SAICA ANNUAL TAX BILL

UPDATE
November 2019

CONTENT PAGE
Session Topic
Session 1 Introduction
Session 2 Individuals, Savings and Employment
Session 3 Companies
Session 4 Financial Institutions and Products
Session 5 Incentives
Session 6 International Tax
Session 7 VAT

Page 1
 CONTENT PAGE
Session Topic
Session 8 Tax Administration (“TAA”)
Session 9 Other Tax Developments
Session 10 Court Cases

Introduction

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 ABOUT THE PRESENTER
Wessel Smit
• [Link] (Hons) HDip Tax MCom
(Taxation)
• CA(SA) and Director of Core Tax (Pty) Ltd
• He is a member of the SAICA Tax
Administration subcommittee and
previous member of the SAICA National
Tax Committee
• Wessel has been a part time tax lecturer
at the University of the Free State in the
CTA, MBA and post graduate tax courses
• He is an annual contributor to selected
chapters in SILKE on Income Tax.
• Wessel provides various taxation related
consulting services including tax opinions
and has presented more than 200
Taxation Seminars during the last 10
years

INTRODUCTION
Amendments that are part of this
seminar

• Rates and Monetary Amounts and

Amendment of Revenue Laws Bill B-37 of
2019 as published on 30 October 2019.
• The Tax Administration Laws Amendment Bill
B-38 of 2019 published on 30 October 2019.
• The Taxation Laws Amendment Bill B-39 of
2019 published on 30 October 2019.

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Slide 6
2019 TAX LEGISLATION PROCESS
Subsequent to the tax pronouncements made by the Minister of Finance (the Minister) as part
of the 2019 Budget announcements on 20 February 2019, the 2019 annual draft tax bills were
published to give effect to the tax proposals announced in the Budget. These 2019 annual
draft tax bills include the following, the 2019 Draft Rates and Monetary Amounts and
Amendment of Revenue Laws Bill (Rates Bill), the 2019 Draft Income Tax Amendment Bill,
the 2019 Draft Taxation Laws Amendment Bill (TLAB), and the 2019 Draft Tax Administration
Laws Amendment Bill (TALAB).
The 2019 Draft Rates Bill was first published on the same day as the Budget (20 February
2019), and published for the second time on 21 July 2019 in order to solicit comments on the
tax proposals contained therein. The 2019 Draft Rates Bill contains tax announcements made
in the 2019 Budget, dealing with changes in rates and monetary thresholds, changes to
personal income tax tables, increases of the excise duties on alcohol and tobacco and
adjustments to the eligible income bands that qualify for the employment tax incentive.
The 2019 Draft TLAB and 2019 Draft TALAB were published on 21 July 2019 and contain
more complex, technical and administrative tax proposals announced in the 2019 Budget.
This year, a separate 2019 Draft Income Tax Amendment Bill was published on 30 July 2019,
which contains environmental incentive announcements made in the 2019 Budget that deal
with the repeal of the exemption for certified emissions reductions as well as the extension of
the of the energy efficiency savings incentives. These changes provide the necessary
legislative amendments required to implement the carbon tax, which came into effect on 1
June 2019.
Due to constitutional requirements, the draft tax bills are divided into two separate categories,
i.e., money bills in terms of section 77 of the Constitution dealing with national taxes, levies,
duties and surcharges (for example the 2019 Draft Rates Bill, 2019 Draft TLAB and 2019 Draft
Income Tax Amendment Bill) and an ordinary bill in terms of section 75 of the Constitution,
dealing with tax administration issues (for example, 2019 Draft TALAB).
PUBLIC COMMENTS
The 2019 Draft Rates Bill, 2019 Draft TLAB and 2019 Draft TALAB were published for public
comments on 21 July 2019 and the 2019 Draft Income Tax Amendment Bill was published for
public comments 30 July 2019. The closing date for public comments on the above-mentioned
2019 draft tax bills was 23 August 2019. National Treasury and SARS received written
comments from 77 organisations and 600 individuals (see Annexure A and B attached).
National Treasury and SARS also 6 engaged stakeholders that submitted comments in more
detail through workshops that were held in Pretoria on 5 and 6 September 2019.
National Treasury and SARS briefed both the Standing Committee on Finance (SCoF) and
Select Committee on Finance (SECoF) on the 2019 draft tax bills on 3 September 2019.
Subsequently, on 10 September 2019, the SCoF and SECoF convened public hearings on
these 2019 draft tax bills. There were about 14 organisations that were present at the public
hearings held by the joint SCoF and SECoF meeting.
On 18 September 2019, National Treasury and SARS presented to both the SCoF and SECoF
the 2019 Draft Response Document on the 2019 Draft Rates Bill, 2019 Draft Income Tax
Amendment Bill, 2019 Draft TLAB and the 2019 Draft TALAB. The 2019 Draft Response
Document contains a summary of draft responses to the public comments received and
proposed steps to be taken in addressing the key issues raised during the consultation
process.

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After the above presentation the SCoF and SECoF have considered the draft Response
Document, presented to it to the Minister for approval, including approving consequential
amendments to the 2019 draft tax bills, prior to the formal introduction/tabling in Parliament in
October 2019.
Extract from National Treasury Draft Response Document on the 2019 Draft Rates and
Monetary Amounts and Amendment of Revenue Laws Bill, 2019 Draft Income Tax
Amendment Bill, 2019 Draft Taxation Laws Amendment Bill and 2019 Draft Tax Administration
Laws Amendment Bill.

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 INTRODUCTION
Amendments that are part of this
seminar

• The Bills have been released on the 30th of

October 2019.
• The Bills have not been signed and promulgated
yet.
• No explanatory memorandum was released with
the Taxation Laws Amendment Bill (“TLAB”) at
the time of drafting this course material.

INTRODUCTION
Amendments

Effective date:
There are different effective dates for the
2019 amendments per the tax Bills – see the
detailed slides for the specific amendment
dates.

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 Individuals, Savings and
Employment

INCOME TAX TABLES

10

10

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Tax of individuals, deceased estates,
insolvent estates & special trusts

• The above-mentioned tax table has been

amended for the 2020 year of
assessment:
– No changes were made to personal income
tax brackets, while the tax-free threshold
increases from R78 150 to R79 000.

11

11

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Tax of individuals, deceased estates,
insolvent estates & special trusts
2018/2019 and 2019/2020

Taxable Income (R) Rate of Tax (R)

0 – 195 850 18%
195 851 – 305 850 35,253 + 26%
305 851 – 423 300 63,853 + 31%
423 301 – 555 600 100,263 + 36%
555 601– 708 310 147,891 + 39%
708 311 – 1 500 000 207,448 + 41%
1 500 001 and more 532 041 + 45%
12

12

Page 8
Slide 12
Extract from 2019 Medium Term Budget Speech:
“Significant tax increases over the past several years leave only moderate scope to boost tax
revenue at this time. Given the size of the required adjustment, however, additional tax
measures are under consideration.”

“We will take stronger measures to fight illegitimate cross-border flows and tax evasion. Our
approach to money laundering will be reviewed by the Financial Action Task Force. Steps are
also being taken to strengthen co-operation between the Financial Intelligence Centre, the
South African Reserve Bank and SARS.”

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Rebates

2020 2019
Rebates for natural persons (R) (R)
Under 65 – Primary 14 220 14 067
65 and over – Secondary 7 794 7 713
75 and over - Tertiary 2 601 2 574

13

13

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Tax Thresholds

2020 2019
Tax Thresholds (R) (R)
Under 65 – Primary 79 000 78 150
65 and over – Secondary 122 300 121 000
75 and over - Tertiary 136 750 135 300

14

14

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Interest Exemptions

2020 2019
Interest Exemption (R) (R)
Under 65 23 800 23 800
65 and over 34 500 34 500

15

15

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Tax Free Investment

2020 2019
Tax Free Investment (R) (R)
Annual Limit 33 000 33 000
Lifetime Limit 500 000 500 000

16

16

Page 11
Slide 16
Any amount received from a tax-free investment is exempt from normal tax (this includes
normal income on the investment as well as any profit arising from the sale of the investment).
The following requirements must be met:
• The investment must be made by a natural person or the deceased or insured estate
of a natural person
• The investment must be a financial instrument or policy that is administered by a
person or entity as designated by the Minister of Finance

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Medical Tax Credits

2020 2019
Medical Tax Credit (R) (R)
1st Dependent 310 310

2nd Dependent 310 310

Additional Dependents 209 209

No change were made to the medical tax
credits.
17

17

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Travel Allowance Deemed Expenditure
Table
• Use actual business costs (The value of the vehicle
is limited to R 595 000 for calculations of wear and
tear while wear and tear over a period of 7 years.
• In the case of a vehicle that is being leased, the
total amount of payments in respect of that lease
may not in any year of assessment exceed an
amount of the fixed cost as determined
• 2020 table not adjusted for inflation
• Reimbursive travel allowance is R3,61 / km for 2019
and 2020 tax years
18

18

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
2020 tax year travel cost table

Value of the vehicle Maintenance

Fixed cost Fuel cost
(incl VAT) cost
R R per annum c per km c per km
0 – 85 000 28 352 95.7 34.4
85 001 – 170 000 50 631 106.8 43.1
170 001 – 255 000 72 983 116.0 47.5
255 001 – 340 000 92 683 124.8 51.9
340 001 – 425 000 112 443 133.5 60.9
425 001 – 510 000 133 147 153.2 71.6
510 001 – 595 000 153 850 158.4 88.9
Exceeding 595 000 153 850 158.4 88.9
19

19

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Subsistence Allowances
Travel in the Republic 2020 2019
Meals and incidental costs 435 416
Incidental costs 134 128
The non-taxable local travel allowance source
code is 3714 for the IRP 5.
Travel outside the Republic
Various from country to country. Please refer to
SARS website, [Link] for latest rates.

20

20

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Retirement Fund Lump Sum Withdrawal
Benefits (unchanged)

Taxable income Rate of tax

R R
0 – 25 000 0% of taxable income

25 001 - 660 000 18% of taxable income above 25 000

660 001 - 990 000 114 300 + 27% of taxable income above 660 000

990 001 and above 203 400 + 36% of taxable income above 990 000

21

21

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Retirement Fund Lump Sum Withdrawal
Benefits (unchanged)

Taxable income Rate of tax

R R
0 – 500 000 0% of taxable income

500 001 – 700 000 18% of taxable income above 500 000

700 001 – 1 050 000 36 000 + 27% of taxable income above 700 000
130 500 + 36% of taxable income above
1 050 001 and above
1 050 000
22

22

Page 15
Slide 21
(ii) The amount of tax levied in terms of item (i) must be reduced by an amount equal to the
tax that would be leviable on the person in terms of that item in respect of taxable income
comprising the aggregate of—
(aa) retirement fund lump sum withdrawal benefits received by or accrued to that person on
or after 1 March 2009 and prior to the accrual of the retirement fund lump sum withdrawal
benefit contemplated in item (i)(aa);
(bb) retirement fund lump sum benefits received by or accrued to that person on or after 1
October 2007 and prior to the accrual of the retirement fund lump sum withdrawal benefit
contemplated in item (i)(aa); and
(cc) severance benefits received by or accrued to that person on or after 1 March 2011 and
prior to the accrual of the retirement fund lump sum withdrawal benefit contemplated in item
(i)(aa).

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Slide 22
(ii) The amount of tax levied in terms of item (i) must be reduced by an amount equal to the
tax that would be leviable on the person in terms of that item in respect of taxable income
comprising the aggregate of—
(aa) retirement fund lump sum withdrawal benefits received by or accrued to that person on
or after 1 March 2009 and prior to the accrual of the retirement fund lump sum benefit
contemplated in item (i)(aa);
(bb) retirement fund lump sum benefits received by or accrued to that person on or after 1
October 2007 and prior to the accrual of the retirement fund lump sum benefit contemplated
in item (i)(aa); and
(cc) severance benefits received by or accrued to that person on or after 1 March 2011 and
prior to the accrual of the retirement fund lump sum benefit contemplated in item (i)(aa).

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Estate Duty (Unchanged)

Estate Duty 2020 2019

0 – R 30million 20% 20%

R 30million and above 25% 25%

23

23

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Donation Tax (Unchanged)

Donation Tax 2020 2019

0 – R 30million 20% 20%

R 30million and above 25% 25%

24

24

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 SMALL BUSINESS
CORPORATIONS

25

25

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Small Business Corporations

Taxable income Rate of tax

R R
0 – 79 000 0% of taxable income
79 000 – 365 000 7% of taxable income above 79 000
20 080 + 21% of taxable income
365 001 – 550 000
above 365 001
58 870 + 28% of the amount above
550 001 and above
550 000
26

26

Page 19
 Eighth Schedule

CAPITAL GAINS TAX

27

27

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Capital Gains Tax Rates (unchanged)

2020 2019
(R) (R)
Annual Exclusion 40 000 40 000
Inclusion Rate: Individuals 40% 40%
Inclusion Rate: Companies and Trusts 80% 80%

28

28

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Capital Gains Tax Exclusions (for
natural persons)

2020 2019
(R) (R)
Annual Exclusion 40 000 40 000
Annual exclusion in year of death –
gains and losses 300 000 300 000
Disposal of small business by
natural person if over age 55 1 800 000 1 800 000
Max market value of assets to
qualify as a small business 10mill 10mill
29

29

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Capital Gains Tax Exclusions

2019 2018
(R) (R)
Primary Residence Exclusion 2,0 m 2,0 m

* First R 2 million gain or loss excluded

30

30

Page 21
Slide 29
Par 57 Exclusion – disposal of small business by natural person if over age 55:
This exclusion of any capital gain up to R1,8 million is available only to a natural person, made
on the disposal of
• an active business asset of a small business owned by him as a sole proprietor, or
• interest in each of the active business assets of a partnership, to the extent of his
interest in the partnership, or
• an entire direct interest, which consists of at least 10% of the equity of a company, in
as far as that interest relates to assets of that company qualifying as active business
assets.
For a person to qualify for this exclusion, he or she must
• have held the small business for his or her own benefit for a continuous period of at
least five years prior to the disposal
• have been substantially involved in the operations of the small business during that
period
• have attained the age of 55 years or, if younger, have disposed of the asset or interest
in consequence of his ill-health, other infirmity, superannuation or death, and
• have realised all his or her qualifying capital gains within a period of 24 months,
commencing from the date of the first qualifying disposal (par 57(2) and (4)).

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Capital Gains Tax Rates
Taxpayer Inclusion Statutory Effective
Rate (%) Rate (%) Rate (%)
Individuals 40 0 – 45 0 – 18
Trusts
Special 40 0 – 45 0 – 18
Other 80 45 36
Companies
Ordinary 80 28 22.4
Small business corporation 80 0 – 28 0 – 22.4
Employment company 80 28 22.4
(personal service provider)
31 Foreign co. (SA branch) 80 28 22.4

31

Paragraph 20 of the 8th Schedule

EVENTS TREATED AS
DISPOSALS AND ACQUISITIONS

32

32

Page 23
Slide 31
Example:
Company X realises a capital gain of R1 000 upon the selling of a capital asset. Thereafter,
the company distributes the capital gain realised to its shareholder by means of a dividend.

Solution:
Company Shareholder
Capital Gain Realised R 1 000
Included in taxable income @ 80% R 800
Normal tax @ 28% R 224
Available for distribution after tax,
therefore dividend= R 776
Dividend Withholding Tax @ 20% R 155.20
Total Tax Paid (R224 + R155.2) R 379.20
Combined Tax Rate: 37.9%

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 CAPITAL GAINS TAX
Events treated as disposals and
acquisitions

The amendment in paragraph 19 clarifies

the interaction between paragraph 19 and
paragraph 43A.

Effective date – On promulgation of the Act.

33

33

CAPITAL GAINS TAX

Extraordinary exempt dividends

• ‘extraordinary exempt dividends’ means so

much of the amount of the aggregate of any
exempt dividends received or accrued within the
period of 18 months contemplated in
subparagraph (1)
– as exceeds 15 per cent of the proceeds received or
accrued from the disposal contemplated in that
subparagraph; and
– as has not been taken into account as an
extraordinary dividend in terms of paragraph 43A(2).’’

Effective date – On promulgation of the Act.

34

34

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 Paragraph 20 of the 8th Schedule

BASE COST OF AN ASSET

35

35

CAPITAL GAINS TAX

Base cost of an asset

The amendment deletes the requirement

that expenditure incurred in improving or
enhancing the value of an asset still be
reflected in the state or nature of the asset
at the time of its disposal (par 20(1)(e) of the
8th Schedule).

Effective date – On promulgation of the Act.

36

36

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 CAPITAL GAINS TAX
Base cost of an asset

The amendment creates policy certainty by

specifically prohibiting bond registration
costs and bond cancellation costs from
forming part of the base cost of an asset.
Par 20(2)(a) of the 8th Schedule)

Effective date – On promulgation of the Act.

37

37

Paragraph 35 of the Eighth Schedule

PROCEEDS FROM DISPOSAL

38

38

Page 27
 CAPITAL GAINS TAX
Proceeds from disposal

The amendment seeks to clarify that the

proceeds in respect of a disposal will not be
reduced in instances where an agreement is
cancelled or terminated, and the asset is
reacquired by the person who disposed of
the asset.
Confirm previous policy decision
Effective date – On promulgation of the Act.
39

39

Paragraph 38 of the Eighth Schedule

DISPOSAL BY WAY OF
DONATION, CONSIDERATION NOT
MEASURABLE IN MONEY AND
TRANSACTIONS BETWEEN
CONNECTED PERSONS
NOT AT AN ARM’S LENGTH PRICE
40

40

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 CAPITAL GAINS TAX
Donations or inadequate
consideration
• The amendments delete an obsolete
reference to paragraph 67 of the Eighth
Schedule.
• Paragraph 67 of the Eighth Schedule was
deleted by section 85 of the Taxation Laws
Amendment Act 23 of 2018 with effect from
the date of promulgation of that Act, namely,
17 January 2019, and was replaced by
section 9HB on the same date;

41

41

CAPITAL GAINS TAX

Donations or inadequate
consideration

• Clarify that the provisions of paragraph

38(1) apply where assets are disposed by
means of a donation or for an inadequate
consideration between persons who are
connected persons in relation to each
other immediately prior to and
immediately after the disposal.

42

42

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 CAPITAL GAINS TAX
Donations or inadequate
consideration

• The amendment in paragraph 38 (1)(b)

deletes the word “and paid” to clarify that
to the amount does not need to be
actually paid in order for the base cost to
be recognized for purposes of this
paragraph.

Effective date – On promulgation of the Act.

43

43

Paragraph 56 of the Eighth Schedule

DISPOSAL BY CREDITOR OF
DEBT OWED BY CONNECTED
PERSON
44

44

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 CAPITAL GAINS TAX
Disposal by creditor of debt owed
by connected person

• In 2018, changes were made to the debt

forgiveness rules.
• The proposed amendment in
subparagraph (2)(a) is a consequential
amendment to clarify the interaction of
paragraph 56 with the provisions of
section 19(3) and paragraph 12A(3).
Effective date – YOA commencing on or after 1
January 2018.
45

45

CAPITAL GAINS TAX

Disposal by creditor of debt owed
by connected person
Paragraph 56(2)(a) (after amendment)
(2) Despite paragraph 39, subparagraph (1) does not
apply in respect of any capital loss determined in
consequence of the disposal by a creditor of a debt
owed by a debtor, to the extent that the amount of
that debt so disposed of represents—
a) an amount—
i. which is applied to reduce the expenditure in respect of an
asset of the debtor in terms of section 19(3) or paragraph
12A; or
ii. which must be taken into account by the debtor as a capital
gain in terms of paragraph 12A(4);
46

46

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 6th Schedule

MICRO BUSINESS TURNOVER

TAX

47

47

Micro-Business Turnover
Tax
Turnover Tax for microbusiness

Taxable Turnover (R) Tax Rate (R)

0 - 335,000 0%

335,001 - 500,000 0 + 1%

500,001 - 750,000 1,650 + 2%

750,001 and more 6,650 + 3%

48

48

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 Section 7B
EXTENDING THE SCOPE OF
AMOUNTS CONSTITUTING
VARIABLE REMUNERATION
49

49

INDIVIDUALS, SAVINGS
AND EMPLOYMENT
Variable Remuneration
• Variable remuneration is defined in s 7B(1)
and includes (before amendment)
– overtime pay, bonus or commission
– a travel allowance or advance paid in terms of s
8(1)(b)(ii), or
– leave pay (an amount which an employer is liable
to pay to an employee due to any leave period
which the employee has not taken during the
year).

50

50

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 INDIVIDUALS, SAVINGS
AND EMPLOYMENT
Variable Remuneration
• If a taxpayer is determining his taxable
income during a year of assessment, any
amount to which an employee becomes
entitled from an employer in respect of
variable remuneration, is deemed to have
– accrued to the employee, and
– constitute expenditure incurred by the employer,
on the date of payment of the amount by the
employer to the employee (s 7B(2)).

51

51

INDIVIDUALS, SAVINGS
AND EMPLOYMENT
Variable Remuneration
• The timing of the accrual and incurral of
variable remuneration will therefore be on the
payments basis and will only be included in
the income of the employee (and be taken
into account for employees’ tax purposes)
and be expenditure incurred by the employer
on the date of actual payment.

52

52

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Variable Remuneration

Purpose

Match the timing between accrual and payment of

various forms of variable remuneration

Amendment
53

53

INDIVIDUALS, SAVINGS
AND EMPLOYMENT
Variable Remuneration
Specific payments
were added to the list

Apply to:
• any night shift allowance;
• any standby allowance; or
• any amount paid or granted in
reimbursement of any expenditure
54

54

Page 35
Slide 53
Reasons for change
It has come to Government’s attention that the current scope of section 7B is limited. There
are certain types of variable remuneration that are not currently catered for in this section. This
includes for example, night shift allowances and standby allowances paid by employers to
employees. As a result, the problem that section 7B was intended to address still remains as
some types of variable remuneration remain outside the ambit of this section.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Variable Remuneration

S 8(b)(ii) & (iii) also amended to state that that

where travel allowance was paid and taxed per
s 7B when paid, the distance travelled would be
deemed to be travelled in the same year that it
was taxed.

Effective date – YOA commencing on or

after 1 March 2020
55

55

Section 7F

DEDUCTION OF INTEREST
REPAID TO SARS

56

56

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Deduction of interest repaid to SARS

• Section 7F makes provision for interest which

were paid by SARS that has to be repaid by
that person to SARS to be deducted from that
person’s taxable income.
• Amendment:
– The deduction is only available to the
extent that the amount of interest is or
was included in the income of that person.

57

57

Section 8

AMOUNTS INCLUDED IN
TAXABLE INCOME

58

58

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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Exempt allowances

Changes were made in section 8(1) of the Act

to exclude exempt allowances or advance in
terms of section 10(1) from taxable income.
What about travel allowances and s 10(1)(o)(ii)
exemption where foreign services are
rendered.

This is to avoid exempt allowances

becoming taxable.
59

59

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Travel allowances

• Proviso’s were added to align a person’s

kilometers travelled for business purposes
with the accrual of the allowance
received in relation to said travel.
• For example s 7B travel allowance on paid
in a tax year, relating to business
kilometers travelled a previous tax year.

60

60

Page 39
Slide 59
Currently, section 10(1)(nA) of the Act makes provision for exemption in respect certain
employment-related allowances, for example, a uniform allowance. As a result, if the
allowance is exempt in terms of section 10(1)(nA), such amount is excluded from “income” as
defined in the Act. However, section 8(1) of the Act includes any such allowance, that are for
example exempt in terms of section 10(1) (nA) of the Act directly into a person’s taxable
income. This means that, notwithstanding that the allowance is exempt, it becomes subject
to tax as a result of its direct inclusion into taxable income in terms of section 8(1) of the Act.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 40
Slide 60
The Act contains section 7B, which makes provision for matching the timing between accrual
and payments of various variable remuneration. Section 7B of the Act deems a person’s travel
reimbursement to accrue on the date that it is paid. However, there is an anomaly, for example,
if a person travels during say February and the reimbursement is paid in March, those
kilometers travelled in February cannot be claimed against the following year’s travel
allowance. In essence a deduction is forfeited as the distance to which the allowance paid
relates is not travelled in the year of assessment the reimbursement is paid.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 41
 INDIVIDUALS, SAVINGS
AND EMPLOYMENT
Allowance asset
Currently, paragraph 12(2)(c) of the Eighth
Schedule to the Act triggers a deemed
disposal for capital gains tax purposes
when an asset which was not held as
trading stock commences to be held as
trading stock.

