Latest Tax Developments. February 2017

Transcription

1 Latest Tax Developments February 2017

2 Introduction Monthly webinar 2nd of 11 webinars Recent developments: This one February 2017; Cannot cover all developments in detail; Relevance of developments; Some will roll over to next month - time; If we missed something that you would like us to cover, please let us know for inclusion in next webinar.

3 Overview Practical issues; General developments; Dispute resolution; Case study; IT Whether the Appellant was entitled to an assessed loss, bad debt and other expenses to be deducted; Interpretation Note 65 (issue 3) trading stock inclusion in income when applied, distributed or disposed of otherwise than in the ordinary course of trade; Interpretation Note 11 (issue 4) Trading stock assets not used; Binding General Ruling 40 Remuneration Paid to Non-Executive Directors; Binding General Ruling 41 VAT treatment of Non-Executive Directors; Binding Private Ruling 262 Employer-provided transport service; Binding Private Ruling 259 capital gains tax implications for an employee share trust;

4 Overview Interpretation Note 16 (issue 2) exemption from income; Interpretation Note 54 deductions corrupt activities, fines and penalties; Tax Guide for Micro Businesses; ITC whether the taxpayer was entitled to condonation for the late filing of the objection; Binding Private Ruling 263 hybrid interest; Binding Private Ruling 260 interest on loans used to acquire shares; Binding Private Ruling 265 amalgamation transactions; and Topics not covered.

5 Practical Issues SARS has determined that, if you have income from one employer with no deductions and it falls under a certain threshold, you are not obligated to submit a tax return. The problem comes in when the taxpayer now sells their property (for example) and wants to invest the money. They then apply for a tax clearance certificate which gets rejected because SARS say there are outstanding tax returns.

6 General Developments ABC of capital gains tax for individuals (Issue 9); Draft Binding General Ruling on associations: funding requirement [comments due 3 March 2017]; Draft Binding General Ruling 9 (Issue 3) taxes on income and substantially similar taxes for purposes of South Africa s tax treaties; Draft Interpretation Note on the exemption from income derived by a person as an officer or crew member [comments due 28 April 2017]; Guide on the US Foreign Account Tax Compliance Act (Issue 2);

7 General Developments Binding General Ruling 39 VAT treatment of municipality affected by changes to municipal boundaries; Singapore DTA [date of entry into force is 16 December 2016]; Zimbabwe DTA [date of entry into force is 1 December 2016]; and Tax exemption guide for public benefit organisations in SA (issue 5).

8 Budget 2017 Tax increases were announced as follows: Introduction of top marginal tax rate of 45% on personal taxable income above R ; Increase in tax rate applicable to trusts (excluding special trusts) from 41% to 45%; In consequence of increased top marginal rate for individuals, effective CGT rate for natural persons increased from 16.4% to 18% and in the case of trusts other than special trusts from 32.8% to 36%. The effective CGT rate applicable to companies remains the same at 22.4%; Increase in dividends tax rate from 15% to 20%. Effective corporate tax rate is 42.4% from 1 March Foreign dividends that don t qualify for exemption will also now have an effective tax rate of 20%; and Withholding tax on non-residents disposing of immovable property is increased from 5% to 7.5% for foreign individuals, from 7.5% to 10% for foreign companies and from 10% to 15% for foreign trusts.

9 Budget 2017 Other tax changes proposed in the budget include: Expanding the VAT base to include VAT on fuel. This is in addition to the fuel levy; The section 10(1)(o)(ii) 183/60 day exemption for employment income to be amended to allow the exemption only where the employment income is taxed in the foreign country; The definition of resident to be amended for VAT purposes to address issues with VAT becoming a cost to certain non-resident companies effectively managed and controlled in South Africa; The VAT zero rating associated with international travel is expected to be changed; Currently VAT is imposed in South Africa upon the supply of certain electronic services and that cloud computing and services provided for by online applications also be subject to VAT; Services supplied relating to securities or shares in a foreign incorporated company listed on the JSE should be subject to zerorated VAT and accordingly changes to the VAT Act should occur to clarify the tax treatment of these services;

10 Budget 2017 Other tax changes proposed in the budget include (contd.): The section 7C amendment to prevent the use of low or non-interest bearing loans to trusts for the transfer of wealth is to include such loans as given to companies owed by a trust. Furthermore the provision will be extended to exclude trusts not used for estate planning and employee share trusts; Income Tax Act to allow individuals to elect to retire, and the date on which the lump sum benefit accrued to the individual depended on the date on which the individual elected to retire and not on the normal retirement age. Currently, once the individual elects to retire, the Income Tax Act does not cater for the transfer of lump sum benefits from one retirement fund to another. It is proposed that transfers of retirement interests be allowed from a retirement fund to a retirement annuity fund, subject to fund rules; The eligibility threshold for employer provided bursaries and scholarships is to increase from R per annum to R The monetary limits are proposed to increase from R to R for NQF7 and below and from R to R for NQF 7 and above;

