Budget Tax Update March 2016 2016 Budget Where

Budget & Tax Update March 2016

2016 Budget

Where is most of our tax collected? * 5% 1% 4% Persons and individuals 4% Companies income tax 39% Dividends tax Taxes on property Value added tax 26% Specific excise duties General fuel levy 1% 2% *Figures per Budget Review 2016 3 Other domestic taxes 18% Taxes on international trade

2015 Budget Highlights • Postponement of the annuitisation requirement for provident funds and taxfree transfers from pension to provident funds • Announcement of a special VDP programme for offshore assets and income • Sharp increase in CGT inclusion rates • Measures to prevent tax avoidance through trusts • Increase in the transfer duty rate on property sales over R 10 million • General fuel levy increase by 30 cents per litre • Sin taxes increase • New tyre levy to be introduced 4

Tax Tables – Individuals 2016/2017 Taxable Income (R) 2015/2016 Rate of Tax (R) Taxable Income (R) Rate of Tax (R) 0 – 188 000 18% 0 – 181 900 18% 188 001 – 293 600 33 840 + 26% 181 901 – 284 100 32 742 + 26% 293 601 – 406 400 61 296 + 31% 284 101 – 393 200 59 314 + 31% 406 401 – 550 100 96 264 + 36% 393 201 – 550 100 93 135 + 36% 550 101 – 701 300 147 996 + 39% 550 101 – 701 300 149 619 + 39% 701 301 and above 206 964 + 41% 701 301 and above 208 587 + 41% 5

Rebates 2017 2016 (R) 13 500 13 257 65 and over – Secondary 7 407 75 and over - Tertiary 2 466 Rebates for natural persons Under 65 – Primary 6

Tax Thresholds 2017 2016 (R) Under 65 75 000 73 650 65 to 74 116 150 114 800 75 and over 129 850 128 500 7

Monthly Medical Scheme Contribution Tax Credits 2017 2016 (R) Taxpayer and first dependant, each 286 270 Each additional dependant 192 181 8

Local Interest Exemption 2017 2016 (R) Under 65 23 800 Over 65 34 500 9

Capital Gains Tax Exclusions 2017 2016 (R) Annual exclusion 40 000 30 000 Annual exclusion in year of death – gains and losses 300 000 Primary residence exclusion 2 million Disposal of small business by natural person if over age 55 or due to ill-health or death 1. 8 million Max market value of assets to qualify as a small business 10 million 10

Capital Gains Tax Effective Rates – YOA commencing 1 Mar 2016 Taxpayer Individuals Trusts Special Other Companies Ordinary Small business corporation Employment company (personal service provider) Foreign company (Permanent establishment) Micro-business subject to turnover tax 11 Inclusion Statutory Effective Rate (%) 40 0 – 41 0 – 16. 4 40 80 18 – 41 41 7. 2 – 16. 4 32. 8 80 80 80 28 0 – 28 28 22. 4 0 – 22. 4 80 0 28 0 22. 4 0

Travelling Allowance • • Deemed expenditure table has changed with effect from 1 March 2016 – See revised table in notes – No increase in the bands – Fixed cost, 2% to 3% increase – Fuel cost, 4. 7% decrease – Maintenance cost, 5. 1% increase – No change in limit on cost of R 560 000 Reimbursive travel allowance where business km’s less than 8 000 p/a increased from R 3. 18/km to R 3. 29/km (3. 5%) 12

Retirement fund lump sum withdrawal benefits 2016/2017 Taxable Income (R) 2015/2016 Rate of Tax (R) Taxable Income (R) Rate of Tax (R) 0 – 25 000 0% 25 001 – 660 000 18% 660 001 – 990 000 114 300 + 27% 990 001 and above 203 400 + 36% 13

Retirement fund lump sum benefits or severance benefits 2016/2017 Taxable Income (R) 2015/2016 Rate of Tax (R) Taxable Income (R) Rate of Tax (R) 0 – 500 000 0% 500 001 – 700 000 18% 700 001 – 1 050 000 36 000 + 27% 1 050 001 and above 130 500 + 36% 14 1 050 001 and above 130 500 + 36%

Corporate Tax Rates – YOA ending between 1 April and 31 March 2016/17 2015/16 Non-mining companies 28% Close corporations 28% Employment companies 28% Non-resident companies (SA sourced income) 28% 15

Withholding Tax • Dividends Tax (s 64 C – N) – 15% unchanged • Royalties (s 49 B) – 15% from 1 January 2015 • Interest paid to non-residents (s 50 A – H) – Exempt if paid by any sphere of SA government, a bank or debt is listed – All other at 15% with effect from 1 March 2015 • Service fees (s 51 A – H) – 15% from 1 January 2017 (NB Proposal to withdraw see later) • Foreign entertainers and sportspersons – 15% • Disposal of immovable property by non-residents – 5% individual, 7, 5% company, 10% trust 16

Small Business Corporations – YOA ending between 1 Apr and 31 Mar 2016/2017 Taxable income (R) 2015/2016 Rate of Tax (R) Taxable income (R) Rate of Tax (R) 0 – 75 000 0% 0 – 73 650 0% 75 001 – 365 000 7% 73 651 – 365 000 7% 365 001 – 550 000 20 300 + 21% 365 001 – 550 000 20 395 + 21% 550 001 and above 59 150 + 28% 550 001 and above 59 245 + 28% No mention of the Davis Tax Review Committee recommendation to replace the reduced tax regime with an annual refundable tax compliance rebate 17

