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)

SO WHAT IS THE FUTURE OF TRUSTS?

One of the questions that we are most confronted with by our clients is what the future of trusts are in South Africa.  Some questions even point to the misconception that the trust instrument itself as legal form is on the verge of being scrapped in South Africa altogether!

The current debate raging is not at all that dramatic, although the consequences for taxpayers potentially may be.  The “crystal ball” gazing exercise which we are so often requested to undertake stems from repeated warnings (some less subtle than other) by the Minister of Finance that the use of trusts as a tool to minimise tax exposure, be it in the form of income tax or estate duty, is being revisited by National Treasury to try and find a solution to the perceived abuse thereof.  As recently as in the 2016 budget, the following statement is made:

“Some taxpayers use trusts to avoid paying estate duty and donations tax. For example, if the founder of a trust sells his or her assets to the trust, and grants the trust an interest-free loan as payment, donations tax is not triggered and the assets are not included in his or her estate at death. To limit taxpayers’ ability to transfer wealth without being taxed, government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder at death, and to categorise interest-free loans to trusts as donations. Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered.”

This alludes both to how trusts are commonly used to minimise tax obligations, as well as how Treasury intends to (what could be considered a more focused) approach to trusts in future, while also hinting at what may be expected going forward.

As a first comment, trusts are popular estate duty planning instruments.  Without going into too much detail, typically an individual will sell his/her assets to a trust on interest free loan account.  In the coming years, the value of the assets will increase in the trust, while the value of the loan account will remain the same in the hands of the individual.

Secondly, trusts are potentially useful for income tax planning purposes as they allow for income to be distributed to individuals that are subject to tax at rates more beneficial than that of the trust (which involves ‘income-splitting’ referred to by Treasury above).  Typically these distributions often contains a fictitious element through distributions made on interest free loan account only (with no real intention that such distributions should vest in the beneficiaries).

It would appear as though Treasury is no longer considering an ‘out-and-out’ onslaught on the taxation of trusts (although this is only speculation).  However, the recent budget perhaps betrays what may be expected and that anti-avoidance legislation is to be introduced that will focus only on abusive practices involving trusts.  For both estate duty and income tax structures involving trusts, it is not farfetched to expect to see provisions introduced into tax legislation which will ensure that loan accounts with trusts all bear interest.  The significance of this?  Interest receipts are subject to income tax.

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)