11 Budget 2017 Other tax changes proposed in the budget include (contd.): Paragraph 12A of the Eighth Schedule (applicable on reduction of debt) does not currently apply to mining companies. This disparity will be addressed; The relief provided in paragraph 12A for dormant group companies or companies under business rescue should be extended to section 19; The practice of settling debt by a means other than cash, such as the conversion of debt into equity, is to be allowed. Provision will be made to recoup capitalised interest where an interest deduction was previously claimed; Specific countermeasures will be introduced to address share sales disguised as share buy backs; Short term shareholding structures aimed at circumventing debt reduction provisions are to be addressed; With a REIT s assets not qualifying as allowance assets in a reorganisation transaction, the legislation will be amended to provide for reorganisation transactions involving REITs;

12 Budget 2017 Other tax changes proposed in the budget include (contd.): Currently the qualifying purpose exemptions for third-party backed shares are too narrow. Provisions are to be further refined to cover all qualifying purposes; Refinements to the venture capital company regime, more specifically to investment returns and the qualifying company test; Large multinational companies will be required to submit country by country transfer pricing policies to SARS from 31 November 2017; Amendments to the Tax Administration Act to curtail inconsistencies arising out of the transitional rules for the calculation of interest on tax debts; Only the portion of travel expenses reimbursed by the employer exceeding the fixed distance or rate as determined, is to be regarded as remuneration for the purposes of determining employee s tax; The annual cap of R on contributions to pension, provident and retirement annuity funds be spread over the tax year for determining monthly employee s tax;

13 Budget 2017 Other tax changes proposed in the budget include (contd.): Clarification will be made that the chairperson of the Tax Board has the final decision as to whether or not an accountant or commercial member must form part of the constitution of the Tax Board; and All decisions by SARS not subject to objection and appeal are to be subject to the remedies under section 9 of the Tax Administration Act.

14 Dispute Resolution

15 CASE STUDY Summary of Issue Appellant rents out properties purchased using access bonds Interest payable is deductible expenditure in the production of income Appellant paid additional amounts into bonds. Appellant withdrew additional amounts and claimed interest as deductible. Issue of deductibility of interest in contention

16 CASE STUDY Argument - SARS Monies withdrawn not for business purposes No proof of production of income received Taxpayer failed to provide proof of entitlement to deductions Large amounts were withdrawn for personal use and only 8% of expenses should be allowed Interests incurred were not in the production of income as provided for in section 11 read with 23(g) of the ITA

17 CASE STUDY Argument - Taxpayer Appellant paid additional amounts above required amount Entitled to pay in extra and withdraw amounts Interest calculated on balance of principal debt not amounts withdrawn Withdrawals not from new interest account Interest is deductible

18 CASE STUDY Ruling Appellant did not create any new bonds Monies withdrawn are additional amounts All expenses attached to the performance of the business operations are deductible. Appeal upheld in favour of plaintiff SARS taken on appeal. Will SARS win? 3:2 split in favour of Taxpayer

19 M FAMILY TRUST V SARS: Judgment Date: 14 December 2016; Whether the Appellant was entitled to an assessed loss, bad debts and other expenses to be deducted

20 M FAMILY TRUST V SARS: Facts Prior to assessment M is shareholder in mining company X Trading Limited ( X ) M held 50% shares in X. In 2008 D Ltd obtains substantial shareholding in X though H (Pty) Share sale agreement concluded. 74% of M shareholders share sold to D Consideration = 26 million shares in D and 25 million options to acquire shares.

21 M FAMILY TRUST V SARS: Facts cont. M share (37%) = 13 Million D shares 12,5 Million options to purchase I (other share holder) and M invited to become directors of D and H. Transaction value for M: shares R Options R

22 M FAMILY TRUST V SARS: Facts cont. Later, M as director of D issued with further shares in September 2008 and in July 2009 November 2009 D takes over WW Ltd D shares amount to M holds 1mil shares and share options in D Trust acquired D shares and D options from M M and Trust conclude oral agreement in which M shares transferred against consideration of R M made a loan to the trust for that amount Loan agreement concluded in Nov 2012, effective date Nov 2009

23 M FAMILY TRUST V SARS: Facts cont. R = D shares R = D options 10 August 2010 Trust disposed of all shares on Australian open market at A$ 0,12 per share. R6,60 e.r. Same day D disposed on 1mil shares. Consideration = A$ Apportioned between M and Trust for trust and 1 mil for M D then resigns as director

24 M FAMILY TRUST V SARS: Facts cont. Total proceeds of sale transferred into Dutch Bank Account Trust portion thereof A$ (R ) Received by stock broker Account held in name of N Trading Ltd, two signatories on account. M and JK. M and JK must sign off on all transactions. JK and M own N Trading Ltd, a corporate entity

