Highlights from the 2024 Draft Taxation Laws and Draft Tax Administration Laws Amendment Bills
Highlights from the 2024 Draft Taxation Laws and Draft Tax Administration Laws Amendment Bills
By Associate Professor David Warneke, Director
On 1 August 2024, National Treasury and SARS released for public comment the 2024 Draft Taxation Laws Amendment Bill (‘the TLAB’) and Draft Tax Administration Laws Amendment Bill (‘the TALAB’), among other draft documents. BDO has submitted its comments on these Draft Bills, which mainly seek to give effect to the tax proposals announced in February’s National Budget. Below I briefly describe the main proposals.
It should be noted that, invariably, many of these proposals will undergo amendment and others may be dropped altogether as part of the legislative amendment process.
Curbing abuse of the employment tax incentive (‘ETI’)
A variety of aggressive tax schemes have emerged that have sought to exploit the ETI incentive. Most commonly, so-called ‘employers’ have claimed the ETI incentive for students at training institutions who do not assist in the carrying on of the business of the ‘employer’ but are merely full-time students. The ‘employer’ does not pay cash remuneration to the ‘employee’ but merely pays the ‘employee’s’ training fee to the training institution. The proposal is that a punitive deterrent, in the form of a 100 per cent penalty, be introduced in the above circumstances. This penalty would come into operation for years of assessment commencing on or after 1 March 2025.
En commandite partnerships: narrowing of the definition of ‘connected person’
The Income Tax Act contains a definition of ‘qualifying investor’, which is essentially any of the limited partners in an en commandite partnership (or in such a foreign partnership). At present the definition in relation to partners in a partnership is extremely wide, in that, besides the partners being ‘connected persons’ in relation to each other, any person that is a ‘connected person’ in relation to any partner is deemed to be a ‘connected person’ in relation to each of the other partners. En commandite partnerships are often used as investment vehicles for large corporate investors who inadvertently become ‘connected persons’ in relation to each ‘connected person’ of all of the other partners. The proposal aims to narrow this definition by excluding ‘connected persons’ in relation to limited partners from being ‘connected persons’ in relation to the other partners. The amendment would apply from years of assessment commencing on or after 1 January 2025.
Clarifying anti-avoidance rules for low-interest or interest-free loans to trusts
In terms of section 7C of the Income Tax Act, interest incurred by a trust at an interest rate lower than the ‘official rate of interest’ in respect of a loan, advance or credit (I shall refer to these items collectively as ‘a loan’) made to the trust (or a company shares of which are held by a trust in certain circumstances) is treated as an ongoing and annual donation made by a natural person, if the loan was directly or indirectly provided by the natural person or, at the instance of the natural person, by a company that was a ‘connected person’ in relation to the natural person. This provision applies whether the trust is a resident or a non-resident. There is thus an overlap with section 31 of the Act – the transfer pricing provisions – which may result in similar treatment in the case of a low-interest or interest-free cross-border loan between a person that is a resident and a non-resident trust which is a ‘connected person’ in relation to such resident. However, instead of using the ‘official rate of interest’ as the benchmark for determining whether the interest rate charged is ‘too low’, section 31 uses an arm’s length rate of interest. To avoid the possibility of double taxation, section 7C contains a blanket exclusion in that it does not apply at all where section 31 applied in respect of the loan. However, the blanket exclusion may be to the detriment of the fiscus in situations where the ‘official rate of interest’ is higher than an arm’s length rate and the proposal is therefore for the exclusion from section 7C only to apply to the extent of an adjustment made in terms of section 31. The amendment would apply from years of assessment commencing on or after 1 January 2025.
Limiting interest deductions in respect of reorganisation and acquisition transactions
Section 23N of the Income Tax Act potentially limits the interest deduction for an acquiring company in respect of debts used to fund section 45 intra-group transactions, section 47 liquidations or section 24O equity share acquisitions. This limitation is based on a prescribed formula. It is proposed that this formula be amended to more closely align it with the similar formula contained in section 23M, which potentially limits the interest deductions on debts owed to certain persons that are entirely or partly not subject to South African taxation on the interest they receive. The amendment would apply to years of assessment commencing on or after 1 January 2025.
Relaxing the assessed loss restriction rule where a company’s existence is terminated
Currently, companies are generally only permitted to set-off a balance of an assessed loss brought from a prior year against their current year’s taxable income to the extent that the amount of such set-off does not exceed the higher of R1 million or 80% of taxable income. It is proposed that companies in the process of liquidation, deregistration or winding up be allowed to fully set-off the balance of any assessed loss brought forward. The rationale for this proposal is that the restriction of a company’s ability to fully set off assessed losses brought forward where its existence is being terminated amounts to a permanent disallowance of the set-off of a portion of the assessed loss, rather than a mere deferral. The amendment would apply to years of assessment commencing on or after 1 January 2025.
Treatment of shares as exchange items under s24I
Companies may enter into financial arrangements involving cross-currency swaps and preference shares held by a resident company in a non-resident subsidiary. Currently, there is a mismatch in the income tax treatment of these transactions which results in tax leakage, since exchange differences on the debt obligation are taxable while exchange differences on the preference shares are not taxable, since these shares do not constitute ‘exchange items’. To address this anomaly, it is proposed that the definition of ‘exchange item’ be extended to include shares in a foreign company that are disclosed as financial assets for purposes of financial reporting under IFRS. The amendment would apply to years of assessment commencing on or after 1 January 2025. This proposed amendment is too wide as it would go much further than the arrangements that it seeks to address, and its scope is likely to be substantially curtailed.
Extension of the definition of ‘REIT’ to unlisted structures
The REIT regime provides a flow-through mechanism where income and capital gains are normally taxed solely in the hands of the investor and not in the hands of the REIT. It is proposed that this regime be extended to cover South African unlisted companies that are regulated by the Financial Sector Conduct Authority (‘FSCA’) through published requirements and conditions that are approved in consultation with the Director-General of the National Treasury. The amendment will come into operation with effect from a date determined by the Minister of Finance by notice in the Government Gazette after the publication of the requirements regulating the unlisted property companies. This amendment is welcomed and is long overdue. Hopefully the necessary requirements will be published soon.
Investment allowance for production of electric and hydrogen-powered vehicles
Motor vehicle manufacturers can look forward to a proposed allowance of 150% for qualifying investments in the production of electric and hydrogen-powered vehicles in South Africa. Investments in buildings (including improvements to buildings) and new and unused machinery, plant, implements, utensils and articles that are owned by the taxpayer or acquired by the taxpayer under an instalment sale agreement will qualify for a once-off allowance of 150 per cent of the cost of such assets. The asset must be used mainly for the production of such vehicles in South Africa. Presumably, the allowance is intended to be claimed in the year in which the asset is first brought into use, although this is not clear from the wording of the proposal. The qualifying assets must be brought into use for the first time on or after 1 March 2026 and before 1 March 2036. Most ironically, the proposed new section is numbered 12V!
Prescription period for input tax claims
VAT vendors have a 5-year period to claim an input tax deduction from, loosely stated, the end of the first VAT period in which the vendor was entitled to claim the input deduction. In practice, the input tax of previous periods is often claimed in a tax period after the tax period in which the vendor was first entitled to such input tax credit. This creates a risk of double deduction of the input. It is therefore proposed that such deductions must be made in the original tax period in which the entitlement to that deduction arose. This will often entail going back several years to reopen the relevant VAT return. It is proposed that the effective date of the amendment will be 1 April 2025. Hopefully, SARS’ systems will be suitably updated to deal with the practicalities of this amendment, should it survive into law.
Recovery of SARS’ legal costs in tax disputes
It is proposed that the costs of senior SARS officials involved in tax disputes, being internal SARS costs, will be recoverable by SARS in court disputes with taxpayers. The proposal is that such fees and costs may be taxed and recovered in the same manner as if such functions had been performed by a legal practitioner in private practice. The proposal would come into effect on the date of promulgation of the TALAB. This is a one-sided proposal that is unbalanced in favour of SARS. To be even-handed, the cost of the taxpayer’s own internal legal counsel in the dispute should be recoverable from SARS if SARS were to lose the case.
Improving the efficiency of the dispute resolution process
To expedite the resolution of tax disputes, it is proposed that the alternative dispute proceedings, which currently may be elected only at the appeal stage in a dispute, be introduced for election at the objection phase of the dispute. To give SARS time to update its operations and systems as needed, the proposal will only come into effect on a date to be determined by the Minister of Finance by notice in the Government Gazette. Unfortunately, this amendment is unlikely to make a meaningful contribution to shortening the time taken to resolve disputes, unless SARS improves the quality of its assessments and the technical expertise of its dispute resolution staff.
Relaxing representative vendor requirements for electronic service providers
Due to practical difficulty often experienced by non-resident suppliers of electronic services in South Africa with appointing a representative VAT vendor who resides in South Africa, it is proposed that a representative VAT vendor appointed by an electronic services supplier or other non‐resident vendor will no longer need to reside in South Africa. The proposal would come into effect on the date of promulgation of the TALAB.
Assigning company public officers by default
It is proposed that the one‐month period within which a company’s public officer must first be appointed for tax purposes be removed. Should a company fail to appoint a public officer on formation, SARS will regard a senior official of the company as the public officer of that company, in order of priority. The proposal would come into effect on the date of promulgation of the TALAB.
Representation in the Tax Court
It is proposed that a natural person, other than a duly admitted legal practitioner, will be allowed to represent a taxpayer in proceedings in the Tax Court if the President of the Tax Court regards such person as a fit and proper person to appear on the taxpayer’s behalf. The proposal would come into effect on the date of promulgation of the TALAB. This proposal appears to be a response to the judgment of the High Court in Poulter v CSARS (A882/023) which found that a lay representative could represent a taxpayer in the Tax Court.
On 1 August 2024, National Treasury and SARS released for public comment the 2024 Draft Taxation Laws Amendment Bill (‘the TLAB’) and Draft Tax Administration Laws Amendment Bill (‘the TALAB’), among other draft documents. BDO has submitted its comments on these Draft Bills, which mainly seek to give effect to the tax proposals announced in February’s National Budget. Below I briefly describe the main proposals.
It should be noted that, invariably, many of these proposals will undergo amendment and others may be dropped altogether as part of the legislative amendment process.
Curbing abuse of the employment tax incentive (‘ETI’)
A variety of aggressive tax schemes have emerged that have sought to exploit the ETI incentive. Most commonly, so-called ‘employers’ have claimed the ETI incentive for students at training institutions who do not assist in the carrying on of the business of the ‘employer’ but are merely full-time students. The ‘employer’ does not pay cash remuneration to the ‘employee’ but merely pays the ‘employee’s’ training fee to the training institution. The proposal is that a punitive deterrent, in the form of a 100 per cent penalty, be introduced in the above circumstances. This penalty would come into operation for years of assessment commencing on or after 1 March 2025.
En commandite partnerships: narrowing of the definition of ‘connected person’
The Income Tax Act contains a definition of ‘qualifying investor’, which is essentially any of the limited partners in an en commandite partnership (or in such a foreign partnership). At present the definition in relation to partners in a partnership is extremely wide, in that, besides the partners being ‘connected persons’ in relation to each other, any person that is a ‘connected person’ in relation to any partner is deemed to be a ‘connected person’ in relation to each of the other partners. En commandite partnerships are often used as investment vehicles for large corporate investors who inadvertently become ‘connected persons’ in relation to each ‘connected person’ of all of the other partners. The proposal aims to narrow this definition by excluding ‘connected persons’ in relation to limited partners from being ‘connected persons’ in relation to the other partners. The amendment would apply from years of assessment commencing on or after 1 January 2025.
