What will the 2018 Budget Speech mean for your business? Our experts share their insights. Join the conversation on Twitter #SABudget2018.
Amendments to debt relief rules:
Taxpayers recently noted that the new debt relief rules introduced during 2017 result in adverse income tax implications.
For example, where a taxpayer raises additional share capital and applies the funding so obtained to settle debt, such settlement of debt could result in an increased tax bill if the debt so settled is not with a South African tax resident group company. This is specifically the case where a South African taxpayer wishes to settle debt with an offshore holding company or treasury company. In such a case, the taxpayer would be required to obtain external/third party funding to settle the debt if it does not want to fall foul of the current debt relief rules. In addition, any amendment to the terms of certain loans may also trigger adverse tax consequences.
The Minister of Finance announced that the Government noted concerns about unintended consequences that may arise from the current debt relief rules and it is proposed that further amendments be made to address these concerns. Although it is uncertain which concerns the Minister referred to, a review of the debt relief rules would be welcomed by business as the legitimate restructure of debt may presently result in adverse income tax consequences which may impede business growth.
Tax rules affecting short-term insurers:
The much anticipated new Insurance Act (2017) permits foreign re-insurers to conduct reinsurance business in South Africa through a branch of an offshore company. A number of offshore insurance companies are considering opening up operations in South Africa under this new rule.
However, the income tax treatment of such branches appeared to be a draw back as the Income Tax Act provisions regulating the taxation of short-term insurance apply only to short-term insurers resident in South Africa and not to foreign short-term insurers operating through a branch. This would result in an uneven playing field as South African insurers are allowed certain tax allowances in respect of technical insurance reserves which would not be available to the foreign insurers.
It has nevertheless been announced that the income tax provisions applying to South African resident short-term insurance companies will be extended to apply to non-residents operating short-term insurance business through branches in South Africa. This announcement will create clarity with regard to the tax position of foreign reinsurers wishing to operate through branches in South Africa.
It is not clear though whether the announcement in this regard would also extend to controlled foreign companies (so-called CFCs) of a South African resident who operate as licensed short-term insurers in their country of tax residency. At present, the legislation with regard to the income tax treatment of licensed short-term CFCs seem to have the unintended consequence of excluding these entities from claiming allowances in respect of technical insurance reserves.
Abuse of collateral lending arrangements:
Legislation is to be introduced to curb schemes where dividends are paid out as manufactured dividends to avoid dividends withholding taxes by foreign shareholders.
Clarity expected to bad debt allowances:
An amendment to the doubtful debts allowance under section 11(j) of the Income Tax Act was made in 2015, with the intention that the allowance would be claimed according to criteria set out in a public notice issued by the Commissioner.
The criteria has nevertheless not been formulated and it is now proposed that the criteria for determining the allowance should instead be included in the Income Tax Act. A specific amendment to the Income Tax Act would result in more clarity to business and will be good news.
Boost for electronic communication providers:
At present companies that provide telecommunications infrastructure are allowed to write off lines or cables used for the transmission of electronic communications over a period of 15 years under section 11D of the Income Tax Act.
These entities will certainly welcome the announcement that the Government proposes reducing the period over which electronic communication lines and fibre optic cables are written off, in a bid to align the tax system with technological advances and international practice.
A more beneficial tax allowance system would hopefully boost additional investment in fibre optic infrastructure which in turn would stimulate business growth.
Tax treatment of collective investment schemes:
It is proposed that the tax treatment of amounts realised by portfolios of collective investment schemes as a result of the trade in underlying assets may no longer purely be taxed as gains of a capital nature. National Treasury notes that some collective investment schemes are trading frequently and arguing, contrary to current case law, that the profits are of a capital nature. Investors are currently benefiting from this tax treatment as the overall return in respect of the collective investment scheme would be enhanced due to the lower effective tax rate.
A move by National Treasury to tax regular trades in collective investment schemes as gains or a revenue nature, would therefore increase the overall tax bill of the collective investment scheme.