Micro Businesses – YOA ending between 1 Mar and 28/29 Feb 2016/2017 Taxable turnover (R) 2015/2016 Taxable turnover Rate of Tax (R) 0 – 335 000 0% 335 001 – 500 000 1% 500 001 – 750 000 1 650 + 2% 750 001 and above 6 650 + 3% 18

Subsistence Allowances • • Travel in the Republic – meals and incidental costs: R 372 (was R 353) per day – incidental costs only: R 115 (was R 109) per day Travel outside the Republic – 19 daily amount for a few countries changed from 1 March 2016

Transfer duty – Natural and juristic persons Agreements on or after 1 March 2016 Taxable income (R) Agreements on or after 1 March 2015 Rate of Tax (R) Taxable income (R) Rate of Tax (R) 0 – 750 000 0% 750 001 – 1 250 000 3% 1 250 001 – 1 750 000 15 000 + 6% 1 750 001 – 2 250 000 45 000 + 8% 2 250 001 – 10 000 85 000 + 11% 2 250 001 and above 85 000 + 11% 10 001 and above 937 500 + 13% No mention of any change to the definition of “date of acquisition” and “property” to align the terms with other legislative provisions 20

Fuel Levies • To be increased by 30. 0 c/l on 6 April 2016 (2015 – 80. 5 c/l ) – General fuel levy on petrol and diesel increases by 30. 0 c/l (2015 – 30. 5 c/l) – Road Accident Fund levy on petrol and diesel was not increased (2015 – 50 c/l) • Total = 443 c/l on petrol; 428 c/l on diesel • Percentage of pump price at Feb 2016 – Petrol 37%; Diesel 45% 21

Sin Taxes • Excise duties increases on 24 February 2016: – Cigarettes from R 12. 42 per pack of 20 cigarettes to R 13. 24 (6. 7%) – Cigars from R 64. 96 to R 69. 28 per 23 g (6. 7%) – Traditional beer no increase – Malt beer from 124 c to 135 c on a 340 ml can (8. 5%) – Wine from R 3. 07 to R 3. 31 a litre (8%) – Sparkling wine from R 9. 75 to R 10. 53 a litre (8%) – Spirits from R 48. 13 to R 52. 07 on a 750 ml bottle (8. 2%) 22

Tax on Sugar-Sweetened Beverages • SA has the worst obesity rate in sub-Saharan Africa • Denmark, Finland, France, Hungary, Ireland, Mexica and Norway have introduced a tax on sugar-sweetened beverages • Proposed date of introduction in SA is 1 April 2017 23

Skills Development • Learnership Allowance and Employment Tax Incentive – Both are due to expire during 2016 • S 12 H – Learnership agreements signed before 1 October 2016 • ETI – 31 December 2016 – Reviews are in process – Possible 1 year extension if reviews are not complete • S 10(1)(q)(ii) exemption for employer provided bursaries to relatives of employees – Remuneration proxy will be increased from R 250 000 to R 400 000 – Exemption limits to be increased from R 10 000 to R 15 000 for NQF level 1 -4 and from R 30 000 to R 40 000 for NQF levels 5 -10 • Ninth Schedule - Education and training based public benefit activities – Proposed expansion of the list of PBAs relating to education and training – Accommodate industry-based training organisations – Allow access to PBO status 24

Environmental Taxes • Carbon Tax Bill released in November 2015 will be amended based on public comment • New Tyre levy from 1 October 2016 on imported tyres at a rate of R 2. 30 per kg of tyre • Incandescent globe levy will increase from R 4 to R 6 per globe from 1 April 2016 • Plastic bag levy will increase from 6 c to 8 c per bag from 1 April 2016 • Motor car emissions tax will increase by 11% on cars and 12% on double cabs • Renewable energy capital allowances to be expanded to include indirect infrastructure costs 25

Retirement Reforms • Implementation date – 1 March 2016 sees a change to the tax treatment of contributions to and withdrawals from retirement funds – Government proposes to postpone the requirement for provident fund members to annuitise to 1 March 2018 • Rollover of excess RAF and Pension Fund contributions to 1 March 2016 – S 11(k) will be amended to allow for the rollover • Order of allowable deductions – S 11(k) will be changed to allow the deduction before the S 18 A deduction • Review of foreign pension contributions and withdrawals – Review will be conducted and we can expect changes 26

Provisional Tax • Para 20 of the 4 th Schedule - Underestimation penalties – Retirement lump sums and severance benefits are excluded – Amounts in Para (d) of the definition of gross income are also excluded • Para (d) amounts are not taxed according to the lump tables • Currently there is no penalty for underpaying provisional tax on these amounts • Proposal to remove reference to Para (d) amounts that are not taxed according to the lump tables from the proviso to Para 20 of the 4 th Schedule • Result will be that underestimation penalties will apply if these amounts are not taken into account when making an estimate of taxable income for provisional tax purposes 27

Provisional Tax (continued) • Another proposal to amend Para 20 of the 4 th Schedule • Date on which estimate for 2 nd provisional tax payment must be submitted • No understatement penalty will apply if an estimate for the 2 nd period is submitted before the due date of the subsequent provisional tax payment • Proposal that this window be closed on the date of assessment of the relevant year 28

Hybrid Debts Instruments – S 8 F • Subordination agreements – S 8 F(b) includes in the definition of hybrid debt instrument, any instrument in respect of which a company owes an amount and the obligation to repay is conditional upon the MV of the assets of that company not being less than the MV of liabilities of that company – The above catches standard subordination agreements – Proposal to exclude debt instruments that are subject to subordination agreements • Double non-taxation – Measures will be introduced to eliminate mismatches associated with hybrid debt instruments where the issuer is not SA resident – This will avoid non-taxation in both countries 29