Clarifying anti-avoidance rules for low-interest or interest-free loans to trusts
In terms of section 7C of the Income Tax Act, interest incurred by a trust at an interest rate lower than the ‘official rate of interest’ in respect of a loan, advance or credit (I shall refer to these items collectively as ‘a loan’) made to the trust (or a company shares of which are held by a trust in certain circumstances) is treated as an ongoing and annual donation made by a natural person, if the loan was directly or indirectly provided by the natural person or, at the instance of the natural person, by a company that was a ‘connected person’ in relation to the natural person. This provision applies whether the trust is a resident or a non-resident. There is thus an overlap with section 31 of the Act – the transfer pricing provisions – which may result in similar treatment in the case of a low-interest or interest-free cross-border loan between a person that is a resident and a non-resident trust which is a ‘connected person’ in relation to such resident. However, instead of using the ‘official rate of interest’ as the benchmark for determining whether the interest rate charged is ‘too low’, section 31 uses an arm’s length rate of interest. To avoid the possibility of double taxation, section 7C contains a blanket exclusion in that it does not apply at all where section 31 applied in respect of the loan. However, the blanket exclusion may be to the detriment of the fiscus in situations where the ‘official rate of interest’ is higher than an arm’s length rate and the proposal is therefore for the exclusion from section 7C only to apply to the extent of an adjustment made in terms of section 31. The amendment would apply from years of assessment commencing on or after 1 January 2025.
Limiting interest deductions in respect of reorganisation and acquisition transactions
Section 23N of the Income Tax Act potentially limits the interest deduction for an acquiring company in respect of debts used to fund section 45 intra-group transactions, section 47 liquidations or section 24O equity share acquisitions. This limitation is based on a prescribed formula. It is proposed that this formula be amended to more closely align it with the similar formula contained in section 23M, which potentially limits the interest deductions on debts owed to certain persons that are entirely or partly not subject to South African taxation on the interest they receive. The amendment would apply to years of assessment commencing on or after 1 January 2025.
Relaxing the assessed loss restriction rule where a company’s existence is terminated
Currently, companies are generally only permitted to set-off a balance of an assessed loss brought from a prior year against their current year’s taxable income to the extent that the amount of such set-off does not exceed the higher of R1 million or 80% of taxable income. It is proposed that companies in the process of liquidation, deregistration or winding up be allowed to fully set-off the balance of any assessed loss brought forward. The rationale for this proposal is that the restriction of a company’s ability to fully set off assessed losses brought forward where its existence is being terminated amounts to a permanent disallowance of the set-off of a portion of the assessed loss, rather than a mere deferral. The amendment would apply to years of assessment commencing on or after 1 January 2025.
Treatment of shares as exchange items under s24I
Companies may enter into financial arrangements involving cross-currency swaps and preference shares held by a resident company in a non-resident subsidiary. Currently, there is a mismatch in the income tax treatment of these transactions which results in tax leakage, since exchange differences on the debt obligation are taxable while exchange differences on the preference shares are not taxable, since these shares do not constitute ‘exchange items’. To address this anomaly, it is proposed that the definition of ‘exchange item’ be extended to include shares in a foreign company that are disclosed as financial assets for purposes of financial reporting under IFRS. The amendment would apply to years of assessment commencing on or after 1 January 2025. This proposed amendment is too wide as it would go much further than the arrangements that it seeks to address, and its scope is likely to be substantially curtailed.
Extension of the definition of ‘REIT’ to unlisted structures
The REIT regime provides a flow-through mechanism where income and capital gains are normally taxed solely in the hands of the investor and not in the hands of the REIT. It is proposed that this regime be extended to cover South African unlisted companies that are regulated by the Financial Sector Conduct Authority (‘FSCA’) through published requirements and conditions that are approved in consultation with the Director-General of the National Treasury. The amendment will come into operation with effect from a date determined by the Minister of Finance by notice in the Government Gazette after the publication of the requirements regulating the unlisted property companies. This amendment is welcomed and is long overdue. Hopefully the necessary requirements will be published soon.