61

61

INDIVIDUALS, SAVINGS
AND EMPLOYMENT
Allowance asset
• However, there is no similar deemed disposal
and reacquisition rules in the recoupment
provisions in section 8(4)(k) of the Act for
allowance assets to trigger a recoupment of
previous allowances.
• In order to address this anomaly, changes
were made in the Act by inserting a new
subparagraph (iv) in section 8(v)(k) of the Act.
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 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Allowance asset

• New deemed disposal and reacquisition rule

for any assets held as trading stock which
was previously not held as trading stock.
• Commenced to hold any asset as trading
stock which was previously not held as
trading stock - this triggers the recoupment
• Similar to Para 12(2)(c) of the 8th Schedule to
the Act.

Effective date – On promulgation of the Act

63

63

Section 3(2)

ESTATE DUTY

64

64

Page 43
 Estate Duty
• In 2015, changes were made in section
3(2) of the Estate Duty Act by inserting a
new paragraph (bA). The main aim of the
amendments was to prevent individuals
from avoiding estate duty by making a
large contribution into a retirement annuity
fund in the year the individual dies.

65

65

Estate Duty
• Consequently, this paragraph makes provision for
inclusion in the estate any amounts that have
not been allowed as a deduction in terms of
sections 11(k), 11(n) or 11F or was not exempt
ito section 10C of the ITA(essentially the excess
non-deductible contributions created by the large
contributions made to the retirement annuity fund).
• However, section 3(2) (bA) erroneously includes
not only excess contributions in terms of sections
11(k), 11(n) or 11F, but also amounts which are not
taken into consideration in terms of the Second
Schedule of the Income Tax Act.
66

66

Page 44
 Estate Duty
In order to close this loophole, retrospective
changes were made to section 3(2)(bA) of
the Estate Duty Act.

Effective date – Deemed to come into operation on

30 October 2019 and applies in respect of:
a) the estate of a person who dies on or after that
date; and
(b)
67
any contributions made on or after 1 March 2016.

67

Paragraph 6(1)(a) of the Second Schedule to the Act

ALIGNING THE EFFECTIVE DATE

OF TAX NEUTRAL TRANSFERS
BETWEEN RETIREMENT FUNDS
WITH THE EFFECTIVE DATE OF
ALL RETIREMENT REFORMS
68

68

Page 45
Slide 67
In 2015, changes were made in section 3(2)of the Estate Duty Act to prevent individuals from
avoiding estate duty by making a large contribution into a retirement annuity fund in the year
the individual dies. Consequently, this paragraph makes provision for inclusion in the estate
any amounts that have not been allowed as a deduction in terms of sections 11(k),11(n) or
11F of the Income Tax Act (essentially the excess non-deductible contributions created by the
large contributions made to the retirement annuity fund). However, section3(2)(bA)
erroneously includes not only excess contributions in terms of sections 11(k), 11(n) or 11F,
but also amounts which are not taken into consideration in terms of the Second Schedule of
the Income Tax Act. In order to close this loophole, it is proposed that retrospective changes
be made to section 3(2)(bA) of the Estate Duty Act.
Comment:
The inclusion of non-deductible contributions in a person’s deceased estate is inequitable as
contributions used to reduce annuities and lumpsums received at retirement should not be
included in estate duty. Further to the above, the effective dates proposed do not have a
desirable impact on tax collection
Response:
Accepted: Legislative changes will be made in the 2019 Draft TLAB to take in to account the
provisions of section 10C of the Income Tax Act when determining the deceased’s tax liability
for estate duty purposes. In addition, it is proposed that the effective dates for the proposed
amendments be changed as follows:
• The proposed amendments shall be deemed to apply to contributions made on or after
1 March 2016 and will apply in respect of the estate of a person who dies on or after
the date of promulgation of the 2019 TLAB.
Extracted from 2019 Presentation to SCOF and SEC on the draft response to the 2019 Draft
Tax Bills.

Page 46
 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Alligning the effective date

The effective date of the tax neutral transfers

from pension to provident or provident
preservation funds were aligned with the
effective date of retirement fund reform
amendments, which is 1 March 2021.

Effective date – Deemed to have come into

operation on 1 March 2019
69

69

Section 10C of the Act

EXEMPTION RELATING TO
ANNUITIES FROM A PROVIDENT
OR PROVIDENT PRESERVATION
FUND
70

70

Page 47
Slide 69
Background
In 2013, retirement fund reform amendments were effected to the Act regarding the
annuitisation requirements for provident funds. The main objective of these amendments was
to enhance preservation of retirement fund interests during retirement and to have uniform tax
treatment across the various retirement funds, thus resulting in provident funds being treated
similar to pension and retirement annuity funds with regard to the requirement to annuitise
retirement benefits. These retirement fund reform amendments were supposed to come into
effect on 1 March 2015.
However, when Parliament was passing legislative changes to these amendments, Parliament
postponed the effective date for the annuitisation requirements for provident funds until 1
March 2016. During the 2016 legislative cycle, Parliament again postponed the effective date
until 1 March 2019. Further, during the 2018 legislative cycle, Parliament once more
postponed the effective date to 1 March 2021. These postponements were due to continuing
negotiations within the National Economic Development and Labour Council (“NEDLAC”).
Reasons for change
Each postponement of the effective date requires several consequential amendments to
various provisions of the Act. In making changes to the effective dates in relation to the several
consequential amendments required, an oversight occurred with regard to paragraph 6(1)(a)
of the Second Schedule to the Act, which makes provision for tax neutral transfers between
retirement funds. Failure to change the effective date in the above-mentioned provision
resulted in the non-taxable treatment of transfers from pension funds to provident or provident
preservation funds with effect from 1 March 2019.
The earlier effective date of 1 March 2019 for the tax neutral transfers from pension to
provident or provident preservation funds creates a loophole as the intention was to align the
effective date of the tax neutral transfers from pension to provident or provident preservation
funds with the effective date of retirement fund reform amendments, which is 1 March 2021.
Extracted from the Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 48
 INDIVIDUALS, SAVINGS
AND EMPLOYMENT
Exemption relating to annuities
• Provident and provident preservation fund members who
receive annuities are afforded the same exemption status that
would be applicable to other retirement fund members (that any
non-deductible contributions be allowed as an exemption when
determining the taxable portion of annuities received from a
provident or provident preservation fund).
• The ability to deduct any non-deductible contributions made to a
provident or provident preservation fund in determining the
taxable annuity received from such fund will apply in relation to
annuities received on or after 1 March 2020.
Effective date – YOA commencing on or
after 1 March 2020
71

71

New paragraph 2D of the 2nd Schedule to the Act

TAX TREATMENT OF BULK
PAYMENTS TO FORMER
MEMBERS OF CLOSED FUNDS
72

72

Page 49
Slide 71
Extracted from the Draft Explanatory Memorandum to the 2019 Draft TLAB
Background
In 2014, changes were made in the Act allowing the exemption of non-deductible retirement
contributions when determining the taxable portion of compulsory annuities received from a
pension, pension preservation or retirement annuity fund. However, this exemption is not
applicable to provident or provident preservation fund members. The rationale behind
excluding provident and provident preservation funds from this exemption was based on the
fact that these fund members were not required by the rules of the provident and provident
preservation fund to utilise at least two-thirds of their fund benefit upon retirement to acquire
or purchase a compulsory annuity (provident or provident preservation fund members were
allowed to receive their full retirement benefit as a lump sum upon retirement).
Reasons for change
With effect from 1 March 2016, Government proceeded with the introduction of some of the
broader objectives of retirement reforms in the Act to ensure greater equity across income
groups. As a result, contributions by both employers and employees to pension, provident and
retirement annuity funds will qualify for a tax deduction, subject to a cap. On the other hand,
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.
Following the above-mentioned amendments in the Act, members of provident or provident
preservation funds receiving an annuity found themselves in a position where any non-
deductible contributions could only be off-set against the lump sum received. The balance of
the non-deductible contributions in excess of the lump sum received are in effect forfeited or
lost.
It has come to Government’s attention that over the past years, a number of provident and
provident preservation funds have, by virtue of amending their plan rules, allowed their retiring
members the ability to opt to acquire or purchase annuities with their fund benefits.
Proposal
In order to promote Government’s policy of a uniform approach to the tax treatment of all
retirement funds, it is proposed that provident and provident preservation fund members who
receive annuities are afforded the same exemption status that would be applicable to other
retirement fund members (that any non-deductible contributions be allowed as an exemption
when determining the taxable portion of annuities received from a provident or provident
preservation fund).
The ability to deduct any non-deductible contributions made to a provident or provident
preservation fund in determining the taxable annuity received from such fund will apply in
relation to annuities received on or after 1 March 2020.
Effective date
The proposed amendments will come into operation on 1 March 2020 and apply in respect of
any year of assessment commencing on or after that date.
Extracted from 2019 Presentation to SCOF and SEC on the draft response to the 2019
Draft Tax Bills.
In 2016, Government introduced some of the broader objectives of the retirement reforms. As
a result, contributions by both employers and employees to pension, provident and retirement
annuity funds qualify for a tax deduction from employees taxable income, subject to a cap. On
the other hand, contributions by employers to pension, provident and retirement annuity funds
Page 50
on behalf on employees qualify as a taxable fringe benefit in the hands of employees.
Consequently, members of provident funds receiving an annuity found themselves in a
position where any non-deductible contributions could only be off-set against the lump sum
received and the balance of the non-deductible contributions in excess of the lumpsum
received is forfeited or lost. In order to promote uniform tax treatment of all retirement funds,
it is proposed that provident fund members who receive annuities qualify for the same tax
exemption status that would be applicable too the retirement fund members.
Comment:
The proposed amendment should be applicable to provident and provident preservation fund
members irrespective of how much of their retirement benefit is taken as a lumpsum upon
retirement. Further to the above, the effective date should apply retrospectively with effect
from 1 March 2019 instead of 1 March 2020.
Response:
Noted. The requirement for provident and provident preservation fund members to annuitize
at least two-thirds of their retirement benefit in order to receive the section 10C exemption
shall be set aside until the effective date of the annuitisation provisions,i.e. 1 March 2021. With
regard to the comment that the effective date should apply retrospectively with effect from 1
March 2019 ,this is not accepted. The effective date shall remain unchanged ,i.e. will apply
with effect from 1 March 2020.
Comment:
The current structure of the provision limits the effectiveness of the relief provided under
section 10C, as the allowable deduction is rarely exceeded. The relief measure should be
amended, and a R500 000 exemption should apply in instances where a taxpayer has not
previously received a lumpsum in their lifetime and such annuity received is below the tax
threshold.
Response:
Not Accepted. Changing the structure of the provision will require further amendments to this
section once the annuitisation provisions come in to effect, this could result in avoidable
complications to the tax system.

Page 51
 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Bulk payments to former members of
closed funds

• Provision is made for the payment of

extraordinary lump sums currently held
by fund administrators on behalf of
deregistered funds to qualify for tax
exempt treatment, if they meet the criteria
to be determined by the Minister of
Finance in the notice.
Effective date – on the date to be determined by the
Minister of Finance by notice in the Government Gazette
73

73

Paragraph 2 of the 4th Schedule to the Act

REVIEWING THE TAX TREATMENT
OF SURVIVING SPOUSE
PENSIONS
74

74

Page 52
Slide 73
Background:
In 2007, paragraph 2C was introduced into the Second Schedule to the Act to allow for the
income tax exemption in respect of a lump sum benefit or part thereof, received or accrued to
a person subsequent to the person’s retirement, death or withdrawal or resignation from a
fund and in consequence of, or following upon an event contemplated by the rules of the fund.
In 2008 changes were made to paragraph 2C of the Second Schedule to the Act to make
provision for the Minister of Finance to prescribe an event by notice in the Government Gazette
in terms of which the above-mentioned extraordinary payments by the retirement funds will
qualify for income tax exemption. Consequently, in 2009, the Minister of Finance published a
notice in Government Gazette No. 32005 (GG 32005) prescribing an event referred to in
paragraph 2C of the Second Schedule to the Act in terms of which the following extraordinary
lump sum payments by the retirement funds qualified for income tax exemption:
a) Any amount received by or accrued to a person from a pension fund, pension
preservation fund, provident fund, provident preservation fund or retirement annuity
fund in consequence of a payment to such fund by the administrator of such fund as a
result of income received by the administrator prior to 1 January 2008 that was not
disclosed to such funds (loosely referred to as “undisclosed secret profits”);
b) Any amount received by or accrued to a person from a pension fund or provident fund
contemplated in paragraph (a) or (b) of the definition of “pension fund” in section 1 of
the Act, to the extent that that amount is similar to a payment in terms of a surplus
apportionment scheme contemplated in section 15B of the Pension Funds Act, No. 54
of 1956 (“the Pension Funds Act”) (loosely referred to as “surplus calculations”);
c) Any amount received by or accrued to a person from a pension preservation fund or
provident preservation fund to the extent that it was paid or transferred to such a fund-
• As an unclaimed benefit contemplated in paragraph (c) of the definition of
“unclaimed benefit” in section 1 of the Pension Funds Act (loosely referred to
as “unclaimed benefits”); or
• As a result of or in consequence of an event contemplated in paragraph (a) of
GG 32005.
Reason for change:
Paragraph 2C of the Second Schedule to the Act read together with the notice published by
the Minister of Finance in GG 32005 prescribing an event referred to in paragraph 2C of the
Second Schedule to the Act, makes provision for instances where the extraordinary lump sum
payments are made by registered, active retirement funds.
When the notice was published by the Minister of Finance in GG 32005, some retirement
funds were no longer registered. These deregistered retirement funds had already paid the
above-mentioned extraordinary lump sum payments to the fund administrators. The fund
administrators had not yet paid these extraordinary lump sum payments to the affected
members and/or beneficiaries. These extraordinary lump sum payments are currently still held
by the respective fund administrators.
In view of the fact that paragraph 2C of Second Schedule to the Act read together with the
notice published by the Minister of Finance in GG 32005 makes provision for the extraordinary
lump sum payments to be made by registered active retirement funds, extraordinary lump sum
payments made by fund administrators in this regards will not qualify for income tax
exemption.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB
Page 53
 INDIVIDUALS, SAVINGS AND
EMPLOYMENT
Surviving spouse pensions

• In order to assist with alleviating the financial

burden, the following changes were made:
– That the tax rebates applicable to all taxpayers
receiving annuity and other income, including the
surviving spouse are not taken into account by
the retirement fund(s) when calculating the taxes
to be withheld;
– Any PAYE excessively withheld will be refunded
upon assessment.

75

75

INDIVIDUALS, SAVINGS AND

EMPLOYMENT
Surviving spouse pensions

• Applicable to all taxpayers receiving annuity

and other income, including the surviving
spouse.
• As a result, retirement funds are required to
apply for an annual tax directive from SARS,
the tax directives will advise the retirement
fund whether or not the fund should be
disregarding the tax rebates when calculating
the taxes due on amounts paid by them.
Effective date – comes into operation on 1 March 2021.
76

76

Page 54
Slide 75
Background:
The Act makes provision for members of retirement funds to deduct contributions to their
retirement funds from their taxable income when determining their monthly employees’ tax
liability and annual income tax payable. Upon the death of a spouse, the surviving spouse
may be entitled to receive a monthly pension known as the “surviving spouse’s pension”, which
is paid by the retirement fund of the deceased spouse which the deceased spouse was a
member of prior to death. This “surviving spouse’s pension” is taxable in the surviving spouse’s
hands and is subject to Pay-As-You-Earn (PAYE) withholding by the retirement fund making
the payment.
If the surviving spouse also receives a salary or other income, that salary or other income is
added to the “surviving spouse’s pension” to determine his or her correct tax liability on
assessment. Generally, the result of the assessment is often that the surviving spouse has a
tax liability that exceeds the employee’s tax withheld by the employer and retirement fund(s)
during the year of assessment, since the aggregation of income pushes them into a higher tax
bracket.
Reasons for change
It has come to Government’s attention that in most cases, the surviving spouse does not
foresee the additional tax liability as a result of the aggregation of income which pushes the
surviving spouse into a higher tax bracket. This creates a cash flow burden and a tax debt for
the surviving spouse. Further, this is becoming financially burdensome for the surviving
spouses, and has, in many cases had adverse effects on the surviving spouse’s financial
capacity.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 55
Slide 76
Extracted from 2019 Presentation to SCOF and SEC on the draft response to the 2019
Draft Tax Bills.
Members of retirement funds can deduct contributions to their retirement funds from their
taxable income when determining their monthly employees’ tax and annual income tax
payable. Upon the death of a member, the surviving spouse may be entitled to receive a
monthly spousal pension from the retirement fund. This spousal pension is taxable in the
surviving spouse’s hands by the retirement fund. If the surviving spouse also receives a salary
or other income, that salary or other income is added to the “surviving spouse’s pension” to
determine his or her correct tax liability on assessment. The result of the assessment is that
the surviving spouse has a tax liability that exceeds the employee’s tax withheld by the
employer and retirement fund(s) during the year of assessment, since the aggregation of
income pushes them into a higher tax bracket. It has come to Government’s attention that the
surviving spouse may not foresee the additional tax liability that creates a cashflow burden
and tax debt for the surviving spouse. In order to alleviate the financial burden, it is proposed
that the tax rebates should not be taken into account when calculating taxes to be withheld by
the retirement funds on the spousal pension.
Comment:
There is no clarity with regard to whom the proposed amendment is meant to apply to, as the
draft legislation seems to imply that it would apply to taxpayers other than surviving spouses.
Response:
Noted. The policy rationale regarding the proposed amendment was to assist surviving
spouses. Based on the comments received, it has now come to Government’s attention that
taxpayers other than surviving spouses are also impacted. In order to cater for this, it is
proposed that legislative changes be made in the 2019 Draft TLAB to extend this to apply to
any taxpayer receiving two or more sources of employment income, provided that one of those
sources is from a retirement fund or an insurer.
Comment:
The proposed amendment would be administratively burdensome for both SARS and
retirement funds, and can therefore not come into effect on 1 March 2020.
Response:
Accepted. In order to provide both SARS and taxpayers more time to ready their systems for
the changes and implementation required as a result of the proposed amendment, it is
proposed that the effective date for the proposed amendment be postponed from 1 March
2020 to 1 March 2021.

Page 56
 Companies

77

77

Definitions

SECTION 1

78

78

Page 57
 COMPANIES
Definition of dividend
• The current definition of “dividend” excludes an amount
transferred or applied that constitutes an acquisition by a
company of its own securities by way of a general
repurchase of securities as contemplated in the JSE
Limited Listings Requirements, where that acquisition
complies with any applicable requirements.
• In 2016, Government granted exchange licenses to the
following stock exchanges, namely, A2X, 4AX, ZARX and
EESE.
• As a result, changes were made in the definition of
dividend to apply to the above-newly stock exchanges,
provided that they meet substantially the same
requirements contemplated in the JSE Limited Listing
Requirements.
Effective date – on promulgation of the Act
79

79

COMPANIES
Definition of identical share

Changes were made in the definition of

identical share to apply to the newly stock
exchanges, provided that they meet
substantially the same requirements
contemplated in the JSE Limited Listing
Requirements.

Effective date – on promulgation of the Act

80

80

Page 58
 COMPANIES
Definition of return of capital

Changes were made in the definition of

return of capital to apply to the newly stock
exchanges, provided that they meet
substantially the same requirements
contemplated in the JSE Limited Listing
Requirements.
Effective date – on promulgation of the Act
81

81

COMPANIES
Definition of provident fund
• Clause were inserted that the rules of the
provident fund may provide for an
employee who elects to transfer the
withdrawal interest (thus before
retirement) to a pension fund established
by the same employer or a pension fund in
which that employer participates
Effective date – Deemed to have come into
operation on 1 March 2019.
82

82

Page 59
 COMPANIES
Definition of withdrawal interest

‘withdrawal interest’ should be determined

on the date on which the member elects
to withdraw due to an event other than
the member attaining normal retirement
age;
Effective date – Deemed to have come into
operation on 1 March 2019.
83

83

Section 8E

RETURN OF CAPITAL

84

84

Page 60
Slide 83
Previously, the withdrawal interest were determined immediately prior to the date on which
the member becomes entitled to a benefit from that fund because of an event other than the
member attaining normal retirement age, as determined by the rules of the fund

Page 61
 COMPANIES
Return of capital

• The amendments to the definition of “hybrid

equity instrument” clarify the scope of the
definition of hybrid equity instrument by
clarifying that any part redemption of a
share refers to a distribution of an amount
constituting a return of capital or a foreign
return of capital in respect of that share as it
is impossible to otherwise redeem a portion
of a share.

85

85

COMPANIES
Issue price
• New definition inserted in s 8E
• issue price’ in relation to a share in a
company means the amount that was
received by or that accrued to that
company in respect of the issue of that
share
Effective date – YOA ending on or after 21
July 2019.
86

86

Page 62
 Section 8EA

ENFORCEABLE OBLIGATION

87

87

COMPANIES
Enforceable obligation

The definition of an enforceable obligation

were deleted.

88

88

Page 63
 Section 22

TRADING STOCK

89

89

Trading Stock

Clarity were provided, confirming that

closing stock must be included in gross
income (s 22(1)(a)(i) of ITA).

90

90

Page 64
 Trading Stock
In determining any diminution in the value of
trading stock, no account must be taken of
the fact that the value of some items of
trading stock held and not disposed of by
the taxpayer may exceed their cost price
(s 22(1)(a)(ii) of ITA).
Effective date – YOA commencing on or
after 1 January 2020.
91

91

Paragraph 12A and paragraph 43A of the Eighth Schedule to the

Act
ADDRESSING ABUSIVE
ARRANGEMENTS AIMED AT
AVOIDING THE ANTI-DIVIDEND
STRIPPING PROVISIONS
92

92

Page 65
 Par 43A / Section 22B

Family Trust
100%

Co B
100% Dividend

Co A BBBEE Trust
Share
subscription

93

93

COMPANIES
Dividend Stripping

The anti-avoidance rules will no longer

apply only at the time when a shareholder
company disposes of shares in a target
company.

