PRESENTATION TO THE SCoF2011 06 22

Presentation Footer 1

Presenters:

Muneer Hassan: Project Director TaxMuneer Hassan: Project Director Tax

Wessel Smith: Member of SAICA’s NTC

Puleng Owen Manyaka: Project Manager Tax

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Introductory comments y

- Response time

- Second submission by 4 July 2011

2011 Bills technical in content- 2011 Bills technical in content

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Presentation focus areas

- Suspension of section 45

- Dividend Tax removal of Value Extraction Tax

Introduction of medical scheme credits- Introduction of medical scheme credits

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SUSPENSION OF SECTION 45

Clause 75 / Section 45Clause 75 / Section 45 Anti-avoidance: suspension of intra-group

ll h 3 22 f SAICArollovers - paragraph 3.22 of SAICA submission

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SUSPENSION OF SECTION 45

Background

• Measures were in place since 1988• Measures were in place since 1988

• Section 45 introduced on 1 October 2001

• SA has no group tax

• Purpose: to grant inter-group reliefPurpose: to grant inter group relief

• Undergone significant amendments to curtail percei ed ab seperceived abuse

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SUSPENSION OF SECTION 45

Section 45 NOT required where there is no GROUP:

Co

Div 1 Div 3Div 2

ASSETS / TRADING STOCK

Expansion

LOAN ACCOUNT

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LOAN ACCOUNT

SUSPENSION OF SECTION 45

Section 45 as applied in daily transactions:

Co

Div 1 Div 3Div 2

SECTION 45: ASSETS / TRADING STOCK

Expansion

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LOAN ACCOUNT

SUSPENSION OF SECTION 45

“Debt push down”

BRIDGING FINANCE

Hold CoSTEP 1

NET PROCEEDS DISTRIBUTED AS DIVIDEND

Target NewCo

SECTION 45 : ASSETS

Target NewCoSTEP 2

CASH

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FUNDED BY DEBT

SUSPENSION OF SECTION 45Problem?

• No mention in Budget• No mention in Budget

• Retrospective

• Affects legitimate transactions

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SUSPENSION OF SECTION 45

Proposed solution?Proposed solution?

• GAAR

• Specific anti-avoidance against perceived abuse

• Group taxation for SA

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Dividends Tax: Removal of the Value-Extraction Tax (VET)Extraction Tax (VET)

Clause 91 / Removal of part IX (the VET) -p ( )paragraph 3.16 of SAICA submission

Background: Current “deemed dividend” rules for STV purposes in section 64C of Income Tax ActSTV purposes in section 64C of Income Tax Act

Th l th d t il d VET l tThe proposal removes the detailed VET rules todetermine if a payment from a company to itsshareholder is a disguised dividend or notshareholder is a disguised dividend or not

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Dividends Tax: Removal of the Value-Extraction Tax (VET) problemsExtraction Tax (VET) - problems

EM > a disguised dividend is essentially a questionthat entirely depends on the facts andthat entirely depends on the facts andcircumstances”.

As such, the legal connection of the payment (e.g.“in respect of” or “as consideration for”) needs toin respect of or as consideration for ) needs tobe determined

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Dividends Tax: Removal of the Value-Extraction Tax (VET) problemsExtraction Tax (VET) - problems

One of the fundamental principles of tax is certaintyOne of the fundamental principles of tax is certainty,meaning the amount of tax which each individual isbound to pay must be certain, and not arbitraryp y , y(Adam Smith – Wealth of Nations – 1776).

Problem?

For most owner managed small companies, it is often ah th i f t t t th h h ldgrey area whether in fact a payment to the shareholder

is a dividend, remuneration or even a loan14

Dividends Tax: Removal of the Value-Extraction Tax (VET) problemsExtraction Tax (VET) - problems

With t l t f l t id t iWithout a clear set of rules to guide taxpayers inthis regard, a great deal of uncertainty andconfusion among such small companies wouldconfusion among such small companies wouldexist.

