Tax relief amid COVID-19

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While South Africa is currently in a state of lockdown during which a significant number of businesses have had to cease operations, some relief from a tax perspective has been announced by the government. Tax-compliant businesses with a turnover of less than R50 million will be allowed to defer (importantly, not have waived) 20% of their pay-as-you-earn liabilities over the next four months, and a portion of their provisional corporate income tax payments, without penalties or interest over the next six months.

There is, however, a legal and practical difficulty in the proposed relief.

Legal

While President Ramaphosa and his Cabinet have alluded to these relief mechanisms, they remain part of the Executive arm of Government. They cannot make law and amendments thereto; that is a function and privilege of the Legislature (Parliament). Without such relief mechanisms being legislated, SARS must impose penalties and interest on late- or short payments in line with existing legislation. It is highly unlikely that Parliament will be convened to make amendments to tax acts to accommodate for the relief. So, what can be done?

SARS can, through a so-called “practise generally prevailing” set-out their application of a tax act. Such a “practise generally prevailing” should be contained in an official SARS publication, which includes a Practise Note. It could, therefore, be considered that SARS issues a Practice Note to indicate how they will apply specific provisions which impose penalties and interest in certain instances. Although not yet tested in law, it is one of the options that could be considered to attach legal consequences to the relief mechanisms which have been proposed. It will be interesting to see what SARS decides to do in this case.

Practical

Persons who deal with compliance related matters will be well aware that penalties and interest are imposed automatically on statements of account when payments are submitted late, or short payments are made. Systems trigger these penalties and interest. Even though SARS’s eFiling system is one of the best electronic filing systems globally, it is unlikely that changes will be made thereto on such short notice.

Unless there is manual intervention from a SARS official, taxpayers who make use of the relief mechanisms, will automatically find themselves in a dispute process. Even though they are fully entitled to the relief (on the assumption that the relief gets properly legislated as indicated above), they will have to go through the process to have penalties and interest remitted.

We suggest, that before any of the relief mechanisms are utilised, taxpayers consult with advisors to ensure that firstly, the relief is legally available, and secondly, how they must manage the dispute process.

This article is a general information sheet and should not be used or relied on as legal or other 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)

When shares become assets

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Many business transactions are concluded in terms of section 42 of the Income Tax Act. The section essentially allows a transfer of an asset by a person to a company, in exchange for equity shares in that company, allowing for tax neutral transaction.The South African Revenue Service has recently issued Binding Private Ruling 339, relating to a transaction in which listed shares are transferred to a collective investment scheme (CIS) in exchange for participatory interests in a collective investment scheme. The parties to the transaction are a resident discretionary investment family trust (herein referred to as the Applicant), and a resident CIS as defined in the Collective Investment Schemes Control Act (herein referred to as the Fund).

The facts

The Applicant holds assets which comprise of fixed properties and listed shares (amongst other things) which are held as long-term investments. In this instance, the current market value of the shares exceeds the base cost. Some shares have been held by the Applicant for more than three years, and some for less than three years. The settlor (also a trustee of the Applicant) of the trust has been managing the investments of the trust, while the administration and stockbroking have been attended to by a separate wealth management company. It has been decided by the trustees to transfer the share portfolio to a CIS to be professionally managed and administered. For this to happen, the Applicant will enter into an agreement to transfer shares to the CIS fund in exchange for a participatory interest in this fund.

Ruling

SARS has confirmed that the transaction in this instance would qualify as an asset-for-share transaction as per the definition in Section 42(1) of the Income Tax Act. It was further confirmed that:

  • Shares held for longer than three years would be regarded as capital assets, and that upon transfer, the participatory interests received in exchange for the shares would be deemed to have been acquired on the dates that the listed shares were acquired.
  • There would be no capital gains tax consequences from the disposal of the listed shares as the Applicant would be deemed to have disposed of the shares for proceeds equal to the base cost, and similarly, to have acquired the participatory interests in the CIS on the dates that the initial shares were acquired, for the same expenditure incurred that is allowable.
  • There would be an exemption on Share Transfer Tax for the proposed transaction.

Observation

If one ignores the potential application of the general anti-avoidance rules which apply to all arrangements, it is unclear why the participants to this arrangement approached SARS for a ruling, since the technical analysis is rather straightforward.

There has recently been an increase in such straightforward rulings issued by SARS. In general (and not suggesting that the parties in this ruling did so) one gets the sense that parties approach SARS for a ruling to avoid any attack on a transaction. SARS is however well within its rights to attack a transaction on anti-avoidance, despite a ruling having been obtained. Parties should, therefore, guard against applying for ruling on seemingly straightforward technical grounds, to avoid any attach on anti-avoidance. Such a strategy may end up being unsuccessful.