94

94

Page 66
Slide 94
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB
Background
The anti-avoidance rules dealing with dividend stripping were first introduced in the Act in
2009. Dividend stripping normally occurs when a shareholder company that intends on
disinvesting in a target company avoids income tax (including capital gains tax) that would
ordinarily arise on the sale of shares. This is achieved when a shareholder company (that
either controls or has a significant influence over a target company) ensures that the target
company declares a large dividend to it prior to the sale of shares in that target company to a
prospective purchaser. This pre-sale dividend, which is exempt from Dividends Tax (in the
case of a resident dividend that declares and pays a dividend to another resident company),
decreases the value of shares in the target company. As a result, the shareholder company
can sell the shares at the lowered share value thereby avoiding a much larger capital gains
tax burden in respect of sale of shares.
In 2017, amendments were made in the Act in order to strengthen the anti-avoidance rules
dealing with dividend stripping. As a result of the 2017 changes, exempt dividends that are
paid to a shareholder company within 18 months of a disposal of shares held by that
shareholder company are currently regarded as extra-ordinary dividends and are treated as
proceeds or income that is subject to tax in the hands of that shareholder company. Further,
in 2018, amendments making provision for the anti-avoidance rules dealing with dividend
stripping rules to override corporate re-organisation rules which were made in 2017 were
reversed to ensure that those 2017 amendments do not hinder legitimate reorganisation
transactions.
Reasons for change
It has come to Government’s attention that certain taxpayers have embarked on abusive tax
schemes aimed at circumventing the current anti-avoidance rules dealing with dividend
stripping arrangements. These schemes involve millions of Rands and have a potential of
eroding the South African tax base. These latest schemes involve, for example, a substantial
dividend distribution by the target company to its shareholder company combined with the
issuance, by that target company, of its shares to a third party or third parties. The ultimate
result is a dilution of the shareholder company’s effective interest in the shares of the target
company that does not involve a disposal of those shares by the shareholder company. The
shareholder company ends up, after the implementation of this arrangement, with a lowered
effective interest in the shares it holds in the target company without triggering the current anti-
avoidance rules. This is because the current anti-avoidance rules are triggered when there is
a disposal of shares while these new structures do not result in an ultimate disposal of the
shares but a dilution of the effective interest in the shares of the target company.
Extract from the 2019 Presentation to SCOF and SECoF on the draft response to the
2019 Draft Tax Bills
• The 2019 Budget Review included a legislative proposal under Annexure C to further
strengthen the anti avoidance rules dealing with dividend stripping in order to curb the
use of new tax structures being used by taxpayers to undermine the 2017 rules. To
curb the use of these new structures, proposed amendments were included in the Draft
TLAB and it was further proposed that these further strengthened rules would apply
with effect from Budget Day(20February2019).
Comment:
The proposed rules are overly broad in their application. These rules have moved away from
the original policy at the time that they were first inserted. This has resulted in a situation where
any new share issue, no matter how small, would reduce the effective interest of an existing
Page 67
shareholder in the target company, potentially triggering the rules even where there is
absolutely no link between the share issue and the relevant extraordinary dividend.
Consideration must be given to requiring a link between the extraordinary dividend and the
issue of shares.
Response:
Not Accepted. The 2017 legislative amendments were necessary because the pre-2017anti
avoidance rules were limited in their scope and were, as a result, being undermined by
taxpayers. The pre-2017anti avoidance rules only applied where the shareholder company
held more than 50 percent of the shares in the target company. This threshold was too high
and did not focus on the ability of a shareholder company that wishes to dispose of shares in
another company to significantly influence the decisions of whether a dividend will be
distributed in respect of those shares to achieve the desired reduction of the value of those
shares and its effective interest in the shares of the target company. Secondly, anti avoidance
rules applied if there was a link between the funding of the subscription amount and the
dividend declared. In this respect, the anti avoidance rules applied where such funding was
provided for or guaranteed by the prospective purchaser of shares or a connected person in
relation to a prospective purchaser. The link between the subscription price and the dividend
made the pre-2017anti avoidance rules easy to circumvent as taxpayers broke the link by
using funders other than the prospective purchaser or connected persons in relation to the
prospective purchaser. Even more worrying was the fact that in cases where the target
company had distributable reserves to fund the dividend with.
However, the following refinements are proposed in the 2019 Draft TLAB to help limit the
application of the proposed anti-avoidance rules regarding dividend stripping to scenarios that
pose the most risk to the fiscus:
Providing certainty regarding the use of the term “effective interest”
• Taxpayers have indicated in both their written submissions and during public hearing
that the term “effective interest” needs to be clarified. More specifically, clarity is
required as to whether taxpayers are required to assess changes in effective interest
held by the shareholder company in a target company in the class of shares that the
target company issues.
• Government is aware that taxpayers are already developing tax structures that will
manipulate the use of different classes of shares to curb the currently proposed rules.
It is Government’s position that the current proposed rules require taxpayers to do a
“facts and circumstances” analysis when determining whether a shareholder
company’s effective interest in a target company has been reduced. In the first
instance, where an extraordinary dividend is paid and shares of the same class are
issued, the effective interest test is applied by considering the effective percentage
held before the share issue to that held after the shares issue. In the instance that an
extraordinary dividend is paid in respect of a one class of shares and shares of a
different class are issued by the target company, the reduction in the effective interest
of the shareholder company must be considered with reference to the reduction of the
value of that shareholder company’s interest in the target company across the different
classes of shares.
• That being said, where possible and with regard to instances that Government
considers the risk of using different classes of shares to avoid the 2019 proposed
changes being used to avoid these proposed rules, limitations will be proposed.
Base cost in respect of deemed disposal
• In the instance that the proposed rules are triggered, the shareholder company must
include the amount of extraordinary dividends received in its income, where the shares
Page 68
 are held as tradingstock, or as a capital gain, where the shares are held as a capital
asset. However, there is no provision that permits the shareholder to claim a
proportional amount of the cost of the shares as a deduction against the income or
capital gain. In addition, interaction of the proposed rules with paragraph 19 of the
Eighth Schedule result in a situation that when the shareholder company is subject to
the inclusions as a result of the proposed rules, paragraph19 also denies that
shareholder company the cost of the shares if those shares are subsequently disposed
of.
• In this regard, it should be noted that the anti avoidance rules dealing with dividend
stripping are meant to curb the use of tax structures to avoid tax ordinarily arising on
the disposal of shares. As such, the anti-avoidance rules should achieve this by
triggering a tax event (i.e. the inclusion of income or a capital gain) and encourage tax
payers to rather enter into share disposal arrangements. As such, parity of the
treatment of the cost of the shares between instances of actual share disposal and
instances deemed disposal will not be provided for. However, in the instance that a
shareholder company disposed of its shares in a target company subsequent to being
subject to the anti avoidance rules dealing with dividend stripping in respect of a
deemed disposal, changes are proposed to ensure that the cost of the shares may be
used to deduct against the proceeds arising from that actual share disposal.
Extraordinary dividends arising in the course of or as part of a corporate reorganisation
transaction
• Taxpayers have indicated that it is not entirely clear whether the proposed rules will
apply in respect of extraordinary dividends that are paid in the course or as part of a
reorganisation transactions. In this regard, consideration of various corporate
reorganisation transactions will be considered and where there is no risk associated
with their potential use by taxpayers to avoid the application of the anti avoidance rules
dealing with dividend stripping, the relevant exclusions will be provided for.

Page 69
 COMPANIES
Extraordinary dividend

Extraordinary dividend - Provided that a dividend

in specie that was distributed in terms of a deferral
transaction must not be taken into account to the
extent to which that distribution was made in terms
of an unbundling transaction as defined in section
46(1)(a) or a liquidation distribution as defined in
section 47(1)(a);

Effective date – Dividends received or

accrued on or after 30 October 2019
95

95

COMPANIES
Deemed disposal rule
• A shareholder company will, for purposes of the anti-
avoidance rules dealing with dividend stripping, be deemed to
have disposed of its shares in the target company, if the
target company issues shares to another party and after that
issuance of shares, it is determined that the effective interest
held by the shareholder company in the target company is
reduced by reason of that issuance of shares.
– In such an instance, the shareholder company will be deemed to
have disposed of a percentage of the shares it holds in the target
company immediately after the share issue that results in a
decrease in the effective interest it holds in the shares of the target
company. The percentage envisaged is the percentage by which
the effective interest held by the shareholder company in the
target company has been reduced by as a result of the issuance
of shares.

96

96

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 COMPANIES
Effective Date

Effective date – Deemed to have come into

operation on 20 February 2019 and apply in
respect of shares held by a company in another
company if the effective interest of those
shares held by that company in that other
company is reduced by reason of shares
issued by that other company, on or after 20
February 2019 to a person other than that
company.

97

97

Sections 40CA of the Act

CLARIFICATION OF THE
INTERACTION OF THE VALUE-
SHIFTING RULES AND THE
DEEMED EXPENDITURE
INCURRAL RULES FOR ASSETS
ACQUIRED IN EXCHANGE FOR
THE ISSUE OF SHARES
98

98

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 COMPANIES
Section 40CA

The Act contains rules in section 24BA and

section 40CA aimed at preventing the
transfer of high value assets to a company
in return for low value shares issued by the
company and the issuance of high value
shares for low value assets.

99

99

COMPANIES
Value shifting rules
Deemed expenditure incurred by a company that
acquires an asset in exchange for the issue of its own
shares

equal to the sum of the market value of the

issued shares immediately after the
acquisition of the asset in respect of the asset

any deemed capital gain which arose ito the value

shifting rules in respect of the acquisition of that
asset.
100

100

Page 72
Slide 99
Background
Section 40CA provides that a company that acquires an asset in exchange for an issue of
shares in itself is deemed to have incurred expenditure in respect of the acquisition of that
asset that is equal to the market value of those shares immediately after the acquisition. This
means that a company that acquires an asset in exchange for the issue of its shares is deemed
to have a base cost in the case of capital asset or a cost of trading stock in the case of trading
stock for that asset.
On the other hand, section 24BA provides that where a company acquires an asset from a
person in exchange for an issue of shares by that company and the market value of the asset
immediately before that disposal exceeds the market value of the shares immediately after
that issue, the amount in excess is deemed to be a capital gain in respect of a disposal by that
company of the shares and the base cost of the shares issued must be reduced in the hands
of the person selling the asset by the amount of that excess. Further, where a company
acquires an asset from a person in exchange for the issue of shares and the market value of
the shares immediately after that issue exceeds the market value of that asset immediately
before the disposal, the amount in excess is deemed to be a dividend that consists of a
distribution of an asset in specie that is paid by the company on the date of that issue.
Reason for change:
Currently, the provisions of the Act do not adequately address the interaction of the above-
mentioned rules. In particular, it is not clear if a company should adjust the deemed
expenditure incurred in terms of section 40CA in respect of an asset acquired in exchange for
the issue of its own shares with the amount of the capital gain triggered in terms of section
24BA. This lack of clarity results in potential double taxation. Potential double taxation will
arise in the instance that the company subsequently disposes of the asset due to the fact that
the company would have paid tax on the capital gain triggered by section 24BA which is
currently not deemed to be expenditure incurred.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 73
 COMPANIES
Value shifting rules

Issues shares R 100 MV

Company A

Asset Transfer: R 150 MV

101

101

COMPANIES
Value shifting rules

Effective date – 1 January 2020 and apply in

respect of acquisitions made on or after that date.

102

102

Page 74
Slide 101
Example 1: Potential double taxation under current rules
Facts:
Company A acquires an asset with a market value of R150 from Person X and as
consideration for the assets, Company A issues shares with a market value of R100 after the
transaction.
Results:
In terms of ordinary principles, Person X has a base cost of R150 for the shares issued by
Company A as he incurred a cost equal to the market value of his asset in order to acquire
the shares. In terms of section 40CA, Company A is deemed to have a base cost of R100 for
the assets (i.e. being the market value of the shares it issued immediately after the
transaction).
Given the difference in value, section 24BA applies to the transaction. As a result, Company
A is deemed to have a capital gain of R50 (i.e. the market value of the assets immediately
before the transaction of R150 – the market value of the shares issued immediately they are
issued of R100). In addition, Person X must reduce his base cost for the shares R50, therefore
not allowing for a base cost increase for shares of a lower value.
This results in a situation where Company A holds assets with a market value of R150 in
respect of which shares worth R100 and a capital gain of R50.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 75
 Section 23C
REDUCTION OF COST OR
MARKET VALUE OF CERTAIN
ASSETS
103

103

COMPANIES
Reduction of cost or market value of
certain assets

• The amendment seeks to align the policy

intention as outlined in the Regulation and
clarify that VAT is to be included in the
“determined value” used to calculate the
fringe benefit arising in the employee’s
hands.

104

104

Page 76
 Section 24O of the Act

CLARIFYING THE EXCLUSION

FROM CLAIMING INTEREST
DEDUCTION FOR DEBT FINANCE
ACQUISITIONS FOR START-UP
BUSINESSES
105

105

COMPANIES
Exclusion from claiming interest
deduction
• The clarification of the exclusion of acquisitions of shares
in companies that are not operating companies or
controlling companies on the date of the acquisition of
shares in an operating company seems to be more of a
restatement of the current requirements for claiming
the special interest deduction.
– Section 24O of the Act explicitly provides that an
acquisition transaction envisages a situation where the
controlling shares being acquired by a company that is
not a part of the same group of companies as the
company in which the shares are being acquired are
shares in a company that, is on the date of that
acquisition, either an operating company or a controlling
company in relation to an operating company.

106

106

Page 77
Slide 106
Background
The Act contains special interest deduction rules in section 24O that make provision for
companies to deduct interest in respect of interest-bearing debt used to acquire a direct or
indirect controlling share interest in an operating company. The policy rationale for the special
interest rules in section 24O was to discourage the use of multiple step debt push down
structures used by taxpayers to obtain interest deductions in respect of debt used to acquire
shares of income producing business. One of the requirements for these rules is that an
operating company must be a company where at least 80 per cent of that company’s receipts
and accruals constitute income as defined (i.e. gross receipts and accruals less receipts and
accruals that are exempt for tax purposes) and that income must have been generated from
its business of providing goods and services.
In 2015, changes were made in section 24O to align these rules with the underlying policy
objective and to ensure that taxpayers could no longer claim the special interest deduction
when the value of the shares of the holding company of an operating company was largely
derived from non-income producing fellow subsidiaries of an income producing operating
company. As a result, share interests that qualify for the special interest deduction were limited
to shares whose value was largely determined with reference to the value of shares of
operating companies where at least 90 per cent of their value was derived from an income
producing operating company.
Reasons for change
It has come to Government’s attention that there are conflicting views regarding the application
of these rules and that some taxpayers intend on claiming the special interest deduction in
respect of newly established companies. For example, a prospective company shareholder
would raise interest-bearing debt to capitalise a newly established company. In turn, the newly
established company uses the funding from its now shareholder to acquire income producing
assets and embarks on its trade. As a result, the shareholder then claims a special interest
deduction in respect of the interest incurred in respect of the interest-bearing debt used to
capitalise the newly established company when it subsequently generates income and meets
the definition of an operating company (at least 80 per cent of a company’s receipts and
accruals constitutes income).
The above-mentioned view goes against the policy rationale for the introduction of the special
interest deduction. The special interest deduction is meant to provide for a deduction where
interest bearing debt is used to acquire shares in established companies with income
producing assets that already generate high levels of income.

Consequently, in the Final Response Document on Taxation Laws Amendment Bill, 2018 and
Tax Administration Laws Amendment Bill, 2018 (dated 17 January 2019 on page 19),
Government stated that the current provisions of the special interest deduction do not support
the deduction of interest on interest-bearing debt used to capitalise newly established
companies that upon capitalisation do not qualify as operating companies as yet. In addition,
the definition of an “acquisition transaction” envisages an acquisition of a controlling interest
in a company that is, upon acquisition, already an operating company or a controlling company
in relation to an operating company.
Proposal
The proposed clarification of the exclusion of acquisitions of shares in companies that are not
operating companies or controlling companies on the date of the acquisition of shares in an
operating company seems to be more of a restatement of the current requirements for claiming
the special interest deduction. It is, nevertheless, still proposed that changes be made in
Page 78
section 24O of the Act to explicitly provide that an acquisition transaction envisages a situation
where the controlling shares being acquired by a company that is not a part of the same group
of companies as the company in which the shares are being acquired are shares in a company
that, is on the date of that acquisition, either an operating company or a controlling company
in relation to an operating company.
Effective date
The proposed amendments are deemed to have come on 1 January 2019 and apply in respect
of interest incurred during years of assessment ending on or after that date.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB
Amending the special interest deduction in respect of share acquisitions funded by
debt to allow for deductions after an unbundling transaction
The Act contains special interest deduction rules in section 24O that make provision for
companies to deduct interest in respect of interest-bearing debt used to acquire a director in
direct controlling share interest in an operating company. In some instances, a company may
be unable to acquire a direct controlling interest in an operating company, but instead may
acquire an indirect controlling interest by acquiring the shares in a controlling holding company
in relation to that operating company. Legislative amendments were included in the Draft TLAB
to allow taxpayers to continue utilising the special interest deduction in instances where an
unbundling transaction involving a company (that previously held an indirect controlling share
interest in a holding company) results in a direct controlling share interest in an operating
company.

Comment:
It may happen that an indirect shareholding in an operating company is transferred to the
acquiring company rather than a direct shareholding, continuation of the deduction should also
be provided for in such instances.

Response:
Not accepted. The policy rationale for the introduction of the special interest deduction in 2012
was to discourage the use of multiple step debt pushdown structures that resulted in the
acquisition of productive assets. The decision to allow taxpayers to be able to carry on claiming
the special interest deduction after acquiring a direct shareholding by way of an unbundling
was to encourage the acquisition of the shares of a productive company rather than a holding
company in relation to a productive company, thus have a more direct interest in the productive
assets. As such, no further concession is being considered in respect of indirect
shareholdings.
Extracted from 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 79
 COMPANIES
Exclusion from claiming interest
deduction

Example:
• A prospective company shareholder would
raise interest-bearing debt to capitalise a
newly established company.
• In turn, the newly established company uses
the funding from its now shareholder to
acquire income producing assets and
embarks on its trade.

107

107

COMPANIES
Exclusion from claiming interest
deduction

Result:
• The shareholder then claims a special
interest deduction in respect of the interest
incurred in respect of the interest-bearing
debt used to capitalise the newly established
company when it subsequently generates
income and meets the definition of an
operating company (at least 80 per cent of a
company’s receipts and accruals constitutes
income).
108

108

Page 80
 Section 24O of the Act

AMENDING THE SPECIAL

INTEREST DEDUCTION RULES IN
RESPECT OF SHARE
ACQUISITIONS FUNDED BY DEBT
TO ALLOW FOR DEDUCTIONS
AFTER AN UNBUNDLING
TRANSACTION
109

109

COMPANIES
Share acquisitions

The legislation now clearly state that where

an unbundling transaction results in a
company holding a direct controlling share
interest in an operating company, that
company may continue to claim the
special interest deduction.

Effective date – 1 January 2019 and apply in

respect of YOA ending on or after that date.
110

110

Page 81
Slide 110
Background
Since the introduction of section 24O in 2012, a company may qualify for a deduction in
respect of interest it incurs on an interest-bearing debt that it issues, assumes or uses to fund
an acquisition of a direct controlling share interest in an operating company or an indirect
controlling share interest in an operating company held through a controlling group company
in relation to that operating company. The companies involved must, however, form part of a
domestic group of companies. The acquiring company can continue to claim the special
interest deduction as long as it also remains within the same domestic group of companies as
that operating company or that holding company in relation to that operating company.
Reasons for change
In some instances, a company may be unable to acquire a direct controlling interest in an
operating company but may be able to acquire only an indirect controlling interest by acquiring
the shares in a controlling group company in relation to that operating company. The interest
incurred in respect of the debt used to fund the acquisition of the shares in the controlling
group company will be deductible if the acquisition meets requirements of section 24O. It is
uncertain, however, if that company may continue to claim the deduction in respect of such
interest should the controlling group company unbundle the shares it holds in the operating
company to that company, i.e. if the indirect controlling interest acquired by that company in
the operating company is in effect converted to a direct controlling interest in the operating
company.
Taxpayers have submitted that certainty should be provided in such an instance the company
can still claim a deduction in respect of the interest incurred on the debt as it would in any
event have qualified for a deduction had it initially acquired a direct controlling interest in the
operating company. Furthermore, following an unbundling there will no longer be any concerns
about an indirect shareholding whose value may not be significantly derived from the value of
an operating company.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 82
 COMPANIES
Share acquisitions

Section 24O will also apply where direct

shareholding was now acquired by way of
s 46 or s 47 transactions.

111

111

Sections 24J and 41 of the Act

CLARIFYING THE TAX
TREATMENT OF TRANSFER OF
INTEREST-BEARING
INSTRUMENTS IN TERMS OF
CORPORATE REORGANISATIONS
112

112

Page 83
 COMPANIES
Interest Bearing Instruments

To ensure accrued interest and a change

in market value of an instrument as a result
of changes in market interest rates are
reflected in the taxable income of the
transferor of an instrument, the corporate
rules does not override the application of
section 24J of the Act.

113

113

COMPANIES
Interest Bearing Instruments

As a result, the transferor will realise an

adjusted gain or adjusted loss on transfer of
an interest-bearing instrument in terms of
section 24J of the Act despite transferring these
interest bearing instruments in terms of the
corporate rules.

Effective date – 1 January 2020 and apply in

respect of YOA ending on or after that date.
114

114

Page 84
Slide 113
Background
The Act contains specific provisions in section 24J that regulates the incurral and accrual of
interest in respect of “instruments”. In this respect, section 24J defines the term instrument to
include "any interest-bearing arrangement or debt". In the event an “instrument” is disposed
of, section 24J(4) of the Act requires the holder of an instrument to account for an adjusted
gain or adjusted loss on transfer or redemption of an instrument in the year of assessment
during which the instrument is transferred or redeemed.
The adjusted gain or adjusted loss on the transfer of an instrument for the holder of an
instrument equals the “transfer price” of such instrument plus any payments received by the
holder during the accrual period in which it is transferred less the “adjusted initial amount” at
the beginning of that accrual period less the accrual amount for that accrual period less
payments made by the holder during that period. The “transfer price” is defined in section 24J
of the Act as “the market value of the consideration payable or receivable, as the case may
be, for the transfer of such instrument as determined on the date on which that instrument is
transferred.”
Sections 42, 44, 45 and 47 of the Act provide for the deferral of tax when assets are moved
between companies forming part of the same ‘group of companies’, as defined in section 41
of the Act. However, when the transferor company disposes of an interest bearing instrument,
those sections deem a disposal of the interest bearing instrument to be an amount equal to
the base cost of such an interest bearing instrument or the amount taken into account in terms
of section 11(a) or section 22(1) or (2) of the Act.
Reasons for change
As stated above that the Act contains corporate reorganisation rules aimed at providing tax
neutral transfer of assets between companies that form part of the same group of companies.
However, the current corporate reorganisation rules do not specifically address the interaction
of the definition of “transfer price” in section 24J of the Act which is equal to market value as
stated above with the deemed proceeds prescribed by the corporate reorganisation rules of
the Act which is equal to the base cost of such an asset or the amount taken into account in
terms of section 11(a) or section 22(1) or (2) of the Act.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 85
 Sections 24I and 41 of the Act
CLARIFYING THE TAX
TREATMENT OF TRANSFER OF
EXCHANGE ITEMS IN TERMS OF
CORPORATE REORGANISATIONS
115

115

COMPANIES
Transfer of exchange ito corporate rules

In order to clarify the interaction between corporate

reorganisation rules and provision governing the
inclusion and deduction of exchange gains or
exchange losses amendments were made in the
corporate reorganisation rules to ensure that when
an exchange item is transferred, the unrealised
and deferred exchange differences on that
exchange item should be realised and is not
deferred.