25 M FAMILY TRUST V SARS: Facts cont. Allegedly, A$ transferred with out M consent Should have been paid to trust M testified: Tried to have funds repatriated but could not secure signature of JK SARS evidence shows M signed funds over. N simply held funds for Trust. Court would not comment on embezzlement of funds. Court focused on application of para 35(3)(c) of Eighth Schedule applied to removal of funds from control of taxpayer

26 M FAMILY TRUST V SARS: Facts cont. Allegedly, A$ transferred with out M consent Should have been paid to trust M testified: Tried to have funds repatriated but could not secure signature of JK SARS evidence shows M signed funds over. N simply held funds for Trust. Court would not comment on embezzlement of funds. Court focused on application of para 35(3)(c) of Eighth Schedule applied to removal of funds from control of taxpayer Court determined that s 35(3) did not apply

27 M FAMILY TRUST V SARS: Should base costs of share options converted into shares be included in base costs of D Ltd shares or alternatively, allowed as a capital loss? M seeks to include share options as capital loss. Shares and options purchased for R Sold for R Capital loss R Para. 20(1)(c)(ix) of Eighth Schedule Base costs SARS argues cancellation of shares and that para. 18 applies. Court finds in favour of Appellant and share options included in base costs.

28 M FAMILY TRUST V SARS: Does an understatement penalty find application and in which category does alleged failure to declare fall? SARS issued understatement penalty of 75% - no reasonable grounds for position taken Now seeks 150% penalty intentional tax evasion Trial by ambush cannot be countenanced and SARS not entitled to increase penalty without due notice.

29 M FAMILY TRUST V SARS: Does an understatement penalty find application and in which category does alleged failure to declare fall? Cont- s of TAA circumstances justifying understatement penalty imposition Prejudice to fiscus in following respects: Including total amount of alleged embezzlement as bad debt Forfeiture of options on tax return. M testifies that never intention to evade tax Relied on accountant Accountant was under pressure and errors were made. Submitted returns and hoped for the best.

30 M FAMILY TRUST V SARS: Does an understatement penalty find application and in which category does alleged failure to declare fall? Cont- Both M and accountant allege bona fide errors Court finds no intentional tax evasion occurred but tax payer failed to take reasonable care and thus is liable for a penalty of 50%. Court refers matter back to SARS for reassessment. No costs order.

31 IN 65 Trading Stock Inclusion in Income When Applied, Distributed or Disposed of Otherwise than in the Ordinary Course of Trade Issue date: 06 February 2017 Section 22(8). Purpose This Note provides guidance on the application and interpretation of section 22(8) which deems an amount to be included in income when trading stock is applied, distributed or disposed of in specified circumstances, otherwise than by sale at market value in the ordinary course of trade. Change from Issue 2 to Issue 3 The only change was an example was added.

32 IN 65 Trading Stock Inclusion in Income When Applied, Distributed or Disposed of Otherwise than in the Ordinary Course of Trade Recap of Interpretation Note The cost of acquisition of trading stock should in principle not be deductible if it is withdrawn for private consumption; donated; sold otherwise than in the ordinary course of the taxpayer s trade for less than its market value; or distributed in specie to a holder of shares. A deduction results from these events because there would be no inclusion in income of closing stock while the cost price would have been allowed as a deduction. Section 22(8) accordingly provides for a deemed inclusion in the taxpayer s income. The amount of the inclusion (for example, at cost, written-down value or market value) will depend on the manner in which the trading stock has been applied, distributed or disposed of.

33 IN 65 Trading Stock Inclusion in Income When Applied, Distributed or Disposed of Otherwise than in the Ordinary Course of Trade Recap of Interpretation Note (cont.) The amount to be included in income is, in the case of trading stock applied for private or domestic use or consumption, its cost price or written-down value, or if the cost price cannot be determined, the market value; donated to an approved public benefit organisation or other qualifying entity referred to in section 18A, the value taken into account under section 22; or in any other case, the market value. Consideration received for trading stock which is less than its market value is excluded from section 22(8) because the amount would already be included in gross income.

34 IN 11 Trading Stock Not Used Issue date: 06 February 2017 Sections 19 and par. 2A of the 8th Schedule. Purpose This Note provides guidance on the application and interpretation of paragraph (ja) and its interaction with other provisions of the Act. Change from Issue 3 to Issue 4 The only change was to reference the 8th Schedule to the Income Tax Act. Recap of the Interpretation Note Taxpayers sometimes manufacture capital assets for use in their businesses which are similar to the trading stock which they manufacture for resale. The treatment of the amount received or accrued on disposal of such manufactured capital assets was the subject of a dispute between SARS and the taxpayer in C: SARS v Volkswagen of South Africa (Pty) Ltd.

