DRAFT TAXATION LAWS AMENDMENT BILL 2012
Two months after the publication of the Taxation Laws Amendment Act, 2011 on 10 January 2012, National Treasury released a Draft Taxation Laws Amendment Bill 2012 (the "Draft TLAB 2012"), on 13 March 2012.
Although the proposed changes are referred to by SARS as "technical corrections" to "address various anomalies, such as ambiguities, unintended language, effective dates and the like", one should not be fooled into thinking that these amendments are simple or inconsequential. On the contrary, as some of the proposed changes are amendments to amendments which come into effect on different effective dates, it can be quite a minefield to work through.
Also, as the bill is still in draft form, there may be further changes before the bill is eventually published. SARS further cautioned that certain legislative provisions, such as the proposed amendments to sections 8E and 8EA, may be subject to further changes as they may need to be tightened to address specific anti-avoidance concerns.
The following is a high-level overview of some of the main proposed, amendments.
Hybrid shares and third-party backed share - sections 8E and 8EA
The main purpose of these anti-avoidance provisions was to deem dividend income from such shares as taxable income in cases where the holder of the shares does not bear some form of equity risk associated with the issuer thereof.
Although the Taxation Laws Amendment Act No 24 of 2011 ("the 2011 TLAA") contained changes to section 8E which were supposed to come into effect on 1 April 2012, the Draft TLAB 2012 effectively postpones the 2011 amendments to October 2012 and also contains further proposed changes to the 2011 amendments.
The main proposed amendments to section 8E are:
To provide that an instrument will not constitute a "hybrid equity instrument" where the consideration received by the issuer was applied directly or indirectly solely to acquire shares in an operating company (other than an operating company in the same group of companies). Although the carve-out does not refer to black economic empowerment ("BEE") transactions, this was one of the reasons for including the carve-out; and
To relax the rules regarding shares backed by a financial instrument, by inter alia including a definition of what constitutes a "financial instrument".
The 2011 TLAA introduced section 8EA, to come into effect on 1 October 2012. The Draft TLAB 2012 however repealed the section of the 2011 TLAA which introduced section 8EA and introduced a new section 8EA, also to come into effect on 1 October 2012.
Although the first version of section 8EA also excluded a share from the definition of a "third-party backed share" where the consideration was used to acquire an equity share in an operating-company (which is also intended to provide relief for BEE transactions), these rules were refined in the latest version of section 8EA to provide for the relief to apply more widely to more complex structures. However, as is the case with section 8E, the operating-company relief applies only to an operating company which does not form part of the same group of companies.
Interest deduction limitation - section 23K
Section 23K (introduced during 2011 in piece-meal fashion) disallows a deduction for any interest incurred by an acquiring company on a debt instrument used to fund the acquisition of any asset in terms of a section 45 intra-group transaction or a section 47 liquidation transaction, or in substitution for any such debt instrument. An amendment is introduced to provide that section 23K will apply for an interim period only, i.e. in respect of a reorganization transaction entered into from 3 June 2011 up to an including 31 December 2012. It is envisaged that enhanced debt/equity rules and anti-excessive debt rules will be enacted to eventually replace section 23K.
(Although the following does not form part of the Draft TLAB 2012, it must be noted that regulations in terms of section 23K were issued on 28 March 2012, prescribing the circumstances under which sections 23K(2) and (3) of the ITA will not apply.)
Dividends tax transition rules
Various amendments to apply to disposals on or after 1 April 2012 are proposed in relation to dividends tax, which replaced STC (secondary tax on companies) on 1 April 2012, including the following:
It has been clarified that where a company declares a dividend before 1 April 2012 (the effective date for dividends tax) and that dividend will only accrue to a shareholder after this date, it is deemed to accrue to the shareholder on the day immediately before 1 April 2012. This ensures that in such cases where a dividend is declared before but only accrues after 1 April 2012, it will be subject to STC and not dividends tax.
Such dividend will thus give rise to STC transitional credits, but all STC credits will now only remain available for a 3-year transitional period as opposed to the current 5-year period.
Section 64E is amended to adjust the timing trigger for dividends tax, distinguishing between dividends paid by listed and listed companies, i.e.:
If a listed company declares a dividend, the dividend is deemed to be paid on the date on which the dividend is paid; and
If an unlisted company declares a dividend, the dividend is deemed to be paid on the earlier of the date on which the dividend is paid or becomes payable.
The deemed dividend that arises from company loans to certain individual shareholders and connected persons to them will be deemed to be a dividend in specie, implying that the company making the loan is liable for any dividends tax in this regard.
In order to avoid potential double taxation, the list of exemptions from dividends tax is extended to include a collective investment scheme ("CIS") in securities, any person to the extent that the dividend is subject to normal tax, and any person to the extent that the dividend was subject to STC.
Where a regulated intermediary pays a dividend to a vesting trust whose sole beneficiary is another regulated intermediary, the regulated intermediary need not withhold any dividends tax. This is introduced to cater for the situation where a CIS holds its financial instruments in a wholly controlled trust in respect of which the CIS is the sole beneficiary.
Distributions in terms of section 44 (amalgamation) and 46 (unbundling transactions) must be disregarded for dividends tax purposes.
Foreign tax rebates - section 6quat
Section 6quat is amended to provide that, although only a portion of foreign dividends are taxable, the full amount of any withholding taxes paid in relation to these foreign dividends could potentially be eligible for a foreign tax rebate.
Dividends treated as income on disposal of certain shares - section 22B
The 2011 TLAA introduced a new section 22B to treat dividends as income if the underlying shares are disposed of in the circumstances set out in section 22B. In terms hereof, the dividends would only be treated as income if, in addition to the other requirements set out in section 22B, the shares were disposed of within 45 days of the accrual of the exempt dividend. Section 22B came into effect on 1 April 2012. The Draft TLAB 2012 proposes to scrap the 45 day-rule with effect from 1 April 2012.