Don’t suffer the tax consequences of waived debt

Tax , ,

Many natural persons or trust shareholders in companies are confronted with the unintended tax consequences of owing an amount on a loan account to the company in which they hold those shares. These tax consequences specifically relate to the “deemed dividend” which arises on interest-free loans (related to so-called “debit loans” in companies). In many cases, there is no intention to ever repay the loan account, and shareholders and companies often consider simply waiving these loan accounts.

The issue typically arises when the shareholder is not immediately subject to any of the adverse debt waiver provisions of the Income Tax Act. The shareholder often opts to absorb any tax recoupments or base cost adjustments as a result of the debt benefit which it received as a result of the waiver. On face-value, in such a case, it is therefore often presumed that a debt waiver does not have any tax consequences.

However, when debts are waived, it is critical that not only the debt waiver provisions of the Income Tax Act are considered, but also the dividends tax provisions and the donations tax provisions.

Dividends Tax

The definition of a “dividend” for income tax purposes includes any amount which has been transferred or applied for the benefit of any person, in respect of the shares of that company. Although a debt waiver is unlikely to constitute an amount transferred in respect of shares, a strong argument can be made that a debt waiver would constitute an amount applied for the benefit of a shareholder.

The debt waiver is therefore likely to result in an amount applied, which constitutes a dividend for which dividends tax is payable by the natural person or trust shareholder. This is a dividend in respect of the entire amount of the loan, not only of the foregone interest that gave rise to the issue in the first place.

Donations Tax

The debt waiver regime provides for an exclusion from its adverse tax consequences to the extent that the donations tax provisions of the Income Tax Act apply. Importantly though, this is only true if the donations tax is actually payable. By including an exemption for the donations tax provisions, donations tax should be taken into account before considering debt waivers in isolation.

To the degree that the company did not receive “adequate consideration” for a loan waiver, it will be regarded as a donation to the shareholder. When a loan is waived and a company does not receive any consideration for the loan, the argument could be made that “adequate consideration” had not been received by the company.

Therefore, despite the debt waiver provisions not triggering any immediate adverse tax consequences for a natural person or trust shareholders, one must not lose sight of potential dividends tax and donations tax implications when waiving loan accounts. It is always recommended that appropriate advice is sought before merely waiving a loan.

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)

Insuring your tax obligations

Tax , ,

In addition to tax liabilities (tax capital amounts), taxpayers are also subject to an array of penalties and interests in respect of late payments, understatements, specific punitive penalties, and compliance-related penalties in terms of various tax Acts, such as the Income Tax Act, and the Value-Added Tax Act. This is often the case when there are uncertain tax positions, where taxpayers had to take a view on specific interpretations on a tax Act, or where assessments have not been finalised and there is a potential threat of penalties.

These uncertainties are often an impediment to the conclusion of transactions and deals, and one often finds in agreements that an amount has to be kept in trust (or escrow) to accommodate any potential or unforeseen tax liabilities which may arise as a result of the transaction. These amounts that have to be withheld (or “parked”) until such a time that a dispute or matter has been finalised, come at a significant interest cost and parties to the agreement do not always favour this as a standard term in agreements.

Internationally, there has been an increase in the number of instances where persons can insure their tax positions as they relate to tax capital, interests, and penalties. In other words, no amounts have to be kept back in trust/escrow, and parties are free to conclude and finalise transactions with full cash flows. Rather, instead of having the escrow amount, taxpayers insure their position by payment of a monthly premium in respects of their exposure to an insurance business. The cumulative premiums in this regard is, firstly, significantly less than the amount that has to be withheld and, secondly, does not mean an immediate cash flow in respect of such amounts. Your tax obligations are therefore fully insured, in a similar fashion to how you would insure your motor vehicle.

The South African insurance industry has not fully caught up with these international trends and there are very few (if any) comprehensive insurance products available to insure tax positions, in respect to unsure tax positions. On face-value, such insurance products appear to cater to “aggressive” or “abusive” schemes, and for taxpayers who want an “out” in respect of abuse of the tax system. However, this is not the case at all – such insurance products accommodate for ease of transaction flow, saving on transaction costs, keeping companies liquid, removing uncertainty from transactions, and facilitating deal flows without fear of adverse tax consequences.

One would hope that the South African insurance market is cognisant of international trends and that they consider making such products available locally, since the risks relating to the product can be proactively managed by both the insurers and the insured party, with the assistance of suitably qualified tax professionals.

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)

Exit tax and homeownership

Property , ,

The exodus of South Africans to foreign jurisdictions has been well publicised, and due to this, much has been written about the so-called “exit tax” that applies when one ceases to be a tax resident in South Africa, as well as matters relating to foreign employment income earned. However, what is often overlooked is what happens when you emigrate but retain your home in South Africa.

The general principle is that when you cease to be a South African tax resident, your home (constituting immovable property in South Africa) will not be subject to the “exit charge”, since that immovable property always remains a part of the South African tax net. This means that should you initially keep your home in South Africa and only sell it a few years down the line, you are only likely to pick up any capital gains tax consequences once you do sell the home.

The question arises, however: What is the interaction is between you having used your home as a primary residence whilst in South Africa and you not having lived there after your emigration? It is important to note that the way in which you used your residence whilst not actually living there while aboard is irrelevant for the consideration below.

In terms of the Income Tax Act, the first R2 million of a capital gain made on the disposal of a “primary residence” is excluded for purposes of calculating your tax liability. However, since you were not resident in your home for the entire time during which you owned the property, it will not constitute as being your “primary residence” for the entire time. An apportionment must thus be made for the time during which you lived in that residence, and the time you used it for other purposes.

