Careful reading prescribed for new tax laws

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 17 November 2011

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Amanda Visser
Published: 2011/11/17

Changes to taxation laws at the end of each year have become the norm and this year is no exception. Significant and far-reaching changes have been proposed in the Taxation Laws Amendment Bill that is due to be debated in Parliament today.

These changes will require companies to keep tax exposure high on their boards' agendas.

David Warneke, tax partner at BDO SA, says the final bill will address some of the more controversial issues but certain problems will remain. "The provisions set out in the bill are complex and the question remains whether SARS (the South African Revenue Service) will have the capacity to administer the act."

The Treasury has often used so- called sniper provisions to counter schemes SARS and the Treasury frown upon. The problem is some of those provisions are extremely complex, Mr Warneke says. Ernie Lai King, tax executive at Edward Nathan Sonnenbergs, says some of the changes will need careful reading.

"One of the more tricky issues is the different dates on which the tax amendments come into effect. Subsections within a section have different effective dates, so careful reading is essential," he says.

Among the most significant changes is the introduction of the dividend tax that will replace Secondary Tax on Companies.

The Treasury broadened the dividend definition to include any amount that has been transferred or applied in respect of any share in the company.

The purpose of the changes is to flag disguised payments and benefits in respect of shares.

Mr Warneke says the proposed changes to the dividend definition, together with the deletion of the proposed value extraction tax, amount to a new "fact and circumstances regime" to determine whether a company has declared a dividend or not.

The question to ask is whether a repayment on a loan, benefit, salary or payment for the use of an asset is in respect of a share. If the answer is yes, then it is considered a dividend and the 10% tax will generally be levied.

The Treasury partially accepted proposals to keep the deemed dividend rules. It was proposed that deemed dividend treatment be automatically applied to loans made by companies to connected persons that are non company residents (domestic natural persons and trusts).

According to a Treasury response document, the loan will give rise to tax annually when the interest rate falls below specified market-related interest levels.

Amendments to section 45 regarding intragroup transactions and to section 47 regarding liquidation transactions would mean that interest incurred on funding to acquire the assets and the business, using these sections in the act, will no longer be automatically deductible.

"Companies have to seek pre- approval from SARS.

"Factors to be taken into account include the level of debt to equity in the acquiring company, the estimated interest expense in relation to the income of the acquiring firm and the debt versus equity features of the debt instrument."

Finance Minister Pravin Gordhan is expected to release a "green list" of transactions with little risk to the fiscus that will not require pre-approval, Mr Lai King says. Another worrying issue was the blurring of debt and equity.

Certain changes made to the tax incentives of 150% deductions on expenses incurred by research and development companies have been welcomed. Newton Cockcroft, tax director at Deloitte, says while companies will no longer require pre- approval of their projects before starting with the work, they will have to submit applications for the projects to the Department of Science and Technology by April 1.

"Companies cannot qualify if they have not applied to the department before incurring costs," Mr Cockcroft warns.

Dov Paluch, MD of Catalyst Research Solutions, says the actual approval process and the requirements have not been spelled out in the new legislation.

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 17 November 2011