This article is a general information sheet and should not be used or relied on as legal or other 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)

Provisional Tax and PAYE deferment and UIF/TERS relief available to you and your employees

Finance News

On 23 March 2020, President Ramaphosa announced certain tax relief measures to be made available to employers and employees to ease the financial strains which may be brought on by the Covid-19 virus and accompanying lockdown. These measures have been put to paper in the Draft Disaster Management Tax Relief Bill which was published by the National Treasury on 01 April 2020.

Following is a summary of the tax measures available with requirements setting out which employers and employees will qualify for these measures.

DEFERMENTS OF PAYE AND PROVISIONAL TAX PAYMENTS

There will also be relief in the form of deferments allowed on provisional tax and PAYE payments.

  1. Provisional tax
    The deferment of provisional tax payments will only apply to a Taxpayer if the Taxpayer is tax compliant and the gross income of the Taxpayer does not exceed R50 million annually. Furthermore, the Taxpayer’s year end must be between 01 October and 31 March. This relief is only applicable from 01 April 2020 up until and including 31 March 2021. The provisional taxes for both the first and second periods may be deferred. In terms of this relief, the Taxpayer is only required to pay 15% of its estimated taxable income in its first period and 65% of its taxable income in the second period. The remaining 20% may be paid as a third payment on or before the last business day of the sixth month after year end. These deferred payments will not be subject to penalties or interest. According to the explanatory notes on Covid-19 measures, measures in terms of individuals carrying on a business have yet to be finalised, but they may be eligible if their turnover is less than R5 million and 10 per cent or less of their turnover is derived from interest, local dividends, foreign dividends, rental from letting fixed property and any remuneration received from an employer.
  2. PAYE
    Employers will be able to defer their PAYE liabilities. Once again, the employer must be tax compliant. The relief will be available from 01 April 2020 up until 31 July 2020 and will only apply to small to medium sized businesses. An employer will be allowed to defer 20% of its PAYE liability for the months of April, May, June and July. Therefor you can defer from 7 May 2020. It is important to note that the employer will still need to pay the full amount of PAYE for the March period on 07 April 2020. The deferred amounts will be required to be paid in six equal monthly instalments, starting 7 September 2020. No penalties or interest will be levied on these deferred payments. It is important to note that understatements of PAYE within this relief period will lead to penalties and interest.

EMPLOYEE DRIVEN RELIEF MEASURES

The Unemployment Insurance Fund

R30 billion has been allocated to the National Disaster Benefit Fund, which will be utilized to pay qualifying Unemployment Insurance Fund (“UIF”) benefits for up to three months. In response to the Covid-19 pandemic, the UIF has two avenues through which to seek relief. The normal UIF benefits and TERS.

  1. Normal UIF benefits
    An employer may claim normal UIF in terms of “reduced or short time”, Illness benefits or Death Benefits. In order for the “reduced or short time” UIF benefits to be claimed, the following requirements must be met:
  • The company has ceased operations and closed or implemented reduced working hours;
  • Employees are being compensated partially according to hours worked;
  • The employer is registered for UIF.

If these requirements are met, benefits payable to the employee will be the difference between what the employer pays and normal UIF benefits payable. There will also be Illness Benefits available in terms of a quarantined employees and Death Benefits in terms of a deceased employees.

  1. TERS
    The Temporary Employer-Employee Relief Scheme (“TERS”) offers another avenue relief and the benefits in terms hereof are determined differently to normal UIF benefits. To qualify for TERS, the following requirements must be met:
  • The employer must be registered for UIF;
  • The employer must have ceased operations for three months or less;
  • Financial distress must have been suffered by the employer leaving it unable to compensate its employees;
  • An employee may only receive COVID-19 benefits in terms of TERS if the total of the benefit together with any additional payment by the employer in any period is not more than the remuneration that the employee would ordinarily have received for working during that period.
  • The latter three points must have been directly linked to the Covid-19 pandemic.

If this avenue is used, the employer cannot also claim normal UIF benefits. The benefit paid out by TERS will be capped at a maximum of R17,715 per month per employee and paid in terms of the income replacement sliding scale (38%-60%) as in the Unemployment Insurance Act 63 of 2001. TERS only applies to the cost of employee salaries during the closure of the business.

  1. The Employment Tax Incentive
    The Employment Tax Incentive (“ETI”) is an incentive aimed at encouraging employers to employ younger employees by providing certain rebates according to the number of qualifying employees which are employed. This measure will apply for the period 01 April 2020 to 31 July 2020. The employer must comply with the following requirements for application of relief
  • The employer must be a small and medium sized business;
  • The employer must be registered for PAYE as at 01 March 2020.

