Under the Tax Administration Act, persons that enter into certain types of transaction must report the details of those transactions to the South African Revenue Service. These types of transaction are called 'reportable arrangements'. In order to determine when the information must be disclosed by, the parties must first establish when the arrangement qualified as a reportable arrangement.
The South African courts have held, on a number of occasions, that taxpayers are entitled to deduct damages or compensation paid to third parties. However, this principle does not apply in all cases. A recent High Court decision has made clear that before a taxpayer calculatedly breaches an agreement, it should carefully consider the incidence of tax.
Dividends are exempt from income tax even if a person receives the dividend by virtue of a cession to that person of the right to receive the dividend. In a notable exception to this principle, if a shareholder cedes the right only to receive dividends (ie, without transferring the other rights attaching to the underlying shares) to a company, the dividend accruing to the company is subject to income tax.
A recent Supreme Court of Appeal judgment referred with approval to certain sections of a South African Revenue Service (SARS) interpretation note. The taxpayer appealed to the Constitutional Court, which held that the courts should not have regard to SARS interpretation notes when interpreting legislation, but may do so where SARS's practice is evidenced by an interpretation note which has been recognised by SARS and the taxpayer.
Section 42 of the Income Tax Act allows taxpayers to transfer assets to a company free of immediate tax consequences, provided that certain requirements are met (ie, there is a roll over for tax purposes). However, certain anti-avoidance provisions may be triggered if the company that acquired the assets disposes of them within 18 months of acquisition. The South African Revenue Service recently provided some guidance on this matter in a binding private ruling.
A recent South African Revenue Service ruling on an employee incentive scheme suggests that Paragraph 80(2) of Schedule Eight of the Income Tax Act (58/1962) applies in respect of any gains realised on a disposal of shares and must be disregarded by the trust where the gains are vested in the beneficiaries. However, the ruling is silent as to whether any such gains must be taken into account for the purposes of calculating the beneficiaries' aggregate capital gains or losses.
The South African Revenue Service recently issued two binding general rulings which address how non-executive directors should account for tax on their earnings as directors. The rulings determined that companies must not withhold employee pay-as-you-earn tax on amounts paid to non-executive directors and that non-executive directors may claim deductions against their income for certain expenses, provided that they meet the requirements of the Income Tax Act (58/1962).
The South African Revenue Service (SARS) recently provided guidance on the difficult issue of accounting for tax following the assumption of contingent liabilities on the acquisition of a business as a going concern. Parties should proceed with caution when structuring sale of business agreements, as it is likely that SARS will adopt the position set out in its interpretation note.
Investors in shares can defer capital gains tax using unit trusts. If a taxpayer transfers listed shares to a unit trust in exchange for units in the trust, the transfer will not give rise to capital gains tax or securities transfer tax, provided that the unit trust meets the requirements under the Collective Investment Schemes Control Act and the transfer meets the requirements under the Income Tax Act.
The South African Revenue Service has issued a number of rulings regarding the conversion of debt to equity, and recently issued a binding private ruling which again dealt with the matter. The ruling involved a restructure of a group of companies. As part of the restructure, one company in the group (a tax resident in South Africa) acquired a loan account in its wholly owned subsidiary company (a tax resident in another country).
Taxpayers should take great care when selling assets where the price is paid in instalments, as the transaction may trigger tricky capital gains tax consequences. This is because where a taxpayer becomes entitled to an amount which is payable in a subsequent tax year (eg, through an asset sale), the full amount must be treated as having accrued to the taxpayer in the current tax year.
The commissioner of the South African Revenue Service has issued an important notice under the Tax Administration Act. The notice expands the list of reportable arrangements under Sections 34 to 39 of the act. However, it also excludes from reporting arrangements where the aggregate tax benefit which may be derived by all the participants to the arrangement is less than R5 million.
Securities transfer tax is usually levied in respect of a sale of shares transaction. However, where a sale of shares is subject to an earnout provision, the issue arises as to how the amount of the securities transfer tax is calculated, specifically in the context of unlisted companies.
Under the Tax Administration Act, which took effect in October 2012, if a transferee receives an asset from a taxpayer who is a connected person in relation to the transferee without consideration or for consideration which is below the fair market value of the asset, the transferee is liable for the tax debt of the taxpayer. However, in so providing, the legislature appears to have cast its net too wide.
When adopted, the Taxation Laws Amendment Bill will change the way in which limited liability partnerships and other foreign partnerships are taxed in South Africa. The proposed changes are in line with other changes in the bill which seek to make South Africa more attractive to investors who wish to use the country as a regional base.