ADDITIONAL MEDICAL EXPENSES TAX CREDIT

B3Section 6B of the Income Tax Act[1] provides for an additional medical expenses tax credit (“AMTC”) which is calculated against qualifying “out of pocket” medical expenses. This tax credit reduces the amount of income tax a natural person (hereinafter referred to as the “taxpayer”) is liable to pay. The AMTC is granted in addition to the medical scheme fees tax credit (“MTC”) in respect of fees paid to a registered medical scheme.[2]

The AMTC can be claimed by a taxpayer in respect of medical expenses incurred by that individual towards the medical expenses of that taxpayer as well as any of his or her dependants as defined. A “dependant” includes the spouse or partner of the taxpayer, any dependent children of the taxpayer or spouse, any other members of the taxpayer’s immediate family in respect of whom the taxpayer is liable for family care and support as well as any other person who is recognised as a dependant of the taxpayer under the rules of the relevant medical scheme.

In order for the expenses to qualify for the AMTC, the expenses must not have been recoverable by the taxpayer from any person (e.g. from the taxpayer’s medical scheme or an insurer under a medical gap cover insurance plan). Qualifying medical expenses can furthermore only be claimed in the year of assessment during which they are actually paid.

The types of expenses that would qualify for the AMTC include amounts paid for services rendered and medicines supplied by any duly registered medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopaedist. Costs incurred for hospitalisation in a registered hospital or nursing home or home nursing by a registered nurse, midwife or nursing assistant will also qualify.

Any “over the counter” medicine will not qualify unless it is prescribed by any duly registered physician (as listed above) and acquired from a registered pharmacist. Medical expenses incurred and paid outside South Africa will qualify if it relates to services and medicines which are substantially similar to those listed above. Furthermore, the Commissioner may also prescribe qualifying expenses in respect of physical impairment or disability that could qualify for tax relief.

The AMTC amount is based on specific formulas and will depend on the taxpayer’s age (i.e. whether or not the taxpayer is 65 and older) and whether the taxpayer, his or her spouse or any of the taxpayer of his or her spouse’s children has a disability as defined.

[1] No. 58 of 1962

[2] Section 6A of the Income Tax Act

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)

INTEREST RECEIVED BY NON-RESIDENTS ON SA BANK ACCOUNTS

B4Persons that are not tax resident in South Africa (“SA”) are only taxed in SA on income received by or which accrued to such non-resident from an SA source. This will include interest received on an SA bank account.[1]

Non-residents may, however, be exempt from SA income tax on interest earned in terms of section 10(1)(h) of the Income Tax Act. The section 10(1)(h) exemption does not apply though to the extent that the non-resident is a natural person who was physically present in SA for a period exceeding 183 days in the 12-month period preceding the date on which the interest was received by or accrued. In these circumstances, the non-resident must register for income tax and declare such SA source interest to the South African Revenue Service. The exemption will also not apply where the debt from which the interest arises is effectively connected to a permanent establishment of that person in SA[2] or where the interest received is in the form of an annuity.[3] The general interest exemptions in section 10(1)(i) may, however, still apply to non-residents that are natural persons.

Other than for an income tax effect, non-residents earning SA source interest can also be subject to the withholding tax on interest (“WTI”) at a rate of 15%, unless certain exemptions apply.[4] This withholding rate can be reduced by an applicable double taxation agreement between SA and the foreign country where the person (who is a non-resident for SA tax purposes) is tax resident. Two exemptions from WTI may apply to non-residents receiving interest on an SA bank account. Firstly, there is a general exemption from interest received from SA banks.[5] Secondly, no WTI is payable where the non-resident exceeds the 183-day threshold as set out above.[6]

In summary, non-residents are not subject to WTI on interest received on an SA bank account. Also, no liability for income tax will arise on condition that none of the exclusions in section 10 mentioned above applies. To the extent that any of these exclusions apply though, the non-resident will have to register for income tax in SA and submit an income tax return. An applicable double taxation agreement should also be considered as it may contain specific provisions relating to the taxation of interest and providing relief to the extent that none is afforded by the domestic legislation discussed in this article, although this will not affect the obligation to submit an income tax return to the South African Revenue Service.

[1] Section 9(2)(b) of the Income Tax Act, 58 of 1962

[2] Section 10(1)(h)

[3] Section 10(2)(b) of the Income Tax Act

[4] Sections 50A to 50D of the Income Tax Act

[5] Section 50D(1)(a) of the Income Tax Act

[6] Section 50D(1)(c) of the Income Tax Act

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)

THE TAXATION OF EMPLOYEE INCENTIVE SCHEMES

B3It has become popular commercial practice for many employers to design employment incentive schemes whereby employees are remunerated for services rendered over a period of time by allowing them to participate in share incentive schemes. Typically, these schemes take the form of either cash-based settled schemes or share-based settled schemes. The former involves participating employees receiving a cash payment after a certain period at the exercise of their share appreciation rights equal to the increase in value of the underlying share value to which the scheme is linked. Share-based payments, on the other hand, involve the employees receiving actual shares in the employer company and which would (ideally) have increased in value over the period of time, due in part to the employees’ endeavours and involvement in the company’s activities.

In terms of section 8C of the Income Tax Act,[1] these benefits received by employees through participation in such schemes are taxed on income tax account, in other words, on the same basis as though these benefits had been a salary earned.

Depending on whether the rights granted under the scheme are restricted or not, the tax consequences arising for the employee will fall due either when the options are granted to the employees (in the case where no restrictions in relation to the options exist), or only once they are exercised or vest for purposes of section 8C (typically when the restrictions linked to the rights granted falls away).[2] At that stage, the gain to be taxed is calculated as being the value of the benefits received in terms of the scheme minus the amount paid (if any) to acquire those benefits.[3]

Restrictions for section 8C’s purposes typically take the form of a restriction on when the rights acquired may be exercised (typically linked to an employee remaining in service of the company for a number of years), or a prohibition on the employee transferring or selling those rights at market value to other persons (the rights granted are often not permitted to be sold to another).[4]

Take the following as an example: Company A grants an employee the right to receive shares in it worth R10 by paying an amount of R1 only. If that right to take up shares may be exercised immediately, and no restriction linked to transferability thereof for example exists, that “unrestricted equity instrument” will give rise to a taxable gain of R9 when the option is received. Where the right to subscribe for shares in Company A for R1 may however only be exercised if the employee is still in employment of Company A within 3 years’ time, or may be exercised at any point in time but may not be sold to another, then the gain realised for section 8C’s purposes will only be calculated when and at the value of the shares when these are eventually acquired. In such an instance, the gain calculated should be reduced by the subscription price of R1 paid for the shares. Similarly, if the reward does not involve the subscription of shares, but rather a payment to the employee of the increased value of shares over a predetermined period in time, the value of the shares minus the R1 paid to acquire the options will be the amount of the gain subject to income tax.

Section 8C has been the focus of many legislative amendments over the past few years and involves arguably one of the most complex provisions of the Income Tax Act. Employees and employers alike would therefore be well-advised to take detailed tax advice prior to entering into, and exercising, rights provided for in terms of employment incentive schemes such as these described above.

[1] 58 of 1962

[2] Section 8C(3)

[3] Section 8C(2)

[4] See the definition of “restricted equity instrument” in section 8C(7)

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)

SECURITIES TRANSFER TAX

B2Levied at 0.25% of the value of shares transferred,[1] the securities transfer tax (“STT”) is a tax often neglected and forgotten. Introduced in 2008, the tax is levied on the transfer of shares held in South African companies or the transfer of membership interests held South African close corporations. The issuing of a share is however not a “transfer” for purposes of the Securities Transfer Tax Act, nor the buying back / redemption / cancellation of a share by the company whose share it is itself where that company is in the process of having its existence terminated.[2]

Due to being a tax which is often overlooked, taxpayers often neglect the administrative requirements linked to the tax too, not only in terms of their relative payment obligations towards the fiscus and doing so timeously, but also due to their failure to observe the relevant filing obligations linked to the requisite tax payments.[3] Such administrative oversights may affect a future application by taxpayers for tax clearance certificates to be issued to them, and may also have a bearing on applications for the suspension of amounts of tax in dispute (STT or other) and ostensibly due to the Commissioner.[4]

STT is ultimately borne by the purchaser of the shares being transferred,[5] although a number of exemptions may apply.[6] Primary among these are transfers of shares to which the so-called “group relief” provisions in the Income Tax Act[7] apply,[8] as well as a transfer of shares in property rich companies on which transfer duty is levied.[9] Finally, in terms of the de minimis provision in section 8(1)(r), STT will also not apply to transfers of shares where the STT payable is less than R100. In other words, no STT is levied on a transfer of shares where the shares transferred have a value of less than R40,000.

