South Africa: Tax Amendments - 2012

Last Updated: 11 December 2012
Article by Ernest Mazansky

Members of Werksmans' Tax Practice highlight some of the more important changes proposed in the Taxation Laws Amendment Bill tabled in Parliament on 25 October 2012.

Yet again, this year's Taxation Laws Amendment Bill (the Bill) is lengthy and wide-ranging and deals with a number of important issues. The intention was for the Bill to be tabled much earlier than it was, but the extent and complexity of the issues contained in earlier drafts necessitated wide-ranging debate and consultation.

Unfortunately the results are not always that satisfactory, and it is regrettable that Treasury seems every year to "bite off more than it can chew" by taking on a far greater workload than its limited resources can deal with. This results in legislation that is of a less-thandesirable quality, necessitating numerous technical amendments thereafter (indeed there were a significant number of technical amendments this year to deal with drafting errors and conceptual problems in last year's legislation).

This publication deals only with aspects that are likely to be of general interest and excludes comment on highly technical or esoteric amendments such as, for example, the new methods of taxing insurers, the mark-tomarket rules for financial institutions, and so on.

In preparing this publication we have attempted as much as possible to use plain language and to limit the amount of technical complexity. The "price" of this, and bearing in mind that this is a summary, is that one sacrifices technical precision in the process. Accordingly this publication should be seen as nothing more than a high level overview, and not as a legal reference.

A number of the amendments have different effective or commencement dates, which will be detailed where appropriate. Except for these the amendments to the Income Tax Act (the Act) are deemed to come into operation for commencement of tax years ending on or after 1 January 2013 (ie they will apply, for example, for years ending 28 February, 30 June and 31 December 2013).

AMENDMENTS AFFECTING CORPORATES

Assets acquired for shares issued

Currently section 24B(1) of the Act provides that where a company receives an asset as a subscription price for shares issued, the cost is equal to the lesser of the market value of the asset and the market value of the shares issued. In terms of the corporate restructure rules, under an asset-for-share exchange in terms of section 42 of the Act, where that section applies, the company is deemed to acquire the asset at the seller's base cost, and the shares issued are deemed to have the same base cost in the seller's hands. The remaining sub-sections of section 24B are anti-avoidance provisions.

The Bill has gone much further with the deletion of section 24B(1) of the Act and the introduction of sections 24BA and 40CA. The latter is, to some extent, a substitute for section 24B(1) in that it states that if a company acquires an asset in exchange for shares issued, the company is deemed to have incurred a cost equal to the market value of the shares issued. Where debt is issued, the cost is equal to the amount of the debt.

Far more wide-ranging is section 24BA. This section applies where the company acquires an asset in exchange for the issue of shares and the consideration is different to that it would have been had the asset been acquired in terms of a transaction between independent persons dealing at arm's length. In such case:

  • if the market value of the asset exceeds the market value of the shares issued, the excess is deemed to be a capital gain by the company, and
  • such gain is applied to reduce the cost of the shares in the seller's hands.

Where the market value of the shares issued exceeds the market value of the asset, the excess is deemed to be a dividend in specie, which triggers dividends tax.

Of course it is not every differential in value that will trigger the section, because if it can be shown that, in the circumstances, the exchange is at an arm's length ratio, no tax can arise. But if tax does arise, it will be noted that the cash will have to be found elsewhere to pay it.

The provision does not apply if the seller and purchaser form part of the same group for tax purposes. This is important because it is not unusual for companies to transfer assets to other group companies as an asset-for-share exchange under section 42 of the Act for a nominal number of shares. In this regard it should be noted that, whereas the corporate restructuring rules under sections 41 to 47 normally override the other provisions of the Act, section 24BA is not overridden. Thus even if the parties (not being members of the same group) believe they are dealing at base cost by using section 42 of the Act, if the "incorrect" number of shares is issued, a capital gain or deemed dividend could arise.

The new rules apply to transactions entered into on or after 1 January 2013.

