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Ok. Got itNedbank Private Wealth will help you understand how the latest proposed tax changes may affect you.
On 31 July 2020 National Treasury and the South African Revenue Service (SARS) published two draft tax bills for public comment:
They propose tax changes that may come into effect towards the end of the year. Some of these proposed changes link to the exchange control reforms announced during the 2020 Budget.
How could these affect you?
We summarise the possible effects below but remember that these are still mere proposals.
Our fiduciary experts pay close attention to developments in industry regulations and changes in legislation. They work closely with your wealth manager to help ensure that your wealth is structured and protected appropriately. We understand that every individual’s needs, family situation, and risk profile are different, which is why personal advice is the foundation of our wealth advisory services.
1. Proposed changes according to the Draft Taxation Laws Amendment Bill | |||
What may change? |
The proposal in more detail |
Who may be affected and how? |
Effective date/ deemed effective date, if enacted. |
Clarifying deductions of contributions to retirement funds – employer contribution deduction. |
Currently an employee can deduct contributions to retirement funds subject to an annual limit of the lesser of R350 000 and 27,5% of the employee’s remuneration or taxable income. Any ‘excess contribution’ above the annual limit is carried forward. The lump sum benefit payouts from retirement funds are taxable in the hands of an employee or taxpayer subject to certain deductions. One of the deductions is the ‘excess contributions’ that the employee did not deduct when they contributed to the retirement fund. This means that the ‘excess contributions’ that the employer made are not deducted against retirement fund payouts, which is an anomaly. The legislation proposes that the 'excess contribution' from both the employee and the employer must be deductible against retirement fund lump sum benefit payouts. |
This is positive for clients who are employed and whose employers make contributions to a retirement fund on their behalf. It will positively affect the calculation of tax on the lump sum benefit from retirement funds. |
1 March 2016 |
The waiting period for the withdrawal of retirement fund lump sums when emigrating. |
This proposal introduces a tax requirement to wait for three years when emigrating from South Africa before being able to access retirement benefit lump sums. SARS and National Treasury are concerned about a ‘failed’ emigrant returning to South Africa after accessing retirement funds. This is part of several proposed changes in the modernisation of exchange control reforms. |
This will negatively affect clients who are emigrating and wish to take their preserved retirement benefits. A person will trigger exit charges (ie will be treated as if they are disposing of their worldwide assets, thereby triggering a capital gains tax event) on stopping being a tax resident in South Africa. But the person would be restricted from withdrawing lump sum retirement funds for three years from the date when their South African tax residency stops. |
1 March 2021 |
A shareholder will be treated as if they have disposed of their shares in a company that stopped being a tax resident. |
Currently a South African tax resident shareholder owning at least 10% of the equity shares or voting rights in a foreign company may be exempt from tax on both foreign dividends received and capital gains on disposal of the equity shares. There is no equivalent exemption for a South African tax resident shareholder owning shares in a South African resident company. This proposal therefore treats a shareholder as if they have disposed of the shares of a company when the company stops being a South African tax resident. This will trigger a capital gains or income tax event. Without this proposed change, there is a loophole for a shareholder once a South African resident company becomes a foreign company, as the exemptions would be available. |
The proposal affects South African resident shareholders who own shares in a non-resident company that was a resident company when the shares were acquired. This may lead to cashflow problems for the shareholder as capital gains tax or income tax may become payable where there is no actual disposal. The shareholders owning less than 10% would be severely affected as they do not qualify for exemption on the eventual disposal of the foreign shares. |
The proposed changes will come into operation on 1 January 2021 and apply for the holder of shares in a company that stops being a resident on or after that date. |
The transfer of listed securities from a South African exchange to an offshore exchange will be treated as share disposal. |
One of the proposed changes to the exchange control reforms is the phasing out of the approval requirement by the South African Reserve Bank when a resident individual or company that owns a listed domestic security transfers that listed domestic security abroad. This proposal interprets it that a shareholder has disposed of the shares at market value and reacquired the shares of a company when those shares are removed from the JSE register and are listed on an exchange outside of South Africa. The disposal date is the day of listing on an offshore stock exchange. |
This proposal affects South African resident individuals or companies that own a domestic listed security and wish to transfer this to an international stock exchange. This may lead to cashflow problems for the shareholder as capital gains or income tax may become payable whereas no actual disposal took place. This is a problematic proposal for the investor since the company itself does not leave the South African tax base simply by virtue of a change in where it is listed, and accordingly it will be treated as a South African company listed on a foreign exchange, ie the investor cannot claim any of the exemptions applicable to owning shares in a foreign company. |
The proposed changes will come into operation on 1 January 2021 and apply to any security that moved from being listed on the JSE to being listed on an exchange outside South Africa on or after that date. |
Use of preference shares to fund a company owned by a connected trust to circumvent the deemed annual donations tax (in terms of section 7C). |
This proposal will close the loophole of using preference share funding to circumvent the deemed annual donation tax applicable to low or non-interest-bearing loans advanced to companies owned by a connected trust. |
If legislated, it will affect an investor funding a company owned by a connected trust. |
The proposal is effective for years starting on or after 1 January 2021. |
2. Proposed changes according to the Draft Tax Administration Laws Amendment Bill | ||
Applicable section of the current legislation that is affected. |
What is the proposal? |
Who may be affected and how? |
Income Tax Act, 58 of 1962: Amendment of section 18A – enables a conduit public benefit organisation (PBO) to donate to approved government departments |
This proposal enables a ‘conduit PBO’ (any PBO that gives money or assets to any other PBO) to donate money to any government department approved by the commissioner of SARS. This is a positive development as it provides more flexibility for PBOs. |
This is positive for any PBO that may wish to donate to SARS-approved government departments. |
Income Tax Act: Amendment of paragraph 30 of the Fourth Schedule – failure to deduct and withhold PAYE; Tax Administration Act, 28 of 2011, section 234 Criminal offences |
This proposal makes it easier for SARS to criminally charge a person for failing to perform certain administrative obligations such as notifying SARS of a change of address or deducting, withholding and paying PAYE. |
This is indicative of the need to expand the tax net. It is bad news for taxpayers because it favours SARS and makes it easier for SARS to criminally charge taxpayers for, as an example, failing to notify SARS of a change of address. |
Tax Administration Act: Amendment of section 95 – estimate return on failure to reply to SARS request for material |
The proposal empowers SARS to raise an estimate return that is not subject to the objection-and-appeal process until the taxpayer submits the requested material. |
This is bad news for taxpayers, due to the potential abuse by SARS. |
The Fiduciary Specialist Team
National:
Tracy Muller (Head of Fiduciary Advice)
Estate Planning Paraplanner: Akhona Modi
Senior Tax Specialist: William Khwela
Coastal:
Hannelie La Grange
Central:
Devs Moodley and Elana Oosthuizen
KwaZulu-Natal:
Priscilla Reddhi