It is important to note that STT is levied on the transfer of both listed and unlisted shares, and clients are therefore encouraged, in the interest of a clean tax administrative record, to take their STT obligations seriously.

[1] Section 2(1) of the Securities Transfer Tax Act, 25 of 2007

[2] See the definition of “transfer” in section 1 of the Securities Transfer Tax Act

[3] These requirements are contained in the Securities Transfer Tax Administration Act, 26 of 2007

[4] In terms of section 164(3)(b) of the Tax Administration Act, 28 of 2011, a taxpayers compliance history is to be considered where the Commissioner decides to suspend an amount of tax in dispute from being payable pending the outcome of that dispute.

[5] Section 7 of the Securities Transfer Tax Act

[6] Section 8

[7] 58 of 1962

[8] Section 8(1)(a)

[9] Section 8(1)(n)

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)

TRANSFER DUTY

B3Transfer duty is a tax levied upon the purchaser of immovable property situated in South Africa.[1] The duty is levied in accordance with the following sliding scale and is based on the value of the property which is the subject of the transfer:

Value of the property (R)

 

Rate

 

0 – 900 000

 

0%

 

900 001 – 1 250 000

 

3% of the value above R900 000

 

1 250 001 – 1 750 000

 

R10 500 + 6% of the value above R 1 250 000

 

1 750 001 – 2 250 000

 

R40 500 + 8% of the value above R 1 750 000

 

2 250 001 – 10 000 000

 

R80 500 + 11% of the value above R2 250 000

 

10 000 001 and above

 

R933 000 + 13% of the value above R10 000 000

 

While the sliding scale above previously only applied to natural persons acquiring property, this is no longer the case, and legal persons too are subject to transfer duty based on the above table. (Previously, legal persons were subject to transfer duty simply at the maximum rate in the table being applied to the entire value of transfers where a legal entity bought property).

Based on the above table therefore property transfers involving property worth less than R900,000 are effectively exempt from transfer duty, although the tax exposure may quickly thereafter jump to involve significant amounts. From the perspective of individuals buying property financed by way of a mortgage bond registered in favour of a lending bank, the duty quickly becomes a material consideration when purchasing a property, considering that the financing of the duty is typically not covered by financing provided by a commercial bank and which therefore may require the duty to be settled by way of existing cash resources available to prospective buyers.

Most notably, property transfers on which the transfer duty may be levied are not limited to transfers of immovable property only, but also includes the transfer of shares of so-called “property rich residential companies”, that is the sale of shares in a company where more than 50% of the value of such a company is derived from residential property owned by that company.[2] [3]

Various exemption apply in respect of transfers of property where the transfer duty will not be levied.[4] These include where the transfer involves a transaction where the relevant group relief provisions of the Income Tax Act[5] are applied, or where the transfer is subject to VAT (i.e. where the seller sells the property as part of its VAT enterprise).[6]

[1] Section 2(1) of the Transfer Duty Act, 40 of 1949

[2] See paragraphs (d) and (e) of “property” in section 1 of the Transfer Duty Act.

[3] Interestingly, the anti-avoidance provision does not extend to shares transferred in companies which own non-residential property.

[4] Section 9 of the Transfer Duty Act.

[5] 58 of 1962

[6] Section 8(15)

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)

WELCOMING TAX NEWS FOR FRANCHISE OWNERS

B2The Tax Court has upheld a decision that a tax deduction allowed by section 24C of the Income Tax Act may be applied to franchisee costs. Section 24C permits the deduction of certain expenses in the current tax year assessment, where those expenses are not yet incurred, on the basis that these expenses will contractually be incurred in future years. This tax allowance protects businesses from being taxed on earmarked funds that bloat their annual earnings.

Where did this decision come?

The appeal involved the taxpayer (restaurant chain) against additional assessments raised by SARS for its 2011 to 2014 years of assessment. They arose from SARS’ refusal of deductions claimed by the taxpayer as allowances in respect of future expenditure in terms of section 24C of the Income Tax Act.

The crux of the dispute lies in whether or not the income received by the taxpayer from sales of meals to its customers can properly be regarded as arising directly from – or put differently, accruing in terms of – the franchise agreement itself. The taxpayer maintains that it can whereas SARS maintains it cannot.