Would result in more disputes and tax courtcases between SARS and taxpayers until a set ofcases between SARS and taxpayers, until a set ofrules have been laid down by the courts, whichcould take a number of years to happencould take a number of years to happen

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Dividends Tax: Removal of the Value-E t ti T (VET) blExtraction Tax (VET) - problems

For example, in the EM, an interest free loan to aFor example, in the EM, an interest free loan to a shareholder is indicated as a disguised dividend.But what about a loan to a shareholder at anBut what about a loan to a shareholder at an interest rate of one or two points below the prime rate?rate? And would a loan to shareholder at prime rate, but who experience financial difficulties be classifiedwho experience financial difficulties, be classified as a disguised dividend, since it could be argued that as the shareholder is not financially sound hethat as the shareholder is not financially sound he or she should not have received a loan at all?

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Dividends Tax: Removal of the Value-Extraction Tax (VET)Extraction Tax (VET)

Proposed solution?Proposed solution?

The proposal to scrap the VET should bereconsidered and the VET should be retained aspart of the new Dividend Tax system to providecertainty to taxpayers regarding their tax liability

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Introduction of medical scheme creditscreditsClause 10 and 47 / Section 6A and section 18(2)(c)- paragraph 2.6 of SAICA submission

Proposal: Medical scheme credits to replace current system of capped monetary amount d d i f di l id ib ideductions for medical aid contributions

B k d M h i f t di l idBackground: Mechanics of current medical aidcontribution deduction and other medicalexpenditure deductionexpenditure deduction

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Introduction of medical scheme credits problemscredits - problems

The amounts proposed for the medical credits areThe amounts proposed for the medical credits arevery low in comparison to the current cappedamounts considering the rising costs of medicalg gcontributions and expenses.

EM indicates that the tax breaks are used as a taxstr ct ring ehicle b high income earners tostructuring vehicle by high income earners toreduce the tax payable, BUT how can it be“structuring” if no current alternative to medical aidstructuring if no current alternative to medical aidmembership?

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Introduction of medical scheme credits problemscredits - problems

In terms of existing legislation medical aidIn terms of existing legislation, medical aiddeductions may potentially give rise to anassessed loss. However, section 6A is silent onassessed loss. However, section 6A is silent onmedical scheme credits that are not used in theyear of assessment in which they arose. It wouldthus seem that such unutilised credits will beforfeited.

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Introduction of medical scheme credits problemscredits - problems

Current system > elderly taxpayers (being 65 years and older – qualifying for a rebate in terms ofand older – qualifying for a rebate in terms of section 6(2)(b)) and disabled taxpayers, will qualify for a 100% tax deduction for their medical aid contributions

Proposed tax credit system > these taxpayers will onlyProposed tax credit system these taxpayers will only receive a R216 additional tax credit per month

The additional R216 credit per month might not besufficient to cover the total medical aid contributions bythese special classes of ta pa er e en if calc lated atthese special classes of taxpayer, even if calculated atan average tax rate of 30%

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Introduction of medical scheme creditscredits

Proposed solution?

We submit that the amounts (proposed credits)should be more in line with the current costs ofshould be more in line with the current costs ofmedical aids.

We propose that this change becomes effective at afuture date when the members have an alternative(when National Health Scheme become effective).

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Introduction of medical scheme creditscredits

Proposed solution?

We propose that the medical aid contributiondeduction system of a 100% for elderly taxpayersdeduction system of a 100% for elderly taxpayers(being 65 years and older – qualifying for a rebate interms of section 6(2)(b)) and disabled taxpayers beretained and that these taxpayers be excluded fromthe new tax credit system to prevent these taxpayersfrom suffering hardship as a result of a reduction in thefrom suffering hardship as a result of a reduction in thetax benefits for their medical aid contributions

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Introduction of medical scheme creditscredits

Proposed solution?

We propose that the legislation should makeWe propose that the legislation should makeprovision for unused medical scheme credits to becarried forward to successive years of assessmenty

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