Welcome to the second edition of our Private Client tax publication, Personal Perspectives. Tax compliance continues to be on the top agenda for both government and corporate's. Tax payers and civil society are asking the right questions in terms of stakeholder accountability on proper tax expenditure.
With the deadline of the Special Voluntary Disclosure Program on 31st August 2017, the window for regularisation of tax and exchange control rules on overseas assets has come to an end and at the same time a new era on exchange of information and country by country reporting is about to kick off. It is clear that the net is tightening on South African’s who illicitly moved funds out of the country and failed to declare them for tax and exchange controls.
Finance Minister Pravin Gordhan believes that Africa’s loses $50bn per annum from illicit financial flows, tax evasion and transfer pricing and are the major sources of Africa’s and South Africa’s tax gap.
We also report a renewed focus by SARS on the use of Trust structures which they believe are widely abused to avoid tax. New legislation will impose deemed interest from 1 March 2017, where assets have been loaned interest free or at a low rate of interest. The deemed interest will be the difference between the official interest rate and any interest actually charged. The trust does not get a deduction for this interest but the person who loaned the assets will be taxed on the deemed interest.
Furthermore individuals will no longer be able to use the R100,000 per annum Donations Tax Exemption to donate part of the loan to the trust.All of this highlights the need to ensure that an individual’s tax affairs are correct and could withstand scrutiny if SARS were to investigate.
Another issue that merits careful attention is around “Employee owned” shares that lock in employees (including senior management) for specific time periods, and will typically defer the liability for employees’ tax to the time when these restrictions are lifted.
Dividends earned by employees on these shares will usually be subject to vanilla tax consequences namely, exemption from income tax and Dividend Withholding Tax at 15 % for individuals. If the assumption is that dividends are paid from employers’ after tax profits, the current rules essentially result in an effective tax rate of 38,8 % on the said dividend.
Proposed changes to the draft 2016 Taxation Laws Amendment Bill seek to include dividends in respect of so-called “Restriction Equity Instruments” within the definition of “remuneration” for employees’ tax purposes. At the marginal rate of 41% the effective tax rate for employees holding these shares and generating dividend income will increase to 57.5 %.
Without any tax relief for the employer company, employee share participation with lock in features may become too costly.
We hope you enjoy this edition of Personal Perspectives. As always, if you have any comments, feedback or suggestions of what you would like us to cover in future issues, please do get in touch.
Head of Tax Markets
T: +27 82 6869345