Avoidance Scheme in respect of Share Sales • Mechanism to avoid the tax consequences of shares sold by a company – Seller receives payment in the form of a dividend, exempt from income tax and dividends tax – Buyer subscribes for new shares and price constitutes CTC • Such a transaction is in substance a share sale and should be subject to tax • Widespread use of these arrangements merits an investigation into whether countermeasures are needed 30

Taxation of Government Grants • The 11 th Schedule sets out the government grants that are exempt from normal tax • Grants of a capital nature still fall out of gross income • Proposal that all government grants be included in gross income and the 11 th Schedule be the sole mechanism to determine whether these are taxable or not 31

Withdrawal of WHT on service fees – S 51 A - H • WHT on service fees came into effect on 1 January 2016 • Unforeseen uncertainty on application of domestic tax law and rights afforded by DTAs • Proposal to withdraw the WHT on service fees • These will be dealt with under the provisions of reportable arrangements in S 35 of the TAA 32

Bad Debt Deduction • S 11(i) provides for a deduction of any bad debt provided that amount is or was included in taxable income • A foreign denominated loan made by a SA taxpayer results in exchange differences that are included in taxable income • Assuming the lender is not a money-lender, if such a loan becomes bad no deduction is available under S 11(a) • Amendment is proposed to S 11(i) to address this and allow the deduction of exchange differences that have been included in taxable income 33

VAT – Non-Executive Directors’ Fees • A non-executive director may be subject to both employee’s tax and VAT • Views differ on which should apply • These issues will be investigated to provide clarity 34

VAT – Company Cars • VAT Reg 2835 sets out method to establish the determined value of a company car for output tax purposes • Para 7(1) of the 7 th Schedule sets out the method to establish the determined value of a company car of income tax purposes • These differ from each other • Employers have had to maintain 2 sets of records • Proposal to align VAT provisions with the 7 th Schedule 35

VAT – Alignment of prescription period • Input tax can be deducted from output tax attributable to a later tax period • The proviso to S 16(2)(n) requires that the later period falls within 5 years from the date the tax invoice should have been issued • It is proposed that this time period be limited in certain instances to the tax period in which the time of supply occurred • In addition it is proposed that the time limit for the payment by SARS of refunds be clarified 36

TAA – Objection and condonation periods • S 104 and the Dispute Resolution Rules allow 30 business days in which to object to an assessment • This is too short in practice resulting in many applications for condonation • Dispute Resolution Rules will be amended to allow – a longer period for lodging an objection; and – might also impact on the provisions for failing to comply with the prescribed time periods • S 104 might be amended to allow for an extended condonation period 37

TAA – Special VDP • New OECD standard for exchange of information between tax authorities comes into effect from 2017 • Taxpayers with undisclosed assets offshore beware • SARS and SARB will relax VDP rules to allow taxpayers to regularise their offshore assets • Media Statement issued 24 February 2016 • SARS and SARB will work jointly • Window period of 6 months from 1 October 2016 • Individuals and Companies can apply • Offshore Trusts will not qualify • Settlors, donors, deceased estates or beneficiaries of foreign discretionary trusts must elect to have the trusts offshore assets and income deemed to be held by them • No-name voluntary disclosure can be made i. t. o. S 228 of the TAA 38

TAA – Special VDP (continued) • Tax relief available – If undisclosed offshore income was used to acquire offshore assets before 1 March 2015 then only 50% of the undisclosed income will be taxed – Offshore investment returns from 1 March 2010 onward will be included in taxable income and taxed in full – Investment returns prior to 1 March 2010 will be exempt – Interest on tax debts arising will commence only from 1 March 2010 – No understatement penalty will apply – No criminal prosecution 39

TAA – Special VDP (continued) • Exchange Control relief available – Available to individuals and companies – On all excon contraventions prior to 29 February 2016 – Levy based on market value of offshore assets at 29 February 2016 • 5% if assets are repatriated to SA • 10% if assets are kept offshore – No reduction for any unutilised portion of the R 10 million foreign capital allowance – Levy must be sourced from foreign funds – If foreign funds are insufficient then additional 2% is added to extent that levy is settled with local assets • Full details of the tax relief will be released in the Rates and Monetary Amounts Bills, 2016 and Exchange Control Regulations 40

2015 Amendments

2015 Amendment Acts • The Rates and Monetary Amounts and Amendment of Revenue Laws Act No. 13 of 2015 – 17 November 2015 • Taxation Laws Amendment Act No. 25 of 2015 – 8 January 2016 • Tax Administration Laws Amendment Act No. 23 of 2015 - 8 January 2016 42

Taxation Laws Amendment Act No. 25 of 2015 - 8 January 2016

Individuals

Bursary and Scholarship exemption for basic education (S 10(1)(q)(bb)) • Current legislation implies that the exemption of the first R 10 000 of a bursary or scholarship granted to the relatives of employees applies to qualifications that begins at Grade 9 • Grades R to 8 do not qualify, which is most of basic education • This was not the intention of the legislation, which was to increase the level of exemption and cover both basic and further education • The amendment expands the exemption to include Grades R to 8 as intended • Effective 1 March 2013 45