Reduction or cancellation of debt

Under current rules a forgiveness of a debt by a creditor, or even the acceptance by the creditor of inadequate consideration in discharge of the debt, has the following consequences:

  • If the debt was used to fund deductible expenditure or assets in respect of which an allowance could be granted, any assessed loss could be reduced.
  • An alternative is that the deductible expenditure, could be treated as having been recouped, which therefore triggers a tax liability.
  • Where the above two do not apply, the reduction of the debt triggers CGT for the debtor.

In an attempt to ease the tax burden on distressed companies the rules (which nevertheless apply to all companies) have been eased in certain circumstances as follows:

  • Where the debt funded expenditure on trading stock which is still held, the reduction of the debt goes to reduce the cost of the stock.
  • Where the reduction of the debt exceeds the cost of the stock still held, the excess is treated as a taxable recoupment.
  • Where the debt reduced was used to fund deductible expenditure, the reduction will be treated as a taxable recoupment.
  • Where the debt reduced funded a depreciable asset, and the reduction has already been applied to reduce the base cost (see below), the reduction is deemed to be a taxable recoupment to the extent of allowances previously claimed.
  • Where the depreciable asset has been reduced by the reduction in the debt, the future depreciation is effectively limited to the amount as reduced.
  • In the case of a capital asset which is not a depreciable asset, the reduction of debt used to fund the cost of the asset must be applied to reduce the base cost.
  • If the reduction exceeds the base cost or the asset is no longer held, the excess is applied to reduce any assessed capital loss.
  • If the capital asset was acquired prior to 1 October 2001, in order to apply the above rules, and merely for the purposes of determining the date of acquisition and the cost, the asset is deemed to be disposed of immediately before the debt reduction for market value, and immediately reacquired for a cost equal to the market value, but the cost is reduced by any gain or increased by any loss that notionally would have been determined had there been an actual disposal.

The above rules do not apply in the following circumstances:

  • where a debt is owed by an heir or legatee of a deceased estate to the estate, and the debt is reduced (hitherto, in terms of a decision of the Tax Court, a bequest of the debt by the deceased to the debtor triggered a capital gain in the debtor's hands, and this provision now counters that rule),
  • where the reduction of the debt constitutes a donation or deemed donation as defined in the Act (though it is not a requirement that donations tax is actually payable, and not all donations trigger donations tax, eg where the donor is a non-resident), or
  • where the reduction is by an employer of a debt owed by an employee and income tax is paid on the fringe benefit under the Seventh Schedule.

The provisions above will also not apply in a CGT context where (a) the debtor and creditor form part of the same group for tax purposes; or (b) where the debt is reduced in anticipation of the liquidation, winding up or deregistration of a company and the creditor is a connected person in relation to the company. There are certain exceptions written in to the legislation where these concessions will cease to apply in certain circumstances (for example in the case of (b) where the company has not taken the prescribed steps to liquidate or deregister within thirty-six months). However it is not entirely clear what the consequences for the company will be if the concessions cease to apply, ie it is not as if there is any mechanism then to tax the reduction of the debt (as was the case when these issues were still governed by paragraph 12(5) of the Eighth Schedule, where non-compliance resulted in CGT).

The new rules apply from tax years commencing on or after 1 January 2013.

Hybrid equity instruments

Last year significant amendments were made to section 8E of the Act, dealing with hybrid equity instruments, and a new section 8EA was introduced to deal with third-party backed shares (ie where the obligations in respect of the issuer of shares were essentially guaranteed by a third party). The intention was, where certain strict requirements were not met, to render the dividend to be taxable as ordinary income.

The new rules were to apply with effect from 1 April 2012. The current amendments, in effect, reverse the changes made to section 8E and introduce new changes to apply from 1 January 2013. In addition, section 8EA has been largely redrafted, and also is to apply from 1 January 2013.

