National Treasury published the latest Draft Tax Bills on 28 July 2021, which incorporate the tax proposals made in the 2021 Budget.
Highlighted below are five key changes proposed by government that taxpayers need to be aware of.
Curbing abuse of ETI
Schemes where Employment Tax Incentive (ETI) is claimed in respect of individuals who do not actually work for the employer who makes the ETI claim has come to the government’s attention.
To curb these practices, the definition of ’employee’ will be amended to ensure that the substance of the employment relationship will determine eligibility for the ETI claim, as opposed to its legal form. The proposal will be deemed to have retroactive operation, from 1 March 2021.
Further strengthening of section 7C
This provision is aimed at curbing the tax-free transfer of wealth to trusts using low interests or interest free loans.
Section 7C has undergone continuous amendment as new schemes emerge to circumvent its application. A further amendment is proposed to widen the scope of this provision to curb the latest avoidance stratagems.
It is clear that government is intent on closing any loopholes around trust structures, which again impugns these structures as tax planning vehicles. It is proposed that this amendment come into operation on the date the Draft Tax Law Amendment Bill (TLAB) was published.
Allowing use of retirement interests to acquire annuities
When a person retires, they are allowed to receive a maximum of one third of the total value of their retirement interest as a lump sum, whereas the remainder may be annuitised in one of three ways.
Currently, a member of a fund is restricted in terms of the annuities they may acquire. In order to increase flexibility for a retiring member and to maximise the retirement capital available to provide for annuities, it is proposed to expand the types of annuities a member can purchase upon retirement.
In line with current legislation, the portion of the retirement interest utilised to purchase each type of annuity must exceed R165,000. The effective date for this amendment is 1 March 2022.
Taxing retirement interests on cessation of residency
To prevent retirement interests from escaping taxation in SA after a person ceases residency, it is proposed that an individual will be deemed to have withdrawn from their retirement fund on the day before they cease residency, triggering a South African tax liability.
In effect, it proposed to impose an exit charge on retirement interests, in addition to the existing exit tax that finds application when a person ceases residency.
It is important to note that the payment of the tax is deferred to when the amount is actually receivable from the retirement fund. In other words, the tax is triggered on the day before the person ceases residency but is payable only upon withdrawal.
The tax will be levied on the value of the interest on the day prior to ceasing residency and will be calculated in terms of the lump sum tax tables prevailing at the time of payment. This provision will come into operation on 1 March 2022.
Restricting assessed losses
In line with the 2020 Budget announcement, government proposes to broaden the corporate income tax base by restricting the offset of the balance of assessed losses carried forward to 80% of taxable income.
The proposal extends to the balance of assessed losses at the time of implementation; it is not only the accumulation of losses starting from the date of implementation that will be subject to the new rules.
National Treasury notes that this proposal is aimed at creating room for government to lower the corporate tax rate as noted in the February Budget Speech. This amendment takes effect from 1 April 2022.
Taxpayers need to speak to their advisors to understand these proposed changes and when they will come into operation. In particular, South Africans who plan on leaving the country and ceasing tax residency must ensure they are planned optimally ahead of the effective date in 2022.