The table hereunder summarizes the additional relief made available during the qualifying period.

Requirement Usual ETI reimbursement Covid-19 additional relief
Employee age 18 – 29 18 – 65
Employee earnings R6,499 R6,499
ETI available in the first 12 months Maximum R1,000 Maximum R1,500
ETI available in the second 12 months Maximum R500 Maximum R1,000
Monthly claim Not available R500/month
After employee ETI has been exhausted No additional reimbursement available R500/month

Other measures worth mentioning

Additional to the discussed measures above, there are also measures being developed to support the informal sector and grants from the South African Social Security Agency (“SASSA”) are being paid out early. The banking sector has also been provided some relief, such as lower capital requirements. The Compensation Fund will also be compensating employees who have contracted Covid-19 in their workplace. Relief is also being supplied to small and medium sized enterprises, who can apply at The Department of Small Business Development for debt relief if they are in financial distress.

Don’t hesitate to contact Zuydam Konsult if you require assistance in any of the relief measures as discussed above.

 

Deemed Disposals and Tax Residency

Finance News , ,

Section 9H of the Income Tax Act deals with matters relating to the cessation of residency in South Africa.

This section essentially states that where a person that is a resident ceases to be a resident during any year of assessment, that person must be treated as having disposed of his assets on the date immediately prior to ceasing his residency, and re-acquiring the same assets on a date immediately thereafter. This is referred to as a “deemed disposal”. Similarly, the year of assessment will be deemed to have ended immediately prior to the cessation and to have started on the next day.

Such a “deemed disposal” does not relate to the immovable property that such a person may hold in South Africa.

As a result of his ceasing to be a South African tax resident (an event simply declared by ticking a box on the annual income tax return when submitted), a so-called “deemed disposal” (also sometimes referred to as an “exit charge”) will be activated in terms whereof all the individual’s assets will be deemed to have been disposed of, at market value, on the day before he ceased to be a South African tax resident.

This event, therefore, potentially gives rise to capital gains tax incurred on the deemed disposal. Excluded from this regime, as stated above, is South African immovable property, cash and (although not explicitly stated, though included on a very technical basis) accumulated retirement-related funds. Apart from these assets, all remaining South African and other worldwide assets are included in the “deemed disposal” regime.

Before a taxpayer decides on cessation of tax residency, an investigation should be done into possible tax treaty relief the individual may qualify for. SARS has stated that “an individual who is deemed to be exclusively a resident of another country for purposes of a tax treaty is excluded from the definition of “resident”. It follows that while an individual may qualify as a resident under the ordinarily resident or physical presence tests, that individual will not be regarded as a resident for South African tax purposes if that person is a resident of another country when applying for a tax treaty.”

Based on this, it is clear that section 9H of the Income Tax Act immediately becomes applicable to a taxpayer in the case of financial emigration or the cessation of tax residency, for whatever reason, and may increase tax liability in the current year of assessment in which the cessation of residency occurs. One must, however, always remember the exemptions described above, and in the event that emigration and/or ceasing to be a tax resident is considered, pre-emigration planning is of utmost importance to ensure that a smooth and fluid transition plan is formulated.

This article is a general information sheet and should not be used or relied on as legal or other 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)

You should get a financial advisor

Finance News , ,

It’s not to say you spend finances irresponsibly, but having a reputable financial advisor comes in handy. Depending on your financial needs, your advisor may be a financial or retirement planner, money manager or a wealth manager. Either way, getting assistance from those who specialise will help you get greater returns for the bucks you spend on their services.

They’ll help you strategise

Whether your financial objective is to donate to charity, leave a financial legacy for your offsprings, or minimise your tax burden and debt, financial advisors strategise and keep you informed on methods that will benefit you.

They’ll assess risks

Putting all your eggs in one basket? Risky. Each portfolio has expectations and having clarity on emotional and behavioural risks of these investments will help you plan ahead for tough times. Advisors will assess where investment risks lie and help you diversify your investments accordingly.

They can do more

If you get yourself an advisor who specialises in more than just financial opportunities, they will provide a scope of the whole financial market by taking a big-picture approach. Because your needs differ from the next person, your financial advisor will structure your financial priorities to suit you. They also search for opportunities across other areas that concern you, such as your estate, and plan your finances in a way that will give a greater positive impact on your portfolio.

If you’re interested in generating financial security and not sure how to go about it, start with contacting a financial firm. In the long run, the money you spend for advisory assistance will be far less than the money you could lose in a faulty investment due to having little information.

This article is a general information sheet and should not be used or relied on as legal or other 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)

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