Monthly Archives: August 2016

Threshold registration requirement for the skills development levy

We have recently become aware of an increased level of audits being conducted by the South African Revenue Service in relation to taxpayers’ obligations in terms of the Skills Development Levies Act, 9 of 1999 (SDL Act). The focus appears to be specifically on non-compliant taxpayers who fail to register as required in terms of section 5 of the SDL Act, and thus for these employers to pay the requisite levy over to SARS. The problem is perhaps amplified thereby that the skills development levy is often considered an ‘unimportant’ tax by taxpayers (primarily due to it being less costly compared to, for example, VAT or income tax). Compliance with the SDL Act is therefore not a top priority to taxpayers, with the effect that taxpayers are also not apprised of their rights and obligations in terms of this Act when confronted by SARS to register and settle an ostensible skills development levy obligation.

The skills development levy (or SDL) is a levy upon employers required to register for SDL (see registration requirement below). It is levied at 1% of remuneration paid to employees during any month (which include directors of a company). The levy is thus also applicable to directors’ remuneration.

Even though directors’ remuneration is also subject to the SDL, what should not be forgotten, though, (especially in the context of what appears to be the focus of SARS’ audits) is that directors’ remuneration is excluded in terms of section 3(5)(e) from determining whether the threshold amount of R500,000 has been reached and which requires registration for SDL purposes (see section 4(b)).

As above, even though the threshold limit for registering for SDL is R500,000 of remuneration paid (or reasonably expected to be paid to employees in the coming 12 months), the R500,000 threshold amount is determined for private companies without having regard to any directors’ remuneration paid. Therefore, although the directors’ remuneration will be subject to SDL once the company is registered, it is ignored for purposes of determining whether a taxpayer is liable, and thus required to register, for SDL.

This is particularly relevant for SME’s conducting business through a private company, especially where remuneration is comprised largely of directors’ salaries. To give an example in illustration: assume a private company pays salaries to non-directors of R400,000, and R1,000,000 to the two directors of the company collectively. On these facts, the company need not register and pay SDL as non-director salaries amount to less than R500,000. Were the company, however, to pay salaries to non-directors of R600,000, then irrespective of the directors’ remuneration, the company would need to register for SDL and pay 1% per month on the total remuneration paid to all employees (including directors).

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)

New proposed tax amendments

National Treasury releases proposed amendments to tax legislation on an annual basis. Some of the most important of these are already foreshadowed when the Minister of Finance delivers his budget speech in Parliament. The proposals made in that Budget Review are then formalised into proposed draft tax legislative amendments in the form of the Draft Taxation Laws Amendment Bill and the Draft Tax Administration Laws Amendment Bill.

This year, after the budget speech on 24 February earlier this year, the proposed amendments were released by Treasury on 8 July 2016. We set out below some of the more significant proposed amendments:

  • As announced in the budget speech, targeted anti-tax avoidance legislation is introduced as relates to trusts. However, Treasury has opted to retain the conduit pipe principle many feared would disappear, and proposes to target interest free loans made to trusts instead;
  • Further refinements to the harmonisation of the tax treatment of withdrawals from pension, provident and retirement annuity funds;
  • Repeal of the withholding tax on foreign service fees paid by SA tax residents;
  • As a result of the very complex and targeted anti-tax avoidance legislation linked to employee share incentive schemes, almost every year amendments are required to close new tax structures set up to reduce the tax consequences of these reward programmes as they relate to employees. This year is no different with certain targeted new anti-avoidance measures being proposed to the taxation of these schemes upon termination, as well as the taxation of dividends paid out on these shares throughout;
  • Significant amendments are introduced to the existing hybrid equity and debt instrument provisions in sections 8E to 8FA of the Income Tax Act, 1962. Most notably, the treatment of interest on subordinated debt as dividends for tax purposes have been addressed as relates to intra-group debt or cross-border debt issued to a South African tax resident;
  • Further relaxation of the rules as relates to venture capital companies are proposed to further entice taxpayers to make use of this very beneficial income tax incentive regime;
  • The Customs and Excise Act, 1964, is to have its own general anti-avoidance rules introduced as section 119B; and
  • A new understatement penalty category is proposed for a transaction to which the general anti-avoidance provisions in the Income Tax Act, 1962, or Value-Added Tax Act, 1991, are applied.

The public is invited to comment on the proposed changes by 8 August 2016. Please contact us should any of the above be of particular relevance to you and should it appear necessary to discuss these prior to these draft bills being passed by Parliament, very probably later this year.

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)

Proposed amendment to the taxation of trusts

National Treasury published its much anticipated proposed annual amendments to tax legislation earlier in July. This year the proposed amendments were widely anticipated to shed led on Treasury’s proposals on how to address the perceived abuse of the trust form specifically going forward, especially as relates to the now well known ‘conduit pipe’ principle (in terms of which income received in a trust may ‘flow through’ the trust and instead be taxed in the hands of the trust beneficiaries). Many in the media, and some practitioners too, widely commented and bemoaned the widely anticipated demise of this well-entrenched South African trust law  principle at the hands of Parliament.

Instead, a far more nuanced and focussed approach is proposed by the new section 7C of the Income Tax Act, 58 of 1962. In terms of this new proposed provision the conduit pipe principle is not at all affected, but rather low-interest (or interest free) loans to trusts are being targeted. Briefly, any loan to a trust that is subject to interest at less than the prime lending rate less 250 basis points will be deemed to carry interest at that rate with interest accordingly accruing (and taxed) in the hands of the trust creditor. Consequently the trust creditor is taxed on deemed interest received, and that while typically the trust will be unable to claim a deduction on interest paid. To the extent further that the deemed interest gives rise to an increased income tax liability in the hands of the trust creditor, and the creditor does not recover said increased amount from the trust, the debtor is further deemed to have received a donation which in turn will be subject to donations tax at 20%.

We consider that the proposed amendments (proposed to be effective from 1 March 2017) should address two forms of perceived abuse of the trust for tax purposes:

  1. In the first instance, it is a common estate duty planning practice for an individual to sell assets on interest free loan account to a family trust to ensure that value-growth of the asset (and thus the estate) accumulates in the trust going forward, while the value of the estate of the individual remains the same. Individuals will now have to think twice before entering into these estate duty planning exercises: a sale on interest free loan account may very well still result in an estate duty saving ultimately (although ironically not effectively for the taxpayer but his/her heirs), but now at a cost of interest accruing to the individual throughout his or her lives and which is subject to income tax on an annual basis; and
  1. Secondly, the practice referred to as ‘income splitting’ is addressed (whereby trust distributions are made to various trust beneficiaries who are taxed at lower marginal tax rates): typically these distributions too would be made on interest free loan account, again therefore resulting in income tax consequences for the individuals in the form of ongoing income tax on the deemed interest received.

The public is invited to comment on the proposed amendments by 8 August. We are however of the view that Treasury is unlikely to make any significant concessions in this regard specifically. While we will keep our client base informed of any developments in this regard as appropriate, it may be prudent to contact us now already to start discussing how most efficiently to manage any risks emanating from the above proposals and as they may relate to existing trust structures post 1 March 2017.

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)