Amendments to debt relief rules
In 2017, the Income Tax Act was amended to address the tax consequences of the reduction of certain debts and the artificial repayment of debts. The rules as they stand are not sensible and impractical to apply. This has been appreciated and it appears these shortcomings will be addressed.
Share buybacks and dividend stripping
In 2017, measures were introduced to strengthen the anti-avoidance rules dealing with share buybacks and dividend stripping. These anti-avoidance rules override the corporate rollover relief rules, with the aim of preventing dividend stripping prior to corporate reorganisations. Following concerns raised regarding the impact of these rules on legitimate transactions, government will review the interaction of these anti-avoidance rules and some of the corporate rollover relief rules.
The application of the anti-avoidance rules dealing with share buybacks and dividend stripping relating to preference share transactions will also be reassessed.
Refining rules for debt-funding in the acquisition of a controlling interest in an operating company
Historically, companies which used debt funding to acquire shares in an operating company were unable to deduct the interest incurred in connection with that debt funding. In 2012 the Income Tax Act was amended to allow these companies to claim an interest deduction if they use debt funding to acquire a specified interest in an operating company and at least 80% of receipts and accruals of the operating company constitute income for tax purposes. Amendments will be introduced to clarify when the test relating to the operating company’s receipts and accruals should be applied.
Abuse of collateral lending arrangement provisions
Currently, the Income Tax Act allows for the transfer of listed shares and both local and foreign government bonds in collateral lending arrangements. However, it appears that the provisions are allegedly being abused by some foreign shareholders using loan arrangements with a South African resident company, where the listed shares are provided as collateral, thereby reducing the dividends tax rate to zero. The legislation regarding collateral lending arrangements will be amended to address this abuse.
Business (Banks and the Financial Sector)
Incorporating new stock exchanges
The Income Tax Act only makes reference to the JSE Limited. Government will review these provisions and incorporate a reference to the new stock exchanges in South Africa which have been recently been approved.
Portfolios of collective investment schemes (CIS)
Currently, where a CIS receives income which is not capital in nature and makes a distribution of that amount to its investors who have a participatory interest in the CIS within 12 months, the amount is taxed in the investor’s hands. Frequently, the CIS’ treats all (or most) of its trades as being on capital account. Some clarification on the treatment of trading profits will be introduced.
Refinement of the venture capital company regime
The venture capital company regime was introduced to promote investment in small and medium-sized enterprises.
Changes will include:
the investment income threshold limitations for qualifying companies will be adjusted;
when and how the controlled company test is to be applied will be clarified; and
the application of the test for connected persons who are shareholders of the VCC will be amended.
Approval of six new special economic zones
The Minister of Finance will approve six additional special economic zones, namely: Coega, Dube Trade Port, East London, Maluti-a-Phofung, Richards Bay, and Saldanha Bay. In these areas, qualifying firms will be entitled to a number of attractive incentives including a reduced corporate tax rate, and employment tax incentives for workers of all ages.
The applicable legislation will be reviewed to ensure that these incentives are provided without creating any opportunities for local companies to reduce their tax liability without due entitlement.
Review of all incentives and grants
The Department of Planning, Monitoring and Evaluation is conducting a review of all incentives and grants to ensure that they are aligned with inclusive growth objectives. In line with this, there are likely to be amendments of any incentives or grants which do not align with these objectives.
The research and development tax incentive which allows taxpayers to deduct 150% of expenditure incurred in relation to qualifying projects will be clarified and simplified.