116

116

Page 86
Slide 116
Background
A. Foreign exchange differences
A taxpayer may carry out transactions denominated in a currency other the South African
Rand (i.e. a foreign currency). Currencies, including the South African Rand, are volatile and
as a result, the price or amount for which the currency of one country can be exchanged for
another country's currency, referred to as an exchange rate, fluctuates. For tax compliance
purposes, a taxpayer must reflect the transactions entered into by that taxpayer in South
African Rands and therefore must translate the foreign currency amounts to South African
Rands. When currencies are translated from one to the other, exchange differences (either a
gain or loss) will arise depending of the performance of the South African Rand in relation to
that of the foreign currency that denominated a taxpayer’s transaction.
Section 24I of the Act determines the exchange differences (foreign exchange gains and
losses) in respect of exchange items that must be included in or deducted from a taxpayer’s
income.
These differences are determined at the end of each year of assessment or on the date that
exchange item is realised or transferred. However, in the instance of differences in respect of
exchange items between connected parties and companies that form part of the same group
of companies, there is a deferral of inclusions and/or deductions in respect exchange
differences until the exchange item is realised.
B. Corporate reorganisations
The Act contains corporate reorganisation rules that make provision for roll over relief in
respect of the transfer of assets and the assumption of qualifying debt between taxpayers.
This, therefore, includes assets or liabilities that may be denominated in foreign currency.
Furthermore, for purposes of applying the roll-over provisions, currently the provisions
governing the corporate reorganisation rules override (unless specifically indicated to the
contrary under those provisions) the other provisions of the Act.
Reasons for change
At issue is that the current corporate reorganisation rules do not provide clarity on the
interaction of these rules and the realisation of exchange gains or exchange losses in respect
exchange items that are transferred under a reorganisation transaction.
There are conflicting views on whether unrealised and deferred exchange differences on
exchange items transferred in terms of corporate reorganisation rules should be deferred
under corporate reorganisation rules or whether an exchange difference should be included
or deducted (as the case may be) when an exchange item is transferred in terms of a
reorganisation rule.
Proposal
In order to clarify the interaction between corporate reorganisation rules and provision
governing the inclusion and deduction of exchange gains or exchange losses it is proposed
amendments be made in the corporate reorganisation rules to ensure that when an exchange
item is transferred, the unrealised and deferred exchange differences on that exchange item
should be realised and is not deferred. As a point of departure, these changes are necessary
as currently section 41(2) provides that the corporate reorganisation rules override all other
provisions of the Act. As such, is it proposed that section 41(2) should be amended to clarify
that the corporate reorganisation rules do not override the provisions of section 24I in respect
of triggering gains or losses upon the realisation or transfer of an exchange item.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB
Page 87
 COMPANIES
Transfer of exchange ito corporate rules

• As a point of departure, these changes are necessary

as currently section 41(2) provides that the corporate
reorganisation rules override all other provisions of the
Act.
• As such, section 41(2) were amended to clarify that the
corporate reorganisation rules do not override the
provisions of section 24I in respect of triggering gains or
losses upon the realisation or transfer of an exchange
item.
• The proposed interaction between corporate
reorganisation rules and section 24I of the Act can be
illustrated with the following example:
117

117

COMPANIES
Transfer of exchange ito corporate rules

Facts:
Company A advanced a loan of $100 to foreign
subsidiary company B during year of
assessment 1 when X$1:R1. The loan was not
hedged and was disclosed as a long-term loan
for financial reporting purposes. The following
table details the sequence of events.

118

118

Page 88
 COMPANIES
Transfer of exchange ito corporate
rules
Year 1:
Loan advanced by Co A to foreign SubCo B $ 100
Transaction spot 1
Year-End spot 5

Year 2:
Transfer of loan to Local Subco C
Transaction spot 6
Year-End spot 7

Year 3:
Settlement of loan
Realisation spot 10
119

119

COMPANIES
Transfer of exchange ito corporate rules
Company A Foreign Sub B
Year 1 Exchange difference on 400
translation ito 24I(3)(a)
Deferral in terms (400)
s24I(10A)(a)
Year 2 Exchange difference on 100
realisation ito 24I(3)(a)
Exchange difference on 400
realisation ito 24I(10A)(b)
Exchange difference on 100
translation ito 24I(3)(a)
Deferral in terms (100)
s24I(10A)(a)

120

120

Page 89
 COMPANIES
Transfer of exchange ito corporate rules

Company A Foreign Sub B

Year 3 Exchange difference on 300
realisation ito 24I (3)(a)
Exchange difference on 100
realisation ito 24I(10A)(b)

In summary, the seller is taxed on all previous exchange differences upon

realisation of the exchange item, whilst the purchaser may only defer
exchange differences from the date of acquisition of the exchange item.

Effective date – 1 January 2020 and apply in

respect of YOA ending on or after that date.
121

121

Sections 9D, 9H and 45 of the Act

HARMONISING THE TIMING OF
DEGROUPING CHARGE
PROVISIONS FOR INTRA-GROUP
TRANSACTIONS AND
CONTROLLED FOREIGN
COMPANY RULES
122

122

Page 90
 COMPANIES
Intra-group transactions and CFC rules

• In order to address the misalignment,

changes were made in the tax legislation and
the capital gain as the exit charge for intra-
group transactions in the case of a foreign
company ceasing to be a controlled foreign
company be triggered on the date before the
day the transferee company ceases to be a
controlled foreign company.

123

123

COMPANIES
Intra-group transactions and CFC rules

• The changes will enable the capital gain to

be taken into account in the net income to
be imputed to residents when a foreign
company ceases to be a CFC.

Effective date – 1 January 2020 and apply in

respect of YOA ending on or after that date.

124

124

Page 91
Slide 123
Background
A. Controlled foreign company rules
A Controlled Foreign Company (CFC) is defined in section 9D of the Act as any foreign
company if more than 50 per cent of the total participation rights or voting rights in that
company are directly or indirectly held or exercisable by one or more persons that are
residents. In 2017, changes were made to the definition of a CFC in section 9D of the Act to
regard as a CFC as any foreign company where the financial results of that foreign company
are reflected in the consolidated financial statements of any company that is a resident as
required under International Financial Reporting Standards (IFRS) 10.
Section 9D(2)(b) of the Act makes provision for the determination of a CFC income when a
foreign company ceases to be a CFC. When a foreign company ceases to be a CFC at any
stage during a year of assessment before the last day of the foreign tax year of that foreign
company, section 9D(2)(b)(ii) of the Act determines that an amount equal to a proportional
amount of the net income of the company must be included in income of residents. The foreign
tax year is stated to end on the day the foreign company ceases to be a CFC and the
proportional amount is calculated from the first day of the foreign tax year of the CFC to the
day before the company ceases to be a CFC.
B. Ceasing to be a controlled foreign company
When a foreign company ceases to be a CFC, section 9H(3) of the Act triggers an exit event
for a foreign company that ceases to be a CFC. The CFC is deemed to have disposed each
of its assets on the date immediately before the day on which that foreign company ceased to
be a CFC and reacquired those assets on the day that the foreign company ceased to be a
CFC. Furthermore, the foreign tax year of a foreign company that ceases to be a CFC is
deemed to have ended on the date immediately before the day it ceased to be a CFC and the
next foreign tax year is deemed to have commenced on the day it ceased to be a CFC.
C. Exiting the group of companies in terms of corporate reorganisation rules
Section 45 of the Act provides for the deferral of tax when assets are transferred between
companies forming part of the same ‘group of companies’, as defined. However, whenever
the transferee company exits the group of companies in relation to the transferor, but retains
an asset acquired within the last six years under an intra-group transaction, a deemed capital
gain is determined for the asset. This is commonly referred to as a de-grouping charge. This
de-grouping charge could also be triggered for an asset that constitutes an equity share if the
transferee ceases to be a CFC in terms of section 45(4)(bA)(i)(bb) of the Act. In this scenario,
the capital gain is taken into account in the determination of the net income of the foreign
company in its year of assessment when it ceases to be a CFC. That would be the day after
the foreign tax year ends in terms of section 9H(3)(d)(i) and the day after the proportional
amount of the net income is determined in terms of section 9D(2)(b)(ii).
Reasons for change
At issue is the misalignment in the timing of the rules for the determination of net income of a
CFC under sections 9D, 9H and 45 of the Act due to the fact that the de-grouping charge
provisions in the corporate reorganisation rules deem a capital gain to arise in the year of
assessment in which a de-grouping takes place. However, the provisions for determining the
net income of CFCs and the provisions for ceasing to be CFCs, when read together, determine
that the year of assessment in which the ‘de-grouping event occurs’ commences and ends on
the same day but the period for which the net income should be determined ended on the day
before the foreign company ceases to be a CFC.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB
Page 92
 Section 41 of the Act
AMENDING THE CORPORATE
REORGANISATION RULES TO
CATER FOR COMPANY
DEREGISTRATION BY
OPERATIONAL LAW

125

125

COMPANIES
Company deregistration by
operational law

• To ensure that statutory amalgamations and

mergers are not unfairly excluded from
qualifying for tax deferral, the current list of
steps taken for liquidation, winding-up and
deregistration were amended by including
instances where companies lodge a notice to
the Commissioner as contemplated in section
116 of the Companies Act.
Effective date – 1 January 2020 and apply in respect
126 of acquisitions made on or after that date.

126

Page 93
Slide 126
Background
The Act contains corporate reorganisation rules that make provision for roll over relief in
respect of the transfer of assets between companies forming part of the same economic unit
as well as their natural person shareholders. Further, in order to qualify for the roll over relief,
the corporate reorganisation rules contain certain requirements and anti-avoidance provisions
that taxpayers must adhere to. With regard to corporate reorganisation rules dealing with
amalgamation transactions and transactions relating to liquidation, winding-up and
deregistration, these rules currently contain a requirement for the liquidation, winding-up or
deregistration of one of the parties to these transactions.
In the case of an amalgamation transaction, these rules require that an amalgamated
company (i.e. the company that disposes of all its asset to another company in respect of an
amalgamation transaction) must be terminated soon after that amalgamation transaction. In
the case of a transaction relating to liquidation, winding-up and deregistration, these rules
require that a liquidation company (i.e. a company that disposes of all its assets to its
shareholders in anticipation of or in the course of its liquidation, winding-up or deregistration)
should also be terminated soon after that transaction.
Further, these corporate reorganisation rules contain measures that disqualify taxpayers from
benefiting from roll over relief if the necessary steps to liquidate, wind-up of register an
amalgamated company or a liquidating company have not been taken within 36 months of the
transaction. However, a longer period than the above-mentioned 36 months may be allowed
if the SARS Commissioner determines that such longer period is justified as envisaged in the
Act.
Reasons for change
In the case of two of the corporate reorganisation rules (namely, “amalgamation transactions”
and “transactions relating to liquidation, winding up and deregistration”), the Act currently
contains a requirement for the liquidation, winding-up or deregistration of one of the parties to
these transactions. In particular, it is required that an amalgamated company (i.e. the company
that disposes of all its asset to another company in terms of an amalgamation transaction)
must be terminated soon after that amalgamation transaction. In the case of a transaction
relating to liquidation, winding-up and deregistration, it is also required that a liquidation
company (i.e. a company that disposes of all its assets to its shareholders in anticipation of or
in the course of its liquidation, winding-up or deregistration) should also be terminated soon
after that transaction.
In order to ensure that taxpayers comply with the requirement regarding the termination of an
amalgamated company and a liquidating company, the income tax act contains rules that
disqualify taxpayers from benefiting from tax deferral if the necessary steps to liquidate, wind-
up or deregister an amalgamated company or a liquidating company have not been taken
within 36 months of the transaction. A longer period may however, be allowed if the
Commissioner of the South African Revenue Service determines that a longer period is
justified. In this regard, the envisaged steps are specifically listed in the tax legislation.
In this respect, section 116 of the Companies Act, No.71 of 2008 (the Companies Act),
requires that a notice detailing the amalgamation or merger must be prepared in the prescribed
manner and form after a resolution approving an amalgamation or merger has been adopted
by each company that is a party to that arrangement. Furthermore, it is required that the notice
should be furnished to the Companies and Intellectual Property Commission (the
Commission). Once the Commission has received this notice, section 116(5)(b) empowers
the Commission to deregister any of the amalgamating or merging companies that did not
survive the amalgamation or merger. However, companies which deregister in terms of section

Page 94
116(5)(b) of the Companies Act, pursuant to a statutory amalgamation or merger have not
been catered for in the list of steps contained in the Act.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 95
 Section 45(5)(b)
REFINING THE INTERACTION
BETWEEN THE ANTI-AVOIDANCE
PROVISIONS FOR INTRA-GROUP
TRANSACTIONS

127

127

COMPANIES
Interaction between the anti-avoidance
provisions for intra-group transactions

Changes were made to ensure that the zero

base cost rule is not triggered subsequent to
a de-grouping charge.

128

128

Page 96
Slide 128
Refining the interaction between the anti-avoidance provisions for intra-group
transactions

Section 45 which provides for tax deferral ([Link] over relief) when companies transfer assets
between group companies also contains multiple anti avoidance rules to ensure that they are
not abused by taxpayers. In Annexure C of the 2019 Budget Review, Government proposed
that it would make legislative changes in the Income Tax Act to clarify how the multiple anti-
avoidance rules applicable to intra-group transactions should interact with each other in order
to ensure that they do not give rise to double taxation. During internal consultative meetings
on the drafting of the Draft TLAB, the potential for double taxation was regarded as an
interpretation issue and that legislative intervention is not required it could be clarified by way
of interpretation guidelines and no changes were proposed in the Draft TLAB.

Comment:
It is understood that a de-grouping should only be accounted for once and cannot be triggered
again by the operation of another anti-avoidance rule. However, the anti-avoidance rule
applicable where assets are transferred on loan account between connected person which
provides that the loan receivable has a zero-base cost does not interact well with the de-
grouping charge. Should the de-grouping charge subsequently be triggered, and the tax
deferral be reversed, there is no need for the zero base cost rule to still apply. The degrouping
charge should be the final charge as it reverses the tax deferral.

Response:
Accepted. Legislative changes will be made to ensure that the zero base cost rule is not
triggered subsequent to a de-grouping charge.
Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 97
 Financial Institutions and
Products

129

129

Section 25BB of the Act

CLARIFICATION OF THE
DEFINITION OF RENTAL INCOME
IN A REIT TAX REGIME IN
RESPECT OF FOREIGN
EXCHANGE DIFFERENCES
130

130

Page 98
 FINANCIAL INSTITUTIONS
AND PRODUCTS
Rental income in a REIT tax regime:
Foreign Exchange Differences

• Changes were made to the definition of

“rental income” in section 25BB of the Act to
include any foreign exchange gains and
deduct foreign exchange foreign
exchange losses arising in respect of an
“exchange item” relating to a “rental income”
of a REIT or a controlled company.
Effective date – 1 January 2020 and apply in respect
of YOA commencing on or after that date.
131

131

Sections 25BB, 42, 44, 45 and 47 the Act

CLARIFICATION OF THE
INTERACTION BETWEEN
CORPORATE REORGANISATION
RULES AND REITS TAX REGIME

132

132

Page 99
Slide 131
Background
The special tax dispensation of a listed company that is a Real Estate Investment Trusts
(“REIT”) or a company that is a subsidiary of a REIT (“controlled company”) makes provision
for a flow-through principle in respect of income and capital gains to be taxed solely in the
hands of the investor and not in the hands of REIT or a controlled company. In turn, a REIT
or a controlled company may claim distributions to its investors as a deduction against its
income. This deduction may only be claimed if a distribution is a “qualifying distribution” that
is more than 75 per cent of the gross income of a REIT or a controlled company consisting of
“rental income”.
The term “rental income” is defined in section 25BB(1) of the Act to mean any of the following
amounts received by or accrued to a REIT or a controlled company:
a) an amount received or accrued for the use of immovable property, including any
penalty or interest charged on the late payment of such amount;
b) any dividend, other than a share buy-back contemplated in paragraph (b) of the
definition of “dividend” in section 1(1) of the Act, from a company that is a REIT at the
time of the distribution of that dividend;
c) a qualifying distribution from a company that is a controlled company at the time of that
distribution;
d) a dividend or foreign dividend from a company that is a property company at the time
of that distribution;
e) any amount recovered or recouped under section 8(4) in respect of an amount of an
allowance previously deducted under section 11(g), 13, 13bis, 13ter, 13quat, 13quin
or 13sex of the Act.
Reasons for change
In order for REITs or controlled companies to diversify and multiply returns for its investors,
many South African REITs or controlled companies have embarked on investments in real
estate outside South Africa. In order to hedge its exposure to foreign currency fluctuations, as
well as secure stable returns to investors in respect of its foreign real estate investments, a
REIT or a controlled company may enter into forward exchange contracts (FEC).
At issue is the current tax treatment of any unrealised exchange gains or losses determined
on the above-mentioned FECs of a REIT or a controlled company. Any unrealised exchange
gains or losses arising from the above-mentioned FECs of a REIT or a controlled company
are in terms of paragraph (n) of the definition of gross income in section 1 and in section 24I(3)
of the Act taken into account in determining the taxable income of such REIT or such controlled
company. This implies that unrealised exchange gains or losses arising from the above-
mentioned FECs of a REIT or a controlled company do not qualify as “rental income” of a REIT
or a controlled company, even though they are incurred solely for the earning of such “rental
income”.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB
Clarification of the definition of rental income in a REIT tax regime in respect of foreign
exchange differences

The special tax dispensation for listed and regulated property companies (REITs) makes
provision for an exemption for REITs of income and capital gains and for dividends to be taxed
in the hands of the investor and not in the REITs. In turn REITs may claim distributions to
Page 100
investors as a deduction against its income. This deduction may only be claimed if the
distribution is a “qualifying distribution” that is, if more than 75 percent of the gross income of
the REIT consists of “rental income”. At issue is the fact that the definition of “rental income”
does not include unrealised exchange gains or losses arising from the forward exchange
contracts entered into by a REITs to hedge its exposure to exchange differences in respect of
rental income. In order to address this, it is proposed that a REIT or controlled company
include foreign exchange gains and deduct foreign exchange losses on exchange items in the
definition of “rental income”.

Comment:
The proposed amendment is welcomed however inclusion of exchange differences in rental
income should be extended to all exchange differences of a REIT or controlled company which
directly or indirectly relate to REIT activities.

Response:
Not accepted. The proposed amendment is intended to assist taxpayers and will for now only
cater for foreign exchange differences relating to “exchange items” that hedge amounts
defined as “rental income”.
Clarification of the definition of rental income in a REIT tax regime in respect of foreign
exchange differences

Comment:
The proposed amendment should be amended to include foreign exchange gains only and
disregard foreign exchange losses because reducing the “rental income” by foreign exchange
losses will make it harder for the REITs or controlled company to reach the 75 percent of“
gross income” target needed to make a “qualifying distribution”.

Response:
Accepted. Changes will be made in the 2019 Draft TLAB to exclude foreign exchange losses
when determining a “qualifying distribution” for the purposes of section 25BB.
Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 101
 FINANCIAL INSTITUTIONS
AND PRODUCTS
Corporate reorganisation rules and
REITS tax regime

In order to ensure that the rules for the REITs

tax regime are aligned with the corporate
reorganisation rules, amendments were made
in the tax legislation so that corporate
reorganisation rules do not give rise to
capital gains tax on disposal of assets
within 18 months after their acquisition by a
REIT or controlled company under a corporate
reorganisation rule.
Effective date – 1 January 2020 and apply in respect
133 of YOA commencing on or after that date.

133

FINANCIAL INSTITUTIONS
AND PRODUCTS
Corporate reorganisation rules and
REITS tax regime

The following assets will not be subject to the

corporate rule anti-avoidance charges as it is
excluded from CGT in the REIT per the normal
REIT rules:
– immovable property
– a share or a linked unit in a company that is a
REIT on the date of disposal, or
– a share in a company that is a controlled
company on the date of disposal.

134

134

Page 102
Slide 133
Background
The Real Estate Investment Trusts (REITs) tax regime, allows for the tax-free earning of rental
income and capital gains a REIT. The investor is taxed on dividends declared by the REIT and
also on gains from the disposal of shares in the REIT. In order to enable this tax treatment
under the REIT regime, the REIT is allowed to claim distributions to its investors as a deduction
against its income. This deduction may only be claimed if a distribution is a “qualifying
distribution” that is, more than 75 per cent of the gross income of the REIT consists of rental
income including income from property entities.
Further section 25BB(5) of the REITs tax regime in the Act makes provision for a capital gains
tax exemption in respect of the following disposals by a REIT or a controlled company:
a. immovable property of a company that is a REIT or controlled company at the time of
disposal;
b. a share or a linked unit in a company that is a REIT at the time of that disposal; or
c. a share or a linked unit in a company that is a property company at the time of that disposal.
A disposal by a REIT or controlled company of any asset that is not listed above as envisaged
in section 25BB(5) of the REITs tax regime is subject to normal tax, including capital gains tax
if applicable.
In turn, the Act contains corporate reorganisation rules aimed at providing for the tax neutral
transfer of assets between companies that form part of the same group of companies,
provided certain requirements are met. For example, when a transferor disposes of an
allowance asset and the transferee company, in turn, acquires that allowance asset as such,
the corporate reorganisation rules allow for the tax neutral transfer of such allowance asset.
However, the corporate reorganisation rules make provision for certain anti-avoidance
measures to be triggered, for example, the rolled over capital gain to be added back to the
taxable income of the company, if a company that acquired the asset, disposes of such asset
within a period of 18 months of acquisition.
Reasons for change
At issue is the interaction of the above-mentioned anti-avoidance measures contained in the
corporate reorganisation rules and the provisions of section 25BB(5) of the REIT tax regime.
In certain instances if the immovable property is disposed of by a REIT within 18 months, the
anti-avoidance measures contained in the corporate reorganisation rules require that the
rolled over capital gain in respect of such immovable property be added to the taxable capital
gain of the REIT for the year of assessment in which the disposal of the immovable property
takes place. On the other hand, section 25BB(5) of the REITs tax regime provides for capital
gains exemption in respect of disposals of certain immovable property by a REIT. The anti-
avoidance measures contained in the corporate reorganisation rules when read with the
provisions of section 25BB(5) of the REITs tax regime create a discrepancy because in
general, corporate reorganisation rules override the provisions for the taxation of REITs in
section 25BB of the Act.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 103
 Sections 28 and 29A of the Act
CONSEQUENTIAL AMENDMENTS
TO THE TAX TREATMENT OF
FOREIGN REINSURANCE
BUSINESS OPERATING A
BRANCH IN SOUTH AFRICA

135

135

FINANCIAL INSTITUTIONS
AND PRODUCTS
Foreign reinsurance
In order to provide clarification on the tax treatment of a foreign reinsurer
that is a long-term insurer that conducts insurance business through a
branch in South Africa and falls under the ambit of section 28 of the Act,
the following changes were made in the Act:

New section 28(3) of the Act

• A new subsection be introduced in section 28 of the Act that allows a
foreign reinsurer that is a long-term that conducts insurance business
through a branch in South Africa to deduct insurance liabilities based
on the concept of “adjusted IFRS value” as used in section 29A of
the Act. This will have the effect that insurance liabilities will be
determined net of negative liabilities and the other adjustments under
section 29A will create alignment with the taxation of domestic insurers
that are conducting the same type of business than the foreign insurer
through its South African branch.

136

136

Page 104
Slide 136
Background
The Insurance Act No. 18 of 2017 (the Insurance Act) which was promulgated on 18 January
2018 is aimed at replacing and/or consolidating substantial parts of the Long-term Insurance
Act and the Short-term Insurance Act. The Insurance Act also makes provision for foreign
reinsurers to operate a reinsurance business in South Africa through a branch, provided that
the foreign reinsurer is granted a license, establishes a representative office as well as a trust
in South Africa.
Consequently, in 2017, changes were made in section 28 of the Act, dealing with tax treatment
of short term insurance business. These changes made provision for a foreign reinsurer that
is a long-term or short-term that conducts insurance business through a branch of that foreign
reinsurer as envisaged in the Insurance Act to be deemed as a short-term insurer for purposes
of the Act.
The above-mentioned 2017 changes in the Act follow changes that were made in the Act in
2015 and 2016, as a result of introduction of Solvency Assessment and Management (SAM)
Framework for a short-term insurer and long-term insurer.
With regard to short-term insurer, the 2015 amendments to section 28(3) of the Act made
provision for a short-term insurer to claim deductions in terms of this subsection that is equal
to the sum of liabilities on investments contracts relating to short-term insurance business in
accordance with International Financial Reporting Standards (IFRS) and amounts recognised
as insurance liabilities in accordance with IFRS relating to premiums and claims reduced by
the amounts recognised in accordance with IFRS in respect of amounts recoverable under
policies of reinsurance and further reduced by deferred acquisition cost.
However, with regard to long-term insurers, the 2016 changes made to section 29A of the Act
made provision for the following: (i) introduction of a new definition of value of liabilities, (ii)
introduction of a new definition of adjusted IFRS value, as well as (iii) transitional rules aimed
at prescribing a phasing in amount and the method and period of phasing in.
Reasons for change
At issue is whether the 2017 changes to section 28 of the Act making provision for a foreign
reinsurer that is a long-term insurer that conducts insurance business through a branch of that
foreign reinsurer as envisaged in the Insurance Act to fall under the ambit of section 28 also
changed the nature of taxation of a foreign reinsurer that is regarded as a long-term insurer in
terms of section 29A of the Act.
In particular, it is not clear which of the IFRS liabilities in a long-term insurance business
conducted through a branch of a foreign insurer would be allowed as a deduction in terms of
section 28(3) of the Act. Further, section 28(3) of the Act due to the fact that a deduction is
only allowed for the amount of insurance liabilities recognised in accordance with IFRS,
relating to “premiums” and “claims”.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 105
 FINANCIAL INSTITUTIONS
AND PRODUCTS
Foreign reinsurance

B. Section 29A of the Act

• In addition, it is proposed that changes be
made in section 29A of the Act to clarify
that insurance business conducted by a
non-resident reinsurer through a South
African branch must be taxed only in terms
of section 28 of the Act.
Effective date – 1 January 2020 and apply in respect
of YOA commencing on or after that date.
137

137

Section 29A of the Act

REFINEMENT OF THE PHASING-
IN TRANSITIONAL RULES FOR
LONG-TERM INSURERS
138

138

Page 106
 FINANCIAL INSTITUTIONS
AND PRODUCTS
Transition rules

• Cessation rules were introduced to

accelerate the phasing-in of the new IFRS
valuation methodology for long-term
insurers ceasing to conduct long-term
insurance business during the phase-in
period of six years.