PAYE and Provisional tax: Medical tax credits for employees over 65 (S 6 B(3), para 9(6) of 4 th Schedule) • Currently the additional medical expenses tax credit from qualifying medical expenses and medical aid contributions that exceed three times the credit for those over of the age of 65 are not incorporated in the monthly PAYE and provisional tax calculations • These additional medical expenses tax credits are claimable on assessment • As a result employees over the age of 65 experience a decrease in take-home pay throughout the year and experience cash flow difficulties through the year • The amendment provides that medical tax credits related to medical scheme contributions by those over the age of 65 be taken into account for both monthly PAYE and provisional tax calculations • Effective 1 March 2016 46

Consistent tax treatment on all retirement funds (definition of ‘pension fund’) • Contributions by both employers and employees to pension, provident and retirement annuity funds will qualify for a tax deduction, capped at a lesser of: – 27. 5% of the greater of taxable income or remuneration; or – R 350 000 per annum • Contributions by employers to pension, provident and retirement annuity funds on behalf of employees will become a taxable fringe benefit in the hands of the employee • On retirement, members of pension, provident and retirement annuity funds will be required to take 1/3 of their retirement benefit as a lump sum and 2/3 of their retirement benefit will be paid to them every month as an annuity until they die • Effective 1 March 2016 47

Consistent tax treatment on all retirement funds (definition of ‘pension fund’) • Vested rights are preserved and members over 55 years at 1 March 2016 are exempted from the requirement to annuitise • The de minimis threshold is increased from R 75 000 to R 247 500 • Members who do not have a retirement benefit exceeding R 247 500 at retirement will not be required to annuitise • Effective on 1 March 2016 48

Closing loophole to avoid estate duty (S 3 of Estate Duty Act) • Individuals with a RAF are allowed to work beyond the regular retirement age and still contribute to their retirement • Lump sum retirement assets are excluded from the dutiable portion of the estate upon death • This provided opportunity for individuals to use RA contributions to avoid estate duty • Contributions to RAFs that did not receive a deduction, since they were above threshold, could pass to the nominated beneficiaries free of estate duty 49

Closing loophole to avoid estate duty (S 3 of Estate Duty Act) • Amendment provides that contributions made on or after 1 March 2015 to a retirement fund that did not receive a deduction would be included in the dutiable part of the estate for estate duty purposes • Contributions that did not receive a deduction which have been included as part of any lump sum payouts to the retirement fund member or that have been used to offset the tax liability for annuity payments to retirement fund members will not be included in the dutiable value of the estate (to avoid any potential double counting) • Effective 1 January 2016 and applies in respect of the estate of the person who dies on or after that date and applies in respect of contributions made on or after 1 March 2015 50

Withdrawal from retirement funds by non-residents (def. of RAF) • Expatriates who move to SA for a fixed term of employment often contribute to a RAF to continue saving for retirement • When these expats leave SA they intend to withdraw their lump sum contributions from their RAF • Current provisions do not allow expats to withdraw a lump sum from their RA when they cease to be tax resident and leave SA or when they leave SA upon expiry of the work visa • Definition of RAF only caters for South Africans who emigrate and that emigration is recognised by the SARB for exchange control purposes • This means that when expats leave SA they are not regarded as having emigrated by SARB for exchange control purposes and are not entitled to receive a lump sum payment from their RAFs 51

Withdrawal from retirement funds by non-residents (def. of RAF) • Amendment to definition of RAF to allow for expats to withdraw a lump sum from their RAF if one of the following two criteria are met: 1. When the expat ceases to be a tax resident and leaves SA; or 2. When the expat leaves SA at the end of their work visa • Effective 1 March 2016 52

Income and disposals to and from a deceased estate (S 9 HA, S 22(8)(b), S 25 and paragraphs 40, 41 and 67 of 8 th Schedule • Various provisions in the Act govern the tax treatment of assets of a natural person upon and subsequent to death • S 25 provides that any income received or accrued any expenses incurred by the deceased estate for the benefit of ascertained heirs and legatees be deemed to be income received or accrued or expenses incurred by those heirs and legatees • The result is that the deceased estate is treated as a conduit in respect of income received by it if it has been derived for the immediate or future benefit of an ascertained heir or legatee 53

Income and disposals to and from a deceased estate (S 9 HA, S 22(8)(b), S 25 and paragraphs 40, 41 and 67 of 8 th Schedule • With the introduction of CGT in 2001, a deceased person is treated as having disposed of all his or her assets, with certain exceptions, for a consideration equal to the market value of those assets at date of death • All capital gains and losses are therefore recognised in the deceased’s hands • The deceased estate is treated as having acquired those assets at that market value and is subsequently subject to tax as a separate entity in respect of gains and losses from any disposals of assets it may thereafter undertake to persons other than the heirs or legatees of the deceased person • There is a mismatch between the application of the CGT provisions and S 25 which results in anomalies and interpretational difficulties 54

Income and disposals to and from a deceased estate (S 9 HA, S 22(8)(b), S 25 and paragraphs 40, 41 and 67 of 8 th Schedule) • S 25 allows for an heir or legatee to claim a deduction in respect of expenses not incurred by him or her • S 25 may also result in the upfront taxation of accrued income that often does not coincide with the pay-out of monies from the deceased estate • The amendments aligns the rules applying in respect of deceased persons and deceased estates with the CGT provisions • Gains and losses of whatever nature will be triggered on a person’s death with the current exceptions being preserved • Income received by or accrued to the deceased estate will be taxed in the hands of the deceased estate 55

