Ricochet News

2017 Draft tax amendments released for public comment

By Patrick Emmett, Senior Tax Consultant - Mazars - Aug 16, 2017
2017 Draft tax amendments released for public comment

National Treasury released the first draft tax amendments on 19 July, which are contained in the Draft Taxation Laws Amendment Bill (DTLAB) and the Draft Tax Administration Laws Amendment Bill (DTALAB).

Some of the proposed amendments are unpacked in further detail below.

Repeal of foreign remuneration exemption

Currently foreign remuneration earned by South African tax residents is exempt from income tax in terms of section 10(1)(o)(ii) of the Income Tax Act, No. 58 of 1962 (the Act), provided the individual is outside of South Africa for a period (or periods) exceeding 183 days in aggregate (of which 60 days must be continuous).

The former Minister of Finance, Pravin Gordhan, mentioned in the 2017 budget speech that in certain instances South African tax residents were benefi ting from double non-taxation in that their foreign remuneration was exempt from income tax in South Africa, and at the same time not subject to any tax in the foreign jurisdiction.

It was understood at the time that the section 10(1)(o)(ii) exemption would not apply in these instances, so it may have come as a surprise that the DTLAB has proposed that the exemption be repealed in its entirety.

The foreign remuneration will thus be fully taxable in South Africa, but at the same time National Treasury have indicated in the Explanatory Memorandum to the DTLAB that the taxpayer will be entitled to claim a tax credit for the foreign tax paid in South Africa in terms of section 6quat of the Act.

The eff ect of this is that those individuals working in no tax jurisdictions or where the tax rate is lower than the marginal tax rate will be required to pay income tax in South Africa. Conversely, where the tax rate is higher in the foreign jurisdiction, as compared to the marginal tax rate in South Africa, the individual will be entitled to a refund, as the foreign tax credit is limited to the South African tax payable amount.

It is proposed that the amendment will come into eff ect from 1 March 2019 and will apply to years of assessment commencing on or after that date. The draft amendment has already resulted in a signifi cant amount of resistance both locally and from those working abroad. Many people working overseas may consider formally emigrating from South Africa to avoid the above, but we caution that this would result in an exit tax being paid (a deemed disposal for capital gains tax purposes of all assets, excluding
immovable property), and would therefore recommend that this be carefully considered.

Increase in exemption for employer provided bursaries to learners with disabilities The fringe benefi t exemption for bursaries granted by an employer to the relative of an employee was amended signifi cantly with eff ect from 1 March 2013 and again last year with eff ect from 1 March 2016.

The bursary exemption was available to employees whose remuneration did not exceed R250,000 up to 1 March 2016 and R400,000 from that date.

The remuneration limit was once again been increased in the 2017 budget proposals, now up to R600,000 with eff ect from 1 March 2017. The exemption amounts have also increased steadily over time, and depending on the level of study also increased from R15,000 to R20,000 and R40,000 to R60,000 from 1 March 2017.

The DTLAB now proposes that in order to take the high costs of educating learners with disabilities into account, that a new monetary limit be introduced for bursaries provided by an employer to disabled dependants of employees as follows:

  • R30,000 per annum for learners with disabilities for Grade R to Grade 12, and NQF1 to NQF 4; and
  • R90,000 per annum for learners with disabilities for NQF 5 to NQF 10.

The Explanatory Memorandum on the DTLAB points out that the dependants who will qualify will be those who are under the family care and support of the employee. It is proposed that the amendment will come into eff ect from 1 March 2018 and will apply to years of assessment commencing on or after that date.

Conversion of Debt to Equity

Currently where a taxpayer owes an amount to another party, and that debt is subsequently reduced, waived, cancelled or discharged, the benefi t received must be accounted for, for income tax purposes.

The tax implications of the reduction will depend on what the loan or credit funded. In the case of tax deductible expenditure, any expenditure claimed as a deduction will be recouped in terms of section 19, and in the case of capital amounts, may result in a capital gain in terms of paragraph 12A of the Eighth Schedule to the Act.

Owing to the recent economic climate, transactions have in many instances been entered into by a company and their shareholder to eff ectively convert debt into equity in order to strengthen their balance sheet. The EM to the DTLAB has indicated that SARS has issued a large number of binding private rulings which provide relief from the above tax implications of any debt reduction.

In order to cater for the above the DTLAB contains a positive proposed amendment whereby the rules dealing with a debt that is reduced, waived, cancelled, forgiven or discharged will not apply to a debt which is owed between a debtor and creditor who form part of the same group of companies, but also contains the requirement that those two entities must form part of the same group of companies for at least 5 years from the date of conversion.

It is further proposed though, that the amendment will not apply to any interest amount included in the amount owing, for which a tax deduction was previously claimed. Any amount so claimed as a deduction previously will be treated as a recoupment in terms of section 19 of the Act, but that any recoupment amount which exceeds any assessed loss fi rst utilised, will eff ectively spread over three years with a third of the excess amount included in each of the three years of assessment after the conversion.

It is proposed that the amendment will come into eff ect from 1 January 2018.

We point out that the above proposed amendments are still in draft form, and may be through the legislative process prior to enacting the fi nal tax amendment acts, which we anticipate to be published in early 2018. Written comments must be submitted to National Treasury by 18 August 2017.

Please feel free to contact the Mazars Port Elizabeth Tax Consulting team should you have any queries on the proposed amendments. For more information, visit Mazars Port Elizabeth at 30 Bird Street, Central, Port Elizabeth, or call 041 501 9700. Also visit them at www.mazars.co.za