Effective date – 1 January 2020 and apply in respect

of YOA commencing on or after that date.
139

139

Incentives

140

140

Page 107
Slide 139
Background
Before 2016, the taxation method for determining taxable profits of a long-term insurer in
section 29A of the Act was based on transfers from the Untaxed Policyholder Fund (UPF),
Individual Policyholder Fund (IPF), Company Policyholder Fund (CPF) and Risk Policy Fund
(RPF) to the Corporate capital Fund (CF). The taxable transfers were determined as the
difference between the market value of the assets allocated to the policyholder funds and the
value of the liabilities of these funds. The value of liabilities was calculated on the basis
determined by the Chief Actuary of the Financial Services Board (FSB) in consultation with
the Commissioner of SARS.
In 2016, amendments were made in section 29A of the Act, regarding the tax valuation method
for long-term insurers due to the introduction of Solvency Assessment and Management
Framework (SAM). These amendments included the following:
a. definition of “value of liabilities”;
b. definition of “adjusted IFRS value”;
c. transitional rules: “phasing-in amount” and period of phasing-in
In particular, the transitional rules dealing with the “phasing-in amount and a phasing-in period”
of six years were introduced as an interim measure aimed at stabilising tax collections by
SARS and reducing the financial impact on certain long-term insurers due to these regulatory
proposed changes. The “phasing-in amount” is the fixed amount representing the difference
relating to policies allocated to a fund between the liabilities for tax purposes and the liability
disclosed in the insurer’s published audited annual financial statements for 2017 adjusted to
the manner of disclosure and reporting applied in 2015. The “phasing-in amount” is applied by
including a reducing amount in the calculation of adjusted IFRS value over a period of six
years for years of assessment ending after June 2018.
Reasons for change
At issue is the fact that unlike other phasing-in provisions available in the Act, the current
phasing-in transitional rules for long-term insurers in section 29A of the Act do not address the
treatment of any portion of the “phasing-in amount” not yet phased-in, if the taxpayer ceases
to be in the business of long-term insurer during the six-year period.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 108
 Sections 30 and 30A of Income Tax Act

PBO'S AND RECREATIONAL

CLUBS

141

141

PBO’s and
recreational clubs
PBO’s or recreational clubs seeking
retrospective approval as an exempt entity
shall be granted such approval, which shall
remain at the Commissioner’s discretion,
subject to meeting certain additional criteria.

142

142

Page 109
Slide 142

The Act currently affords the Commissioner the discretion to approve an organisation as a
public benefit organisation (PBO) (in terms of section 30(3B) or recreational club (in terms of
section 30A(4) retrospectively. Once approved as a PBO or recreational club, the receipts and
accruals of such entity are exempt from income tax provided that certain provisions in section
10 are met. In the 2019 Draft TLAB, changes were made in the Act to delete sections 30(3B)
and 30A(4) of the Act and to remove obsolete transitional measures initially introduced to
provide organisations that were exempt from the Act under the repealed legislation the
opportunity to re-apply under section 30 and section 30A of the Act. Organisations were
granted until December 2004 to re-apply under section 30 and until December 2010 to reapply
under section 30A of the Act.
Comment:
The deletion of the provisions allowing the Commissioner to retrospectively approve a PBO or
recreational club as an exempt entity will have adverse financial effects for such entities due
to the limited resources available to such entities makes it difficult for them to deal with tax
technical issues on a timeous basis.
Response:
Noted. The granting of the retrospective approvals to PBO’s and recreational clubs that have
been in existence for several years has the consequence that previously taxed receipts and
accruals become exempt. This results in refunds having to be paid by SARS with interest,
dating back, including years that have already prescribed. As opposed to deleting the relevant
provisions, PBO’s or recreational clubs seeking retrospective approval as an exempt entity
shall be granted such approval, which shall remain at the Commissioner’s discretion, subject
to meeting certain additional criteria.
Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 110
 Section 12R of the Act
ALIGNING THE PROVISIONS OF
SPECIAL ECONOMIC ZONE (SEZ)
WITH THE OVERALL OBJECTIVES
OF THE SEZ PROGRAMME

143

143

INCENTIVES
Special Economic Zones
Qualifying companies to only qualify for the
income tax benefits provided that the
companies

• Carrying on a trade
• In a location that is approved (or subsequently approved)
as a zone
• Before 1 January 2013
• On or after 1 January 2013  any trade not previously
carried on by that company or any connected person in
relation to that company in the Republic in a location that is
144 approved / subsequently approved as a zone

144

Page 111
 INCENTIVES
Special Economic Zones
• On or after 1 January 2013 commenced any trade and that
trade—
• comprises of the production of goods not previously
produced by that company or any connected person in
relation to that company in the Republic;
• utilizes the use of new technology in that company’s
production processes; or
• represents an increase in the production capacity of
that company in the Republic.’’.

Effective date – 1 January 2019 and apply in

respect of YOA ending on or after that date.
145

145

Section 12R of the Act

REVIEWING THE SEZ ANTI-
PROFIT SHIFTING AND ANTI-
AVOIDANCE MEASURES
146

146

Page 112
Slide 145
Aligning the provisions of SEZ with the overall objectives of the SEZ programme
The SEZ regime was preceded by the Industrial Development Zone (IDZ) programme which
was introduced in South Africa in 1993 which was intended to promote new investment in the
country by providing focused administrative support as well as some indirect tax benefits to
enterprises that operated in designated industrial areas. The SEZ regime was introduced in
terms of the Special Economic Zone Act,No.16 of 2014 (SEZ Act) but only came into operation
on 9 February 2016. In order to provide further support to the SEZ regime, income tax benefits
were introduced to the Act in 2013 for qualifying companies operating within the SEZ.
Currently, the income tax provisions for qualifying companies operating within an SEZ do not
expressly make a provision for requirement new investments or an expansion of an existing
company may qualify for income tax benefits. The 2019 Draft TLAB contains proposed
changes to make provision for qualifying companies to only qualify for the income tax benefits
if the companies are:
- Newly established businesses carrying on a new trade or a trade that was not carried
on by a connected person; or
- Expansions of existing businesses of businesses originally operating within an IDZ or
outside an IDZ where such expansions result in an increase in the gross income of a
company that amounts to at least 100 percent of the gross income of that company
before any expansion. The required gross income increment in the gross income of
the company should be determined with reference to the highest gross income derived
by that company during any of the three immediately preceding years of assessment

Aligning the provisions of SEZ with the overall objectives of the SEZ programme

Comment:
The proposed expansion requirements are very inflexible and do not look into other
complexities which are faced by businesses in their growth and expansions evidence.

Response:
Accepted. In order to have a better indicative tool to assess whether an expansion benefits
the fiscus, legislative changes will be proposed in the 2019 Draft TLAB to consider the number
of new jobs that will be created on a net basis in order to determine if a qualifying company is
eligible for the tax benefits will be considered as an initial requirement. Furthermore,
companies will need to provide evidence of their projections and expected return growth in the
medium term (i.e. three years) to further corroborate their claims of expected growth.

Comment:
Many businesses started their operations in 2013, when the SEZ tax incentives were first
introduced into the Act. The test as to whether a taxpayer is carrying on a new business should
look back to when the SEZ tax rules were first introduced in 2013. In addition, the test is very
stringent as a new business is considered to be one that was never carried on by a connected
person, whether in South Africa or worldwide.

Page 113
Response:
Accepted. Legislative changes will be made in the 2019 Draft TLAB to change the effective
date for the new business test to align it with the introduction of the SEZ tax incentives in the
Act. In addition, a taxpayer will fail the new business test if it relates to a trade previously
carried on in South Africa.

Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 114
 INCENTIVES
Anti-avoidance measure

All on an all or nothing basis

A company is not wholly disqualified from

claiming the income tax benefits for the SEZ
regime
147

147

Section 12J
REVIEWING THE ALLOWABLE
DEDUCTION FOR INVESTORS
INVESTING IN A VENTURE
CAPITAL COMPANY

148

148

Page 115
Slide 147
Background
The Act contains rules dealing with the special tax incentive for the SEZ regime. Although the
income tax rules for the SEZ regime were first introduced in the Act in 2013, they were only
intended to take effect when the SEZ Act comes into operation. The SEZ Act only came into
operation of 9 February 2016. Despite this delay in the promulgation of the SEZ Act, some
companies had already established their businesses within the intended designated SEZs,
even before the coming into effect of the provisions of the above-mentioned acts.
In 2015, changes were to the income tax rules for the SEZ regime to introduce the anti-profit
shifting anti-avoidance measure that mitigates against the risk that profits of ordinary tax
paying companies that do not operate within the designated and approved SEZs and are taxed
at a company tax rate of 28 per cent may be artificially transferred to qualifying companies
under the SEZ regime that are taxable at a lower rate of 15 per cent in instances that they are
connected persons in relation to each other. In its operation, the anti-avoidance measure
wholly disqualifies a qualifying company from claiming any of the SEZ income tax benefits (i.e.
tax rate of 15 per cent and the accelerated building allowance or 10 per cent of the cost to the
qualifying company) if more than 20 per cent of its deductible expenditure incurred or more
than 20 per cent of its income arises from transactions with connected persons.
The above-mentioned anti-avoidance measure is important and necessary for South Africa to
meet the international minimum standards set by the OECD Forum for Harmful Tax Practices
and European Union Code of Conduct Group (Business Taxation).
Reasons for change
At issue is the fact that the above-mentioned anti-avoidance measures to the SEZ tax regime
were introduced in 2015, after the introduction of the SEZ tax regime in 2013, after some
companies had already established their businesses within the SEZs, but before the coming
into effect of the SEZ regime in 2016.

It has come to Government’s attention that the current anti-avoidance measure that operates
on an all-or-nothing basis may affect some legitimate business models or transactions that
were entered into when some companies established their businesses within the SEZs, before
the SEZ regime came into effect and before the introduction of these anti-avoidance
measures. Their business models require them to transfer goods and products to sales
companies that are often connected persons in relation to those SEZ qualifying companies.
These sales companies then on-sell the goods to the customers both within the SADC region
including South Africa.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB
Reviewing the SEZ anti profit and anti-avoidance measures
In 2015, changes were made to the income tax rules for the SEZ regime to introduce the anti-
profit shifting anti-avoidance measure that prevent the risk of having profits of ordinary tax
paying companies which are not operating within designated and approved SEZs (thus taxed
at the normal corporate tax rate of 28 percent), to be artificially transferred to qualifying
companies operating under the SEZ regime which are taxed at a lower rate of 15 percent.
Such transfers are often made between companies which are connected persons to each
other. This anti-avoidance measure wholly disqualifies a qualifying company from claiming
any of the SEZ income tax benefits.
To address this concern of the total disqualification, proposed changes to the existing anti-
avoidance measure to change the all-or-nothing approach were included in the Draft TLAB to
Page 116
ensure that a company is not wholly disqualified from claiming the income tax benefits for the
SEZ regime. In other words, to make a carve out such that income to the qualifying company
in respect of transactions with any connected person in relation to that qualifying company
which is below 20 percent threshold to enjoy the 15 percent preferential tax rate. Additionally,
to make a provision for a qualifying company to be treated as carrying on a separate trade
outside of the SEZs relating to the income with its connected person in as far as it exceeds
the threshold and thus be subject to the normal corporate tax rate of 28 percent.

Reviewing the SEZ anti profit and anti-avoidance measures

Comment:
The currently proposed amendments are administratively burdensome and undermine the tax
incentive as most business models make transfers with connected persons. It is submitted
that domestic transfer pricing should rather be applicable.

Response:
Not Accepted. The proposed amendments with regard to the anti-avoidance measure
contained in the 2019 Draft TLAB will be withdrawn and the current all-or-nothing rule will
continue. In the interim, SARS will need to first determine their availability of adequate capacity
to administer and audit domestic transfer pricing for the SEZ incentive. Should SARS indicate
that the necessary capacity is available to conduct domestic transfer pricing and it is a focus
area, legislative proposals in this regard will be made in the next legislative cycle.
Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 117
 INCENTIVES
Venture Capital Company

Investors
Invests

VCC
Invests

Qualifying
Companies
149

149

INCENTIVES
Venture Capital Company

• Tax deduction in respect of investment in

VCC shares is limited to
– R5 million per annum per company
– R2,5 million per annum per person other
than a company.

Effective date – 21 July 2019 and applies

in respect of expenditure incurred by the
taxpayer on or after that date.
150

150

Page 118
Slide 150
Background
The venture capital company (VCC) tax incentive regime was introduced in the Act in 2008.
The main aim of the VCC tax incentive regime is to raise equity funding in support of the socio-
economic development of small business which otherwise would not have had access to
market funding due to either or both their size and inherent risk.
When the VCC tax incentive regime was introduced in 2008, the rules contained a very strict
investor criterion. As a result, a natural person who invests in the VCC shares was eligible for
a 100 per cent deduction of the amount invested, however, the deduction was limited to R750
000 per tax year. In turn, individual investors were also subject to a lifetime deduction limit of
R2 250 000.
In 2011, changes were made in the VCC tax incentive regime in order to make it more
attractive. General relaxation of requirements of the provisions of the VCC tax incentive regime
was made so as to increase the intake in this regard. As a result, ceilings and prohibitions
associated with investors seeking a deduction were completely removed. For example, the
natural person limitation of deduction to R750 000 per tax year as well as the lifetime deduction
limit of R2 250 000 was removed. This implied that all taxpayers, both natural persons and
legal entities can now freely obtain a full deduction for investing in a VCC, without any
monetary threshold limitation.
In order to get the VCC regime to gain more traction, in 2015, further changes were made in
the tax legislation so as to broaden the scope of the VCC regime. As a result, the uptake of
the VCC tax incentive regime has grown significantly over the past three years leading to a
telling investment into the economy.
Reasons for change
The primary aim of the tax system is to generate sufficient revenue to support government’s
funding priorities. By providing relief to taxpayers via targeted tax incentives like exemptions,
deductions and credits, Government also encourages socio-economic development.
Over the past two years, Government has endeavored to end abuse within the VCC tax
incentive regime by making changes in the provisions of the VCC Tax incentive regime aimed
at re-emphasising an incentive for true venture capitalists that saw the same value-add in the
VCC tax incentive regime as Government and not just as another method of finance especially
of own projects.
Despite Government’s efforts to introduce these anti-avoidance measures, it has come to
government’s attention that some taxpayers are still attempting to undermine the objectives
and principles of the VCC tax incentive regime to benefit from excessive tax deductions. Based
on administrative data on tax expenditure, the average expenditure per annum incurred by a
new VCC shareholder to obtain VCC shares ranged between R1,3 million at its lowest to R2,1
million at its highest over the past 4 years.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 119
 Section 12K

EXEMPTION OF CERTIFIED
EMISSION REDUCTIONS

151

151

INCENTIVES
Section 12K

• Section 12K is repealed

Effective date – 1 June 2019

152

152

Page 120
Slide 152

In 2009, government introduced a tax exemption for income generated from the sale of
certified emission reduction credits arising from projects developed under the Clean
Development Mechanism (CDM) of the Kyoto Protocol. To avoid a double benefit scenario,
where the same emissions reductions lead to both an income tax exemption under section
12K of the Act and a lower carbon tax liability for a taxpayer under the Carbon Tax Act, it is
proposed that the tax exemption for certified emission reduction units is repealed to become
effective from the date of introduction of the carbon tax.

Comment:
Some stakeholders acknowledged the potential for double dipping. Suggested that the
exemption continues but is limited to those credits from projects that will not be used as off
sets under the carbon tax
Response:
Not accepted.
–The carbon tax creates the economic incentives for the uptake of carbon offset projects in
South Africa by helping to improve the financial viability of low carbon projects and making
these projects more cost competitive with high carbon emitting initiatives. The offset allowance
provides an additional incentive for taxpayers to invest in low carbon projects and to help
reduce their tax liability. To date, since the introduction of the tax exemption for CERs, there
has also been a limited uptake of CDM projects in South Africa with only 15 projects issued
with carbon credits. In light of this, the primary instrument that will drive investments in carbon
offset projects over the short, medium and long term will be the carbon tax.
–Maintaining the tax exemption for CERs could create further distortions in the market where
credits from CDM projects qualify for preferential tax treatment compared to credits generated
under the GS and VCS. The repeal of the tax exemption will ensure a more equitable tax
regime where offsets generated under the different carbon standards will be subject to similar
tax treatment.

Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 121
 Section 12L
DEDUCTION IN RESPECT OF
ENERGY EFFICIENCY SAVINGS

153

153

INCENTIVE
Energy efficiency savings

• Date extended from 1 January 2020 to

1 January 2023

Effective date – 1 January 2020

154

154

Page 122
Slide 154
In 2013, Government introduced the energy efficiency savings tax incentive to encourage
investments in energy efficiency measures to help reduce emissions of greenhouse gases,
address climate change, and promote efficient energy use. To date, the incentive has helped
to promote significant investments in energy intensive sectors such as mining as well
manufacturing amounting to about R 3 billion in total. During stakeholder consultations on the
carbon tax, there were views that the energy efficiency savings tax incentive should be
extended beyond 2020 to ensure that there is long term policy certainty on revenue recycling
commitments made under the carbon tax. It was therefore proposed to extend the duration of
the incentive to be aligned with the first phase of the carbon tax, ending 31 December 2022.
Comment:
There was broad support by stakeholders for the extension of the duration of the incentive.
Some stakeholders were of the view that the incentive should be extended beyond 2022.
Response:
Noted.
As part of the holistic review of the Section 12L incentive, government will consider the overall
design, administration and economic feasibility of the incentive.
Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 123
 Section 4 of the Employment Tax Incentive Act, No 26 of 2013 “the
ETI Act”
UPDATING THE EMPLOYMENT
TAX INCENTIVES (ETI) TO ALIGN
WITH THE NATIONAL MINIMUM
WAGE

155

155

INCENTIVE
Minimum Wage
The higher of the national minimum wage or
the other wage regulating measures is the
applicable minimum wage as contemplated in
the NMW Act.
The minimum wage of R2 000 per month available in
the ETI Act remain in place for categories of workers
or companies that may be exempt from the national
minimum wage.

Effective date – 1 August 2019

156

156

Page 124
Slide 156
Background
The Employment Tax Incentive (ETI) programme was introduced in January 2014 to promote
employment, particularly of young workers. After its initial 3 years and based on a process of
review and consultation with NEDLAC the programme was extended for a further two years.
In light of the need to support youth employment, as indicated in the State of the Nation
Address (SONA) delivered on 15 February 2018, and following further consultations with
NEDLAC, the programme was further extended to 28 February 2029.
The programme aims to reduce the cost of hiring young people between the ages of 18 and
29 (also referred to as qualifying employees) through a cost sharing mechanism with
Government, while leaving the wages received by the qualifying employees unaffected. The
ETI Act affords employers who are registered for PAYE and hire qualifying employees the
ability to decrease their PAYE liability. The amount by which the employer’s PAYE liability can
be reduced by is prescribed by a formula and is calculated based on the wages paid to the
qualifying employees. The monthly wages used in applying the formula are categorised as
follows:
a. Wages of R2 000 or less;
b. Wages of between R2 001 and R4 000; and
c. Wages of between R4 001 and R6 500.
Reasons for change
During 2018 significant amendments were promulgated to implement the National Minimum
Wage. The National Minimum Wage Act, No. 9 of 2018 (“the NMW Act”) introduced a national
minimum wage of R20 per hour or R3 500 per month. To ensure that Government policies are
aligned, some of the provisions relating to wages available in the NMW Act should also be
reflected in the category of wages contemplated in the ETI Act.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 125
 Sections 1 in respect of the definition of “special economic zone”
and 6 of the ETI Act

CLARIFYING THE INTERACTION

BETWEEN THE EMPLOYMENT
TAX INCENTIVE AND THE SEZ
PROVISIONS
157

157

INCENTIVE
Employment tax incentive and SEZ
provisions

• The definition of the “special economic

zone” in the ETI Act were amended to align
it with the definition contained in the Act.
• For a company to claim the ETI incentive
without any age limit, the company should be
a “qualifying company” as contemplated in
the Act for purposes of claiming the income
tax incentives under the SEZ regime.
Effective date – 1 March 2020
158

158

Page 126
Slide 158
Background
Both the Act and ETI Act contain special tax dispensation for SEZ regime. The Act SEZ tax
rules make provision for qualifying companies that operate within an SEZ to be taxed at a
reduced corporate tax rate of 15 per cent instead of the current 28 per cent that is generally
applicable to other companies. Furthermore, these companies qualify to claim for accelerated
allowances, amounting to 10 per cent of the cost of the building each year over a period of 10
years, on buildings and improvements to buildings owned by them.

On the other hand, the ETI Act makes provision for employers operating within an SEZ to
qualify for the ETI. The ETI was introduced by Government as a mechanism to support
employment growth in South Africa with a particular focus on the employment of the youth.
The ETI tax incentive can only be claimed by any employer in respect of a qualifying employee
if that employee is 18 years old and not more than 29 years old. However, if the employer
operates through a business located within an SEZ, that employer can claim the ETI in respect
of its employee that renders services to that employer with an SEZ without any regard to the
age of that employee
Reasons for change
In order to benefit from the income tax incentives contained in the Act, a company carrying on
a business within the SEZ area must meet certain requirements to ensure that the SEZ
incentives are claimed by acceptable manufacturing businesses (i.e. businesses that are not
involved in the disqualified trades listed in the Act or listed by the Minister of Finance by notice
in a Government Gazette. In terms of the Act, for a company to be a qualifying company a
company must be a company that –
a. is tax resident in South Africa
b. operates within a designated SEZ area
c. carry on business through a fixed place of business situated within a designated SEZ area
d. derives 90 per cent or more of its income from the carrying on of a business or rendering of
services within one or more SEZs; and
e. is not carrying on a disqualified trade listed in the Act and in terms of the Government
Gazette.
In contrast, the ETI Act does not clearly provide a specified criterion for employer companies
operating within an SEZ that want to claim the ETI without having the age limit as a restriction.
As a result, the ETI Act currently makes provision for all employers operating within an SEZ
to claim the ETI in respect of all their employees without any regard for the age limit. Failure
by the ETI Act to have a limitation that only allows this extended incentive to only qualifying
companies has the potential of resulting in non-qualifying companies and, even more worrying,
non-manufacturing companies (such as logistics and warehousing entities) claiming the ETI
in respect of all their employees.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 127
 INTERNATIONAL TAX

159

159

Section 9D(2A) further proviso (i)(aa) and (ii)

REVIEWING THE COMPARABLE
TAX EXEMPTION

160

160

Page 128
 INTERNATIONAL TAX
Comparable Tax Exemption

The comparable tax exemption threshold

were reduced to 67.5 per cent from the
current percentage of 75 per cent

Effective date – 1 January 2020 and applicable

in respect of YOA ending on or after that date.