Income and disposals to and from a deceased estate (S 9 HA, S 22(8)(b), S 25 and paragraphs 40, 41 and 67 of 8 th Schedule • Roll-over relief will be provided in respect of transfers from the deceased estate to any heir or legatee • The deceased estate will be treated as a natural person for tax purposes • Exemptions applicable to natural persons, excluding rebates contemplated in sections 6, 6 A and 6 B, will apply to the deceased estate • Effective 1 March 2016 56

Corporate

Debt-financed acquisitions of controlling share interests – S 24 O • The introduction of the special interest deduction in respect of debt-financed acquisitions of controlling share interests was aimed at removing the need to implement multiple step debt-push-down structures • Currently the special interest deduction is available when a company acquires the shares in an operating company and at the end of the day of that acquisition the company becomes a controlling group company in relation to that operating company • The requirements to qualify for the special interest deduction seek to mimic the conditions present in a tax-deferred debt-push-down structure • It has been noted that the policy intention to accommodate these tax-deferred debt-push-down structures is not clearly expressed in the current legislation which may lead to the abuse of the special deduction • The amendments aim to align the current special interest deduction in respect of debt used to acquire controlling share interests to the underlying policy objectives 58

Debt-financed acquisitions of controlling share interests – S 24 O • Amendment to the definition of an operating company – An operating company’s receipts and accruals in a year of assessment is required to consist of at least 80% income generated from carrying on business continuously through the sale of goods or the rendering of services – A controlling group company in relation to an operating company will no longer be automatically considered as an operating company • Amendment to definition of an acquisition transaction • Introduction of a qualifying share interest which qualifies for the special interest deduction • Introduction of a redetermination of a qualifying share interest which qualifies for the special interest deduction where a reorganisation event occurs • Consequential amendments to interest limitation provisions • Effective 1 January 2016 and applies in respect of years of assessment ending on or after that date 59

Return of capital after a taxpayer has held a share for 3 years – S 9 C • Section 9 C provides taxpayers with the certainty that if they hold equity shares for a period of at least 3 continuous years, the gains and losses on disposal will be of a capital nature regardless of intention • The amendments: – Clarify the meaning of the term “disposal” in respect of an equity share that has been held for a period of at least 3 years to mean disposal as defined in paragraph 1 of the 8 th Schedule as well as a disposal as contemplated in section 9 H of the Act – Remove the definition of “qualifying share” to more clearly reflect that a) any amount received or accrued (including a return of capital) and b) that any expenses incurred in respect of an equity share that has been held for at least 3 years will be deemed to be of a capital nature – Provide that a return of capital or expenses incurred in respect of an equity share held for at least 3 years will be deemed to be of a capital nature. Tax deductible expenditure incurred in relation to the equity share prior to being held for at least 3 years will still be subject to recoupment on disposal • Effective 1 January 2016 60

Cancellation of contracts – Paragraphs 3, 4, 11, 20 & 35 of the 8 th Schedule • The cancellation of a contract is regarded as a disposal for CGT purposes • Same year cancellation – The 8 th Schedule contains distinct adjustment rules with the intention to effectively put the taxpayers in a zero tax position as if they never entered into the transaction • Subsequent year cancellation – The original owner will have a deemed capital loss equal to the proceeds received in the year of disposal while the base cost in the year of the original disposal is treated as a capital gain in the year of cancellation – The intended policy effect was to reverse the previous year’s capital gain on the asset as an aggregate capital loss in the year of cancellation 61

Cancellation of contracts – Paragraphs 3, 4, 11, 20 & 35 of the 8 th Schedule • Same year cancellation – Old provisions – The adjustment rules allow a reduction of the proceeds in the hands of the original owner to the value of the amount that has been repaid or has become repayable to the person to whom the asset was sold – This has a netting effect on the amount of the proceeds effectively reducing it to nil – However, the base cost of the asset in the hands of the original owner is unaffected resulting in a possible capital loss in the hands of the original owner – The disposal of the asset in the hands of the new owner, as a result of the subsequent cancellation of the contract, is also subject to the adjustment rules that would give rise to the same tax effect as the normal disposal rules 62

Cancellation of contracts – Paragraphs 3, 4, 11, 20 & 35 of the 8 th Schedule • Subsequent year cancellation – Old provisions – The normal application of the provisions of the 8 th Schedule relating to the disposal, and acquisition, will apply to both parts of the transaction on a cancellation in a subsequent year – The old legislation could give the original owner the unintended benefit of a step-up in base cost without actually having paid or given up any economic benefit / value in the chain of ownership as the previous year’s gain is netted off through a capital loss in the original owner’s hands during the year of cancellation 63

Cancellation of contracts – Paragraphs 3, 4, 11, 20 & 35 of the 8 th Schedule • Amendments - Same year cancellation – A disposal and subsequent cancellation of a contract in the hands of the original owner be specifically excluded from a disposal as contemplated in the 8 th Schedule – This has the effect that no capital gain / loss calculation will be required and that the base cost in the hands of the original owner will be the exact same amount as it was prior to entering into the contract 64

Cancellation of contracts – Paragraphs 3, 4, 11, 20 & 35 of the 8 th Schedule • Amendments - Subsequent year cancellation – The amendment limits the base cost of the asset reacquired in the hands of the original owner to an amount equal to the base cost of that asset prior to entering into the relevant contract on the disposal of the asset that has subsequently been cancelled – To reflect actual economic value / expenses incurred post entering into the contract, the base cost of the asset reacquired will take into account any subsequent expenditure incurred by the new owner as allowed under paragraph 20 of the 8 th Schedule • Effective 1 January 2016 65