Investment allowance for production of electric and hydrogen-powered vehicles
Motor vehicle manufacturers can look forward to a proposed allowance of 150% for qualifying investments in the production of electric and hydrogen-powered vehicles in South Africa. Investments in buildings (including improvements to buildings) and new and unused machinery, plant, implements, utensils and articles that are owned by the taxpayer or acquired by the taxpayer under an instalment sale agreement will qualify for a once-off allowance of 150 per cent of the cost of such assets. The asset must be used mainly for the production of such vehicles in South Africa. Presumably, the allowance is intended to be claimed in the year in which the asset is first brought into use, although this is not clear from the wording of the proposal. The qualifying assets must be brought into use for the first time on or after 1 March 2026 and before 1 March 2036. Most ironically, the proposed new section is numbered 12V!
Prescription period for input tax claims
VAT vendors have a 5-year period to claim an input tax deduction from, loosely stated, the end of the first VAT period in which the vendor was entitled to claim the input deduction. In practice, the input tax of previous periods is often claimed in a tax period after the tax period in which the vendor was first entitled to such input tax credit. This creates a risk of double deduction of the input. It is therefore proposed that such deductions must be made in the original tax period in which the entitlement to that deduction arose. This will often entail going back several years to reopen the relevant VAT return. It is proposed that the effective date of the amendment will be 1 April 2025. Hopefully, SARS’ systems will be suitably updated to deal with the practicalities of this amendment, should it survive into law.
Recovery of SARS’ legal costs in tax disputes
It is proposed that the costs of senior SARS officials involved in tax disputes, being internal SARS costs, will be recoverable by SARS in court disputes with taxpayers. The proposal is that such fees and costs may be taxed and recovered in the same manner as if such functions had been performed by a legal practitioner in private practice. The proposal would come into effect on the date of promulgation of the TALAB. This is a one-sided proposal that is unbalanced in favour of SARS. To be even-handed, the cost of the taxpayer’s own internal legal counsel in the dispute should be recoverable from SARS if SARS were to lose the case.
Improving the efficiency of the dispute resolution process
To expedite the resolution of tax disputes, it is proposed that the alternative dispute proceedings, which currently may be elected only at the appeal stage in a dispute, be introduced for election at the objection phase of the dispute. To give SARS time to update its operations and systems as needed, the proposal will only come into effect on a date to be determined by the Minister of Finance by notice in the Government Gazette. Unfortunately, this amendment is unlikely to make a meaningful contribution to shortening the time taken to resolve disputes, unless SARS improves the quality of its assessments and the technical expertise of its dispute resolution staff.
Relaxing representative vendor requirements for electronic service providers
Due to practical difficulty often experienced by non-resident suppliers of electronic services in South Africa with appointing a representative VAT vendor who resides in South Africa, it is proposed that a representative VAT vendor appointed by an electronic services supplier or other non‐resident vendor will no longer need to reside in South Africa. The proposal would come into effect on the date of promulgation of the TALAB.
Assigning company public officers by default
It is proposed that the one‐month period within which a company’s public officer must first be appointed for tax purposes be removed. Should a company fail to appoint a public officer on formation, SARS will regard a senior official of the company as the public officer of that company, in order of priority. The proposal would come into effect on the date of promulgation of the TALAB.
Representation in the Tax Court
It is proposed that a natural person, other than a duly admitted legal practitioner, will be allowed to represent a taxpayer in proceedings in the Tax Court if the President of the Tax Court regards such person as a fit and proper person to appear on the taxpayer’s behalf. The proposal would come into effect on the date of promulgation of the TALAB. This proposal appears to be a response to the judgment of the High Court in Poulter v CSARS (A882/023) which found that a lay representative could represent a taxpayer in the Tax Court.