On 21 July, National Treasury and the South African Revenue Service (SARS) released the second batch of draft tax amendments for the 2019 legislative cycle, which includes both proposed substantive tax amendments, and administrative changes. This follows the release of the first batch on 10 June 2019, dealing predominantly with addressing abusive arrangements aimed at avoiding the anti-dividend stripping provisions as well as aligning the effective date of tax-neutral transfers between retirement funds with the effective date of annuitisation for provident funds, which is 1 March 2021.
Some of the main items addressed in the second round of draft bills are:
- Clarifying the interaction between corporate reorganisation rules and other provisions of the Income Tax Act;
- Refining the tax treatment of long-term insurers; and
- Refining investment criteria and anti-avoidance measures for the Special Economic Zone regime.
Practitioners are currently scrutinising the bills and getting to grips with the proposed changes. There are, however, two proposed changes of which the public should take immediate notice.
Review of section 72 of the Value-Added Tax Act
The VAT Act contains provisions in section 72 that provide SARS with the discretionary powers to make arrangements in which the provisions of the VAT Act can be applied. This power can be exercised where any vendor or class of vendors conduct their business in such a way that difficulties, anomalies or incongruities arise regarding the application of the VAT Act. The arrangement or decision by the Commissioner as provided under section 72 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.
Challenges have arisen 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. Because the provisions of the VAT Act are in itself mandatory, to address this anomaly, it is proposed that changes be 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.
Reviewing the allowable deduction for venture capital companies (“VCC”)
Government has endeavoured to end the perceived abuse within the VCC tax incentive regime by making changes in the provisions of the incentive 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”. National Treasury indicates that, despite Government’s efforts to introduce anti-avoidance measures, it has come to their 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 four years.
In an effort to balance the benefit and perceived effectiveness of the VCC tax incentive regime whilst still protecting the bottom-line impact of high tax expenditure on the fiscus, it is proposed that changes be made in the VCC tax incentive regime to reintroduce a limitation of the amount to be deducted in respect of taxpayers’ investments in VCC shares. To consider the effect of inflation and to further balance the intended impact of the VCC tax incentive on both small business and the fiscus, it is proposed that the tax deduction in respect of investment in VCC shares should be limited to R2,5 million per annum per VCC shareholder.
National Treasury will accept written comments on the draft bills until the close of business on 23 August 2019. The public is encouraged to engage with their tax practitioners if there are any matters that they wish to bring to the National Treasury’s attention.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)