The 2017 Draft Taxation Laws Amendment Bill and the 2017 Draft Tax Administration Laws Amendment Bill have been published by the National Treasury and the South African Revenue Service (SARS) on 19 July 2017.
The main proposals contained in the 2017 Draft Taxation Laws Amendment Bill deal with the following:
Contributed tax capital
The 2017 Budget Speech proposed amendments to the definition of “contributed tax capital” (CTC), to prevent the abuse of capital distributions to international companies, thereby avoiding the payment of dividends tax.
Proposed amendments in the draft bill include measures to limit the CTC where:
- group companies are interposed to benefit from CTC enhancements afforded by asset for share transactions; and
- disguised sale of share transactions involving the subscription for new shares and buy-back of the sale shares by way of dividend.
The proposed amendments are included in the new section 8G of the Income Tax Act and are effective from 19 July 2017.
Share buy-backs and dividend stripping
The draft bill proposes that in order to curb the use of share buy-back schemes as well as circumvention of dividend stripping rules, the current anti-dividend stripping rules should be broadened to include ‘’tainted’’ dividends in the proceeds on sale of shares under certain circumstances. The mischief the amendments seek to address is the conversion of taxable share sale consideration into exempt dividends.
The proposed amendments are to section 22B and paragraph 43A of the 8th schedule of the Income Tax Act and are intended to be effective from 19 July 2017.
Prevention of tax avoidance through the use of trusts
Section 7C which came into operation on 1 March 2017, significantly amended the tax treatment of trusts. It is applicable in circumstances where a loan is made to a trust and no interest (or interest lower than the official rate of interest contemplated in the Seventh Schedule to the Income Tax Act (currently 8%)), is payable on the loan, and the loan is made available (whether directly or indirectly) to the trust by a natural person or a company that is a connected person in relation to that natural person.
The effect of the application of section 7C would be as follows:
- any interest forgone by the taxpayer in respect of the interest free or low interest loan would be treated as an ongoing and annual donation to the trust; and
- no deduction, loss, allowance or capital loss may be claimed by the taxpayer in respect of the interest free or low interest loan made to the trust.
Section 7C is a specific-avoidance section, targeting the avoidance of estate duty and donations tax. Certain taxpayers attempted to avoid the application of Section 7C by advancing interest free or low interest loans to companies whose shares are held by trusts. By advancing the loan to the company rather than the trust, the anti-avoidance measure will not apply as it currently only applies to loans advanced to trusts. An alternative mechanism was to transfer the loan claims to current or future beneficiaries of trusts, to break the link with the “connected person”.
The draft bill introduces mechanisms to curb the above practices and being an anti-avoidance measure, the proposed amendment will come into effect on 19 July 2017 and applies in respect of any amount owed by a trust or company in respect of a loan, advance or credit provided to that trust before, on or after that date.
On the positive side, a specific exclusion is also introduced to ensure that bona fide employee share schemes are not negatively affected by section 7C.
Tax on expatriates
The current exemption applicable to South African residents working in a foreign country for more than 183 days in a year, in terms whereof the employment income earned by them is tax exempt in South Africa, is to be repealed.
The draft bill proposes to tax all South African residents on foreign employment income earned in respect of services rendered outside South Africa with relief from foreign taxes paid on the income under section 6quat of the Act.
The proposed repeal of section 10(1)(o)(ii) will come into effect on 1 March 2019 and will be applicable in respect of years of assessment commencing on or after that date.
Other amendments are also contained in the draft tax bills, but these are the main ones that will affect corporate taxpayers. Bravura anticipated the above amendments after the release of the 2017 Budget Review. The public is invited to comment before 18 August 2017, and this may lead to a refining of the wording or the change of certain of the implementation dates, requiring taxpayers to plan accordingly. More detailed commentary will be provided once the final legislation is tabled in parliament in January/ February 2018.