As is well known, the effect of section 8E of the Act is that if a share (usually, but not exclusively, a redeemable preference share) qualifies as a hybrid equity instrument, as mentioned, the dividend becomes fully taxable in the shareholder's hands. The major criterion is that the company should not be under an obligation to redeem the shares within three years of date of issue, or the shareholder should not have the right to dispose of the share (whether by way of redemption or sale or otherwise) within such three-year period.

The major change to section 8E is that a preference share will be a hybrid if it is secured by a financial instrument (ie an interest-bearing arrangement or a financial arrangement based on or determined with reference to a specified rate of interest or the time value of money), or the preference share is subject to an arrangement in terms of which a financial instrument may not be disposed of. In other words, when the issuer provides any form of such security, the preference share will be a hybrid.

An exception to this new rule is if the share was issued for a "qualifying purpose". In essence this means that the share can be issued for one or more of the following purposes:

  • A direct or indirect acquisition of an equity share in an operating company. An operating company is (i) a company which carries on business continuously and in the course or furtherance of which it provides goods or services; or (ii) a controlling group company in relation to that company, or (iii) any listed company. (It is not a qualifying purpose if the shares were acquired from another company in the same group.)
  • The settlement of debt which was used to fund a direct or indirect acquisition of an equity share in an operating company.
  • Settlement of debt used to fund certain dividends on the preference share.
  • The direct or indirect acquisition of a preference share or a redemption of a preference share if it was issued for the purposes above.
  • The issue of a preference share to fund a dividend.

In other words, in broad terms, a qualifying purpose will be to finance, or re-finance, the acquisition of an equity share in an operating company, including accrued dividends on the preference shares.

The third-party backed share rules in section 8EA are triggered when any person other than the issuer of the share has an enforcement obligation, ie one to acquire the share from the holder or make any payment in terms of a guarantee or indemnity, while an enforcement right is largely the corollary thereof. A thirdparty backed share is defined as a preference share where there is an enforcement right or an enforcement obligation if any specified dividend or return of capital is not received. In other words, in these circumstances, the dividends are taxable.

However this rule will not apply where the obligation is enforceable against any one or more of the following:

  • the relevant operating company,
  • an issuer of a preference share if that share was issued for the purpose of a direct or indirect acquisition by any person of an equity share in an operating company,
  • any person that directly or indirectly holds at least 20% of the equity shares in the operating company, or the person who acquired the equity shares, or the issuer of the preference shares, or any group company in relation to the above, or any natural person, or, briefly, a non-profit organisation.

Mostly, as mentioned, the new rules apply to dividends received during tax years commencing on or after 1 January 2013. Unfortunately there are a host of bona fide arrangements put into place years ago which, at the time, did not trigger any adverse tax consequences, and there simply is not enough time to renegotiate and restructure all those arrangements before the new legislation kicks in. It is clear that this legislation is retroactive, and the proper way would have been to make the new rules applicable to preference shares issued hereafter, and not to future dividends on existing preference shares.

Interest incurred on a debt to acquire shares

As is well known, interest on a loan to acquire shares will not be allowed as a deduction as the shares produce tax-exempt dividend income. As a result, where shares in an operating company are purchased (ie essentially a new subsidiary is acquired and not merely passive or portfolio investments) and debt is utilised to fund the application, in order to ensure that a deduction is obtained for the interest, complex post-acquisition re-structuring is required, which is commonly known as a debt push-down structure.

In order to avoid this complex restructuring, section 24O of the Act has been introduced, and it applies to acquisition transactions concluded on or after 1 January 2013. Where the section applies, the purchaser (which must be a company) will be allowed a deduction for interest incurred on the acquisition of shares.

The following are the requirements which must be met:

  • The target company must be an operating company, ie it must carry on business continuously and in the course or furtherance of which it provides goods or services for consideration, or it is a controlling group company in relation to such a company.
  • The purchaser must, at the close of the day of the transaction, become a controlling group company, ie it must end up with at least 70% of the target company's equity shares. Note that this does not mean that it must acquire 70%. For example it might already have acquired 60% without obtaining a deduction, but then if it acquires another 10%, the section will apply to the whole debt.
  • The interest will cease to be deductible if the acquirer and the target cease to form part of the same group, or the target company ceases to be an operating company.

