2024’s Budget Speech was as predictable as the sun rising in the east. No bracket creep, no increases, no risks taken in an election year.
Despite the current economic climate, no stimuli was introduced to attract foreign investment which could lead to a broadened tax base. Quite worryingly, the piggy bank was broken open and everyone knows the level of desperation when this route is taken.
Suggested stimuli could have included further relaxations of exchange control measures as South African taxpayers and businesses desperately need more accessible exposure to the offshore markets. The current distressed approach to keep “capital” within our borders sends a clear message of panic. The messaging is not comforting and we expect to see an increase in special dispensation applications.
By not providing further incentives to attract foreign investment, by playing it safe and by not providing consolation to the masses in difficult times, leads to a worrisome “wait-and-see” until 29 May 2024. If ever there was a time, we have to let our votes count.
A few Annexure C proposals were made, including a positive indication to revisit the notorious section 7C-discussion as it relates to sections 7(8) and 31 of the Income Tax Act (“the Act”):
During this round, National Treasury proposed to clarify the interaction between sections 7C and 31 of the Act.
Section 7C is an anti-avoidance provision to prevent the tax-free shifting of wealth to trusts by utilising low or interest-free loans domestically or cross-border. It determines that if the interest rate charged on loans made by individuals to trusts (and certain connected-person companies) is lower than the official rate of interest (currently 9,25%), the difference between the interest charged and what would have been charged at the official rate of interest, is then a deemed donation which is taxed at 20% (up to R30 million, 25% over R30 million).
Section 31’s benchmark is “arm’s length” which should be tested and applied in each client’s specific circumstances, much more subjective that section 7C.
Given the wording of the exclusion of section 31 in section 7C(5), there has always been two schools of thought relating to the interaction between sections 7C and 31. Add two SARS interpretation notes (“IN”), i.e. IN 114 and 127, then you have a real conundrum to deal with. Although IN 127 seems to clarify the position between section 7C and 31, interpretation notes are non-binding. It’s merely SARS’ view of the subject matter and therefore, although valuable to know and understand SARS’ view, it’s not decisive. National Treasury confirmed this in the Budget as follows:
“… the exclusion does not effectively address the interaction between the trust anti-avoidance measures and transfer pricing rules where the arm’s length interest rate is less than the official rate on these cross-border loan arrangements. It is proposed that amendments be made to the legislation to provide clarity in this regard.”
This proposal is therefore welcomed to ensure legal certainty in an already challenging environment. We will keep our clients updated on developments herein.
Should you have any questions relating to the article, please contact Marteen (marteen@fidelisvox.co.za) or Suzanne Smit (suzanne@fidelisvox.co.za)