35 IN 11 Trading Stock Not Used Recap of the Interpretation Note (cont.) The taxpayer manufactured motor vehicles for sale to the public but also manufactured vehicles for its own use which it used for some time and then sold. SARS argued that the proceeds on disposal of the latter vehicles was of a revenue nature. However, the court disagreed, holding that the amount derived from the disposal of these vehicles was of a capital nature. As a result of the decision in the Volkswagen case, paragraph (ja) was inserted into the definition of gross income. The effect of this deemed inclusion in gross income means that despite the amounts derived from the disposal of such assets being of a capital nature, they are deemed to be gross income and the assets remain trading stock until disposed of. On the other hand if the assets were initially acquired as trading stock and subsequently used as capital assets, the taxpayer must include the market value of the assets in income under section 22(8)(b)(v) while the base cost of the assets will be equal to the amount so included in income under paragraph 12(3) of the Eighth Schedule.

36 IN 11 Trading Stock Not Used Interaction between par (ja) and section 22 Under section 22(1) a taxpayer must include in closing stock the amount of any par. (ja) assets held and not disposed of at the end of the year of assessment because such assets comprise trading stock. Section 22(1) details the method by which trading stock must be valued at the end of the year of assessment for the purpose of determining the taxable income of the taxpayer. For accounting and taxation purposes, trading stock must always be valued at the lower of cost or net realisable value. Disposals at less than market value When a par. (ja) asset is sold for less than their market value, the actual consideration is taxed under par. (ja) while the difference between market value and the actual consideration will be included in the income of the taxpayer under section 22(8)(b)(ii).

37 IN 11 Trading Stock Not Used Deduction Cost of manufacture A deduction for the expenditure incurred in manufacturing a par. (ja) asset must be considered under section 11(a) read with section 23(g). Its cost would normally be capitalised for tax and accounting purposes because it constitutes expenditure incurred with the intention of creating a capital asset. However, since the amount received or accrued on disposal of such an asset constitutes gross income and the asset constitutes trading stock, it will be accepted that the cost, determined on the same basis as for other similar trading stock items, allocated to the asset concerned will not constitute expenditure of a capital nature for purposes of section 11(a). This treatment is subject to the condition that the general requirements of the relevant sections have been met and that the transactions would not constitute an impermissible tax avoidance arrangement under section 80A to 80L.

38 IN 11 Trading Stock Not Used Deduction Cost of manufacture (cont.) The manufacturing costs of paragraph (ja) assets manufactured and disposed of in the same year of assessment, will be deductible in full under section 11(a); and in different years of assessment, will be subject to section 22. It follows that since sections 11(a) and 22 apply to paragraph (ja) assets, no allowance may be claimed under other sections for example section 11(e) (wear and tear), 11(o) (scrapping allowance) or 12C (the 40/20/20/20 allowance).

39 Binding General Ruling 40: Remuneration Paid to Non-Executive Directors Issue: Whether amounts paid to non-executive directors (NED) are remuneration and whether employees tax should be levied thereon accordingly. NED s are not common law employees. Only way that NED will be subject to employees tax is if statutory tests apply 2 requirements premises test services performed mainly at premises of client (mainly means more than 50%). control/supervision test control or supervision exercised over manner in which duties performed / hours of work. If both tests are satisfied à will be deemed to be carrying on dependent trade and will receive remuneration for employees tax purposes.

40 Binding General Ruling 40: Remuneration Paid to Non-Executive Directors Note: mere fact that NED spends time preparing for board meeting and is paid an hourly rate for each meeting à not indicate a form of control/ supervision over hours of the NED. If NED receives remuneration, section 23(m) will prohibit certain deductions. Ruling: NED not common law employee and no control or supervision exercised over NED s manner of duties/ hours worked. Therefore NED does not earn remuneration and no employees tax deductible. No prohibition under section 23(m) ito claiming deductions. BGR40 doesn t apply to non-resident NEDs and applicable w.e.f. 1 June 2017.

41 Binding General Ruling 41: VAT Treatment of Non-Executive Directors Issue: Whether term enterprise extends to non-executive directors (NED). VAT treatment of employees and independent contractors dealt with in proviso (iii) of definition of enterprise in section 1(1) of VAT Act. This definition envisages: An employee employed under an employment contract - i.e. common law employee (proviso (iii)(aa)). Cannot qualify as enterprise activity and therefore cannot register or charge VAT on salary received. An independent contractor under contract for services (proviso (iii)(bb)) liable to register and charge VAT on enterprise activities carried on independently. NED not common law employee.

42 Binding General Ruling 41: VAT Treatment of Non-Executive Directors For VAT purposes, NED to be treated as independent contractor contemplated in proviso (iii)(bb). Therefore NED to register and charge VAT iro any director s fees earned for services rendered as NED if value of such fees exceed VAT registration threshold of R1mil in any consecutive 12 month period. This rule applies whether NED ordinarily resident of RSA or not. NED can also voluntarily choose to register for VAT even if doesn t exceed VAT registration threshold. BGR41 applies w.e.f. 1 June 2017.