161

161

Section 9D(9A) of the Act

ADDRESSING CIRCUMVENTION
OF CONTROLLED FOREIGN
COMPANY ANTI-DIVERSIONARY
RULES
162

162

Page 129
Slide 161
Background
The South African controlled foreign company rules contain an exemption known as a
comparable tax exemption. This exemption makes provision for CFCs operating in foreign
countries where tax payable in that foreign country is at least 75 per cent of what would have
been payable in South Africa, had the South African tax rules applied, to exclude the foreign
business income from the net income calculation of the CFC. The main aim of this exemption
is to reduce the compliance burden of South African multinationals from being taxed on foreign
business profits and thereafter claiming credit against South African income tax.

In addition, the comparable -tax exemption seeks to protect the South African tax base whilst
providing the need for South African multinational entities to be competitive offshore by
disregarding all tainted, passive and diversionary controlled foreign company income if little or
no South African tax is payable.
Reasons for change
In the context of the global trend towards lower corporate tax rates, in 2018, the Minister
announced in the Budget Review the intention to review the comparable tax exemption in
order to determine whether an amendment is warranted. Based on the above-mentioned
statement, a review was conducted, and it came to light that the current 75 per cent threshold
is no longer comparable. As a result, providing little or no assistance to cater for South African
CFCs in the current world order.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 130
 INTERNATIONAL TAX
CFC anti-diversionary rules
• In order to prevent the circumvention of the CFC
anti-diversionary rules, the anti-diversionary rules
were extended to include both direct and indirect
transactions between:
– the South African connected person and an independent
non-resident customer for the export of goods;
– an independent non-resident supplier and the South
African connected person for the import of goods; and
– the controlled foreign company and the South African
connected person for the rendering of services.

Effective date – 1 January 2020 and applicable

in respect of YOA ending on or after that date.
163

163

Section 1: Definition of “permanent establishment”

REVIEWING THE DEFINITION OF
PERMANENT ESTABLISHMENT

164

164

Page 131
Slide 163
Background
The Act contains anti-avoidance provisions in section 9D aimed at taxing South African
residents on the net income of a controlled foreign company (CFC). In order to strike a balance
between protecting the South African tax base and the need for South African multinational
entities to be competitive, the South African CFC rules contains various exemptions. That said,
CFC income which is generally regarded as tainted income, for example, passive income and
diversionary income does not qualify for any of the CFC exemptions.
Currently, the South African CFC rules contain three sets of anti-diversionary rules in 9D(9A)
of the Act, namely, CFC inbound sales, CFC outbound sales and CFC connected person
services. These CFC anti-diversionary rules are aimed at ensuring that CFC activities are not
being used to shift taxable income offshore through transfer mispricing.
Reasons for change
It has come to Government’s attention the current CFC anti-diversionary rules do not
adequately address multi-layered structures that fragment the current diversionary transaction
link for tax. Certain multinational enterprises are circumventing CFC anti diversionary rules by
diverting profits to members of the group that are subject to tax at a lower rate and are not
subject to the specific anti-diversionary rules. This is achieved by the imposition of additional
CFCs in the supply chain between the South Africa resident connected person and the
independent non-resident supplier or customer.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 132
 INTERNATIONAL TAX
Permanent establishment

• The proposed amendment to the definition

of “permanent establishment” in section
1 of the Act was WITHDRAWN.

Proposed amendment withdrawn from 2019

TLAB.

165

165

Section 1 of the Act - definition of “Domestic Treasury Management

Company”
CLARIFICATION OF THE
QUALIFYING CRITERIA FOR
DOMESTIC TREASURY
MANAGEMENT COMPANY

166

166

Page 133
Slide 165

On 7 June 2017, South Africa signed the Multi lateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and Profit Shifting (MLI). In line with preserving
the sovereignties countries, signatories of the MLI have the right to make a list of their
reservations and notifications which will be known as the MLI position of that country. South
Africa took the MLI position not to expand the definition of permanent establishment (PE). As
a consequence, a misalignment ensued between the South African’s tax treaties still using the
narrow definition of PE and the Income Tax Act definition using the expanded definition. In
order to address this misalignment, it is proposed that changes be made in the Income Tax
Act to align the definition of PE with the SAMLI position.
Comment:
It is not clear why this amendment is necessary. Before the MLI, Before the MLI, the definition
of “permanent establishment” in section 1 of the Act was, in any event, never aligned with the
definitions of that term contained in SouthAfrica’s DTAs. Consequently, there has always been
(and will always be) a “misalignment”. Critically, from a policy perspective, we do not see the
rationale for attempting to align what is essentially a domestic law source provision with a DTA
concept. SA’s reservation out of the MLI simply establishes our “two-way” DTA position. The
definition in section 1 focuses solely on inbound activities by non-residents. One would have
expected SA to cast the net slightly wider (as the post-2018 definition does) to catch inbound
foreign investors in our domestic source rules, before giving them the opportunity to benefit
from the potentially narrower DTA provisions

Response:
Noted. The proposed amendment to the definition of permanent establishment will be
withdrawn from the 2019 Draft TLAB.
Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 134
 INTERNATIONAL TAX
Domestic Treasury Management
Company

The requirement that a domestic treasury

management company be incorporated or
deemed to be incorporated in South Africa
were re-instated in the Act in respect of new
companies that are registered with SARB for
the first time on or after 1 January 2019.

167

167

INTERNATIONAL TAX
Domestic Treasury Management
Company

A domestic treasury management company

were incorporated or deemed to be
incorporated in South Africa does not apply to
those companies that were already
incorporated or deemed to be incorporated
offshore if registered with SARB before 1
January 2019.
Effective date – 1 January 2019 and applicable in
respect of YOA commencing on or after that date.
168

168

Page 135
Slide 167
Background
In 2013, Government introduced the DTMC regime. The main objective of this regime was to
encourage listed South African multinational companies which are registered with the
Financial Surveillance Department (FSD) of the South African Reserve Bank (SARB) to
relocate their treasury operations to South Africa. Consequently, changes were made in the
Act to insert the definition of DTMC with effect from years of assessment commencing on or
after 27 February 2013.
The Act definition provided that a DTMC must be a company that is:
a. incorporated or deemed to be incorporated in South Africa;
b. that has its place of effective management in South Africa; and
c. that is not subject to exchange control restrictions by virtue of being registered with the
financial surveillance department of the SARB.
In 2018, changes were made in the Act to remove the requirement that a DTMC be
incorporated or deemed to be incorporated in South Africa, due to the fact that this requirement
was burdensome for companies that were incorporated offshore but had their place of effective
management in South Africa or wanted to move their place of effective management to South
Africa.
Reasons for change
Currently, there is misalignment between the definition of DTMC in the Act and in SARB
Circular 5/2013. Although amendments were made in the Act in 2018 to delete the requirement
that the DTMC must be incorporated or deemed to be incorporated in South Africa, however,
no corresponding changes were made in SARB Circular 5/2013.

Page 136
 Section 31 of the Act definition of “affected transaction”
REVIEWING OF THE “AFFECTED
TRANSACTION” DEFINITION IN
THE ARM’S LENGTH TRANSFER
PRICING RULES

169

169

INTERNATIONAL TAX
“Affected transaction”

• The scope of the transfer pricing rules

were extended to also include
transactions between persons that are not
connected persons, but that are
“associated enterprises” as described in
Article 9(1) of the MTC on Income and on
Capital of the OECD
Effective date – 1 January 2020 and applicable in
respect of YOA commencing on or after that date.
170

170

Page 137
Slide 170
Background
In 1995, the transfer pricing rules were introduced in the Act. Over the years, changes were
made to the South African transfer pricing rules to be in line with international standard. The
main aim of the transfer pricing provisions in section 31 of the Act is to prevent a reduction in
South African taxable income as a result of mispricing or incorrect characterisation of
transactions. As a general matter, a taxpayer is required to adjust its taxable income to reflect
arm's length amounts if it enters into transactions with a “connected person” as defined in
section 1 of the Act, on terms or conditions that are not at arm's length, derives a tax benefit
from such terms and conditions and the connected person is tax resident outside South Africa.
South Africa like most countries has adopted the OECD and UN “arm’s length principle” as a
benchmark for income tax purposes.
Reasons for change
Both the OECD and UN use the concept of “associated enterprises” when applying the arm’s
length principle, which is the internationally recognised tax standard for allocating profits
resulting from transactions between associated enterprises. The concept of “associated
enterprises” is described in the Commentary on Article 9 of the OECD MTC as parent and
subsidiary companies and companies under common control.
The wording of Article 9(1) of both the OECD and UN MTC is as follows:
“Where:
a. an enterprise of a Contracting State participates directly or indirectly in the management,
control or capital of an enterprise of the other Contracting State, or
b. the same persons participate directly or indirectly in the management, control or capital of
an enterprise of a Contracting State and an enterprise of the other Contracting State, and in
either case conditions are made or imposed between the two enterprises in their commercial
or financial relations which differ from those which would be made between independent
enterprises, then any profits which would, but for those conditions, have accrued to one of the
enterprises, but, by reason of those conditions, have not so accrued, may be included in the
profits of that enterprise and taxed accordingly.”
On the other hand, South Africa still uses the concept of “connected persons” when applying
the arm’s length principle. The fact that South Africa does not have or use the concept of
associated enterprises when applying the arm’s length principle presents a challenge in
application of the transfer pricing rules in respect of transactions between “associated
enterprises” that are not regarded connected persons.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 138
 INTERNATIONAL TAX
“Associated Enterprise”

The concept of “associated enterprises” is

described in the Commentary on Article 9 of
the OECD MTC as parent and subsidiary
companies and companies under common
control.

171

171

INTERNATIONAL TAX
Comparability exemption

Comparitability exemption in section

31(6)(b)(iii) has also been reduced from
75% to 67.5%.

172

172

Page 139
Slide 171
The wording of Article 9(1) of both the OECD and UN MTC is as follows:
“Where:
a) An enterprise of a Contracting State participates directly or indirectly in the
management, control or capital of an enterprise of the other Contracting State, or
b) The same persons participate directly or indirectly in the management, control or
capital of an enterprise of a Contracting State and an enterprise of the other
Contracting State, and in either case conditions are made or imposed between the two
enterprises in their commercial or financial relations which differ from those which
would be made between independent enterprises, then any profits which would, but
for those conditions, have accrued to one of the enterprises, but, by reason of those
conditions, have not so accrued, may be included in the profits of that enterprise and
taxed accordingly.”
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB
The Act contains transfer pricing rules aimed at preventing a reduction in the South African
taxable income as a result of mispricing or incorrect characterisation of transaction. This is
done through the application of the arm’s length principle on transactions entered between
“connected parties”. The “affected transaction” definition relating to the arms length transfer
pricing rules in the Act only apply to connected persons as defined. The application of these
rules to connected persons only has the unintended consequence that the transfer pricing
rules in respect of transactions between “associated enterprises” are not captured. On the
other hand, in both the OECD and the UNMTC,“ affected transaction” applies to associated
enterprises and not only to connected persons. In order to address this anomaly, it is proposed
that “affected transaction” definition which relates to the arm’s length principle should be
aligned with the OECD and UNMTC.

Comment:
The proposed amendment to import the concept of “associated enterprises” into the Act is
inappropriate. For example, in the context of the OECDMTC, the term is not defined and is
deliberately vague and broadly described to avoid the restricting or overriding domestic law
definitions that trigger the application of transfer pricing rules. Therefore, the description of the
term “associated enterprise” in the OECDMTC is certainly not intended to represent a standard
benchmark definition. Its incorporation into domestic law will create significant uncertainty as
to when the transfer pricing rules are applicable. Furthermore, the new definition would require
further definitions, elaborations and clarifications of participation, control, management and
enterprise.

Response:
Noted. SARS will further provide guidance on the interpretation of the term “associated
enterprise”. In order to give SARS and taxpayers more time to consider the interpretation of
the term “associated enterprise”, it is proposed that the effective date of this provision be
postponed by a year from 1 January 2020 to 1 January 2021.
Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 140
 Section 24I and paragraph 43 of the Eighth Schedule to the Act

CLARIFICATION OF THE
INTERACTION OF CAPITAL GAINS
TAX AND FOREIGN EXCHANGE
TRANSACTION RULES
173

173

INTERNATIONAL TAX
Foreign exchange rules and CGT

• The rules for companies and trading trusts

in paragraph 43 of the Eighth Schedule to
the Act were amended by inserting a new
proviso to provide an appropriate
mechanism for eliminating double
taxation.
Effective date – On promulgation of the Act
174

174

Page 141
Slide 174
Background
In general, the tax treatment of effects of changes in foreign currency falls under two main
provisions, namely section 24I of the Act and paragraph 43 of the Eighth Schedule to the Act.
Section 24I of the Act generally recognises foreign exchange gains and losses on an annual
basis irrespective of whether the gains or losses are realised.
On the other hand, paragraph 43 of the Eighth Schedule to the Act has two sets of capital gain
or loss currency rules that are available when disposing of assets. The first set of capital gains
tax rules relates to the method for calculating capital gains and losses for natural persons and
non-trading trusts that dispose of an asset in foreign currency after having acquired that asset
in the same foreign currency. Therefore, natural persons and non-trading trusts determine the
capital gain or loss in the relevant foreign currency followed by a translation to local currency,
e.g. Rand.
In turn, the second set of capital gains tax rules for companies and trading trusts, acquiring or
disposing of an asset in foreign currency, requires that both proceeds and the base cost be
translated to local currency, e.g. Rand. In short, the capital gain or loss is determined in local
currency after translating the base cost and proceeds to local currency using either spot rates
or average rates.
Reasons for change
The current rules in paragraph 43(6A) of the Eighth Schedule excludes the application of the
second set of capital gains tax rules mentioned above to companies and trading trusts in order
to avoid duplication of the currency gains and losses arising under section 24I. In particular,
paragraph 43(6A) of the Eighth Schedule to the Act excludes foreign debt which includes
foreign bonds that can give rise to a capital gain or capital loss. In general, this exclusion is
applicable to the disposal of debt and related derivative instruments such as forward exchange
contracts and foreign currency option contracts.
Based on the above, it can be argued that once a company and trading trust are excluded
from the application of paragraph 43(1A), that company or trading trust must determine a
capital gain or loss under general rules taking into account sections 24I and 25D of the Act.
As a result, paragraph 43 of the Eighth Schedule does not apply.
In addition, it is unclear how the foreign currency gain and loss provisions interact with capital
gains provisions as section 24I of the Act determines exchange gains and losses over the
lifetime of an exchange item while paragraph 35(3)(a) eliminates amounts from proceeds on
disposal of an asset.
Extracted from the Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 142
 INTERNATIONAL TAX
Foreign exchange rules and CGT
Example
• Company B acquired a foreign bond as long-term
investments during its first year of assessment for
X$100 when the exchange rate was X$1:R1.
• At the end of the first year of assessment the
exchange rate was X$1:R1,40 and at the end of
year 2 X$1:R2.
• On the last day of year 2 Company B disposed of
the bond for an amount accrued of X$120.

175

175

INTERNATIONAL TAX
Foreign exchange rules and CGT
Section 24I applied to the foreign bond that is an
exchange item
End of first year of assessment X$100 x R1,40 140
Less: Date of acquisition X$100 x R1 (100)
Income exclusion 40

Date of disposal at the end of second year of 200

assessment X$100 x R 2
Less: Beginning of second year of assessment (140)
X$100 x R1,40
Income inclusion
176
60

176

Page 143
 INTERNATIONAL TAX
Foreign exchange rules and CGT
Section 25D
Amount received or accrued X$120 x R2 (Para 35 240
read with s 25D(1))
Less: Arguable reduction of amounts included in (100)
income under s 24I
Proceeds (Para 35) 140
Less: Base cost X$100 x R 1 (para 20(1)(a) read (100)
with s 25D(1))
Capital gain 40

177

177

Value Added Tax

178

178

Page 144
 Section 2(1)(i) of the Value Added Tax Act No. 89 of 1991 (“the VAT
Act”)

CLARIFYING FINANCIAL
SERVICES TO INCLUDE THE
TRANSFER OF OWNERSHIP OF
REINSURANCE RELATING TO
LONG-TERM REINSURANCE
POLICIES
179

179

VALUE ADDED TAX

Financial Services

In order to provide clarity as to the VAT

treatment of the transfer of ownership of
reinsurance relating to long-term insurance
to another reinsurer, changes were made to
section 2(1)(i) of the VAT Act to specifically
include these as activities falling within
financial services.
Effective date – 1 April 2020
180

180

Page 145
Slide 180
Background
Section 2(1)(i) of the VAT Act deems specific activities including the provision or transfer of
ownership of a long-term insurance policy or the provision of reinsurance in respect of such
policy as financial services. In turn, section 12(1)(a) of the VAT Act makes provision for the
exemption of financial services. This implies that the actual provision of reinsurance in respect
of a long-term insurance policy is an exempt financial service.
Reasons for change
At issue is the fact that the provisions of the VAT Act do not specifically address the VAT
treatment of the transfers of ownership of reinsurance relating to long-term insurance to
another reinsurer, due to the fact that such transfer is not specifically included under activities
regarded as financial services in section 2(1)(i) of the VAT Act. In addition, there are conflicting
views as to whether the transfer of ownership of reinsurance relating to long-term insurance
to another reinsurer is exempt or not. There is a view that since the underlying policy is exempt
and the reinsurance of the underlying policy is exempt, then surely it was not the intention of
the legislature to omit these transactions from being specifically included under activities
regarded as financial services in section 2(1)(i) of the VAT Act.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 146
 Section 8(25) of the VAT Act
REFINING THE VAT CORPORATE
REORGANISATION RULES

181

181

VALUE ADDED TAX

VAT Corporate Reorganisation Rules
• VAT relief is available to group companies in
instances where a fixed property is transferred in
terms of corporate reorganisations as envisaged in
section 42 or 45 of the Income Tax Act, dealing
with “Asset-for-share transactions” and “Intra-
group transactions”, provided that specific
requirements are met.
– the relief ito section 8(25) is limited to the supply is of
fixed property and the supplier and the recipient have
agreed in writing that, immediately after the supply,
the supplier will lease the fixed property from the
recipient

182
Effective date – 1 April 2020
182

Page 147
Slide 182
Background
The VAT Act contains rules in section 8(25) that provide for VAT relief by treating the supplier
and the recipient of goods or services as the same during corporate reorganisation
transactions, between companies that form part of the same group of companies, provided
certain requirements are met. This provision is similar to the corporate reorganisation
provisions available in the Income Tax Act, which are aimed at providing tax neutral transfer
of assets during corporate reorganisations, between companies that form part of the same
group of companies.

However, section 8(25) of the VAT Act further provides that if the corporate reorganisation
transactions take place in terms of section 42 or 45 of the Act, the VAT relief is only available
if the transfer relates to the transfer of an enterprise, or part of an enterprise capable of
separate operation, as a going concern.
Reasons for change
Currently, the relief provided in terms of section 8(25) does not apply to corporate
reorganisation transactions where the only asset transferred will be fixed property that will be
leased back to the supplier once transfer of the property is completed. The supply is not
capable of operating separately and the property itself is currently not an income-earning
property. This creates adverse cash flow for the group of companies with regards to the input
tax credits of the recipient and the output tax liability of the supplier.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 148
 Section 72 of the VAT Act

REVIEWING SECTION 72 OF
THE VAT ACT

183

183

VALUE ADDED TAX

Section 72

In view of the fact that the provisions of the

VAT Act are in itself mandatory, in order to
address the above-mentioned anomaly,
changes were made in section 72 of the VAT
Act to align the provisions of this section
with the spirit of the other provisions of the
VAT Act.
Effective date – 21 July 2019
184

184

Page 149
Slide 184
Background
When VAT was introduced in South Africa in 1991, the VAT Act contained provisions in section
72 that provides the Commissioner with the discretionary powers to make arrangements or
decisions as to the manner in which the provisions of the VAT Act shall be applied or the
calculation or payment of tax or the application of any rate of zero per cent or any exemption
from tax provided for in terms of the VAT Act, provided that the Commissioner is satisfied that
as a consequence of the manner in which any vendor or class of vendors conducts his, her or
their business, trade or occupation, difficulties, anomalies or incongruities have arisen or may
arise in regard to the application of the VAT Act. The arrangement or decision by the
Commissioner as provided under section 72 of the Act must have the effect of assisting the
vendor to overcome the difficulty, anomaly or incongruity without having the effect of
substantially reducing or increasing the taxpayer’s ultimate liability for VAT.
Reasons for change
In 1996, the Constitution of the Republic of South Africa (“Constitution”) came into effect. The
introduction of the Constitution in 1996 came after the introduction of the VAT Act in 1991.
Over the past years, challenges arose regarding the application of the mandatory wording of
the other provisions of the VAT Act versus the discretionary wording of the provisions of
section 72 of the VAT Act.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 150
 VALUE ADDED TAX
Section 72

• An arrangement or decision made in

respect of an application made before 21
July 2019 that ceases to be effective on or
before 31 December 2021, may be
reconfirmed by the Commissioner on
application by the vendor in whose favour
the arrangement or decision was made:

185

185

VALUE ADDED TAX

Section 72
• Provided that—
– the effective period of the reconfirmed arrangement or decision
may not extend beyond 31 December 2021;
– for purposes of the application to reconfirm such arrangement or
decision, the wording of section 72, prior to the amendment shall
apply;
– the application to reconfirm such arrangement or decision must
be received by the Commissioner no later than two months prior
to the expiry date of such decision or, in exceptional
circumstances, such other date acceptable to the Commissioner;
and
• ceases to be effective after 31 December 2021 or that does
not specify an effective period, shall cease to be effective on
31 December 2021.

186

186

Page 151
Slide 185

Section 72 of the VAT Act permits the Commissioner the discretion to make arrangements
and decisions to overcome difficulties, anomalies or incongruities that taxpayers may face in
applying any provision of the VAT Act. These difficulties, anomalies or incongruities would
have arisen as a result of the manner in which a vendor or class of vendors conducts his, her
or their business, trade or occupation. Over the past years, challenges arose regarding the
application of the mandatory wording of the other provisions of the VAT Act versus the
discretionary wording of the provisions of section 72 of the VAT Act. The proposed amendment
in the 2019 Draft TLAB seeks to clarify and amend the section so as to align section 72 with
the policy intent of the other VAT provisions.
Comment:
Clarity is required on how the proposed amendments will impact on current rulings, including
whether vendors can apply for an extension of current rulings.
Response:
Accepted. Transitional rules will be implemented to deal with current rulings, including
applications for extensions of current rulings.
Comment:
The proposed amendment states that the decision of the Commissioner may not be contrary
to the construct and policy of the VAT Act as a whole or of any specific provision of the Act.
The policy as it relates to the various provisions of the Act is generally unknown, save for the
published SARS documents which are (for the most part) general in nature.
Response:
Not Accepted. The policy intent may be determined by the reference to overall scheme of the
Act and to secondary aids to interpretation, such Budget Speeches, Budget Reviews and the
Explanatory Memoranda that are published with legislative amendments. SARS also
publishes various guidelines, Interpretation Notes and rulings
Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 152
 VALUE ADDED TAX
Section 72

• An arrangement or decision made ito section 72 of

the VAT Act, 1991, which constituted a binding
general ruling and ceases to be effective on or
after 21 July 2019 or does not specify an
effective period, shall cease to be effective on
31 December 2021.
• The amendment is deemed not to be a
subsequent change in law for purposes of section
85 of the TAA, in respect of an arrangement or
decision referred to in subsection (3) or (4).
187

187

Section 1(1) definition of “enterprise”, “foreign donor funded

project”, “person”, new definition of “implementing agency”,
sections 8(5B) and 50(1) of the VAT Act
REFINING THE VAT TREATMENT
OF FOREIGN DONOR FUNDED
PROJECTS
188

188

Page 153
 VALUE ADDED TAX
Foreign donor funded projects

• Definition of “foreign donor funded project”

in section 1(1) of the VAT Act was
extended to clarify what will qualify as a
FDFP for VAT purposes.
• The new definition makes reference to
approval by the Minister of Finance.

189

189

VALUE ADDED TAX

Foreign donor funded projects

• The definition of “enterprise” was

amended to include the activities of an
implementing agency in respect of the
FDFP rather than the activities of the
FDFP.

