South Africa: 2019 South African Budget Speech Summary/Tax Proposals

Last Updated: 12 March 2019
Article by   ENSafrica

Most Read Contributor in South Africa, February 2019

Overview

A very conservative budget was read by the South African Minister of Finance today, 20 February 2019. There are no notable increases in any of the direct or indirect taxes. The major increase in revenue is to be achieved by allowing "bracket creep" ie, to allow inflation to naturally increase the tax take.

The Commission of Inquiry into Tax Administration and Governance by the South African Revenue Service("SARS") has recommended steps to improve governance at the agency. SARS is strengthening its operations by re-establishing the LBC and setting up a dedicated unit to tackle syndicated tax evasion. Revenue collections have been negatively impacted by paying out the backlog of VAT refund claims, which has substantially reduced the backlog of such claims.

business tax proposals

On the tax policy side, there are numerous proposals, some of which are to take immediate effect:

  • Dilution transactions ¡V with immediate effect, the anti-avoidance rules relating to share buybacks will be extended to include transactions that involve the distribution of a substantial dividend to the current company shareholder and the subsequent issue of shares to a third party.
  • In very brief summary, the following proposals are on the slate for further legislative action:

    • Correcting certain anomalies arising from applying the value shifting rules (where the market value of the asset acquired by a company differs from the market value of shares issued in exchange);
    • Dealing with possible double taxation when a company that acquired assets in exchange for shares subsequently disposes of assets in circumstances where the shares and the assets differed in value on acquisition;
    • A reconsideration of requirements around the special interest deduction for debt financed acquisitions of the controlling shareholding in an operating company;
    • Restrictions on utilising the special interest deduction in the case of the debt funded capitalisation of newly established companies (as opposed to acquiring a controlling interest in an existing income generating company);
    • Specific provisions dealing with the transfer of exchange items and interest-bearing instruments between companies as part of a group reorganisation;
    • Refining and clarifying the interaction between various anti-avoidance rules applicable to intra-group transactions;
    • Harmonisation of the provisions that are applicable to ¡§exit charge¡¨ on corporate de-grouping in the context of corporate reorganisation rules and the provisions relating to controlled foreign companies in section 9D and section 9H of the Act;
    • Amending the rules relating to the deregistration of companies in order to effect compliance with certain of the reorganisation/merger rules to align them with the Companies Act, 2008 provisions;
    • Further work will be done to find solutions for the tax treatments of amounts received by portfolios of collective investment schemes (which had received considerable attention during 2018);
    • The tax treatment of unlisted REITS will be considered where they are widely held or held by institutional investors;
    • The current REIT regime is to be reviewed with attention given to inconsistencies affecting, inter alia, foreign exchange differences and corporate reorganisation rules;
    • Amendments will be considered to address the administrative burden on the transfer of assets between a risk policy funds paying benefits in the form of an annuity and an untaxed policy holder fund;
    • The provisions of the Income Tax Act, 1962 will be revised to bring them in line with the New Insurance Act, 2017;
    • In relation to special economic zones ("SEZs"), certain changes will be made to review the provisions and clarify the policy intent and address unintended misalignment with the Special Economic Zone Act, 2014 and reviewing the anti-avoidance measures relating to transactions between a company and connected persons within the SEZ; and
    • The rules relating to venture capital companies will be reviewed with a view to preventing certain abuse relating to excessive tax deductions.
    • Government will review the urban development zone tax incentive which is due to expire on 31 March 2020 to determine whether it should be extended or not.

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