43 Binding Private Ruling 262 Issued 30 January 2017 Ruling is valid for 5 years from 16 January 2017 Deals with Employer-Provided Transport Service It covers paragraphs 2(e) and 10(1)(b) and (2)(b) of the seventh schedule The ruling is to determine the taxable fringe benefit value that will be granted by an employer to its employees by providing a transport service. The Applicant is the employer and a company incorporated and resident in South Africa The employees are the second party in the ruling

44 Binding Private Ruling 262 Cont. The Applicant want to provide a transport scheme for employees to travel to and from work efficiently. The nature of the business is such that public transport is not available when the employees start or end their working day. There are two types of transport concepts, namely a shuttle service and a direct service. The shuttle service will operate between the nearest public transport interchange and the business unit The direct service is dedicated to transport to a specific place within a residential area to serve as a central collection point.

45 Binding Private Ruling 262 Cont. Routes are structured in a circular format Applicant will make use of independent shuttle companies The shuttle companies will invoice the Applicant at regular intervals. The employees will not be required to pay any consideration for the services to be provided.

46 Binding Private Ruling 262 Cont. Ruling No value will be placed on the taxable benefit to be granted by the Applicant to its employees by rendering a transport service to them.

47 Binding Private Ruling 259 Issued 18 January 2017 Ruling is valid for 5 years from 19 October 2016 Deals with Capital Gains Tax Implications for an employee share trust It covers Section 8C and paragraphs 20(1)(h)(i), 35, 38 and 80 of the eight schedule The ruling is to determine tax consequences for an employee share trust on the vesting of shares in the employees

48 Binding Private Ruling 259 Cont. Parties to the proposed transaction The Applicant is a public company incorporated and resident in South Africa Employer Companies are private companies incorporated and resident in South Africa and are subsidiaries of the Applicant An employee share ownership trust that is established in and resident of South Africa Qualifying employees of the Applicant who are also residents of South Africa

49 Binding Private Ruling 259 Cont. The Applicant s commitment to BEE results in attracting and retain black employees. Eligible employees will obtain equity shares in the Applicant. The Applicant will implement the share plan for eligible employees and through recommendation to the board of directors be incentivised through the plan The eligible employees will not be required to make contributions to participate in the plan.

50 Binding Private Ruling 259 Cont. Steps for implementing the plan will be as follows: Share in the Applicant will be issued to the trust. Employer Companies will settle subscription consideration for the shares in the applicant issued to the Trust in cash, equal to market value/ left outstanding on loan account Eligible Employees will receive participation interests in the Trust. interests will confer vested rights to the Trust income (i.e. units) over a five year period, the underlying group shares and voting rights.

51 Binding Private Ruling 259 Cont. Ruling The Trust will not realise a capital gain or loss on the disposal of the group shares when those shares vest in the eligible employees.

52 Interpretation Note 16 (Issue 2) Section 10(1)(o)(ii) Income Tax Act No. 58 of 1962 Issue date: 2 February 2017 Exemption from income tax: Foreign Employment Income Issue 1 of Interpretation note 16 was issued 27 March 2003 Apportionment of remuneration where income is earned both in and outside RSA is better explained. An employment relationship must exist by means of an employment contract. Independent contractors or self-employed person as well as directors earning director s fees do not qualify. The meaning of 12-month period is extended to 365 day period.

53 Draft IN 16 (Issue 2) Cont. Only remuneration derived outside the Republic which includes the RSA territorial waters. See definition of Republic under section 1(1) Calendar days must be looked at to determine the 183 days, not just working days. Definition of calendar month changed according to Subbulutchmi v Minister of Police and Another Public office holders and services rendered on behalf of an employer under section 9(2)(h) Gains under Section 8C are also included in the guide Work days are used to calculate the apportionment of the 8C exemption.

54 Interpretation Note 54 Deals with deductions under Section 23(o)(i) and (ii) [deductions iro corrupt activities, fines and penalties]. Section 23(o) of the IT Act prohibits deduction, for income tax purposes, of expenditure incurred in respect of: Corruption or corrupt activity, contemplated in Chapter 2 of Prevention and Combating of Corrupt Activities Act ( PCCAA ) [scenario A]; or A fine or penalty imposed as a result of an unlawful activity [scenario B]. Scenario A: Corrupt Activities Includes: Someone who is an accessory to corruption/ corrupt activity; and An attempt/ conspiracy to commit offence or inducing another person to commit corruption.

55 Interpretation Note 54 Scenario A: Corrupt Activities contd. Section 23(o)(i) does not require that there be a criminal conviction in court before the section kicks in; Therefore, any payment that constitutes an activity into Chapter 2 of the PCCAA will be denied as a deduction for income tax purposes. Scenario B: Fines and Penalties Section 23(o)(i) prohibits deduction of fine/ penalty as a result of an unlawful activity carried out in RSA / other country (if that activity would be unlawful had it been carried out in RSA). Fine = financial penalty imposed for a crime committed. Penalty = some form of sanction declared or operating by order of a court of law

56 Interpretation Note 54 Scenario B: Fines and Penalties Contd. Fines or penalties in the context of tax include: Par 5(5), 4th Schedule to the IT Act where employer fails to deduct/withhold correct amount of employees tax; and Sections 234 and 235 of the TAA lists offences which courts could impose criminal penalties. Penalties falling outside section 23(o) If a penalty is not unlawful may therefore still qualify for deduction if requirements of sections 11(a) and 23(g) are met. Example: penalty imposed in a building contract where work is not completed by a certain date such penalty is not as a result of unlawful conduct. Such penalty may still qualify for deduction into section 11(a).

