Some changes made to the Taxation Laws Amendment Bill, 2020

Reference documents

Taxation Laws Amendment Bill, 2020 “TLAB”

In October 2020, the Minister of Finance presented the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2020, the Tax Administration Laws Amendment Bill, 2020, and the Taxation Laws Amendment Bill, 2020.

This article focuses on a few of the upcoming amendments to the Taxation Laws Amendment Bill, 2020. As the number of changes are extensive only a limited number will be listed in this article.

Scholarships and bursaries

Section 10(1)(q) and (qA) allow for tax-exempt scholarships and bursaries to be received by individuals, including where an employer grants scholarships or bursaries to its employees or their relatives. There are certain limits and requirements in order for the latter scholarships or bursaries to be tax-exempt. With effect from tax years commencing on or after 1 March 2021, the exemption will no longer apply to the scholarship or bursary if any remuneration to which the employee was entitled or might in the future have become entitled was in any manner whatsoever reduced or forfeited as a result of the grant of the scholarship or bursary.

Capital Gains Tax

The amendment relates to the participation exemption applicable to capital gains, found in paragraph 64 of the Eighth Schedule to the Act. This is where a South African resident holds at least 10% of the equity shares and voting rights in a foreign company and, subject to certain requirements, a capital gain arises on disposal, that capital gain is exempt from CGT. An amendment now states that this exemption will not apply in respect of a capital gain determined in respect of the disposal of a share in a CFC (controlled foreign company), to the extent that the value of the assets of the CFC “is attributable to assets directly or indirectly located, issued or registered in” South Africa. This amendment applies to any disposal of shares in a CFC on or after 1 January 2021.

Controlled foreign companies

The amendment is to section 9D of the Act dealing with treatment of a controlled foreign company (CFC). Subject to any exemptions, the profit of the CFC is recomputed to arrive at the equivalent of taxable income under the Act, and the South African-resident shareholder’s proportion thereof is effectively taxed in the shareholder’s hands.

In computing the taxable income, any dividend from a South African company would be treated as exempt income from an income tax perspective. An amendment now requires that, in computing the equivalent of taxable income of the CFC, 20/28 of the South African dividend must be included as taxable income. The effect of this is that where the shareholder of the CFC is a South African company, and 28% of this amount is taxed, the effective tax rate becomes 28% of 20/28 = 20%, which is the rate of dividends tax on a dividend from a South African company (and the effective tax rate attributable to a foreign dividend).

If an individual or a trust is the shareholder, then the effective rate is 45% of 20/28 = 32%, which is greater than the rate at which tax on South African or foreign dividends is imposed. Recognising that the South African dividend itself would have been subject to dividends tax at 20%, or possibly less under a relevant double tax agreement, the amendment includes an adjustment mechanism to ensure that, to the greatest extent possible, the tax payable by the shareholder on the CFC’s profits as determined above, together with the dividends tax withheld on the South African dividend, will not exceed an effective rate of 20%.

For the reason given above, this mechanism can only work properly where the shareholder of the CFC is a company. This amendment applies to any South African dividends received by a CFC on or after 1 January 2021.

Individuals Tax

Section 7CAs states any person who has made an interest-free or low-interest loan to a local or offshore trust, or to a local or offshore company owned by a local or offshore trust, is subject to donations tax on a deemed donation. The donation is calculated by multiplying the loan by the official rate of interest as defined in section 1 of the Act, and deducting any interest actually accrued on the loan, and multiplying the result by the rate of donations tax.

The tax is payable in March of each year. Previously, a way around this problem was to finance the structure, onshore or offshore, by means of having the company owned by the trust issuing preference shares, which could be zero-coupon preference shares or, if not, certainly not cumulative preference shares. The amendment deems any such preference share to be a loan and deems any dividend or foreign dividend to be interest.

The expression “preference share” is given the same meaning as in section 8EA(1) of the Act, and therefore means any share which is not an equity share or any equity share if any amount of a dividend or foreign dividend is based on or determined with reference to a specified rate of interest or the time value of money.

The amendment comes into operation on 1 January 2021 and applies in respect of any dividend or foreign dividend accruing during any tax year commencing on or after that date; first time application is in the year ending 28 February 2022.

Expatriate tax

When a resident works abroad for a lengthy period, the remuneration is exempt from tax in South Africa (the exemption to be limited to R1.25 million from 2021). The requirements for the exemption are that the individual must be outside South Africa for a period or periods exceeding 183 full days in aggregate during any period of twelve months, and for a continuous period exceeding 60 full days during that period of twelve months.

Given the fact that individuals could have been prevented from leaving South Africa during the lockdown, with the result that they might not have met the 183 day threshold, an amendment has been made, effective 29 February 2020, stating that, in respect of any tax year between 29 February 2020 and 28 February 2021, the requirement is to spend 117 full days in aggregate during any period of twelve months. This reduction of 66 days supposedly correlates to the period of lockdown when flights for business purposes were not available.

Emigration

When a member of a pension or pension preservation fund, provident or provident preservation fund or retirement annuity fund (a retirement fund) emigrates, including emigrating for exchange control purposes, that individual is entitled to receive 100% of the value of the retirement fund, even though this might be contrary to the general rules in the case of a resident.

With the proposed exchange control relaxations, one of which will be that there will no longer be a distinction between a resident and an emigrant, and thus no longer any formal emigration procedure, the reference point in granting this dispensation can no longer be exchange control emigration. Accordingly, with effect from 1 March 2021, the requirement, in order to access the money in the retirement fund, is that the person must not be a South African resident for an uninterrupted period of three years or longer from that date. As a phasing-out provision, a concession has been made such that the old rules will continue to apply to any person who has submitted an application for emigration to the Reserve Bank. The application must have been received by the Reserve Bank on or before 28 February 2021, and approved by it or an authorised dealer on or before 28 February 2022.

As this article is merely a summary of some amendments to the Taxation Laws Amendment Bill, 2020 “TLAB”, the reader is advised to consult the Bill in its entirety for full detail of the amendments. Such documents are usually kept on the SARS website at this link https://www.sars.gov.za/Legal/Preparation-of-Legislation/Pages/Bills.aspx