Draft tax pro­pos­als hold nasty sur­prise as ex­emp­tion re­pealed

The Star Early Edition - - BUSINESS REPORT - Amanda Visser

THE newly re­leased draft Tax­a­tion Laws Amend­ment Bill holds some nasty sur­prises, with the end not yet in sight.

The pro­pos­als aim, among oth­ers to close lu­cra­tive loop­holes with the avoid­ance of in­come tax and cap­i­tal gains tax and to pre­vent the dou­ble non-tax­a­tion of South Africans work­ing abroad.

The bill in­tro­duces tax pro­pos­als in re­la­tion to is­sues raised dur­ing the Fe­bru­ary Bud­get. It gives flesh to the bones of what was an­nounced in the bud­get.

How­ever, Pa­tri­cia Wil­liams, a part­ner at law firm Bow­mans, says the pro­pos­als stretch be­yond is­sues iden­ti­fied in the bud­get. Some may shock “un­sus­pect­ing tax­pay­ers”.

She refers to the re­peal­ing of the tax ex­emp­tion on for­eign in­come en­joyed by South Africans work­ing abroad. Na­tional Trea­sury said in the bud­get the ex­emp­tion was “ex­ces­sively gen­er­ous” since the per­son might also be ex­empt from tax in the for­eign com­pany.

The ini­tial pro­posal was that the ex­emp­tion will only be al­lowed if the South African worker was pay­ing tax in the for­eign coun­try.

“The ac­tual pro­posal, how­ever, re­peals the ex­emp­tion as a whole, in other words it in­cludes the full for­eign in­come into the South African in­come tax net, re­gard­less of whether or not this was tax­able in the for­eign coun­try.”

She says the “blow” is some­what soft­ened by the fact that South Africans who have paid tax will be able to get tax cred­its for the tax they paid in the for­eign coun­try.

How­ever, Erika de Villiers, head of pol­icy at the South African In­sti­tute of Tax Pro­fes­sion­als (SAIT), said claim­ing the cred­its won’t be easy.

“It gives rise to prac­ti­cal con­cerns that are al­ready ex­pe­ri­enced

Bill in­tro­duces tax pro­pos­als in re­la­tion to is­sues raised dur­ing the Fe­bru­ary Bud­get.

by short-term as­signees (who never ben­e­fited from the ex­emp­tion) and will in fu­ture also be ex­pe­ri­enced by longterm as­signees (who are out­side of the coun­try for more than 183 days in a year).”

She said there was of­ten a very long de­lay in re­ceiv­ing the ben­e­fit of the for­eign tax credit. In the mean­time, the em­ployee car­ried the cash flow bur­den of the dou­ble tax.

One of the rea­sons for the de­lay is the oner­ous re­quire­ment of prov­ing that the for­eign tax was payable to a for­eign gov­ern­ment. Such ev­i­dence is of­ten dif­fi­cult to ob­tain in prac­tice as tax sys­tems vary and some rev­enue ser­vices do not pro­vide proof.

“We ex­pect that there will be ex­ten­sive fur­ther com­ment and con­sul­ta­tion on this pro­posal, as there are con­cerns re­gard­ing the im­pact on in­di­vid­u­als, busi­ness and the com­pet­i­tive­ness of South Africa as a hub for in­vest­ment into Africa.”

Jerry Botha, man­ag­ing part­ner at Tax Con­sult­ing, ex­plained where the em­ployee falls into the 45 per­cent tax bracket and pays 25 per­cent tax in the for­eign coun­try, the South African Rev­enue Ser­vice (SARS) will now collect the dif­fer­ence of 20 per­cent.

“There are lim­ited op­tions for South Africans abroad, should this law take ef­fect. One al­ter­na­tive would be to prop­erly em­i­grate, in which case there is a dis­posal cap­i­tal gains tax event (a so-called exit charge).”

Botha said SARS prob­a­bly an­tic­i­pates this likely move, as the 2016-17 tax re­turn now had a spe­cific dis­clo­sure hereon, which never pre­vi­ously ex­isted.

“We have seen some ex­pa­tri­ates in­di­cat­ing that with full tax on in­ter­na­tional em­ploy­ment in­come, which is what is ef­fec­tively pro­posed, cou­pled with the high costs of in­ter­na­tional work, com­ing home may be their only al­ter­na­tive.”

Wil­liams also re­ferred to the “over-zeal­ous” clo­sure of the share buy­back loop­hole. The clo­sure had been an­tic­i­pated for some time with pre­vi­ous mea­sures in­tro­duced hav­ing ob­vi­ously not been suf­fi­cient for SARS and Trea­sury.

The share buy­back ar­range­ments was in essence mis­used to avoid cap­i­tal gains tax. The Com­pa­nies Act made pro­vi­sion for a com­pany to be able to buy back its own shares. Pro­ceeds of buy­backs were in­cluded in the def­i­ni­tion of a div­i­dend.

Trea­sury said in its ex­plana­tory mem­o­ran­dum the div­i­dend tax regime al­lowed for an ex­emp­tion from div­i­dend tax when div­i­dends are paid to cer­tain share­hold­ers.

In terms of the pro­posal, if a com­pany with a qual­i­fy­ing in­ter­est (50 per­cent share­hold­ing) dis­poses of shares, then any div­i­dend re­ceived at any time in the pre­ced­ing 18 months, must be treated as a cap­i­tal gain and taxed ac­cord­ingly.

Wil­liams said the con­se­quence was that this would now ap­ply to all dis­pos­als and not only to share buy­back trans­ac­tions. “Even for nor­mal div­i­dends re­ceived within 18 months be­fore a share dis­posal, there would be a very sig­nif­i­cant in­crease in tax.”

In a nor­mal sale (no share buy­back) the pro­ceeds on the dis­posal would have been sub­ject to cap­i­tal gains tax at a rate of 22.4 per­cent. In the case of the distri­bu­tion of a div­i­dend sub­se­quent to the share buy­back there will be no tax.

Wil­liams said 2018 tax in­creases in­clude those on sugar and car­bon, and VAT on petrol and diesel.

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