Limiting excessive debt in businesses
The legislative focus on debt versus equity in funding arrangements continues. Government will enact a revised set of reclassification rules deeming certain debt to be equivalent to shares. In 2013 Government will also consider an “across-the-board” percentage ceiling on interest deductions, relative to earnings before interest and depreciation, to limit excessive debt financing.
Deductibility of interest on loans raised to acquire shares
South Africa does not permit the deduction of interest on funds borrowed to acquire shares. This has led to the use of indirect acquisition techniques employing the intra-group relief provisions in ways that led to the temporary suspension of this relief in 2011. Where debt is used to acquire a direct equity interest of at least 70% in a company, interest on the loan funding raised will be deductible.
Property loan stock companies and property unit trusts
The use by property loan stock companies of dual linked units consisting of a debenture and a share, with a distribution in the form of interest, is to be eliminated so that other entities do not undertake the same structure to avoid tax by relying on excessive debt. The treatment of property loan stock entities from a tax perspective will be placed on a par with property unit trusts.
Debt cancellations and restructurings
Given the potentially high number of distressed companies, it is proposed that a simplified regime will be created to alleviate the tax impact on the debtor when debt is unilaterally reduced or cancelled, without full consideration, and to eliminate adverse tax consequences when the debt relief merely restores the debtor to solvency. At present, these activities lead to tax liability for the debtor. Special rules will also be required to address the situation where creditors agree to convert their debt interest into an equity stake as partial compensation.
Company law reform and company restructurings
Various provisions, including the company reorganisation and other restructuring roll-over relief provisions will be reviewed to bring them into line with the provisions of the new Companies Act, 2008. This is a welcome development, as we, and other commentators, have for some time been concerned about anomalies between the two Acts.
Mark-to-market taxation of financial instruments
The tax treatment of financial instruments on a mark-to-market basis has been considered for some time. This tax treatment aligns with financial accounting. It is proposed that a revision of the taxation of financial instruments and derivatives will be undertaken and, in certain circumstances, will bring the tax treatment in line with standards in terms of international financial reporting standards.
Securities Transfer Tax (STT)
STT is payable at the rate of 0.25% of the value of any shares purchased, whether the shares are listed or unlisted. This tax is subject to certain exemptions, one of which is where a broker purchases shares for its own account and benefit. With effect from 1 April 2013, the above exemption will fall away and the purchase of shares by a broker for its own benefit will be subject to STT, albeit at an appropriate lower rate to be announced. Government is also investigating the possibility of bringing derivatives within the STT net.
Share block conversions to sectional title
The conversion of a share block company into a sectional title scheme has previously generated a host of tax problems. It is proposed that conversions in the form of company liquidations, which is merely a change to direct interest from an indirect interest, will receive tax-free roll-over treatment.
Relief for small businesses
With effect from 1 March 2009 a turnover tax for micro businesses was introduced in terms of which small or micro businesses are taxed on a turnover basis at a very low rate. Currently, a micro business does not pay tax on the first R150 000 of its turnover. In order to improve cash flow for micro businesses they will now have an option of paying turnover tax, VAT and employees’ tax six monthly, with effect from 1 March 2012.
Small business corporations were previously taxed at a rate of 10% for a taxable income of up to R300 000. As from 1 April 2012 the tax-free threshold for small business corporations will be increased to R63 556 resulting in a 7% tax rate being applicable to taxable income of up to R350 000. In the case of taxable income above R350 000 the normal corporate tax rate of 28% will apply to that entity.
Review of tax system for insurers
The global insurance industry is undergoing reforms associated with solvency assessment and management projects. These rules will change the way insurers determine their reserves. There are several related tax issues:
- In the case of short-term insurers, the ability to regulate the use of reserves, which are deductible for tax purposes and form the basis for tax deductions while providing a safety cushion for the insurers, have not been fully co-ordinated. In addition, the fiscus has had difficulties with captive insurers for years.
- In the case of long-term insurers, the four funds system of taxation has long been in need of review for various reasons.
These concerns necessitate a comprehensive review of the tax system for insurers. The tax system for calculating short-term insurance reserves will be addressed in 2012, and that for long-term insurers in 2013. A short paper on long-term insurers will be circulated for comment by mid-2012.