It will be recalled that last year section 23K of the Act was introduced to require, in order for interest in relation to a debt push-down to be deductible, that a directive from the SARS first be obtained, and it became necessary to submit a large amount of information to the SARS to enable them to assess whether the borrowing would have an adverse effect on the tax base (in which case a directive would not be granted and the interest would not be allowed as a deduction). Section 23K has been amended to require such a directive where it is desired that the interest be allowed as a deduction under section 24O.

It is clear that section 24O will only be of practical value where an existing company, with existing taxable income, acquires the shares in, what will become, a group company. If an SPV is the acquirer, it will obtain a deduction which it cannot use.

Dividend cessions

Last year, in an attempt to close down certain tax products, particularly where investments where made in a fund of money market instruments but the investor received a taxfree dividend, amendments were enacted so as to remove the tax exemption from dividends in certain circumstances. One of these amendments related to the cession of a dividend or the right to a dividend.

It was not considered suitably effective, and the rules have been tightened considerably with effect from 25 October 2012.

The major change is that the dividend will lose its exemption not only where there is a cession to a company of a right to a dividend, but where there is an exercise of a discretionary power by a trustee of a trust to award the dividend to a corporate beneficiary. (An exception to the rule applies where the cession or exercise of the discretion is part of the disposal of all the rights attaching to a share.)

Other changes relate to situations where share borrowings are involved.

Deemed dividend

As was announced earlier this year, legislation has been introduced to counter perceived abuse whereby dividends tax on listed shares is avoided (typically by non-residents). Three situations are identified as follows:

A person acquires the right to a dividend by way of cession and the dividend is announced or declared before that acquisition. In such case the dividend is deemed to be paid for the benefit of the person who ceded that right, and thus the dividends tax consequence will follow as if the cession had not taken place.

A person borrows a share in a listed company and the dividend is announced or declared before the borrowing. Any amount paid by the borrower, essentially as a manufactured dividend, is deemed to be a dividend paid by the borrower, who would thus have an obligation to withhold dividends tax.

A person acquires a share in a listed company after a dividend is announced or declared, and the acquisition is part of an arrangement in terms of which that share or a similar share must be disposed of to the other person. In such case that other person is deemed to be the one to whom the dividend is paid. Again it is as if the acquisition did not occur.

These rules apply from 1 September 2012.

Amendment to value shifting rules

A value shifting arrangement arises essentially where a person allows himself or herself to be diluted in relation to an interest in a company, trust or partnership in favour of a connected person (for example a parent owns 100 shares, comprising 100%, in a company worth R10 million, and allows his or her child to subscribe for 100 shares for R100 – there is a shifting of value of R5 million from the parent to the child).

In such a case there is a deemed disposal for CGT purposes.

In light of the introduction of section 24BA as discussed above (see "Assets acquired for shares issued"), it was considered that it is no longer necessary to apply the value shifting rules to a company, and thus, with effect from 1 January 2014, they will apply only to a trust or partnership.

The rationale is that value-shifting arrangements would arise where assets are transferred to a company for an excessive number of shares, and as this was governed by section 24BA, it is not necessary to trigger CGT as well under the Eighth Schedule. The problem (for the fiscus) is that value shifting arrangements could occur as a result of a cash subscription as well, but now such an arrangement will no longer trigger CGT.

Variable remuneration

In 1993, in order to resolve a dispute as to the timing of the deductibility of leave pay provisions, section 23E of the Act was inserted. Effectively it provided that leave pay is deductible when actually paid or it becomes due and payable, while it is taxable at the same time in the hands of the employee (and thus is subject to PAYE at that time).

Section 23E has been deleted and the provisions relating to leave pay have been incorporated into a broader provision – section 7B of the Act – which applies the same principle, but to a wider range of variable remuneration, being:

  • overtime pay, bonuses or commissions,
  • allowances or advances in respect of transport expenses, and
  • leave pay.

