The annual tax laws and tax administration law amendment bills have recently been published by National Treasury for comments by the public. Of particular interest, the following changes have been proposed:
Clarifying the timing of disposal rules in respect of an asset acquired from a deceased estate
When a person passes away, the Estate Duty Act provides for the assets of that person, as at the date of death, to be part of a deceased estate, before the assets are distributed to the respective heir(s). The Estate Duty Act also makes provision for the Executor to act on behalf of the deceased and administer his / her estate, including the preparation and submission of the Liquidation and Distribution Account to the Master of the High Court Office and submission of the final tax returns to SARS (including the payment of estate duty and capital gains tax, if applicable).
The proposal clarifies that the time of disposal of the heir’s personal right to claim delivery of the deceased estate assets be made in the legislation so that the disposal of assets by the estate occurs on the date when the Liquidation and Distribution account becomes final. This is a welcome change, as it eliminates costly disputes between heirs and executors, and ultimately creates certainty in law.
Strengthening anti-avoidance rules in respect of loan transfers between trusts – Section 7C
The Explanatory Memorandum (“EM”) of the Tax Laws Administration Bill states that since section 7C was introduced in the Income Tax Act, further schemes were developed to increase the base cost of high value trust assets and in particular, shares in off-shore companies resulting in loan arrangements between South African trusts not subject to the anti-avoidance measures. The features of the schemes are as follows:
- Step 1: Shares in a foreign company held by a family trust (which is established in South Africa) are bought back on loan account.
- Step 2: Through journal entries and principles of set-off, the buy-back amount is used to capitalise new foreign companies held by a trust. Under step 2, there are no cash flows nor any money inflow into South Africa. The scheme enables taxpayers to rebase the cost of foreign capital assets for the family through the capitalisation of new foreign companies.
- Step 3: Finally, the loan claim (reflecting the amount owed by the original foreign company is to the trust in respect of the share buy-back) is disposed of to another trust in which the relatives of the founder of the first trust are beneficiaries or the founder. This disposal is effected in terms of an interest free loan account.
We are of the opinion that the proposed change is non-sensical as the specific example given in the EM primarily contravenes Exchange Control regulations: a domestic trust may generally not hold foreign direct investments as a starting point. The origin of this proposed change is drafted from a point of illegality in the first instance and should be addressed at Reserve Bank / FinSurv level. Submissions will be made to this effect.
Applying tax on retirement fund interest when an individual ceases to be tax resident
National Treasury proposed that the interest earned on the capital amount in retirement funds should be taxed when an individual ceases to be tax resident. This only becomes payable, however, when the non-tax resident are entitled to divest from the retirement fund in South Africa, i.e. 3 years after ceasing tax residency.
The tax basis upon which SARS is levying the tax poses challenges including, but not limited to treaty override, and practical implementation considerations not considered or addressed in the EM. The proposal is still vague from a legal and practical perspective, and may cause investors to reconsider keeping investments in pension funds.
Submissions have been made via The South Africa Institution for Tax Professionals’ working groups. Should you have any particular questions, please contact Suzanne Smit at suzanne@fidelisvox.co.za.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)