayers would be well advised to study the proposals and make submissions if necessary.

2023 draft Taxation Laws Amendment Bill

As per SARS and National Treasury’s media statement, also published on 31 July 2023, the draft TLAB contains the more complex policy and technical amendments to the various tax acts. We discuss some of these below.

Renewable energy tax incentives

Given the urgency of the matter, the first draft legislation regarding the renewable energy tax incentives to arrest the decline in energy safety and supply in South Africa (and assisting with meeting climate change goals) was published on 21 April 2023. This legislation was welcomed in the sector and proposed a personal rooftop solar energy tax credit for individual taxpayers, as well as a separate and distinct 125% accelerated depreciation allowance for renewable energy generation assets.

Subsequent to the publication of the first draft legislation on 21 April 2023, there was a public consultation process regarding the proposed renewable energy tax incentives. The revised legislation now published in the draft TLAB factors some of those public submissions into account.

In respect of the individual rooftop solar energy tax credit, we summarise a few key aspects below.

• While there were extensive submissions and discussions that the proposed section 6C rooftop solar energy credit was not sufficient enough (in monetary terms) to increase uptake in solar, the credit has remained at 25% of the cost of the solar PV panels with an upper limit of R15,000. National Treasury was at pains to point out during discussions that it did not have much flexibility to amend the monetary limit as this has already been factored into budgets for the 2024 financial year and it was largely confined to working within those parameters.
• The rooftop solar energy credit is limited to “new and unused solar photovoltaic panels, with the generation capacity of each being not less than 275W”. Furthermore, they must be brought into use for the first time by the taxpayer on or after 1 March 2023 and before 1 March 2024. The rationale behind limiting the incentive to solar panels is that the Government wants to encourage the “generation” of energy and for this reason (amongst others) it has not been extended to include batteries. What is interesting to note is that an inverter forms a substantial cost of any solar PV system and is a necessary requirement for operation. This is because the inverter converts the direct current (DC) received from the solar panels to alternating current (AC) so that it can be used within South African households to power appliances and lights. Without the inverter, the solar PV panels are not of much use.

In respect of the 125% accelerated depreciation allowance for renewable energy generation assets, the proposed revised section 12BA largely mirrors the existing section 12B 100% (or three-year write off) for renewable energy assets. However, there are some notable differences:

• the allowance is limited to “new and unused” assets and thus secondhand assets are excluded;
• the assets must be brought into use on or after 1 March 2023 and before 1 March 2025;
• there are no generating capacity thresholds for hydro power (ceiling of 30MW in section 12B);
• there is no distinction between solar PV assets generating less than or more than 1MW as assets qualify for the 125% allowance irrespective of generating capability; and
• in addition to the normal restrictions on leased assets as contained in section 12B, the proposed section 12BA provides that under a finance lease type scenario, the seller cannot claim the section 12BA allowance if it remains the owner during the period of the finance lease.

Withdrawal of Practice Note 31 and introduction of section 11G

Another notable proposal relates to the intended withdrawal of SARS Practice Note 31 and the insertion of a proposed section 11G into the Income Tax Act 58 of 1962 (ITA). To replace Practice Note 31, it is proposed that a deduction will be allowed if the following requirements are met:

• expenditure not of a capital nature is incurred;
• if the expenditure is incurred by a company taxpayer in the production of its income;
• if that expenditure is incurred in the production of interest income accruing from another company that forms part of the same group of companies; or
• that interest income arises because of a loan, advance or credit advanced by that company, directly or indirectly, to that other company.

Importantly, there is a proviso that the amount allowed to be deducted under this section shall not exceed the amount of the interest income. It is interesting to note the non-capital expenditure requirement, particularly with reference to the fact that section 24J of the ITA does not refer to whether interest incurred is of a capital or non-capital nature.  

Clarifying the definition of a foreign business establishment in the CFC rules

In CSARS v Coronation Investment Management SA (Pty) Ltd (1269/2021) [2023] ZASCA 10 (07 February 2023), the Supreme Court of Appeal (SCA) had to determine whether a controlled foreign company (CFC) of a South African resident had met the “foreign business establishment” (FBE) exemption from imputation of income under section 9D of the ITA. The SCA concluded that the primary operations of the relevant CFC’s business was that of fund management, which comprises investment management. It was concluded that these were not conducted in Ireland but outsourced to other entities outside of Ireland and therefore, the relevant CFC did not meet the requirements for an FBE exemption in terms of section 9D(1). Given this, the SCA held that the net income of the relevant CFC is imputable to its South African tax resident shareholder.

Seemingly on the back of this case, National Treasury identified that some taxpayers are retaining certain management functions but outsourcing other important functions for which the CFC is also being compensated by its clients. The explanatory memorandum to the draft TLAB states that to qualify for the FBE exclusion, all important functions for which a CFC is compensated should be performed either by the CFC or by another CFC in the same group of companies that is located and subject to tax in the same country as the CFC’s fixed place of business.

With reference to the rationale behind the proposed amendments, it is interesting to note that the draft TLAB proposes deleting the words “conduct the primary operations of that business” and replacing them with “perform all the important functions of that business for which the controlled foreign company is compensated”. There is therefore a proposed shift away from the “primary operations” concept towards an “important functions” concept. Notably, it is unclear whether additional more explicit reference will be made to the outsourcing of functions to another CFC in the same group of companies that is located and subject to tax in the same country as the CFC’s fixed place of business.

Tax administration proposals

There are also some important and key tax administration proposals in the draft TALAB including the insertion of new provisions relating to advance pricing agreements for transfer pricing purposes and the removal of the distinction between resident and non-resident employers for purposes of registering for employees’ tax.

Summary

There are a number of key and far-reaching tax technical and tax administrative proposed amendments and taxpayers would be well advised to study the proposed amendments and their impact on their tax positions. Comments can be submitted until 31 August 2023.