Taxpayers are often incorrectly advised that for purposes of the apportionment mentioned above it is the primary residence exclusion of R2 million that must be apportioned on a time basis to determine the capital gains tax exposure. However, paragraph 47 of the Eighth Schedule of the Income Tax Act is clear in that it is the capital gain that must be apportioned on a time basis for the period you were resident and the period in which you were not resident. The gain made in respect of the period during which you did not reside in the property as your primary residence is fully subject to capital gains tax, while the R2 million primary residence exclusion can only be applied to that portion of the gain during which you indeed resided in the property, as your primary residence.

Persons who currently reside aboard or intend to emigrate while retaining their property, which they used as a primary residence at some stage, are therefore encouraged to obtain professional assistance when doing the apportionment calculations to ensure that they are not prejudiced in any way (either through the overpayment or underpayment of tax in respect of the disposal of that property).

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)

Smart accounting, the smart way

Tax , ,

The last several years have seen an increase in “smart accounting systems” that have online capabilities and that can integrate with various other business solutions. These smart accounting systems have revolutionised traditional accounting, and there can be no question that many businesses run a more organised and financially sound operation as a result of the availabilities of these programs and applications.

While the benefits of using these systems speak for themselves, businesses should ensure that the data processing and back-end of these systems (which is often based overseas) are compliant with local value-added tax (VAT) legislation. A prevalent example is where Point of Sale systems integrate with these accounting packages – when customers swipe their cards or make online payments using the Point of Sale systems, they often get email notifications confirming they have paid. These confirmations are presented in the form of a “tax invoice”.

Subsequently, when the Point of Sale system integrates with the smart accounting package, the bulk sales of a day are imported into the accounting package by means of an invoice posting in the accounting package. Therefore, one sits with a situation where a customer has received a tax invoice from the Point of Sale application system and a second invoice, in respect of the same supply, which is generated when the Point of Sale system integrates with the accounting package. This results in two tax invoices having been generated in respect of the same supply. This is specifically prohibited in terms of section 20 of the Value Added Tax Act, which only allows one tax invoice to be issued in respect of each supply. The mischief that the legislature is trying to prevent is clear – when multiple tax invoices are issued in respect of the same supply, multiple VAT input claims can be claimed by vendors in respect of the same supply.

There are also various other smaller challenges with using smart accounting packages and ensuring that its operations are VAT compliant (including the requirements for a valid tax invoice, the circumstances under which you are allowed to issue credit notes, and certain default settings in respect of VAT percentages applied to certain transactions). Fortunately, these smart accounting systems allow for specific customisation and certain transaction flows to be conducted in a different way.

Compliance with local VAT legislation should therefore by no means be an impediment in using these systems, as long as businesses ensure compliance. The use of these systems should be promoted, but should be done with professional assistance and persons who have a keen grasp of both the accounting side of the systems, as well as tax legislation, especially during the set-up phase of the systems and new applications.

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)

Bursaries and scholarships: The tax rules are changing

Tax , ,

Over the past several years, many employers and employees have made use of the beneficial tax treatment of bursary and scholarship schemes, as provided for in the Income Tax Act. The Act contains provisions that provide an exemption in respect of bona fide bursaries or scholarships granted by employers to employees or relatives of qualifying employees, subject to certain monetary limits and requirements stipulated in the Act. Essentially, an employee is not taxed on an amount granted to him/her when it meets the criteria as set out in the Act. 

In the case of a bona fide bursary or scholarship granted to a relative of the employee without a disability, the Act makes provision for the exemption from tax to apply only if the employee’s remuneration does not exceed R600 000 during the year of assessment. In addition, the amount of the bursary or scholarship will only be exempted up to a limit of R20 000 for studies from Grade R to 12, including qualifications at NQF levels 1 to 4, and R60 000 for qualifications at NQF levels 5 to 10. These levels are increased where the bursary or scholarship is made to a person with a disability. 

National Treasury has noted that it has come to Government’s attention that a number of schemes have emerged in respect of employer bursaries granted to the employees or relatives of employees. These bursary schemes are developed by an institution other than the employer and marketed to the employer as a means of providing tax–exempt bursaries to their employees or relatives at no additional cost to the employer. These schemes seek to reclassify ordinary taxable remuneration received by the employee as a tax-exempt bursary granted to the relatives of employees. As a result, an employee can cater to their relative’s studies by way of salary sacrifice. The portion of the salary sacrificed by the employee is paid directly by the employer to the respective school and is treated as a tax-exempt bursary in the employee’s or relative’s hands.  

It is proposed that the exemption, in respect of a bona fide bursary or scholarship granted by the employer to the relatives of the employee, should only apply if that bona fide bursary or scholarship granted by the employer is not restricted only to the relatives of the employee, but is an open bursary or scholarship available and provided to members of the general public. Furthermore, it is proposed that the requirement that the applicability of the exemption is dependent on the fact that the employee’s remuneration package is not subject to an element of salary sacrifice, be reinstated. 

Lastly, it is proposed that, as a means of further encouraging employers to grant bursaries to relatives of employees without subjecting such bursary to an element of salary sacrifice, that the employer deduction in relation to said bursaries is only afforded if the bursary to the employee’s relative is not subject to an element of salary sacrifice. 

The above proposals are currently open for public debate, and it is yet unclear whether the proposals will be enacted as is currently suggested. We expect the final bill which contained the proposals to be made available during November 2020. 

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)

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