190

190

Page 154
Slide 189
Background
In 2006, changes were made in tax legislation to make provision for the tax treatment of foreign
donor funded projects in terms of the Official Development Assistance Agreement (ODAA).
ODAA is an international agreement in terms of section 231(3) of the Constitution of the
Republic of South Africa. ODAA’s involve support from foreign institutions in the form of
grants/funding, technical assistance, provision of assets, etc.
The VAT Act provides that if the project meets the requirements of the definition of “Foreign
Donor Funded Project” (“FDFP”) in section 1(1) of the VAT Act, the project is a person as
defined and is deemed to have made a zero-rated supply to the foreign donor in terms of
section 11(2)(q) of the VAT Act. Accordingly, the project will be required to register for VAT
with the South African Revenue Service (SARS) and thereafter claim all VAT incurred on
expenses as input tax, thereby ensuring that the funds are not utilised to pay any VAT.
In order to implement the foreign donor funded project in South Africa in terms of the ODAA,
a further project agreement flowing from the ODAA may be entered into, which specifically
relates to a particular project. This project agreement may appoint a specific government
department as being responsible for the implementation of the particular project. In turn, the
above-mentioned government department may facilitate the implementation of the project by
entering into another agreement with another entity, called the “implementing agency”, thereby
sub-contracting the particular project to another “implementing agency” or “subcontractor”.
Further, the subcontractor may further subcontract parts of the particular project to other
vendors. There are also instances where the foreign donor contracts directly with various
implementing parties in relation to various parts of the project.
Reasons for change
The above-mentioned scenarios have created confusion regarding who must register the
project as a foreign donor funded project for VAT as required in terms of the VAT Act, who is
entitled to the input tax claims and who is the actual implementing agency. In view of the fact
that the implementing agency is required to facilitate the project and report on the progress of
the project as well as ensuring that the funds are used for only the specified project and not
to pay taxes or any other unrelated costs, consequently, the implementing agency is the one
required to register the foreign donor funded project for VAT purposes and the registered
foreign donor funded project is entitled to claim the input tax credits on expenses incurred in
relation to the project. However, in instances where the foreign donor has contracted directly
with various implementing parties, there may be more than one implementing agency and
hence more than one FDFP that is entitled to register for VAT purposes in relation to one main
project.
There is further confusion on what requirements need to be met before a project may be
registered for VAT with SARS as a FDFP. The current definition in the VAT Act creates
uncertainty and does not cater for all the policy requirements that need to be met before SARS
will register a project as such. As a result, registrations of foreign donor funded projects for
VAT purposes are often delayed due to the need for SARS to constantly seek clarity from
National Treasury.
Extracted from the 2019 Draft Explanatory Memorandum to the 2019 Draft TLAB

Page 155
Slide 190
An Official Development Assistance Agreement (ODAA) is an international agreement that is
binding on the Republic in terms of section 231(3) of the Constitution of the Republic of
SouthAfrica. ODAA’s involve support from foreign institutions in the form of grants/funding,
technical assistance, provision of assets for a specific project, etc. ODAA’s, if they meet certain
requirements of the VAT Act, may be registered (as a “foreign donor funded project”) for VAT
in order to reclaim any VAT incurred on expenditure, thereby ensuring that the funds provided
are not used to pay taxes in SouthAfrica. The requirements of the VAT Act are not very clear
on what the policy position is regarding the requirements that must be met to be registered as
a “foreign donor funded project” for VAT purposes. The proposed amendments in the 2019
Draft Bill will provide clarity on what these requirements are.
Comment:
The proposed amendments are not clear as to the impact of the proposed amendments on
existing projects. Further, clarity is required regarding the process to be followed to register
the project as a foreign donor-funded project.
Response:
Accepted. A guideline will be issued by SARS providing clarity on the process to be followed.
With regard to the impact on current projects, changes will be made in the 2019 Draft TLAB
to provide that the proposed amendments will only be applicable to those projects that apply
for registration on or after the 01 April 2020.
Comment:
The proposed amendment states that each project must be registered separately for VAT.
This is cumbersome. It is proposed that where one entity manages many such projects, the
entity been titled to register all the various projects under one VAT registration number.
Response:
Not Accepted. Each project has its own terms and conditions, its own implementation plan, its
own funding requirements, end date, etc. For these reasons, each project will be required to
be registered separately in order to remain separately identifiable. Further, the VAT system
does not permit a vendor to be issued with more than one VAT registration number, unless it
is registering different branches. By including this proposed amendment to section 50(1), it is
proposed that each project be registered as a branch of the vendor that is the “implementing
agency” of the various projects.
Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 156
 VALUE ADDED TAX
Foreign donor funded projects

• The “implementing agency” where defined

– to refer to the government of the Republic,
– any institution or body established and appointed
by a foreign government as contemplated in
section 10(1)(bA)(ii) of the Income Tax Act
– to perform its functions in terms of the ODAA or
– any person who has entered into a contract with
either of these parties to implement, operate,
administer or manage a FDFP.

191

191

VALUE ADDED TAX

Foreign donor funded projects

Further, in order to ensure that the

implementing agency ring-fences the activities
relating to the FDFP, section 50(1) were
amended to require the project to be registered
as a separate entity from the other enterprise
activities of the implementing agency.
Effective date – 1 April 2020

192

192

Page 157
 Tax Administration Amendments

193

193

S 18A OF THE INCOME TAX

ACT

194

194

Page 158
 TAX ADMINISTRATION
S 18A of Income Tax Act

The amendment correct an oversight and

align the wording to make reference to both
an accounting authority under the PFMA and
an accounting officer under the Local
Government: MFMA.

195

195

S 49E OF THE INCOME TAX

ACT

196

196

Page 159
Slide 195
Section 18A(2C) provides that the Accounting Authority contemplated in the Public Finance
Management Act for the department which issued any receipts in terms of section 18A(2),
must on an annual basis submit an audit certificate to the Commissioner confirming that all
donations received or accrued in the year in respect of which receipts were so issued were
utilised in the manner contemplated in section 18A(2A).
A department contemplated in section 18A(1)(c) includes the national, provincial or local
sphere of government. The Public Finance Management Act, 1999, however, applies only to
the national and provincial sphere of government. The Local Government: Municipal Financial
Management Act, 2003, is applicable to the local sphere of government. The Local
Government: Municipal Finance Management Act requires a municipality to have an
accounting officer who must be accountable under that Act.
The fact that section 18A(2C) does not contain a reference to an accounting officer under the
Local Government: Municipal Finance Management Act, appears to be an oversight, since
sections 18A(5B) and (7) both refer to an accounting authority under the Public Finance
Management Act and an accounting officer under the Local Government: Municipal Finance
Management Act. The proposed amendment aims to correct this oversight and align the
wording of section 18A(2C) with sections 18A(5B) and (7).
Extracted from the Memorandum on the objects of the tax administration laws amendment bill,
2019.

Page 160
 TAX ADMINISTRATION
S 49E of Income Tax Act
• Where more than one payment is made to the same
foreign person within a period of two years from the
date of the first payment, the written undertaking
need only be submitted once, namely before the first
payment to that foreign person, provided the
conditions affecting the rate at which the royalty tax or
withholding tax on interest is paid do not change and
the payment of the royalty or interest is still made to or
for the benefit of that foreign person.
• However, a declaration and written undertaking under
this section will no longer be valid after a period of 5
years.
197

197

TAX ADMINISTRATION ACT

Section 49E

• The new requirements with regard to the

written undertaking have also been
extended to royalties or interest payments
that are exempt from royalty tax or
withholding tax on interest.
• As such declaration in writing will be valid
for 5 years

198

198

Page 161
Slide 197
Section 49E(3) of the Income Tax Act requires a foreign person to or for the benefit of whom
a royalty payment is made, to submit to the local person making the payment, a declaration to
permit a reduced rate of tax to be applied as a result of the application of an agreement for
the avoidance of double taxation. An example would be the case of a beneficial owner of a
royalty payment who is a resident in the United States of America, where the Double Tax
Agreement between the United States and South Africa provides for a lower withholding tax
rate than that prescribed in the Act.
It was submitted that this requirement creates an administrative burden for local persons that
enter into multiple transactions with a single foreign person during the year. This would then
mean that a declaration would have to be obtained by the local person from the same foreign
person with regard to each and every transaction entered into.
The same issue was raised with regards to withholding tax on interest where local persons
that have foreign investors need to obtain a declaration in terms of section 50E(3) where a
reduced rate of tax has been applied as a result of the application of an agreement for the
avoidance of double taxation.
Extracted from 2019 Tax Administration Laws Amendment Bill

Page 162
 S 50E OF THE INCOME TAX
ACT

199

199

TAX ADMINISTRATION
S 50E, 64 FA, 64G of Income Tax Act

• An exception to the five year validity has been created

for certain scenario’s.
• No time limitation will be imposed on the validity
of the declarations and undertakings in these
instances.
– Section 50E – Bank or financial institutions is subject to
legislation with regard to the foreign person to which
payment is to be made.
– Section 64FA – The exception will also apply to dividends
tax by companies declaring and paying dividends in terms
of this section

200

200

Page 163
Slide 200
See the note on section 49E above. However, an exception to the five year validity limitation
has been created for banks and other financial institutions involved in the payment of interest,
where that bank or financial institution is subject to the Financial Intelligence Centre (FIC)
legislation, Foreign Account Tax Compliance Act (FATCA) or the Common Reporting
Standard (CRS) regulations with regard to the foreign person to or for the benefit of which the
payment is to be made and takes account of these provisions in monitoring the continued
validity of the declarations, i.e. the content of the declarations is monitored under or subject to
the anti-money laundering, ‘‘know your client’’, FATCA or CRS requirements. In these
instances, no time limitation will be imposed on the validity of the declarations and
undertakings.
Extracted from 2019 Tax Administration Laws Amendment Bill

Page 164
 TAX ADMINISTRATION
S 50E, 64 FA, 64G of Income Tax Act

– Section 64G – The exception will also apply to

dividends tax by companies declaring and paying
dividends in terms of this section
– Section 64H – The exception will also apply to
dividends tax by regulated intermediaries in terms
of this section
• The requirement to submit a declaration and written
undertaking has been removed insofar tax free
investments are concerned.

201

201

S 64FA OF THE INCOME TAX

ACT

202

202

Page 165
Slide 201
Currently, in order to ensure that dividends tax is not withheld from dividends declared on
shares held as a tax free investment in terms of section 12T of the Income Tax Act, the
regulated intermediary through which the investments are held will need to be provided with
the required declaration and written undertaking as contemplated in section 64H. Failing this,
dividends tax will have to be withheld and the investor would need to seek a refund of the
dividends tax from the regulated intermediary once the required declaration and written
undertaking has been provided. The proposed amendment aims to remove this requirement
insofar as tax free investments are concerned.
Extracted from 2019 Tax Administration Laws Amendment Bill

Page 166
 TAX ADMINISTRATION
S 64FA of Income Tax Act

The exception to the time limitation on the

validity of the declarations and undertakings,
as proposed in section 50E(4), will also
apply to dividends tax by companies
declaring and paying dividends ito this
section.

203

203

PARAGRAPH 14 OF THE 4TH

SCHEDULE

204

204

Page 167
Slide 203
See the note on section 49E above. The proposed amendment aims to align the wording of
section 64FA with the proposed amendments to section 49E and 50E. The exception to the
time limitation on the validity of the declarations and undertakings, as proposed in section
50E(4), will also apply to dividends tax by companies declaring and paying dividends in terms
of this section.

Page 168
 TAX ADMINISTRATION
Paragraph 14 of 4th Schedule

The amendment aims to clarify that the

penalty in terms of this paragraph may also
be imposed where an employer submits a
return that is not in the prescribed form
and manner i.e. an incomplete return.

Effective date – On promulgation of the Act.

205

205

PARAGRAPH 19 OF 4TH
SCHEDULE

206

206

Page 169
 TAX ADMINISTRATION ACT
Paragraph 19 of the fourth schedule

The purpose of the amendment is to

exempt the executor from having to submit
an estimate of provisional tax on behalf of
the deceased person in respect of the period
up to date of death.

This amendment has no impact on the

deceased person’s obligation to make a first
period estimate where he or she is still alive on
31 August.
207

207

SECTION 41B OF THE VAT ACT

208

208

Page 170
Slide 207
The last day of the year of assessment of a natural person in the year of his or her death is
the date of death.
At present there is no exemption from the payment of provisional tax by a natural person in
respect of the period ending on the date of death, which can result in the imposition of
underestimation penalties under paragraph 20 of the Fourth Schedule.
In that regard, paragraph 19(6) of the Fourth Schedule provides that a person that fails to
submit an estimate of provisional tax within four months of the end of the second period is
deemed to have submitted an estimate of nil.
As a result, a deceased person may be subject to the underestimation penalty in paragraph
20 of the Fourth Schedule on assessment if no estimate was submitted by the executor within
the four-month period. In order to have this penalty remitted under paragraph 20(2C) of the
Fourth Schedule, the executor would have to lodge an objection.
Extracted from 2019 Tax Administration Laws Amendment Bill

Page 171
 TAX ADMINISTRATION ACT
Section 41B of the VAT Act

Rulings ito Section 41B are not subject to

the prescribed fee as set out in Section
79(6) and Section 81(1)(b) of the TAA.

209

209

TAA Act: Amendment of section 11

LEGAL PROCEEDINGS
INVOLVING COMMISSIONER

210

210

Page 172
Slide 209
The proposed amendment corrects the numbering of the section and aims to clarify that rulings
in terms of section 41B of the Value-Added Tax Act, are not subject to the prescribed fee (i.e.
the application fee and the cost recovery fee) as set out in section 79(6) and section 81(1)(b)
of the Tax Administration Act, 2011.
Extracted from the Memorandum on the objects of the tax administration laws amendment bill,
2019.

Page 173
 TAX ADMINISTRATION ACT
Legal proceedings involving
commissioner

The amendment increases the current one

week period to 10 business days in order
to afford SARS sufficient time to investigate
the matter to see if it can be resolved
without resorting to litigation, unless a
competent court directs otherwise, for
example in the case of urgency.

211

211

TAA Act: Amendment of section 91

ORIGINAL ASSESSMENTS

212

212

Page 174
Slide 211
A one-week notice period has proven to be impractical in practice to give effect to the rationale
for the notice, i.e. to enable SARS an opportunity to investigate the matter further and to decide
how to resolve the dispute, for example by exploring a dispute resolution process, thereby
avoiding litigation at the public’s expense. The proposed amendment increases the current
one-week period to 10 business days in order to afford SARS sufficient time to investigate the
matter to see if it can be resolved without resorting to litigation, unless a competent court
directs otherwise, for example in the case of urgency.
In comparison, for example, section 5(2) of the Institution of Legal Proceedings Against
Certain Organs of State Act, 2002, provides that no process referred to in section 5(1) of the
Act may be served, as contemplated in that subsection, before the expiry of a period of 60
days after the notice, where applicable, has been served on the organ of state in terms of
section 3(2)(a).
Extracted from 2019 Tax Administration Laws Amendment Bill

Page 175
 TAX ADMINISTRATION ACT
Original assessments

The amendment aims to clarify when SARS

may make an assessment based on an
estimate under this provision i.e. if no return
is submitted or where no return is required,
the taxpayer fails to pay the tax required
under a tax Act.

213

213

TAA Act: Amendment of section 100

FINALITY OF ASSESSMENT
OR DECISION

214

214

Page 176
 TAX ADMINISTRATION ACT
Finality of assessment or decision

The amendment clarify that an assessment

or decision is final if an appeal has been
filed and is withdrawn.

215

215

Amendment of section 191 of TAA

REFUNDS SUBJECT TO SET-

OFF AND DEFERRAL

216

216

Page 177
 TAX ADMINISTRATION ACT
Refunds subject to set-off

• The amendment clarify that SARS may set-

off refunds against the outstanding tax debt
of the taxpayer as well as amounts
outstanding in terms of customs and
excise legislation, even if there is no
outstanding tax debt. In such instances the
full amount is then utilised towards customs
and excise debt.

217

217

Amendment of section 210

NON-COMPLIANCE SUBJECT
TO PENALTY

218

218

Page 178
Slide 217
The set-off of refunds against amounts outstanding in terms of customs and excise legislation
is not a new principle. The principle applied prior to the enactment of the Tax Administration
Act, 2011, where amounts refundable in terms of the Income Tax Act, 1962 (section 102(3))
as well as the Value-added Tax Act, 1991 (section 44(6)), could be set off against customs
and excise debt. Section 76C of the Customs and Excise Act, 1964, similarly permits the set-
off of customs and excise refunds against any outstanding tax debt.
Extract from the Tax Administration Bill 2019; Objects of Bill

Page 179
 TAX ADMINISTRATION ACT
Mandatory Disclosure Rules

• It has emerged internationally that offshore

structures and arrangements are being
designed in an attempt to circumvent
financial account reporting under the OECD’s
Common Reporting Standard (“CRS”).
• The standard is used for the exchange of
financial account information between
countries.

219

219

TAX ADMINISTRATION ACT

Mandatory Disclosure Rules

• Subject to the approval of the Minister, the

OECD’s model Mandatory Disclosure Rules are to
be implemented in South Africa in proposed new
CRS regulations.
• These will be issued in respect of the OECD
Standard for Exchange of Financial Account
Information in Tax Matters under section 257 read
with paragraph (a) of the definition of “international
tax standard” in section 1 of the Act.

220

220

Page 180
 TAX ADMINISTRATION ACT
Mandatory Disclosure Rules

The Mandatory Disclosure Rules will require

certain persons to report structures and
arrangements, and the proposed amendment
of section 210 aims to enforce this reporting
obligation by means of similar penalties to
those currently in force for non-compliance with
the reportable arrangement scheme under the
Act.

221

221

TAA Act: Amendment of section 223

UNDERSTATEMENT PENALTY
PERCENTAGE TABLE

222

222

Page 181
Slide 221
Mandatory non-disclosure penalties
(Main references: Sections 210 and 212; clauses 37 and 38 of the Draft Bill)
To ensure that structures and arrangements designed to circumvent the internationally agreed
CRS are brought to SARS’ attention, it is proposed that the Minister be empowered to include
the OECD’s model mandatory disclosure rules in a revised set of CRS regulations and that
failure to comply with the rules be subject to similar penalties to those that exist for non-
compliance with the existing reportable arrangement legislation in the Act.
Comment:
It is not clear how the introduction of a penalty for non-disclosure under the mandatory
disclosure rules will address the concern set out in the Memorandum of Objects, which
seemingly relates to structures and arrangements that are designed to circumvent such
disclosure requirements. If a structure is successful at doing so by falling outside of the
requirements, then a penalty cannot apply. The purpose of the proposed penalty must be
clarified.
Response:
Comment misplaced. The mandatory disclosure rules, as set out in the draft CRS Regulations
made available for public comment in May 2019, deal with attempts to circumvent CRS
reporting.
Comment:
It is not clear whether the penalty will apply separately in relation to each account that is not
reported or whether it will apply in aggregate for each reporting period. The legislation should
clearly stipulate on what basis the penalty is proposed to be levied.
Response:
Noted. The penalty is triggered where there is a failure to report the arrangement or structure
and is not account based.
Comment:
The title of section 212 refers to “Reportable arrangement and mandatory disclosure penalty”.
The proposed amendment to section 212(1)(b) reads as follows “…..who fails to disclose the
information required to be disclosed under the regulations.” As there is a difference between
the terms “mandatory and “required” it is proposed that the term “required” be deleted and the
subsection be amended to read as follows: “….who fails to disclose mandatory information
under the regulations”.
Response:
Not accepted. The term “mandatory disclosure” is used for consistency with international
model legislation. The information is required to be disclosed under the regulations (rather
than being optional), which is a formulation used throughout the Tax Administration Act, 2011.
Comment:
The regulations issued under section 257 should refer to the ‘static’ definition of “intermediary”
i.e. as defined at a given date, in order to avoid problems similar to those that necessitated
the proposed change to the definition of “permanent establishment” in Clause 2(1)(i) of the
Taxation Laws Amendment Bill, 2019.

Page 182
Response:
Comment misplaced. A full definition of intermediary is provided in the draft CRS Regulations
made available for public comment in May 2019.
Extracted from the 2019 Draft Response Document on the 2019 Draft Tax Bills

Page 183
 TAX ADMINISTRATION ACT
Understatement penalty percentage
table
The proposed amendment is a technical
correction to effect clarity.
– made full disclosure to SARS of the
arrangement.

223

223

TAA Act: Amendment of section 234

CRIMINAL OFFENCES RELATING
TO NON-COMPLIANCE WITH TAX
ACTS
224

224

Page 184
Slide 223
Remission of understatement penalty upon full disclosure or arrangement to SARS
(Main reference: Section 223; clause 39 of the Draft Bill)
The proposed amendment is a technical correction to effect clarity regarding the levying of the
understatement penalty where a taxpayer has made full disclosure or an arrangement with
SARS.
Comment: It is not clear what is meant by “made full disclosure”. This could be interpreted to
mean all the information that is required to be provided to SARS has been provided or it could
mean that all information related to the arrangement has been provided to SARS, whether
there is a requirement (or a mechanism) to do so or not. It is submitted that it is the former
which should apply.

Page 185
 TAX ADMINISTRATION ACT
Criminal offences relating to non-
compliance with tax Acts

The amendment clarifies that a person, who

willfully and without just cause issues to SARS
an erroneous, incomplete or false document
required to be issued under a tax Act, is subject
to a criminal sanction under section 235.

225

225

TAA Act: Amendment of section 256

TAX COMPLIANCE STATUS

226

226

Page 186
 TAX ADMINISTRATION ACT
Tax compliance status
• The amendments update the provisions relating to a
taxpayer’s tax compliance status to take account of
recent system developments that speed up the
process.
• It furthermore enables the Commissioner to, by public
notice, insert a de minimis for the amount of
outstanding tax debt that will contribute to a taxpayer’s
tax compliance status as being indicated as non-
compliant.
• It also provides for the Commissioner to allow a grace
period before a taxpayer’s tax compliance status is
indicated as non-compliant to third parties.
227

227

Other Tax Developments

228

228

Page 187
Slide 227
The proposed amendments update the provisions relating to a taxpayer’s tax compliance
status to take account of recent system developments that speed up the process. It
furthermore enables the Commissioner to, by public notice, insert a de minimis for the amount
of outstanding tax debt that will contribute to a taxpayer’s tax compliance status as being
indicated as non-compliant.

Comment:
The wording of section 256(2) appears to exclude the possibility of a taxpayer applying for a
TCC him/herself. Section 256 should clearly distinguish and/or clarify what the procedures
and implications are, for both a taxpayer and a taxpayer’s client applying for a taxpayer’s tax
compliance status, should they be different.

Response:
Comment misplaced. A taxpayer always has access to his or her tax compliance status
through the eFiling platform. The section regulates third party access to this information.

Comment:
A distinction should be made in the subsection between the provision of access to a taxpayer’s
compliance status and the actual confirmation (determination) of the taxpayer’s compliance
status as they are two distinct processes. The 21 business days appears excessive if it relates
merely to third party access to a taxpayer’s tax compliance status–and not to the actual
confirmation of the tax compliance status as is alluded to in the latter part of the subsection.
Providing access to a taxpayer’s tax compliance status should be instantaneous once the
status has been confirmed(determined).

Response:
Not accepted. The 21 day period refers to the time period SARS requires to verify or confirm
internally whether or not there are circumstances that may preclude SARS providing the
taxpayer with the ability to grant third party access to the taxpayer’s tax compliance status.
Comment:
It is requested that consideration be given to exclude tax debts subject to a request for
suspension in terms of section 164(2). Pending a decision from a senior SARS official to
suspend payment, after such a request has been made, a taxpayer’s tax compliance status
should not be adversely affected for the period commencing on the day that SARS receives
such a request and ending 10 business days after notice of SARS’ decision to the taxpayer.