57 Tax Guide for Micro Businesses: 2016/17 Background Micro business = an entity with qualifying turnover that doesn t exceed R1 million for a YOA; and Not specifically disqualified from registering as a micro business. Benefit of being micro business? A single tax (turnover tax) is paid instead of normal tax, CGT and dividends tax. Bi-annual payments for employees tax, SDL, UIF and VAT. Turnover Tax If natural person/ company with qualifying turnover that doesn t exceed R1mil is registered as micro business à liable for turnover tax.

58 Tax Guide for Micro Businesses: 2016/17 Turnover Tax contd. Qualifying turnover Qualifying turnover = total receipts from business activities (excluding capital receipts and receipts from small business funding entity that are exempt from income tax / exempt government grants) Persons who do not qualify as micro businesses If any shares/interest in the equity of a company are held à do not qualify certain exceptions exist, for example, if shares/ interests are:» In companies listed on SA exchange; in collective investment schemes; in body corporates; in venture capital companies; less than 5% in social co-operatives/ co-operative burial societies; in friendly societies; in any company that takes steps to liquidate/deregister/wind up. If natural person is partner in any other partnership.

59 Tax Guide for Micro Businesses: 2016/17 Turnover Tax contd. Persons who do not qualify as micro businesses contd. If investment income and professional services exceed 20% of total receipts of the business. If proceeds from sale of capital assets used mainly for business purposes exceed R1,5 million over a three-year period. Immovable property will be regarded as being used mainly for business purposes if more than 50% of its total floor area is used for business purposes. Other assets will be regarded as being used mainly for business purposes if its used more than 50% of the time for business purposes. Only companies with a February year-end qualify. If any partners, members or shareholders of a company are not natural persons during a YOA.

60 Tax Guide for Micro Businesses: 2016/17 Turnover Tax contd. Persons who do not qualify as micro businesses contd. Labour brokers who do not have tax exemption certificate are disqualified. All personal service providers (= company/ trust whose services are rendered to a client by a connected person) are disqualified. Iro company, PBOs (approved by SARS under sec 30), recreational clubs (approved under sec 30A), associations (approved under sec 30B) and small business funding entities (approved under sec 30C) are disqualified. Taxable turnover Turnover tax imposed on taxable turnover of registered micro business. Taxable turnover = receipts (excl. capital receipts) by micro business for carrying on business activities in RSA less any amounts refunded for goods/services supplied by micro business.

61 Tax Guide for Micro Businesses: 2016/17 Turnover Tax contd. Taxable turnover contd. Therefore amounts that accrue to micro business and that have not as yet been received are not included in taxable turnover for YOA. If micro business is VAT vendor, VAT charged on supply of goods/services must be included in its qualifying turnover. Specific inclusions in taxable turnover 50% of all capital receipts from disposal of immovable property/ other asset used mainly for business purposes; and Investment income (excl dividends) received by company. Specific exclusions from taxable turnover Investment income received by natural persons.

62 Tax Guide for Micro Businesses: 2016/17 Turnover Tax contd. Taxable turnover contd. Specific exclusions from taxable turnover contd. Exempt amounts received/accrued from small business funding entity. Exempt government grants. Any amounts which accrued to micro business before micro business was registered for turnover tax. Any refund received for goods/services supplied to micro business. Turnover tax administration Registration: before 1 March or within 2 months of commencing with business activities.

63 AB CC V C:SARS (ITC 13635) Concerns appeal to Tax Court (TC) following SARS decision not to condone late filing of objection by taxpayer. Background SARS issued assessment wrt PAYE on 18 September NOO filed on 7 March 2013 later than 30 days from date of assessment. Notice of Invalid Objection issued by SARS on 28 March 2013 as objection no lodged within timeframes and no reasonable grounds for delay provided. Therefore, issue before TC is whether SARS should have condoned late filing of objection.

64 AB CC V C:SARS (ITC 13635) Taxpayer s Case That exceptional circumstances exist which gave rise to delay, due to: Taxpayer s auditor s only received notice of assessment dated 18 September 2012 on 4 December 2012; Thereafter auditor s asked SARS for information. 4 witnesses called: Witness 1 (hosted auditor s servers) testified that address upgraded. New address not working when SARS sent and audit firm not aware that address not working yet. Court indicated that witness 1 s testimony was credible and that events were reasonably probably true that witness 2 didn t receive SARS .

