Draft Tax Bills – What They Mean for You

Treasury on Wednesday published for public comment the 2021 draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, the 2021 draft Taxation Laws Amendment Bill and the 2021 draft Tax Administration Laws Amendment Bill. The Bills will be introduced in parliament later this year following the public comment phase. Several important proposals have been made relating to taxation of retirement funds at emigration, extension of learnerships and urban development zones, restricting set-off of assessed loss, anti-avoidance measures for trusts and corporates, among others.

Here are the key changes you need to be aware of:

Taxation of retirement funds at emigration

  • As anticipated following the budget speech delivered on 24 February earlier this year, the ongoing exchange control reform dealing with the retirement funds held by individuals has caused a proposed amendment whereby an individual emigrating from South Africa for tax purposes will be deemed to cash in or withdraw their retirement savings, giving rise to a tax cost. Up to now retirement funds, along with cash, and South African immovable property held would have fallen outside of the so-called “exit charge” levied when an individual ceases to be a South African tax resident. It is proposed for this exclusion of retirement funds to be altered and going forward for the tax cost in relation to the retirement fund to be calculated on the day before the individual ceases to be a South African tax resident. The tax cost itself will be deferred (with interest) until the funds are actually withdrawn and against which PAYE will then be automatically withheld by the retirement fund paying out those cash proceeds.

Extension of Learnership and UDZ allowances

  • A beneficial learnership allowance is currently provided for employers meeting the qualifying criteria in section 12H of the Income Tax Act when engaging in these agreements with junior employees. The incentive was due to expire on 1 April 2022, yet has now been extended for a further two-year period until 1 April 2024.
  • The urban development zone (“UDZ”) incentive was introduced in 2003 to provide for beneficial tax allowances for property investments  in certain central business districts of South Africa’s major cities. This has borne quite some success – notably in Cape Town’s CBD – wherein property developers were motivated through these tax allowances to invest in South Africa’s cities. The incentive, which lapsed effectively on 31 March 2021, has been extended for a further two-year period.

Restricting the set-off of balance of assessed losses in the determination of taxable income

  • For years of assessment commencing on or after 1 April 2022, if a company’s accumulated assessed loss balance exceeds 80 per cent of its taxable income, the company will be required to pay corporate income tax on 20 per cent of its current-year taxable income. The balance of assessed loss not utilised, can be carried forward to the next year of assessment. This amendment is in line with the 2020 Budget announcement and in line with global trends.

Anti-avoidance measures for loan transfers between trusts

  • Changes are proposed to ensure that the anti-avoidance measures of section 7C of the Income Tax Act also apply in respect of any loan, advance or credit that a trust, directly or indirectly provides to another trust in relation to which, its beneficiaries or the founder are connected persons in relation to the founder or beneficiaries of the trust that provided the loan, advance or credit. This proposed change significantly expands the scope of application of section 7C. The proposed amendment, if promulgated, will be effective from 28 July 2021.

Corporate roll-over transactions

  • Various changes are proposed to the corporate roll-over provisions in the income tax act with effect from 1 January 2022, including:
    • The introduction of anti-avoidance provisions relating to unbundling transactions;
    • The reversal of the application of the zero base cost anti-avoidance rule for loans in intra-group transactions; and
    • Refining the rules which trigger additional consideration for CGT purposes where debt has been assumed during asset-for-share transactions.

Curbing abuse in Employment Tax Incentive (“ETI”) schemes

  • Changes be made effective 1 March 2021 in the ETI Act to clarify that substance over legal form will be considered when assessing an employer’s ability to claim the ETI. As such, ‘work’ must actually be performed in terms of an employment contract and the employee must be documented in the employer’s records as envisaged in the record keeping provisions contained in the Basic Conditions of Employment Act.

VAT treatment of the temporary letting of immovable property

  • Changes have been made in the VAT Act effective 1 April 2022 by inserting a new section that will deal with the deemed change in use adjustment when  residential fixed property is leased for the first time. This includes whether that deemed change in use adjustment results in the residential fixed property exiting the VAT net or not and the subsequent deemed supply where the residential fixed property is sold. National Treasury argues that the new section will not prejudice property developers whose intention, with regard to the residential fixed property, was always that the residential fixed property is trading stock, intended for the making of taxable supplies in the course of such property developer’s enterprise activities.

“Contributed tax capital” returns

  • In terms of the proposed amendment to the Income Tax Act’s definition of “contributed tax capital” (“CTC”), the return of “CTC” (a tax notion broadly similar to share capital) can only be effected if all shareholders are going to participate in that CTC distribution. To date, distributions from companies could be determined to be “CTC” for one shareholder (in proportion to shareholding) and a “dividend” for another, giving rise to varying tax consequences for taxpayers.