International Tax

Withdrawal of special foreign tax credit for services sourced in South Africa – S 6 quin, S 6 quat(1 C) and (1 D) • The special tax credit regime is a departure from international tax rules and tax treaty principles • It indirectly subsidises countries that do not comply with the tax treaties • The amendments provide for the withdrawal of the special foreign tax credit for service fees • All tax treaty disputes are to be resolved by competent authorities of the respective countries through mutual agreement procedures • A concession is provided to partly mitigate double tax faced by SA taxpayers in doing business with the rest of Africa • S 6 quat (1 C) and (1 D) is amended to allow for a deduction in respect of foreign taxes which are paid or proved to be payable without taking into account the option of the mutual agreement procedure under tax treaties • Effective 1 January 2016 67

Reinstatement of CFC diversionary income rules – S 9 D • The diversionary rules in respect of the CFC outbound sale of goods that were removed by the 2011 Taxation Laws Amendment Act is reinstated to its pre 2011 form • The old diversionary rules in respect of the CFC inbound sale of goods that were changed by the 2011 Taxation Laws Amendment Act is reinstated to its pre 2011 form • Effective 1 January 2016 68

Definition of interest for withholding tax purposes – S 50 A • Currently the Act does not contain the general definition of term “interest” • S 50 A dealing withholding tax on interest also does not contain a definition of the term “interest” • Only definition of interest contained in the Act is found in S 24 J and only for the purposes of that section • The lack of a definition of the term “interest” makes it difficult to determine which amounts are included in the concept of interest for the purposes of withholding tax on interest • The amendment provides that the term “interest” will be defined in S 50 A with reference to paragraphs (a) or (b) of the definition of “interest” under S 24 J(1) • Effective 1 March 2016 and applies in respect of interest that is paid or becomes due and payable on or after that date 69

Amendments to Business Incentive Provisions • Urban development zones – allowing for demarcation of additional UDZs per qualifying municipality • Extending the window period and introducing a compliance period for the industrial policy project tax incentive regime • Further alignment of the tax treatment of government grants • Depreciation allowance in respect of transmission lines or cables used for electronic communications outside SA • Special economic zones anti-profit shifting provision (effective 9 February 2016) • Accelerated capital allowances for manufacturing assets governed by supply agreements • Depreciation allowances for renewable energy machinery • Adjustment of energy savings tax incentive 70

VAT

Commercial Accommodation – S 1(1) • Currently the definition of commercial accommodation in S 1 contains a monetary threshold of R 60 000 • The proviso to the definition of enterprise states that where supplies in respect of commercial accommodation do not exceed the R 60 000 threshold then the supplies will not be deemed to have been made in the course of an enterprise • The amendment removes the monetary threshold from the definition of “commercial accommodation” and leaves the threshold in just one definition, i. e. in the proviso of the definition of enterprise • In addition, the threshold is increased to R 120 000 • Effective 1 April 2016 72

Zero Rating: Goods Delivered by Cartage Contractor – S 11(1)(m)(ii) • The supply of movable goods in terms of a sale or instalment credit agreement to a customs controlled area enterprise or an IDZ operator is subject to VAT at the zero rate, subject to, amongst others, the goods being delivered by a registered cartage contractor whose “main activity” is that of transporting of goods • The amendment aligns the VAT Act with the SARS Interpretation Note 30 (Issue 3) • The words “main activity” in S 11(1)(m)(ii) is changed to “activities include” to allow for the zero rating of goods delivered by a registered contractor whose activities include that of transportation of goods • The amendment also removes the requirement for the cartage contractor to be registered for VAT • Effective 1 April 2016 73

Time of Supply: Connected Persons (Undetermined Amounts – S 9(2)(a), S 10(4)(a) • S 9(2)(a) provides that where supplies are made between connected persons and the consideration for the supply cannot be determined when the goods are appropriated, VAT is payable when the goods are removed or are made available or when the services are performed, whichever is the earlier • Where the value of the goods cannot be determined when the goods are removed or services rendered then the amount of the output tax payable cannot be calculated • This leads to an impractical situation of making the provisions of the VAT Act difficult to implement 74

Time of Supply: Connected Persons (Undetermined Amounts – S 9(2)(a), S 10(4)(a) • Amendment where recipient vendor fully taxable – The provisions of S 9(2)(a) will not apply to connected persons who are fully taxable and where the consideration cannot be determined at the time the supply is deemed to be made • Amendment where recipient vendor partially taxable – The consideration is deemed to be the open market value in instances where the supply is between connected persons and the consideration cannot be determined at the time of the supply – Where the open market value is difficult to quantify at the time of supply, the taxpayer may make an application to the Commissioner for approval of an alternative method of determination • Effective 1 April 2016 75

Tax Administration Laws Amendment Act No. 23 of 2015 - 8 January 2016

Self Assessment – S 3 of IT Act • International research confirms that the international trend is to move away from administrative income tax assessment towards self assessment and voluntary compliance • Various developments have already taken place which has brought SA to the point where it, in practice, has a system of self-assessment • Examples of these reforms include: – Automatic processing of tax returns submitted by taxpayers – Introduction of a system of advanced tax rulings – A new dispute resolution process – A revised penalty regime for administrative non-compliance 77

Self Assessment – S 3 of IT Act • The income tax self-assessment system still contains remnants of administrative assessment which include various discretionary powers to be exercised by the Commissioner • To formalise self assessment in SA the remnants of administrative assessment must be removed • Effective on a date determined by the Minister of Finance by notice in the Gazette 78