65 AB CC V C:SARS (ITC 13635) Taxpayer s Case 4 witnesses called contd.: Witness 2 (manager from audit firm) by end September 2012, he moved to different department and no longer handling taxpayer s account. Witness 2 didn t receive SARS for reason explained by Witness 1. Became aware of letter of assessment in November 2012 but didn t inform colleague (witness 3) who was handling the matter. Witness 3 (team leader from audit firm) handling taxpayer s account. Indicated he met with SARS on 5 December 2012 to discuss STC objection. However, he only became aware of the PAYE (current dispute) assessment on 8 December He then sought information from SARS to prepare the PAYE objection (as IRP5 still outstanding) - He sent an to SARS on 12 November 2012 asking to add casual workers and to therefore resubmit the EMP501s). Testified that believed that matter still ongoing as he requested info from SARS. Court indicated that info requested from SARS related to VAT and STC (irrelevant to PAYE and current dispute) this also didn t stop him from submitting objection in December 2012 at least. Not done because went on holiday.

66 AB CC V C:SARS (ITC 13635) Taxpayer s Case 4 witnesses called contd.: Witness 3 (team leader from audit firm) contd. Court indicated that a diligent person would ve applied for extension to file the objection. Witness 3 also sent on 20 February 2013 indicating intention to object which was baseless procedure and caused unreasonable delay. Witness 4 (member of taxpayer) testified that postal addresses on the EMP501 return and PAYE assessment were correct. Court indicated that assessment advised taxpayer of the requirement to lodge valid objection. Despite this, Witness 4 did not object or apply for an extension SARS s Case Only called 1 witness (employed by company that handles SARS s mailing system). Testified that assessments dispatched on 22 September 2012.

67 AB CC V C:SARS (ITC 13635) Court s Ruling Witness 4 (member of the taxpayer) confirmed receipt of assessment in 2012 and therefore, SARS s witness is to be believed. What happened after witness 4 received assessment is between witness 4 and the taxpayer s auditing firm. Section 153(3) of TAA indicates that use of tax practitioner does not absolve the taxpayer from any liability, responsibility or duty imposed under a tax Act by reason of the fact that the taxpayer s representative failed to perform his/her responsibilities or duties. Therefore, taxpayer failed in proving existence of exceptional circumstances that gave rise to delay in lodging objection. SARS s decision not to condone late objection is correct therefore appeal dismissed.

68 BPR 263 Hybrid Interest Issue date: 01 February Sections of the Act Sections 8FA, 10(1)(k)(i) read with par. (hh) of the provisio thereto, 24J(1) Definition of interest, 24JB(2)(b), 64D, 64E, 64EA, 64F and 64FA Summary This ruling determines the income tax consequences of the entitlement to and the payment of a share in the profit of the Co-Applicant to the Applicant in the context of a funding arrangement, as well as the recharacterisation rules contained in section 8FA

69 BPR 263 Hybrid Interest Parties to the transaction The Applicant: A public company inc. in and a resident of SA. The Co-Applicant: A private company inc. in and a resident of SA Description of the proposed transaction The Applicant conducts business as an investment bank. As part of the Applicant's normal business operations, it grants credit facilities and advances loans to its clients. The Co-Applicant is a client of the Applicant and the owner-developer of a shopping centre. The Applicant concluded two interest-bearing loan agreements with the Co- Applicant; a senior loan facility and a mezzanine loan facility. As consideration for making available the funding in terms of these loan agreements, the Applicant, the Co-Applicant and the Co-Applicant s shareholder concluded a profit sharing agreement.

70 BPR 263 Hybrid Interest Description of the proposed transaction (cont.) In terms of the profit sharing agreement the Applicant will be paid a share of the profit that is to be realised in the event of, amongst other things, the sale of the immovable property or the sale of the shares in the CoApplicant (expressed in the profit sharing agreement as a specific rand amount). The proposed transaction is the imminent sale of all of the shares in the Co- Applicant to a REIT. The amount of the profit share, to which the Applicant will become entitled to upon the execution of the proposed transaction, is the result of negotiation between the parties at the time of the conclusion of the profit sharing agreement and is influenced by the expected future fair value of the property as well as the Applicant s expected return on the funding provided.

71 BPR 263 Hybrid Interest Ruling a) The profit share constitutes interest as defined in section 24J(1) for the Applicant and the Co-Applicant. b) The profit share constitutes hybrid interest for purposes of section 8FA, with the following consequences under section 8FA(2): i) This amount is deemed to be a dividend in specie that is declared and paid by the Co-Applicant to the Applicant, during which this amount is incurred by the Co-Applicant. ii) This deemed dividend in specie is not deductible by the CoApplicant. iii) This amount is deemed to be a dividend in specie that is declared and paid to the Applicant, during which this amount accrues to the Applicant. The profit share will constitute a dividend for purposes of section 24JB and will be excluded, as a result, under section 24JB(2)(b). Paragraph (hh) of the proviso to section 10(1)(k)(i) will not apply to the profit share that is deemed to be a dividend in specie, received by the Applicant and will be exempt from normal tax under section 10(1)(k)(i).