However, as far as franchisees are concerned, it is clear that where a franchise agreement sets out an obligation to incur future expenditure, such expenditure may very well fall within the beneficial parameters of section 24C of the Act.

The Court’s decision

The Tax Court held that there need not be one physical contract document to give rise to section 24C’s benefit. Furthermore, while different parties were involved (the franchisor and the restaurant’s customers), the franchisee’s agreements with each were “inextricably linked” and “not legally independent and separate”.

The income deducted was, therefore, regarded as earned under the same contract as the taxpayer’s future expenditure, fulfilling the requirements of section 24C.

Reference:

  • B v Commissioner for the South African Revenue Services (IT14240) [2017] ZATC 3 (3 November 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)

DIVIDENDS TAX RETURNS

B1

With effect from 1 April 2012, dividends tax was introduced to replace the then “secondary tax on companies” (or “STC”). The tax is currently levied at 20%. The dividends tax regime brought with it a requirement for dividends tax returns to be submitted periodically (if even no liability for dividends tax arose) and we wish to bring to our clients’ attention when this would be required.

From 1 April 2012, dividends tax returns were required for all taxpayers who paid a dividend.[1] Although not initially required, but the Income Tax Act was subsequently amended retrospectively to provide therefor. Returns were, from that date, not required for dividends received though. However, through various amendments being introduced, the scope of the dividends tax compliance regime was broadened significantly. With effect from 21 January 2015, dividends tax returns were also made compulsory for all dividends tax exempt (or partially exempt) dividends received.[2] The most significant implication flowing out of this amendment is that from this date, all South African companies receiving dividends from either South African companies, or from dual-listed foreign companies (to the extent that the dividend from the foreign company did not comprise a dividend in specie). The requirement for dividends received from dual-listed foreign companies to also carry with it the requirement for a return to be submitted was however removed a year later, with effect from 18 January 2016.

Where dividends are paid by a company, or dividends tax exempt dividends are received by any person from South African companies, the relevant returns (the DTR01 and/or DTR02 forms) must be submitted to SARS by the last day of the month following the month during which the dividends in question were received or paid. In those instances, where a dividends tax payment is also required, payment of the relevant amount of tax is to be effected by the same date too.[3]

Although the non-submission of dividends tax returns at present to not carry any administrative non-compliance penalties, we always encourage our clients to ensure that they are fully compliant with relevant requirements prescribed by tax statutes. We would therefore encourage our clients to revisit their dividends history and ensure that their records and returns are up to date and as required by the Income Tax Act.

[1] Section 64K(1)(d) of the Income Tax Act, 58 of 1962 (“the Income Tax Act”), as it read at the time.

[2] Section 64K(1A) of the Income Tax Act. Dividends received from regulated “tax free investment” accounts do not require a return to be submitted.

[3] Section 64K(1)(a) to (c)

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)

COMPANY TAX IN SOUTH AFRICA

B3If you are self-employed or a business owner, you have to pay company tax in South Africa. How much business tax you pay and what deductions you can claim will depend on the size and type of your business.

What is company tax?

Company tax (also called, “corporate income tax”) is what keeps our economy functional. There exists different business categories, who all have to go through registration procedures and have to pay tax. Tax is a rather complicated matter, which is why a lot of people choose to rather pass it on to professional business accountants.

Who needs to pay company tax?

All registered businesses in South Africa have to pay company tax on their worldwide income to SARS. Companies based outside of South Africa, but operating in South Africa, must pay tax on income derived from within South Africa only. The type of companies that have to pay company tax in South Africa include:

  • listed and unlisted public companies
  • private companies
  • close corporations
  • co-operatives
  • collective investment schemes
  • small business corporations
  • share block companies
  • body corporates
  • public benefit companies
  • dormant companies

What steps must be taken?

  1. Register as a taxpayer. Every business liable to tax under the Income Tax Act, 1962, must register with SARS as a taxpayer. You can register once for all different tax types, using the client information system.
  2. Submit annual tax return. Every registered taxpayer must submit a return of income twelve months after the end of the financial year. Returns can be submitted electronically or manually via SARS.
  3. Submit provisional tax returns. Every company must submit provisional tax returns. Your first provisional tax return must be submitted six months from the start of the year, and the second at year-end, and must contain an estimate of the total taxable income earned or to be earned for that period. Payment of the tax must accompany the return. A third “top-up” payment may be made six months after year-end.