Non-resident sellers of immovable property – S 35 A of ITA • Under current legislation amounts withheld from payments to non-resident sellers of immovable property is allocated to the non-resident seller’s provisional account • Should the non-resident seller not submit a return for that year the amount stays in the provisional account • The amendment provides that if the non-resident seller does not submit a return within 12 months after the end of the year of assessment, the payment of that amount is deemed to be a self-assessment in terms of section 95(3) of the TAA • Effective 8 January 2016 79

Dividends tax return – S 64 K of ITA • Amendment provides that recipients of foreign dividends, paid by foreign companies, that are exempt from dividends tax need not submit a return • Effective 8 January 2016 80

Deceased estate and provisional tax – Para 1 of 4 th Sched. • Effective 1 March 2016 deceased estates shall be taxable in respect of all income and capital gains and losses realised in the estate with no attribution to heirs or legatees • The deceased estate will be taxed as a natural person • The imposition of a liability for the payment of provisional tax will impose additional administrative burden on executors • A deceased estate will also be exposed to risk of understatement penalties • The amendment exempts deceased estates from the payment of provisional tax • Effective 1 March 2016 81

Provisional Tax Estimate, Penalty – Para 20 of 4 th Sched. • The liability to pay provisional tax is premised on the taxable income estimated by the taxpayer • The estimates are therefore a pre-requisite before a provisional tax liability can arise • The penalty for late payment of provisional tax can only be levied when a provisional taxpayer fails to pay an amount of provisional tax for which he or she is liable • If a taxpayer submits the estimate late, that estimate is deemed to be a nil estimate • As the estimate is nil, there is no liability to pay provisional tax • If there is no liability to pay, there can be no failure to pay on time and thus no late payment penalty can be charged 82

Provisional Tax Estimate, Penalty – Para 20 of 4 th Sched. • The amendment replaces the words “nil submission” with “an estimate of an amount of nil taxable income” to clarify this position • The amendment also inserts a time period to indicate by when a taxpayer will be considered as having submitted an estimate of an amount of nil taxable income • Where the estimate in respect of the relevant provisional payment is submitted prior to the date of the subsequent provisional payment then this deeming provisional will not apply (NB Refer budget proposal to close this window on date of assessment of the relevant year) • Effective 8 January 2016 83

Tax invoices, debit notes and credit notes – S 20, S 21 of VAT Act • The amendments relaxes the particulars required for a tax invoice, debit note and credit note • Tax invoice – The words “VAT invoice” or “invoice” is now acceptable for a valid tax invoice – The requirement that “tax invoice”, “VAT invoice” or “invoice” be “in a prominent place” is now removed • Debit note and credit note o The requirement that “debit note” and “credit note” be “in a prominent place” is now removed • Effective 8 January 2016 84

International tax standard – S 1 of TAA • New definition inserted with the aim to facilitate the automatic exchange of information between tax administrations • International tax standard means – – The OECD Standard for Automatic Exchange of Financial Account Information in Tax Matters; – The country-by-country reporting standard for multinational enterprises specified by the Minister; or – Any other international standard for the exchange of tax-related information between countries specified by the Minister • Effective 8 January 2016 85

Reduced assessments – S 93 of TAA • The provision was inserted to allow taxpayers a less formal mechanism to request corrections to their returns and so reduce assessments, without having to follow the objection and appeal route to do so • The intention of the legislation differed to the interpretation thereof • The word “undisputed error” has now been replaced by “readily apparent undisputed error in the assessment” • The amendment also moves the prescription override remedy for the taxpayer in specified circumstances which was contained in section 98 to this section, in an amended form, as the exercise of the remedy will not necessarily result in a withdrawal of the assessment, but rather a reduced assessment • Effective 8 January 2016 86

Withdrawal of assessments – S 98 of TAA • The provision was inserted to provide taxpayers with a prescription override remedy in specified circumstances • The intention of the legislation differed to the interpretation thereof • The amendment deletes this remedy from section 98 and moves it to section 93 in an amended form • Effective 8 January 2016 87

Extension of prescription period – S 99 of TAA • The amendment allows for the prescription period to be extended, by prior notice of at least 30 days, by a period appropriate to a delay arising from: – Failure by a taxpayer to provide all relevant material requested by SARS within the period under S 46(1) or the extended period under S 46(5); – Resolving information entitlement disputes, including all legal proceedings • The prescription period may also be extended, by prior notice of at least 60 days, by 3 years in the case of assessment by SARS and 2 years in the case of self-assessment where the audit or investigation relates to: – The application of the doctrine of substance over form – The application of GAAR – The taxation of hybrid entities or hybrid instruments – Section 31 of the ITA (transfer pricing matters) • Effective 8 January 2016 88

Liability of third party for tax debts - S 179 of TAA • The amendment provides that SARS may only issue a notice to a third party who owes money to, or holds funds for, a taxpayer, to pay that money or those funds to SARS after: – A final demand for payment had been issued to the taxpayer – At the latest, 10 business days before the issue of the notice • Within 5 business days of receiving the demand a tax debtor may apply to SARS for a reduction of the amount to be paid to SARS • For a natural person the application can be based on basic living expenses of the tax debtor and his or her dependants • For a non natural person the application can be based on serious financial hardship • Also, SARS need not issue a final demand if a senior SARS official is satisfied that to do so would prejudice the collection of the tax debt • Effective 8 January 2016 89