There is a subtle difference with the new provision in that it no longer accrues to the employee or becomes expenditure of the employer when the amount is paid or becomes due and payable, but only when the amount is actually paid.

The section will apply in respect of accruals or expenditure incurred on or after 1 March 2013.

Corporate restructuring rules

A number of amendments have been made to the rules contained in sections 41 to 47 of the Act, and, except as set out below, in the main these relate to extending the concessions so as to facilitate the restructuring of foreign groups held by South African residents.

A new section 43 has been inserted to deal with "substitutive share-for-share transactions".

In essence the section seeks to give rollover relief where shares in a company are exchanged for different shares in that same company, and the new shares acquired are trading stock where the shares disposed of are trading stock; or the new shares are acquired either as capital assets or trading stock where the shares disposed of were capital assets.

As such, in effect, the entire "tax profile" of the shares disposed of applies to the new shares acquired, including cost, date of acquisition, and, if these shares were held at 1 October 2001 when CGT was introduced and the shares were valued for the purpose of determining the base cost, such a valuation.

The rules apply both to equity shares and non-equity shares, but in the latter case the rules apply only when a non-equity share is disposed of and another non-equity share interest is acquired by means of a subdivision or consolidation.

The rules will also allow a linked unit, comprising a share and a debenture, currently issued by property loan stock companies, to be restructured, whereby the debentures become shares, and thus roll-over relief is given when the new RE IT legislation becomes effective (see below).

These rules apply in respect of transactions concluded on or after 1 January 2013.

Investment policies disguised as short-term insurance policies

It has become a fairly widespread practice whereby companies insure their assets against short-term risks with a registered insurer, but, using arrangements which mimic protected cell arrangements (as South Africa does not have protected cell legislation) the excess of premiums over claims is accumulated and invested, and will ultimately be for the benefit of the insured (rather than a profit for the insurer).

A new provision, section 23L, has been inserted into the Act to apply in respect of premiums incurred and policy benefits received on or after 1 January 2013. Under this section premiums will no longer be allowed as a tax deduction.

In future, policy benefits will be fully taxable, but, to the extent they equal the amount of premiums incurred which were not deductible, the taxable amount is reduced.

An insurance policy falls under section 23L if it is not an insurance contract as defined in IFRS Standard 4.

REITs

A number of countries have legislated for real estate investment trusts, commonly known as REITs, and essentially these rules allow for a flow-through whereby the REIT itself is not taxed on its net rentals, but rather the owners of the REIT are taxed thereon. South Africa's so-called property unit trusts, which are governed by the Collective Investment Schemes Act, achieves this precise result, and they are also listed on the JSE. However, for commercial reasons (principally restrictions on gearing and rules relating to the management company) such vehicles are not all that popular, with the vast majority of South African REITs being in the form of the so-called property loan stock, or variable loan stock, companies. These are ordinary companies which issue shares and linked debentures, and are often listed on the JSE, where virtually all the profit is distributed to shareholders in the form of a tax-deductible interest payment on the debenture element.

For some time there has been concern that the extent of the interest payment goes beyond what is legally deductible for tax purposes, but the SARS adopted a pragmatic attitude in that they realised that they could not change their policy, and rather the legislation needed to be changed. The introduction of REIT legislation has achieved this objective.

The legislation passed this year is the first step, and there will need to be further amendments in later years to expand the ambit of the law in relation to REITs. But the basic building blocks have been put in place.

