The second batch of the 2016 Draft Taxation Laws Amendment Bill (second draft) was published on 25 September 2016 for public comment.
Grant Thornton is pleased to note that the second draft has changed substantially from the first draft which was published on 8 July 2016. The Tax Advisory team welcomes the fact that public comments received on the first draft have been taken into account.
The decision to extend the window periods for claiming learner tax incentives is particularly laudable.
The second draft released at the end of September also contains the following:
- Additional amendments relating to the Employment Tax Incentive (ETI)
- Amendments relating to the learnership allowance;
- Updates and amendments regarding restricted equity shares; and
- Revised amendments for proposals concerning interest free loans to trusts and restricted equity shares in respect of employee share schemes.
Employment Tax Incentive (ETI)
The ETI which was originally introduced in January 2014 to promote employment, particularly of young workers, is set to expire on 31 December 2016.
Initial evidence indicates that the incentive has had a positive impact on the number of new jobs created and there has been a higher-than-expected level of interest in this incentive with over 32 000 employers claiming the incentive for 686 402 employees in the 2014/15 tax year.
The total value of claims between 1 January 2014 and 31 March 2016 was R6.06 billion.
It is proposed that the ETI be extended for another two years until 28 February 2019 in order to evaluate further data and evidence on the performance and impacts of the incentive.
Further, the draft amendment proposes a monetary cap of R20 million on the value of ETI claims per employer, per annum, in order to target smaller employers. This is because preliminary evidence suggests that the incentive has the biggest impact on smaller employers, and these smaller companies are far more likely to create new jobs.
It is also proposed that the period for claiming learnership allowances will be extended for another five years from 1 October 2016 to 31 March 2022.
The review of the incentive programme indicates that the incentive has – to date - delivered on its objectives to encourage skills development and job creation.
The learnership allowance, which provides an additional tax deduction for formal SETA-registered training programmes, supported an estimated 447 721 learnerships between 2009 and 2014.
In line with the current economic situation and skills development priorities of Government it is proposed that in order to target this incentive to a wider range of learners the value of the allowances should be increased as follows:
- For those learners who may not have basic to intermediate qualifications, to increase the incentive from R30 000 to R40 000;
- For a person with a disability from R50 000 to R60 000 for qualifications up to NQF level 6.
For learners with qualifications to NQF Level 7 or higher, it is proposed that the incentives should be decreased from R30 000 to R20 000. For a person with disability it will remain at R50 000 for an NQF level 7 or higher.
Restricted equity shares
The proposals in the first draft which relate to the taxation of dividend payments derived from restricted equity shares at the marginal personal income tax rates, instead of at the dividend withholding tax rate, and which are set to come in to operation on 1 March 2017, have been postponed. The postponement is due to concerns regarding administrative difficulties to implement the initial proposal and the differing views on the appropriate timing of an income tax deduction at a corporate level.
In the meantime, these proposals have been replaced with specific anti-avoidance measures in the second draft which tax the following dividends:
Dividends, in respect of restricted equity instruments, consisting of or derived from;
- the proceeds from the disposal or redemption of any share in a company; or
- the deregistration/ liquidation of a company,
that reduces or liquidates the value of the equity shares from which the value of the restricted equity instrument is derived.
Interest free loans to trusts
Second version of proposed new section concerning the tax regime of Trusts
The second draft introduces a second version of the proposed new section 7C to the Income Tax Act (‘the Act’) which contains measures to prevent Estate Duty and Donations Tax avoidance through the transfer of assets to a Trust on interest-free loan account.
As discussed in our earlier newsletter on the first version of section 7C, transferring assets to a Trust on interest-free loan account or on loan account at an interest rate below that considered to be an arm’s length rate results in a reduction of Estate Duty and it also results in the avoidance of Donations Tax. The proposed new section 7C is designed to prevent this avoidance of tax.
The section applies in respect of any loan, advance or credit that —
- any natural person (“the lender”); or
- at the instance of the lender, a company in relation to which the lender is a connected person,
directly or indirectly provides to a Trust in relation to which the lender or the company, or any person that is a connected person in relation to the lender or the company, is a connected person.
If the loan is interest-free or if the interest rate charged is less than the official rate (currently 8%), the shortfall will be treated as an on-going annual donation made by the lender to that Trust on the last day of each year of assessment during which such arrangement persists and it will be subject to 20% Donations Tax.
If the loan was provided by a company to the Trust at the instance of more than one lender who is a connected person in relation to that company each of those lenders must be treated as having donated, to that trust, his proportionate share based on the equity shares and voting rights held in that company by those lenders.
In addition, the lender is prohibited from claiming any capital loss which may arise as a result of the reduction or waiver of, or failure on the part of the Trust to repay, the debt.
Section 7C will not apply in the following circumstances:
(a) Where the Trust is an approved Public Benefit Organisation;
(b) Where the loan was provided to the Trust in return for a vested interest held by the lender in the receipts and accruals and assets of that Trust and—
- the beneficiaries of that Trust hold, in aggregate, a vested interest in all the receipts and accruals and assets of that Trust;
- no beneficiary of that Trust can, in terms of the Trust Deed, hold or acquire an interest in that Trust other than a vested interest in the receipts and accruals and assets of that Trust;
- the vested interest of each beneficiary of that Trust is determined solely with reference and in proportion to the assets, services or funding contributed by that beneficiary to that Trust; and
- none of the vested interests held by the beneficiaries of that Trust is subject to a discretionary power conferred on any person in terms of which that interest can be varied or revoked.
(c) Where the Trust is a Special Trust established solely for the benefit one or more persons who are incapacitated by a disability.
(d) Where the Trust used that loan wholly or partly for purposes of funding the acquisition of an asset and—
- that asset was used throughout that year of assessment by the lender or by the lender’s spouse as a primary residence; and
- the amount owed relates to the part of that loan that funded the acquisition of that asset.
(e) Where the loan has been subjected to the transfer pricing rules in section 31(1).
(f) Where the loan was provided to the Trust in terms of a Sharia compliant financing arrangement.
(g) Where the loan is owing to a company and it is taxed as a deemed dividend in terms of section 64E(4).
One main difference between the first and second versions is that the first version created deemed income in the hands of the lender where the second version creates a deemed donation in the hands of the lender.
The first version also prohibited the application of the annual exemption from Donations Tax (in terms of section 56(2)) of the first R100 000 of donations where the lender donates any amount which reduces the loan capital. This prohibition does not appear in the second version. It appears therefore that the R100 000 exemption may apply to the reduction of the loan. Moreover, it appears that the exemption may also apply in respect of the deemed donation created by the second version of section 7C.
The proposed section 7C will apply to any amount owed by a Trust in respect of a loan, advance or credit provided to that Trust before, on or after 1 March 2017. There is still time, albeit limited, to make changes to your current structure if required. We would be pleased to discuss how these provisions might apply to your Trust structure and which changes could be put in place before 1 March 2017.
Grant Thornton urges any taxpayers that may be affected by these proposed amendments to consult their tax practitioners as soon as possible to determine the impact on existing as well as anticipated business transactions.
For further information or for assistance in understanding if you may be affected by these amendments, please contact us.