South Africa: Paying Too Much CGT? Pravin Gordhan's Tax Rate Reprieve

Last Updated: 18 July 2016
Article by Hugo van Zyl

During February 2016 the beleaguered South African Minister of Finance, Minister Pravin Gordhan, made a serious attempt to balance government's books.

Gordhan was called back after Minister Nene was removed from his position, by President Zuma early December 2015. The true reason for this politically motivated musical chairs, appointing three ministers in less than 4 days, remains a mystery. Point is Nene was removed and Gordhan had to step in and rescue the cash flow and ensure the country did not face junk status.

Being an election year, the increase in wealth taxes, went down well with the grassroots support base of the ruling African National Congress (ANC). On February 24, 2016, said Gordhan then increased the effective capital gains tax (CGT) rate as of 1 March 2016.

Or did he not?

Perhaps the increase date was much later? Especially for corporates with year ends April 2016 to January 2017?

The effective date of the CGT increase has caused many taxpayers and their trusted auditors some nightmares. What is the tax rate applicable for corporate tax years ending on or after 1 March 2016? How is it possible to sell an asset before 24 February 2016, yet pay the "2017 tax year CGT rate" for year ends ending on or after 1 March 2016?

Because the 2016 budget, presented by Minister Gordhan on February 24th, included another tax and exchange control (excon) amnesty to be known as a Special Voluntary Disclosure Program (S-VDP or Special VDP similar to the USA's OVDP), most accountants overlooked the impact of the CGT rate increase. Now, during June 2016, most corporates not following the last day of February end of year tax regime, have to pay provisional (interim) tax.

June is a very popular tax year end for SA corporates, and their final provisional tax payment is due. For others, with a December year end the first provisional tax return is now due. Most listed companies with September year end are now approaching their interims auditor preparing their interim JSE reports. Accordingly, tax managers are called upon to quantify the tax cost due end September.

Suddenly, as never before, the writer is called upon by auditors and their clients to settle the tax rate disputes. Do we provide and pay over at the old rate of 18,64%, or do we pay over at the newly announced rate at 22,4% of the taxable capital gain? What is the understatement penalty should we use the incorrect tax rate? Is the most prevalent question: What is the underpayment of Provisional Tax penalty and interest charge?

Needless to remind the reader, Gordhan had less than three months to prepare his 2016 budget speech. Add to this the fact that the S-VDP draft tax bill was so badly worded and had to be re-issued in April 2016, and many accountants and auditors are most concerned about the fact that the tax amendment laws have not yet been passed.

It is an election year, and most politicians are canvassing grassroots and not attending to the normal parliamentary processes, the writer is told. We need the uncertainty on the effective CGT rate to be dealt with by parliament, the EFF disruptions notwithstanding.

Not so, argues writer!

There is no uncertainty, and the Minister's documents (dated 24 February 2016) and Treasury's subsequent draft bill (dated 12 April 2016) are quite clear: all the tax year ends up to end January 2017 will pay the OLD (read lower) CGT rate. It cannot be, say most accountants and auditors. Writer respectfully suggests the confusion is caused by neither the Treasury nor Gordhan, but by the profession itself.

In the past fifteen years, we fell into the bad habit of publishing CGT rates without the accompany inclusion rate, which lead most of us to believe the CGT rate changes will follow the same pattern as a change in corporate tax rates. Typically, the tax draft tax bill dealing with tax rates reads as follows (and very few of us ever noticed the subtle differences):

Complicated wording to say all companies with a year end on or after 1 April 2016 (current year) will pay the changed tax rate, that is, June year-end companies will pay the new corporate tax rate. This year there was no change in the corporate tax rate; it stayed 28%, yet the effective CGT rate changed.

Practically explained, a corporate with a tax year end on or after 1 April of this year would have paid current tax rates on income partly earned in the previous calendar year. A June 2016 year-end company will only know in February 2016 what the effective tax rate as of 1 July 2105 will be i.e. the December 2015 provisional tax is paid at the old rate and on the last day of June 2016, we have to pay not only the last six month's tax,but also the shortfall because of a tax rate increase (assuming there was one).

Not so in the case of an increase in the effective CGT tax rate!

The devil is in the detail. There was no change in the tax rate; there was a change in the inclusion rate. A capital gain as defined in the 8th Schedule to the SA Income Tax Act (the act), is only added to the taxable income (as defined in section 26A of the Act) after applying the so-called inclusion rate. If we look at Gordhan's Chapter 4, page 50 of the 2016 budget proposal tabled in Parliament on 24 February 2016, he wrote it, and we overlooked it completely:

Government proposes to increase the inclusion rate for capital gains for individuals from 33.3 per cent to 40 per cent, and for companies from 66.6 per cent to 80 per cent. This will raise the maximum effective capital gains tax rate for individuals from 13.7 per cent to 16.4 per cent, and for companies from 18.6 per cent to 22.4 per cent. The annual amount above which capital gains become taxable for individuals will increase from R30 000 to R40 000. The effective rate applicable to trusts will increase from 27.3 per cent to 32.8 per cent. These new rates will become effective for years of assessment beginning on or after 1 March 2016. [Writer added the emphasis]

In the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Amendment Bill, 2016 issued on April 12th, 2016 section 11(1) read with the sub-section (2) effective date, amends the 8th Schedule's paragraph 10 inclusions rates and reads:

Section 11(1): ....by the substitution for subparagraph (c) of the following subparagraph [in Para 10 of the 8the Schedule]:

"(c) in any other case, [66,6] 80 per cent," (2) Paragraphs (a) and (c) of subsection (1) are deemed to have come into operation on 1 March 2016 and apply in respect of years of assessment commencing on or after that date. [Writer added the emphasis]

It is the CGT inclusion rate that is changed, and unlike the tax rate amendment rules, the tax year must commence after 1 March 2016. If we use the same June 2016 year-end example, the new increase CGT effective tax rate only kicks in on 1 July 2017 (and not 1 July 2105 as in the case of a normal tax rate increase).

On reading this careful analysis of South Africa (SA) tax law, the writer attempts to bring clarity to many clients having called in the last month or two asking what CGT rate should be applied.

The old rate? or increased new rate?

The good news is that companies with a year end until 31 January 2017 (yes, 2017) need not apply the increased CGT rate, as yet!

The take home message is that corporates had a longer planning period as individuals and local trusts, suffered their increase CGT rate on transactions as of 1 March 2016.Yes, there is time to reduce the end June provisional tax payments, and if you have a September 2016 or December 2016 year end, there is even time to crystallize the pending sale to ensure the lower effective CGT rate is enjoyed.

Originally published in Tax Connections

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions