SARS recently published a first bash of legislation to be included in the Revenue Laws Amendment Bill to be promulgated later this year. In this context the following amendments are relevant:
- a new definition is to be inserted in s1 of the Income Tax Act defining a beneficiary of a trust. It is to be defined as a person who has a vested or contingent interest in the whole or portion of the receipt or accruals or the assets of the trust. This amendment will bring clarity to the entire concept as to who is a beneficiary as it was previously argued that a beneficiary should only be a person with vested rights as opposed to somebody that is a discretionary beneficiary only to be benefitted pursuant to the exercise of the discretion by the trustees of the trust. This amendment will not only apply to income tax, but also capital gains tax. It will also clarify the position as to whether taxpayers should disclose whether or not they are beneficiaries of offshore trusts as it was equally argued previously that only persons with vested rights should disclose that fact and that persons with a discretionary right does not need to indicate that he is a beneficiary of the trust;
- the provisions of s11(j) of the Income Tax Act are also to be amended which deal with the claiming of doubtful debts. Previously it was argued that an allowance in respect of a doubtful debt may potentially be granted even though the deduction would not be allowed if the debt actually becomes bad. The amendments will now make it clear that a doubtful debt allowance can only be claimed to the extent that, if the debt actually becomes bad, a bad debt allowance can be claimed;
- in order to curb abuse relating to deductible donations made to a public benefit organisation that has been approved as such, for instance if focussed on education, a penalty provision is to be inserted in circumstances where the PBO abuses the donation or does not meet the requirements of s18A. In order to force PBOs to comply with the provisions, the result will now be that the donation will become taxable in the hands of the PBO instead of being exempt. In other words, the focus is not so much to trace down the donor that made the donation in good faith, but to penalise the PBO;
- to the extent that a lessee erects improvements on the land leased to it, the question arises whether the lessee can claim a loss for capital gains tax purposes in view of the fact that the improvements will affix to the land and the lessee will never become the owner thereof. The lease would be a capital asset in the lessee’s hands. If improvements are made, the cost of the improvements will form part of the base cost of the lease. On expiry of the lease, the cost of the improvements would otherwise be claimable as part of the base cost. It is now proposed that the cost of improvements only be taken into account on disposal of the lease and not when the improvements have been incurred;
- the provisions relating to broad based share schemes and share incentive schemes are to be amended. Some of the key amendments are the following –
- any consideration given by an employee will be taken into account in the ultimate gain made by the employee;
- individuals will still be taxed even though they cease to be employees during the holding of the shares;
- to the extent that an employee dies or becomes insolvent, it is regarded as a "no fault disposal" and tax is to be levied on the actual consideration;
- the exercise of an option or the conversion of a financial instrument resulting in the acquisition of a share would also be covered by share incentive schemes. For instance, if one has a loan that is to be converted into a share, that will also be covered by s8C on the basis that the difference between the market value and the consideration paid by the employee will be taxable calculated at income tax rates;
- if a taxpayer leaves the employment of his employer and forfeits a share, alternatively dies or becomes insolvent, the intention now is that the taxpayer will only be taxed on the actual consideration received and not on the deemed market value of the shares at that stage. Previously an inequity existed as an employee would have been taxed on the market value of the share even though he would not actually have received such market value in cash as he would generally be deemed to have forfeited the share at that stage;
- linked to the aforegoing, it has also been acknowledged that it is difficult to determine the market value of shares, especially in the context of a private and/or unlisted company. An employee will now be taxed on the actual consideration received as opposed to deemed market value;
- it is not clear whether these amendments will be retrospective, but the expectation is that it will be the case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.