72 BPR 263 Hybrid Interest Ruling (cont.) The dividend in specie will be exempt from dividends tax under section 64F, read with section 64FA, if the necessary declaration and undertaking are submitted to the Co-Applicant. Period for which this ruling is valid This binding private ruling is valid for a period of three years from 6 December 2016.

73 BINDING PRIVATE RULING 260 Ruling to determine the continuing deductibility of interest on loans used to acquire shares in companies that will be liquidated following the distribution to the borrower as a dividend in specie of the businesses operated by those companies

74 BINDING PRIVATE RULING 260 Law Considered ITA: Section 23(f), (g), 24J Eighth Schedule

75 BINDING PRIVATE RULING 260 Facts Four parties: Applicant Company A Company B Company C

76 BINDING PRIVATE RULING 260 Facts Applicant is main trading subsidiary within a group of listed companies. Applicant has always sought to make new acquisitions by buying assets and businesses from companies. On occasion, Applicant had to buy shares instead of assets and businesses (price settled out of cash reserves of Applicant). In such cases, Applicant immediately took steps to procure distribution of the assets as a liquidation distribution under section 47 of ITA.

77 BINDING PRIVATE RULING 260 Facts For the acquisition of Shares in Company A and B, Applicant incurs debt to fund. Applicant relies on 24O to claim deduction for interest arising on debt used to finance share cost. Company B is solely a holding company of Company C (Company C is an operating company) Applicant wants to cause distribution to occur under section 47 and which entails elimination of Company A and B. Applicant wishes to know if interest still deductible despite elimination of the companies.

78 BINDING PRIVATE RULING 260 Proposed Transaction Company B will unbundle shares in Company C to Applicant under section 46 of the Act. Liquidation distributions by Company A and C will be effected as in s 47. Applicant A B C

79 BINDING PRIVATE RULING 260 Ruling Interest incurred on the loans owing by the Applicant which were obtained to fund acquisition of shares in Company A and B will continue to be deductible (most likely under section 24J rather than in terms of section 24O as elimination of companies will cause 24O to stop applying). Interest will not be disallowed as a deduction under 23(f) and (g)

80 BINDING PRIVATE RULING 265 This ruling determines the tax consequences for a company that intends to dispose of its assets in terms of an amalgamation transaction as defined in section 44(1). The company holds loans and preference shares in the company that will acquire the assets

81 BINDING PRIVATE RULING 265 Law Considered ITA: section 19 section 44 paragraph 12A of the Eight Schedule

82 BINDING PRIVATE RULING 265 Facts Four Parties: Applicant: Private company resident and incorporated in SA Co Applicant: Company resident and incorporated in SA Company A: Company effectively managed outside SA, sole shareholder of the Applicant and majority shareholder of Co-Applicant Company B: Dormant Company incorporated and resident in SA

83 BINDING PRIVATE RULING 265 Description of Proposed Transaction Applicant sold business to Co-Applicant as intra-group transaction. Purchase price settled by way of cash payment, redeemable preference shares and creation of interest bearing loan in favour of the Applicant. Applicants only assets are: Loans to group companies (incl Co-Applicant) Preference shares held in Co-Applicant Shares in Company B which have value of nil.

84 BINDING PRIVATE RULING 265 Description of Proposed Transaction Applicant has no liabilities Later, interest bearing loan settled partially with proceeds from preference share issue. Interest payable not being serviced Results in Co-Applicant making a loss. Co-Applicant wishes to better financial position. Co-Applicant and Applicant to be amalgamated

85 BINDING PRIVATE RULING 265 Description of Proposed Transaction Applicant will dispose of all its assets to the Co-Applicant. Capital assets to be acquired as capital assets. Co-Applicant will issue ordinary shares to Applicant with a value equal to face value of loan and market value of preference shares. Applicant will distribute ordinary shares to be obtained in Co-Applicant to Company A. Enables disposal of all assets. Applicant will then take steps prescribed in section 44(13)(a) to liquidate 36 months after amalgamation.

86 BINDING PRIVATE RULING 265 Ruling Proposed Transaction will comply with para (a) of definition of amalgamation of transaction (s 44(1)) Section 44(2) will apply. Applicant deemed to have disposed of assets for amounts equal to base costs. Applicant and Co-Applicant deemed to be same entity for purposes of CGT and determination of base costs. No reduction amount as defined in section 19(1) and paragraph 12A(1) will result from proposed transaction.

87 Not covered Draft Binding General Ruling on treatment of transport, insurance and handling expenses; and Binding Private Ruling Acquisition of a business in exchange for the assumption of liabilities and the issuing of a loan note. Binding Private Ruling (BPR) 257 Islamic financing arrangement. Binding General Ruling 29

88 Thank you Thank you for listening; and Thanks to my technical team. Tax Consulting South Africa Nico Theron