Voluntary disclosure programme – S 226, S 227 and S 229 • The amendment clarifies that an audit, unrelated to the default being disclosed by an applicant, will not disqualify an applicant for full voluntary disclosure relief • Currently one of the requirements for a valid voluntary disclosure is that the disclosure must involve a “default” which has not previously been disclosed • The amendment now requires that the “default” must not be a default that occurred within 5 years of the disclosure of a similar “default” • The amendment also broadens the voluntary disclosure relief to include 100% relief in respect of late payment of a tax • It should be noted that this relief does not extend to the penalties in respect of late submission of a return • Effective 8 January 2016 90

Delivery of notices – S 251 of TAA • The amendment clarifies that a delivery of a notice may also be made to a registered user’s electronic filing page • Effective 25 August 2014 91

Tax compliance status – S 256 of TAA • SARS is often approached to verify the tax compliance status of an entity for periods before the current date of the request • The amendment enables SARS to provide the tax compliance status of a taxpayer irrespective of the period to which the request relates • Effective 8 January 2016 92

Davis Tax Committee (DTC) First Interim Report on Estate Duty

Key recommendations • The flat rate of tax for trusts should be maintained at its existing levels • The deeming provisions of sections 7 and 25 B should be repealed insofar as they apply to RSA resident trusts • The deeming provisions of sections 7 and 25 B should be retained insofar as they apply to non-resident trusts • Trusts should be taxed as separate taxpayers • The only relief to the rule should be the “special trust”. The definition should be revisited • No attempt should be made to implement transfer pricing adjustments in the event of financial assistance or interest-free loans being advanced to trusts 94

Key recommendations • All distributions of foreign trusts be taxed as income • The principle of inter-spouse exemptions and roll-overs should be either withdrawn completely, or subjected to a specified limit • Inter-spouse donations tax exemptions should be retained, subject to the exemption being amended to exclude all interest in either fixed property or companies • The primary abatement be increased to R 6 million per taxpayer • The current estate duty flat rate of 20% should be retained 95

Judge Davis indicates the shift in some of the DTC’s view • Trusts were not dealt with correctly in the first report and the conduit principle will probably remain in respect of distributions from local trusts made in the year of assessment • The estate duty abatement may increase to a flat R 15 million per individual (no spousal exemption and no roll over) • The estate duty rate might be staggered, for e. g. duty may be levied at a rate of 20% up to a certain point above R 15 million and at 25% thereafter. This is a new recommendation focussed on high net worth families • Large interest-free loans in trusts will possibly lead to the trust being attacked in terms of the existing estate duty anti-avoidance provisions. This is likely to apply where the planner is in control of the trust 96

Judge Davis indicates the shift in some of the DTC’s view • It was probably incorrect to suggest taxing all distributions from offshore trusts as revenue • The DTC is very concerned about undisclosed offshore trusts and the fact that the VDP is not working to the extent that it should. Additional foreign exchange amnesty may possibly be recommended • Any possible legislative changes will be announced in either the 2016 budget or the next 97

2016 Budget – Measures to prevent tax avoidance through Trusts • Concerns around the avoidance of – – Estate duty – Donations tax – Income splitting and other tax benefits • Founder sells assets to a trust on interest free loan – – No donations tax and assets are not included in founder’s estate on death • Proposal to – – Trust assets funded via a loan to the trust will be included in the estate of the founder (lendor/donor) at death – Categorise interest-free loans to trusts as donations – Limit the use of discretionary trusts for income splitting – Limit the use of discretionary trusts for other tax benefits 98

Court Case

High Court Ruling – Input tax deduction • South Atlantic Jazz Festival (Pty) Ltd v CSARS – HC A 129/2014 WC 6 February 2015 • The court case considers whether a supplier’s failure to issue a tax invoice, despite being demanded by the vendor to do so, precludes the vendor from applying the provisions of either S 20(7) or S 16(2)(f) of the VAT Act to claim an input tax deduction • The appellant staged international jazz festivals on an annual basis for which it concluded sponsorships from various parties • In terms of these sponsorship contracts the sponsors paid money and provided goods and services for the festival • The appellant then provided branding and marketing services to the sponsors • It was common cause between the parties that the contracts represented barter transactions • All parties were registered vendors 100

High Court Ruling – Input tax deduction • The appellant was liable to declare output VAT on the value of the supply of its branding and marketing services but failed to do so • SARS raised additional assessments based on the values and terms stipulated in the sponsorship contracts • Appellant did not contest the output tax liability but contented that it should be entitled to offset the liability with the input tax attributable to the supplies made to the sponsors in terms of either sections 20(7) or 16(2)(f) of the VAT Act • The appellant’s reliance on the said sections stemmed from the fact that the sponsors never issued tax invoices in terms of section 20 and that the contracts should therefore serve as proof of entitlement to a deduction of input tax • The Commissioner disallowed the inputs on the basis that the appellant was not in possession of a valid tax invoice 101

High Court Ruling – Input tax deduction • The Court held that there must be an existence or availability of sufficient documentary records • The Court accepted that the sponsorship contracts constituted sufficient documentary evidence • The following was held by Binns-Ward J at paragraph [15]: “…If the documents were good enough for the Commissioner to assess the appellant’s output tax liability, it is impossible to conceive, having regard to the character of the particular transactions, why they should not also have been sufficient for the purpose of computing the input tax which should have been deemed to have been levied by the sponsors…” 102

Thank You For more information please contact the Fasset Call Centre on 086 101 0001 or visit www. fasset. org. za