Resources

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)

BEWARE OF CAPITAL GAINS TAX WHEN YOU EMIGRATE

B1While many people immigrate to South Africa, we also see many of our clients emigrating from South Africa. And while formal migration-status is not necessarily linked to tax residency, the time of tax migration often coincides with formal emigration linked to passport or visum status. Many are surprised to learn (often after the fact) that emigration for tax residency purposes gives rise to tax consequences in South Africa, and specifically to capital gains tax (“CGT”) consequences in the form of so-called “exit charges”.

In essence, section 9H of the Income Tax Act, 58 of 1962, determines that when a person ceases to be tax resident in South Africa, that person is deemed to have disposed of all his or her assets on the day that the individual emigrates for income tax purposes. In other words, in calculating their income tax exposure, individuals emigrating for tax purposes are regarded as having sold all of their assets at market value on the day before that on which they leave the country. As a result, a capital gain is realised on this deemed disposal that is subject to CGT at the prevailing tax rates. Currently, 40% of capital gains so realised by individuals are included in their annual taxable income, which amount may be subject to tax at rates of as high as 45%.

The policy justification for taxing individuals upon emigration is that taxes are to be levied on all capital growth achieved on assets owned by South African residents while they were tax resident. Once an individual will have emigrated, limited mechanisms would exist whereby capital gains may only be realised upon eventual actual sale of assets subsequently once the individuals are no longer tax resident in South Africa. (It is for this reason that South African immovable property is excluded from the “exit charges” regime; section 35A of the Income Tax Act provides for a withholding tax mechanism whereby CGT may be recovered from non-residents when they sell South African immovable property.)

While one may have sympathy for the policy justification for the levying of “exit charges”, it must be recognised that any deemed disposal of assets necessarily creates a cash flow conundrum for the individuals affected, quite often proving prohibitive for wealthy individuals seeking to emigrate. It is quite possible that assets of individuals emigrating may consist mainly of illiquid assets such as share investments. Upon emigration, these very assets may need to be actually disposed of in order to raise sufficient cash resources to be able to pay the resultant CGT that would have been payable on a deemed disposal of those assets at emigration.

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)

DO YOU NEED A TAX CLEARANCE CERTIFICATE?

B3Taxpayers may require SARS to issue them with a tax clearance certificate for various reasons. This includes a general confirmation that the relevant taxpayer’s affairs are all in order and up to date (a so-called “Good Standing” tax clearance certificate), or a certificate being required to participate in certain government tenders.

Perhaps most notably in recent times, natural person taxpayers are also requesting “FIA” tax clearance certificates, being tax clearance certificates issued to taxpayers who intend to utilise their R10m annual foreign investment allowances to transfer funds abroad for investment purposes. The South African Reserve Bank (through its authorised dealers (most commercial banks)) will not grant approval for transfer of funds in this manner without confirmation from SARS in the form of a FIA certificate being issued that the individual’s tax affairs are all up to date and in order.

Many do not realise that the issuing of tax clearance certificates is a process specifically regulated by the Tax Administration Act.[1] Any tax clearance certificate must be requested in the prescribed form and manner by a taxpayer or his/her representative.[2] A tax clearance certificate must be issued in the prescribed format and include at least the original date of issue of the tax compliance status confirmation to the taxpayer, the name, taxpayer number and ID number (or company registration number) of the taxpayer.[3]

After receipt of an application in the prescribed form, SARS must either issue or decline to issue the tax clearance certificate requested within 21 business days, or such longer period as may reasonably be required if a senior SARS official is satisfied that the confirmation of the taxpayer’s tax compliance status may prejudice the efficient and effective collection of revenue.[4]

In practice, SARS often takes well in excess of the 21 business days in which to issue tax clearance certificates, especially for purposes of Foreign Investment Allowance applications. In terms of the Tax Administration Act, SARS may not take longer than the 21 days to process such an application, unless there is some form of proof that tax collections may be jeopardised if the certificate is issued (and which will rarely be the case). Where such delays are experienced though, taxpayers are in practice left with very few remedies, which are conceivably limited to either approaching the Tax Ombud (whose recommendations are not binding), the Public Protector or the High Court for an order forcing SARS to make a decision on issuing a certificate. Most taxpayers will therefore, sadly, simply have to endure SARS’ delays in processing tax clearance certificate applications.

  • [1] Section 256 of the Tax Administration Act, 28 of 2011
  • [2] Section 256(1)
  • [3] Section 256(4)
  • [4] Section 256(2)

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)