In essence, the following are the key points:

  • It will no longer be necessary to have linked units with interest paid on the debentures, and the companies will be encouraged to convert the debentures into shares. This will be achieved tax-free by way of roll-over relief, so as to avoid any CGT, by the use of substitutive share-forshare transactions under the new section 43 of the Act (see "Corporate restructuring rules" above).
  • In order to qualify as a REIT the company must be a resident whose shares are listed, and the shares will be listed as a REIT as defined in the JSE's Listings Requirements.
  • Any dividend declared (including interest on a linked debenture) will be treated as a qualifying distribution if more than 75% of a REIT's gross income in the previous tax year consists of rental income (the latter being quite widely defined).
  • Any such qualifying distribution ranks as a tax deduction in determining the REIT's taxable income. Thus only undistributed profits will be taxed at the normal rate of 28%.
  • The distribution is, even when it comprises interest on a debenture, deemed to be a dividend. As such, it is subject to dividends tax where appropriate.
  • However, unlike most dividends, the dividend is not tax-exempt as far as South African residents are concerned. Thus South African residents will be fully taxable on the dividend, but non-residents will be exempt.
  • Although, as with any other dividend, a RE IT dividend is subject to dividends tax, there is a special exemption in respect of dividends received or accrued before 1 January 2014 (the reason is to give the companies an opportunity to amend their systems).

The new rules come into operation in respect of tax years commencing on or after 1 April 2013.

AMENDMENTS AFFECTING INDIVIDUALS

Additional medical expenses tax credit

Last year the medical schemes fees tax credit rules were introduced as section 6A of the Act, as part of the switch from the medical deduction to the tax credit or rebate. This year section 6B of the Act was introduced to deal with the additional tax credit.

The criteria and definitions are not all that different to those relating to the current medical expense deduction. The major difference between a deduction and a rebate is that the former is deducted in arriving at taxable income subject to tax, whereas the rebate or credit is a deduction from the actual tax liability itself.

The following are the rebates:

  • In the case of a person over sixty-five, or where the person, his or her spouse, or his or her child has a disability (as defined), the rebate is 33,3% of so much of the medical scheme contributions as exceeds three times the medical scheme tax credit under section 6A; plus 33,3% of the qualifying medical expenses paid.
  • In all other cases, the rebate is 25% of so much of the aggregate of (a) medical scheme contributions as exceeds four times the amount of the medical scheme fees tax credit, and (b) the qualifying medical expenses, all as exceeds 7,5% of the taxable income.

The credit system will apply from 1 March 2014.

INTERNATIONAL TAX ASPECTS

Definition of "resident"

Under the controlled foreign company (CFC) rules the CFC's profits are effectively taxed in the South African shareholder's hands. There are two major exemptions from the CFC rules, being (a) where there is a foreign business establishment (essentially being a substantive business in the foreign country), and (b) the so-called high-tax exemption (essentially where the amount of tax payable by the CFC in the foreign country is at least 75% of the tax that it would have paid in South Africa if it were a resident).

It sometimes happens, however, that these foreign-owned companies are not CFCs because they do not have their place of effective management abroad, but rather they have their place of effective management in South Africa, rendering them to be resident here. This means that they still have to put in South African tax returns and claim the foreign tax paid as a credit. Often there is no, or very little extra, tax to pay, but there is still the required administrative compliance burden on both the taxpayer and the SARS.

To resolve this, the definition of "resident" will, with effect from tax years commencing on or after 1 January 2013, exclude a company if:

  • it is incorporated in a foreign country,
  • it has its place of effective management in South Africa, and
  • assuming its place of effective management was not here, it would be a CFC with a foreign business establishment (and therefore exempt) and it would enjoy the high-tax exemption.

It is not clear why a CFC falls out of the rules when it either has a foreign business establishment or it enjoys the high-tax exemption, but here, to be treated as not being a resident, it must qualify under both headings.

Transfer pricing

The transfer pricing rules are designed to ensure that connected persons in different countries transact at arm's length rates, to ensure that foreign affiliates are not undercharged by the South African person, and the latter does not overpay in respect of charges levied by the foreign affiliate.

These rules also apply to CFCs and oftentimes they do little more than add to the administrative burden of both the taxpayer and the SARS, because the CFC is outside of the South African tax net by reason of the exemptions already discussed above.

Accordingly, with respect to tax years commencing on or after 1 January 2013, the transfer pricing rules will not apply in respect of financial assistance or the use of intellectual property granted by a resident to a CFC if:

  • the resident owns at least 10% of the equity shares and voting rights in the CFC, and
  • the CFC has a foreign business establishment and it qualifies under the high-tax exemption.

