TAX AMENDMENTS:

HERE’S THE LOWDOWN

Foreign income tax exemption for SA residents: The foreign employment income of South African residents working abroad will become taxable from 1 March 2020. Current legislation provides for an exemption of R1 million, which will be increased to R1.25 million. The aim is to encourage South Africans working abroad to maintain their bond with this country. See our article on the top five questions our clients are asking about the new ‘expat tax’.

Transfer duties: No transfer duties will be payable on the purchase of property to the value of R1 million (this has been increased from R900 000).

Limiting the use of assessed losses: From 1 January 2021, companies with assessed losses will from be restricted from utilising the full loss in a future year by restricting the offset of assessed losses carried forward to 80% of taxable income, for tax years starting on or after 1 January 2021.

Public benefit organisations (PBOs): If a PBO approved to receive tax-deductible donations fails to submit audit certificates, the South African Revenue Service (SARS) may regard these donations as taxable income for the organisation. This sanction won’t apply to a PBO conducting mixed activities, some of which qualify for the issue of receipts and some of which don’t.

Withdrawal of retirement funds upon emigration: For exchange control purposes, individuals who are emigrating are currently able to withdraw funds from their pension, provident and preservation funds, and retirement annuity funds via the South African Reserve Bank (SARB). It is proposed that the withdrawal of these funds be reviewed, with amendments coming into effect on 1 March 2021.

Circumventing of anti-avoidance rules for trusts: In 2017, SARS introduced Section 7C donations tax on interest-free loans between a trust and connected persons. This rule was extended to companies owned by a trust. Many taxpayers restructured their tax affairs in such a way that the lender subscribed for preference shares in the company owned by the trust. Treasury has proposed that the rules preventing tax avoidance through the use of trusts be amended.

BROADENING THE TAX BASE

We certainly welcome the fact that Budget 2020 doesn’t focus on increasing personal and corporate taxation – this would have been counterproductive for an already overburdened tax base in an environment of stagnant economic growth.

The Budget instead focused on increased reliance on the re-established Davis Tax Committee ‘to address tax leakages, customs fraud, trade mispricing and harmful tax practices; setting up a new centre focused on wealthy individuals who have complex tax arrangements; and renewing the focus on illicit and criminal activity, including non-compliance of religious PBOs’.

The focus is also on broadening the tax base and simplifying the tax system by eliminating exemptions or deductions where possible. This is particularly important to companies, as it could result in a significant reduction in the corporate tax rate, which could increase South Africa’s competitiveness in the international arena.

The definitive move to rely less on exchange controls to combat tax avoidance is in our view a welcome development. Tax legislation is a more appropriate tool, and legislation will be strengthened to enhance compliance rather than by employing exchange controls. Making efficient use of the wealth of information collected via the Common Reporting Standards will likely be a major driver to combat tax evasion.

‘FINANCIAL EMIGRATION’ PHASED OUT

As a consequence of the enhanced tax system and availability of information, the concept of emigration will be phased out from 1 March 2020, which will result in emigrants and residents being treated equally, but with enhanced verification processes for individuals transferring more than R10 million out of the country. Further details are to be published on the SARB website.

Restrictions on emigrants investing in South Africa having bank accounts and borrowing in South Africa have been repealed. The requirement to operate through a Blocked Rand account will also therefore fall away.

CAPITAL FLOW MANAGEMENT

A new capital flow management system will also be introduced, resulting in all foreign-currency transactions (for corporates and individuals) being allowed, except for a risk-based list of capital flow measures. This welcome change will no doubt increase competitiveness and reduce unnecessary red tape. A list of remaining capital flow measures will be published on the SARB website.

If you have any questions or need assistance in reviewing your tax affairs, call Fay Nkosi on 011 778 6632 for an appointment or email fayn@privatewealth.sanlam.co.za.