Response:
Accepted. The proposed amendment will be reworded to include the period for which SARS
may not proceed with collection steps undersection 164(6).
Extracted from the 2019 Presentation to SCOF and SECoF on the draft response to the 2019
Draft Tax Bills

Page 188
 South African

CARBON TAX

229

229

South African Carbon Tax

Background and current status
The carbon tax was:
• Announced in 2010
• 2012 budget speech announced that it will be introduced in
2013/2014
• Finally promulgated in 23 May 2019 – Act 15 of 2019

Tax will be payable on direct emissions from 1 June 2019. The

tax is unique in that it:
• Has several relief mechanisms
• •allows emitters to offset taxable emissions by using offsets.

Builds on greenhouse gas reporting regulations–

• Regulation 275 National Environmental Management: Air Quality
Act (39/2004): National Greenhouse Gas Emission Reporting
Regulations

230

230

Page 189
 [Link]
Notes/Pages/[Link]
SARS INTERPRETATION NOTES –
REFER TO – REFER TO SARS
WEBSITE
231

231

[Link]
Binding-Rulings/Pages/[Link]
SARS PUBLISHED BINDING
RULINGS – REFER TO SARS
WEBSITE
232

232

Page 190
 Court Cases

233

233

TAX COURT

234

234

Page 191
 COURT CASES
Tax Court
Date of Case Applicable Keywords
Delivery Number Legislation
28 June IT 14434 Income Tax Income tax; section 13quin; building
2019 /2019 Act, 1962 allowance; whether the Appellant was entitled
to a building allowance in the tax year
claimed
12 June IT 14287 Income Tax Income tax; whether the Appellant is liable for
2019 Act, 1962 tax in terms of section 64 of the Income Tax
Act

17 April IT 24510 Income Tax Income tax; whether revenue from the sale of
2019 Act, 1962 gift cards constitute gross income

235

235

COURT CASES
Tax Court
Date of Case Applicable Keywords
Delivery Number Legislation
27 Februa 13868 Income Tax Income tax; lease; whether the Appellant was
ry 2019 Act, 1962 entitled to a postponement and condonation
for filing its appeal
31 14106 Income Tax Income tax; whether the taxpayer was
January Act, 1962 entitled to be a PBO and be allowed a tax
2019 exemption in terms of section 10(1)

20 Decem 14189 Income Tax Income tax; lease; whether a lease premium
ber 2018 Act, 1962 is of a capital or revenue nature

236

236

Page 192
 COURT CASES
Tax Court
Date of Case Applicable Keywords
Delivery Number Legislation
13 Decem 14426 Employment Tax Employment tax incentive; whether the
ber 2018 Incentive Act, Appellant was entitled to an employment
2013 tax incentive deduction
Labour Relations
Act, 1995
5 Decemb VAT Value-Added Tax Value-added tax; promotional products;
er 2018 1558 Act, 1991 adverting and promotional products;
whether the Appellant was liable for VAT
in terms of section 8(15) on certain
promotional products for advertising and
promotional services

237

237

COURT CASES
Tax Court
Date of Case Applicable Keywords
Delivery Number Legislation
1 13988 Income Tax Income tax; section 24C; loyalty
November Act, 1962 programme; whether the Appellant was
2018 entitled to a section 24C allowance in
respect of a loyalty programme it
administered

238

238

Page 193
 IT 24510
INCOME TAX: WHETHER
REVENUE FROM THE SALE OF
GIFT CARDS CONSTITUTE
GROSS INCOME
239

239

COURT CASES
The facts

The taxpayer carries on business as a high

street retailer of clothing, comestibles and
general merchandise.
As part of the facilities offered to its
customers, it “sells” gift cards.
These can be redeemed for goods at any of
the taxpayer’s stores.
240

240

Page 194
 COURT CASES
The facts

• It is the company’s practice at the end of

each month to transfer amounts received in
respect of gift cards into a separate bank
account, and to appropriate from that bank
account the amount representing the value of
goods acquired on redemption of gift cards
and the unredeemed value of any gift cards
(which are valid for a period of three years)
that have expired during the month.

241

241

COURT CASES
The facts

For income tax purposes, the taxpayer had,

prior to the YOA in dispute, declared the
amounts received for the issue of gift cards as
gross income and claimed an allowance for
future expenditure representing the estimated
cost of goods that it would be obliged to supply
to the holders of the cards on presentation for
redemption.

242

242

Page 195
 COURT CASES
The facts

• However, following the promulgation of the

Consumer Protection Act, it reconsidered the
treatment of its receipts in respect of gift cards.
– Section 63 of the CPA provides that ‘any
consideration paid to a supplier in exchange for a
prepaid certificate, card, credit voucher or similar
device … is the property of the bearer of that …
device to the extent that the supplier has not
redeemed it in exchange for goods or services ...’

243

243

COURT CASES
The facts

– Section 65 of the CPA provides that the supplier

must not treat the consideration as its property
and requires that the supplier ‘in the handling,
safeguarding and utilisation of that property, must
exercise the degree of care, diligence and skill
that can reasonably be expected of a person
responsible for managing any property belonging
to another person …’

244

244

Page 196
 COURT CASES
The facts

• In its 2013 return of income the taxpayer excluded the

amount standing to the credit of the separate account,
asserting that the amounts had not yet accrued to it
from “gross income”.
• SARS conducted an audit of the return and issued an
additional assessment, which included as income the
amount standing to the credit of the separate account,
against which it allowed a deduction in respect of
future expenditure, which was consistent with the filing
positions adopted by the taxpayer in earlier years.

245

245

COURT CASES
The facts

• After the taxpayer’s objection against the

additional assessment was disallowed, an
appeal was lodged, and the matter
proceeded for hearing in the Tax Court.

246

246

Page 197
 COURT CASES
The issue

‘The question in this appeal from the additional

assessment by the Commissioner of the taxpayer’s
taxable income in the 2013 fiscal year is whether the
revenue from the “sale” of the taxpayer’s gift cards
during that year constituted part of its “gross income”
for the purposes of the Income Tax Act as soon as it
was received by the taxpayer (as contended by the
Commissioner), or would become such only when the
card was redeemed, or having not been redeemed,
expired (as contended by the taxpayer).’

247

247

COURT CASES
The arguments

• For SARS, it was argued that the

transactions by which gift cards were issued
were a sale (which Binns-Ward J understood
to mean a cash sale).
• That is, that the card was ‘sold’ to the
purchaser and the consideration should be
treated as cash sale revenue, which accrued
on issue of the card.

248

248

Page 198
 COURT CASES
The arguments

• The secondary argument advanced by counsel for

SARS was that:
– ‘… the taxpayer’s receipts in respect of the “sale” of gift
cards were indistinguishable from any other receipts taken
at its tills when merchandise was sold, and that the
revenue was available for use in the taxpayer’s operations
if it chose.
– She argued that it was therefore of no significance that an
amount equal to the sum of the gift token receipts was
subsequently sequestered in a separate specially
identified banking account.’

249

249

COURT CASES
The arguments

• For the taxpayer, the primary argument

was that, irrespective of the CPA, the
amounts were not received by the
taxpayer for its own benefit, but for the
benefit of the holder of the gift card and
that they only became entitled to the
amounts when the card was redeemed or
on its expiry.

250

250

Page 199
 COURT CASES
The arguments
• The taxpayer’s second argument was
that the provisions of section 63 and 65 of
the CPA, coupled with its treatment of the
receipts in conformity with the statute,
characterised the receipts as amounts
received on behalf of or for the benefit of
the cardholder and not as beneficial
receipts of the taxpayer.

251

251

COURT CASES
The judgement
• The court rejected the first level of the argument.
• It found that the argument was based on the
notion that the moneys were received and,
pending the redemption or expiry of the cards,
somehow held “in trust” for the benefit of the
cardholders.
• The court held that the mere segregation of the
receipts in respect of unredeemed gift cards in a
separate banking account identified for that
purpose did not mean that the taxpayer did not
hold the money for itself and for its own benefit.

252

252

Page 200
 COURT CASES
The judgement
• The taxpayer might have seen itself as some sort
of trustee but there was no evidence that it had
bound itself in a legally effective manner to hold
the receipts in a fiduciary capacity. It did not matter
where the taxpayer kept it, or how it accounted for
it in its books. It could have spent it or saved it as
it wished – for its own benefit.
• The court found, accordingly, that the taxpayer
was correct to have included its receipts in
respect of unredeemed gift cards in its accounting
for its gross income in the period before the
commencement of the CPA.
253

253

COURT CASES
The judgement
• However, the position changed after the introduction of the
CPA.
• According to the court, the question that then arose was
whether the taxpayer’s method of dealing with the gift card
receipts in apparent compliance with the requirements of the
CPA entailed that it received the proceeds for itself, or for the
gift card bearers.
• The court held that the CPA required it to take and hold the
receipts for the card bearers, and to refrain from applying
them as if they were its own property, and its method of
dealing with the receipts was directed to doing just that.
• The CPA forbade the taxpayer from receiving the moneys
taken in for gift cards for itself until the cards were redeemed.

254

254

Page 201
 COURT CASES
The judgement

• Accordingly, the gift card receipts were

“received” by the taxpayer, not for
itself, but to be held for the card bearer.

255

255

COURT CASES
The judgement

• The court held, accordingly, that the

receipts on account of gift cards were
correctly not included in the taxpayer’s
“gross income” and that the relevant
assessments should be set aside.

256

256

Page 202
 COURT CASES
The judgement
• The counsel for the Commissioner raised an interesting
argument, namely, that the CPA was introduced to protect
consumers’ rights, and not to change the incidence of tax. In
that regard, the court held as follows:
– If the manner in which the CPA protects consumers entails the
deferral of beneficial receipt of revenue by suppliers as a matter
of fact, then the knock-on effect on the determination of the
suppliers’ taxable income is only to be expected. Were it
otherwise, the necessary implication would be that suppliers fall
to be taxed on income they have not yet received, and which has
not yet accrued to them. The CPA does not express any such
intention. And any such effect would be at odds with the scheme
of the [ITA]. A conflict between the two sets of legislation arises
only if it is construed in the manner contended for by the
Commissioner. It does not arise on the approach contended for
by the taxpayer’s counsel.
257

257

COURT CASES
The judgement
• The court accordingly dismissed that
argument.
• Essentially, the court found that the
Commissioner cannot apply fiscal laws in
a vacuum; he must determine the incidence
of tax in the real world, and in light of all the
relevant facts and circumstances, including
common law or legislation that requires
taxpayers to act in a certain manner.
258

258

Page 203
 HIGH COURT

259

259

COURT CASES
High Court
Date of Case Applicable Keywords
Delivery Number Legislation
Acti-Chem SA
15 August (Pty) Ltd Customs & Excise Customs & Excise; Rebate item 306.07
2019 Act, 1964 of Schedule 3; section 75; rule 75;
New! Whether the rebate claimed by the
appallent is warranted

260

260

Page 204
 SUPREME COURT OF APPEAL

261

261

COURT CASES
Supreme Court of Appeal
Date of Case Applicable Keywords
Delivery Number Legislation
27 Atlas Income Tax Income tax; valuation of stock at year end
September Copco Act, 1962 in terms of section 22(1)(a) of the Income
2019 South Tax Act 58 of 1962.
New! Africa (Pty)
Ltd
6 BMW Income Tax Payment by employer to tax consultants
September South Act, 1962 to render assistance to expatriate
2019 Africa (Pty) employees – whether a taxable "benefit
Ltd or advantage" as contemplated in the
definition of "gross income" in section 1
Also of the Income Tax Act 58 of 1962 read
see media with section 2(e) or (h) of the Seventh
summary Schedule.
262

262

Page 205
 COURT CASES
Supreme Court of Appeal
Date of Case Applicable Keywords
Delivery Number Legislation
22 March Benhaus Income Tax Act, A company that excavates ground and
2019 Mining 1962 digs up mineral-bearing ore for a fee on
(Propriet delivery to another entity that processes
ary) the ore, undertakes mining operations
Limited within the meaning of section 1 and 15(a)
of the Income Tax Act 58 of 1962. It is
thus entitled to claim deductions of the
full amount of capital expenditure on
mining equipment in the tax year in which
it is incurred, in terms of section 36(7C)
of the Act.

263

263

COURT CASES
Supreme Court of Appeal
Date of Case Applicable Keywords
Delivery Number Legislation
26 Purlish Tax Administration Appeal against imposition of
February Holdings Act, 2011 understatement penalties; the appellant’s
2019 (Propriet conduct fell within the category listed in
ary) items (a) to (d) of the definition of
Limited "understatement" in section 221 of the
Tax Administration Act; SARS suffered
prejudice; no bona fide or inadvertent
error; the imposition of penalties was
justified; the increase of understatement
penalties by the Tax Court incompetent
and set aside.

264

264

Page 206
 COURT CASES
Supreme Court of Appeal
Date of Case Applicable Keywords
Delivery Number Legislation
3 Big G Income Tax Act, Income Tax Act 58 of 1962; income
December Restaura 1962 tax; section 24C; whether income of
2018 nts (Pty) taxpayer in years of assessment received
Ltd or accrued in terms of franchise
agreement; used to finance future
expenditure incurred by taxpayer in the
performance of obligations under that
agreement; income and obligations must
originate from the same contract.

265

265

COURT CASES
Supreme Court of Appeal
Date of Case Applicable Keywords
Delivery Number Legislation
20 Milnerto Income Tax Act, Income Tax; purchase price of erven in a
November n 1962 township sold by developer; sales
2018 Estates occurring in one tax year and all
Ltd suspensive conditions fulfilled in that
year; transfer registered and purchase
price received in following year; whether
purchase price deemed to have accrued
in year that sale agreements concluded;
section 24(1) of Income Tax Act 58 of
1962; stare decisis.

266

266

Page 207
 COURT CASES
Supreme Court of Appeal
Date of Case Applicable Keywords
Delivery Number Legislation
9 Sasol Oil Income Tax Act, Income tax; contracts for the sale of
November (Pty) Ltd 1962 crude oil by one entity within the Sasol
2018 Group, to another, and the back to back
sale of the same oil to yet another entity
in the group, were not simulated in order
to avoid a liability to pay tax, nor were
they entered into solely for the purpose of
avoiding the payment of tax for the
purpose of section 103(1) of the Income
Tax Act 58 of 1962.

267

267

Atlas Copco South Africa (Pty) Ltd

INCOME TAX: VALUATION OF

STOCK AT YEAR END

268

268

Page 208
 COURT CASES
The Facts

• Atlas Copco South Africa (Pty) Ltd, the

taxpayer, is part of a multinational group
headquartered in Sweden.

• It imports machinery and equipment for use

in the mining and related industries in
South Africa.

269

269

COURT CASES
The Facts

• The group applied an accounting policy to

write down stock not sold within 12 months
by 50% and by a further 50% if not sold in
24 months.

• This same policy was applied by the

taxpayer to determine the value of stock
for tax purposes.
270

270

Page 209
 COURT CASES
The Facts

• SARS disallowed this adjustment on the basis that

the value of closing stock, for tax purposes, can
only be reduced by: (s 22(1)(a))
– “such amount as the Commissioner may think just
and reasonable as representing the amount by which
the value of such trading stock … has been
diminished by reason of damage, deterioration,
change of fashion, decrease in the market value or for
any other reason satisfactory to the Commissioner”

271

271

COURT CASES
The judgement
• The Tax Court described the legal dispute as being whether
the NRV, if lower than the cost of the trading stock, may and
should be accepted to represent the value of closing stock for
tax purposes.
• It ruled in favour of the taxpayer and concluded that the use
of NRV to determine the value of closing stock was an
appropriate method that yielded a sensible and business-
like result.
• The SCA held that, similarly to the VWSA case, the Tax Court
erred in its views that NRV provided an appropriate valuation
of closing stock for tax purposes. The focus of the enquiry
therefore shifted to the basis used to determine the quantum
of the diminution in the value of the stock.

272

272

Page 210
 COURT CASES
The judgement
• Ponnan JA noted that it was difficult to
discern the taxpayer’s basis for the
diminution of value.
• He suggested that this was due to the fact
that the taxpayer deviated from its initial
reliance on the group policy applied to
determined NRV, which had been largely
negated by the judgment in the VWSA case
in the SCA.
273

273

COURT CASES
The judgement

• The court considered the method and

supporting evidence used by the taxpayer
to determine the diminution in the value of
6 stock categories.

• It concluded in each instance that the

taxpayer failed to demonstrate a
diminution in the value of the closing
stock.
274

274

Page 211
 COURT CASES
The judgement

• Instead, the bases for such write-downs

were described as unmotivated
guesstimates, to be based on an
aggressive accounting write-down policy
rather than a true reflection of the factual
position and, in the case of demo stock, to
reflect the auditor’s inability to locate the
stock rather than a diminution in value of
the stock.
275

275

COURT CASES
The takeaway
• If the value of closing stock, as taken into account for tax
purposes, is reduced below its cost, the taxpayer should be
able to provide evidence of the decrease in the market
value of the stock.
• Mere reliance on an accounting policy is not sufficient
grounds to reduce the value taken into account for tax
purposes.
• Wallis JA, at paragraph 46 of the judgment in the VWSA case,
stated that the fiscus is concerned with the value of trading
stock as a whole.
• This statement could be interpreted that section 22(1)(a)
should to be applied to a taxpayer’s overall stock position.
Paragraph 22 of the judgment in the Atlas Copco case would
however suggest that it is appropriate to apply section
22(1)(a) to each category of stock item, rather than its overall
stock position.
276

276

Page 212
 BMW South Africa (Pty) Ltd

INCOME TAX: PAYMENT BY

EMPLOYER TO TAX
CONSULTANTS TO RENDER
ASSISTANCE TO EXPATRIATE
EMPLOYEES.
277

277

COURT CASES
The facts

• BMW South Africa (Pty) Ltd (‘BMW SA’) is a member

of an international group;
• Group employees are assigned from other companies
within the BMW group to undertake employment with
BMW SA from time to time;
• The BMW group has a tax equalisation programme
which ensures that the employees will receive the
same take-home pay as they would have received if
they had not been assigned to another jurisdiction for
a temporary period;

278

278

Page 213
 COURT CASES
The facts
• In order to manage the equalisation, it is imperative
that the tax liability in South Africa should be
accurately established, and, to this end, BMW SA and
the relevant employer in the country of residence
engaged professional tax consultants to prepare the
relevant tax calculations that form the basis of any
equalisation payment or adjustment;

• The contract under which the employee undertook to

perform the services in a foreign jurisdiction stated that
professional consultants would prepare the income tax
submissions of the employee in both the home and
host country;
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The facts

• In South Africa, three consultant firms were

engaged and, at the expense of BMW SA,
were required to register the employees as
taxpayers, collect the relevant information for
the preparation of any return from the
relevant employees, prepare and file all
returns on behalf of the employees and deal
with any compliance-related issues arising
out of the returns submitted.

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The facts

• In the course of an audit of BMW SA’s

PAYE returns, SARS formed the opinion
that the services of the tax consultants
were a taxable fringe benefit enjoyed by
the employees and assessed BMW SA to
additional employee’s tax, penalties and
interest.

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The facts

• In raising the assessments, SARS placed reliance

on paragraph (i) of the definition of ‘gross income’
in section 1 of the Income Tax Act (‘the Act’), which
includes in taxable income:
– ‘the cash equivalent, as determined under the
provisions of the Seventh Schedule, of the value
during the year of assessment of any benefit or
advantage granted in respect of employment or to the
holder of any office, being a taxable benefit as defined
in the said Schedule …’

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The facts

• In turn, the Seventh Schedule to the Act, in paragraph

2(e), deems a taxable benefit to have been granted to
an employee if, as a benefit or advantage of or by
virtue of employment:
– ‘any service … has at the expense of the employer been
rendered to the employee (whether by the employer or by
some other person), where that service has been utilized
by the employee for his or her private or domestic
purposes and no consideration has been given by the
employee to the employer in respect of that service …’

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The facts

• After its objection to the assessments had

been disallowed, BMW SA appealed to the
Tax Court, which had found in favour of the
Commissioner.

• On further appeal to the High Court, the

decision of the Tax Court was upheld.
• BMW SA then appealed to the SCA.
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The argument

• The arguments advanced by BMW SA addressed two

fundamental bases:
– The tax consultants were contractually bound to provide
the services to BMW SA so that it could manage the
remuneration of its employees under the tax equalisation
programme, and the services were rendered to the
employer and not to the employee;
– The tax equalisation programme was intended to ensure
that the employees gained no benefit or advantage from
the geographic location, so no benefit or advantage
accrued to the employees.

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The judgement

• The judgment, delivered by Navsa JA, dealt first with

the submission that the tax consultancy services were
for the benefit of the employer and not the employee.
• At paragraph [21], the application of paragraph (i) of
the definition of ‘gross income’ in section 1 of the Act
was identified as the taxing provision:
– ‘It is correct that the benefit or advantage contemplated in
the definition of ‘gross income’ in s 1(i) of the Act must
have been granted in respect of employment or to the
holder of any office.’

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The judgement
• In examining whether the services were granted in
respect of employment, Navsa JA found, at paragraph
[24]:
– ‘The services rendered by the firms to expatriate
employees … were to ensure that the latter met their
obligations to SARS. It is undisputed that the amount …
constitutes payments by BMWSA for the services rendered
to the expatriate employees... That payment was made in
terms of the contract of employment. These were services
that the expatriate employees would otherwise have had to
pay for personally. The ineluctable conclusion is that the
services provided are a benefit or advantage as
contemplated by s 1 of the Act, read with paragraph 2(e) of
the Seventh Schedule.’

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The judgement
• BMW SA’s argument that the fact that the services were
rendered to assist and protect the employer indicated that
they were not a benefit of employment was dealt with in
paragraph [25] of the judgment:
– ‘There will be instances in which benefits or advantages
contemplated within s 1(i) read with the Seventh Schedule have
some residual or marginal advantage for an employer. The
primary question, however, is whether an advantage or benefit
was granted by an employer to an employee and whether it was
for the latter’s private or domestic purposes. In the present case,
as stated above, the compelling conclusion is that the services
were correctly valued and utilised for the employees’ private or
domestic purposes as contemplated by s 1 of the Act read with
para 2(e) of the Seventh Schedule.’

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The judgement
• As to the argument that the question of benefit could not
arise because the purpose of the tax equalisation
programme was to eliminate any benefit from the foreign
services contract, Navsa JA endorsed the opinion of the
Tax Court that the question of the professional services
was a private issue between the company and the
employees, and rejected the argument advanced by
BMW SA at paragraph [26]: ‘…
– [T]he confirmation of the assessment will not lead to the
expatriate employees being worse off in terms of their
employment with BMWSA. In terms of their tax equalisation
policy, they will have to bear the additional tax burden on
behalf of the expatriate employees. BMWSA’s policy and
terms of employment cannot dictate the application of the
provisions of the Act.’

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The judgement

Judgment was accordingly given in favour

of the Commissioner and the assessments
were confirmed

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The take away

• The matter here turned primarily on the

contractual arrangements between the
employee and employer on the one hand and
the employer and consultants on the other
hand. The contracts provided a clear road map
that linked the services to the employee rather
than to the employer. As a result, the benefit to the
employer was considered residual or marginal and
ultimately was disregarded as irrelevant.

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The take away

• The decision can however be criticized on the basis

that the court decided to take an objective approach
instead of looking at the facts subjectively. It can be
argued that the main purpose of the arrangements
between BMW SA and the tax consultants was to
benefit BMW SA as the employer. In terms of the
BMW group’s tax equalisation programme, BMW SA
will bear the additional tax costs of the expatriate
employees. It is therefore possible that the
arrangements primarily benefited BMW SA and that
they merely resulted in an ancillary benefit to the
employees. The court, to a substantial degree, ignored
the benefit to BMW SA.
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The take away

• Furthermore, it is possible, if the contract had

required that the tax consultants advise BMW
SA of the amounts of tax to be withheld from
the remuneration of the employees, and to
evaluate the employees’ tax assessments to
confirm the amounts of any refunds due to
the employees, that the outcome may have
been different.

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The take away

• Parties to an arrangement should identify

and carefully consider the possible tax
implications for the persons affected.

• The old adage that the devil lies in the

detail is well illustrated in this decision.

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 Thank you

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