Foreign investment entity

In order to encourage fund managers to use South Africa as a base of operations, rules have been enacted effectively to exempt the fund's income from tax here, because, absent these rules, it could be argued that the fund is resident in South Africa because its place of effective management is here.

To be a foreign investment entity various criteria must be met which, in brief, are the following:

  • It must not be incorporated, established or formed in South Africa.
  • The assets must consist solely of a portfolio of cash, listed instruments, government stock and derivatives, all held for investment purposes (presumably, therefore, not for speculative purposes, though it is not clear whether the expression "investment purposes" should be given such a narrow interpretation). Clearly private equity funds are not covered by the legislation
  • No more than 10% of the shares or participatory interests in the entity may directly or indirectly be held by South African residents.
  • The entity may have no employees and no directors or trustees who are engaged in its management on a full-time basis.

In such case, the definition of "resident" has been amended to the effect that, in determining whether it is a resident by reason of the fact that it has its place of effective management in South Africa, no regard must be had to any of the following activities:

  • one which constitutes a financial service (as defined) or a service that is incidental to a financial service;
  • one which is carried on by a financial service provider (as defined).

Exit charge

Following the widely reported Tradehold case, the rules relating to the so-called exit charge have been re-written in the form of a restated section 9H of the Act, which is deemed to have come into operation on 8 May 2012 (shortly after the Tradehold decision was handed down by the Supreme Court of Appeal).

Since the implementation of CGT on 1 October 2001 there has always been an exit charge in the rules. Because non-residents are, with certain limited exceptions, outside of the CGT net, in order to prevent an avoidance of CGT by a person giving up residence, the rule (in common with that in many other countries) was inserted to the effect that, on cessation of residence, the person is deemed to have disposed of his or her assets at market value on the day before ceasing residence.

In the Tradehold case the court held that as the company was a resident of Luxembourg, the double tax agreement between that country and South Africa precluded the deemed sale being subject to CGT, as only residents of Luxembourg would be liable for the tax.

Strangely the point that the deemed sale took place on the day before cessation of residence was not argued. The decision might well have been different had the point been argued. On the other hand, it has been speculated that this would have made no difference, because the trigger for the exit charge was the cessation of residence, and by the time the deemed sale took place the company was already a resident of Luxembourg and protected by the treaty, so that even if the deemed sale took place the day before, it was already a resident of Luxembourg.

The new section 9H of the Act does not seem to add much to the previous rules, save in one respect. The rules now state that, not only will the deemed sale take place on the day before cessation of residence, but the person's year of assessment is deemed to end on that date. The definition of "resident" has also been amended to state that a person ceases to be a resident on the date of cessation of residence.

Presumably these two amendments seek to set up the argument that the person could not have been non-resident on the previous day and, in any event, the deemed sale took place in the previous year of assessment when the person was still a resident.

Well, if that is all that it takes ...!

There was also an exit charge in relation to STC, in terms of which a company ceasing residence was deemed to have distributed its reserves as a dividend, in order to trigger a payment of STC. That rule was not carried over into the conversion to dividends tax. However, that rule has now been written into the new section 9H, so that a company ceasing residence will also be liable for dividends tax on the excess of the market value of its shares over its contributed tax capital.

MISCELLANEOUS AMENDMENTS

Apart from the other amendments referred to in the Introduction, the following amendments are worth mentioning:

Income Tax

  • Completion of the "clean break" principle when dividing retirement interests in a divorce.
  • Valuation of a fringe benefit in respect of rented employer–provided vehicles.
  • Depreciation of supporting structures for energy projects.
  • Further refinements to the headquarter company regime
  • Foreign tax credits for service fees improperly subject to foreign withholding taxes.
  • Revised currency rules for intra-group exchange items.

VAT

  • Amendment to the definition of instalment credit agreement (which encompasses both suspensive sale agreements and finance leases).
  • Amendments relating to credit notes and debit notes.

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.

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Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.