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National Treasury releases for public comment a draft of the 2010 Taxation Laws Amendment Bills which give effect to the 2010 budget tax proposals. The draft legislation and explanatory memorandum can be found on the National Treasury (http://www.treasury.gov.za) and SARS (http://www.sars.gov.za) websites.
Below are some updates that might be pertinent to you:
Retrenchment
Lump sum termination of employment payments after 1 March 2011 will be subject to the same tax treatment regardless of whether the lump sum is obtained from the employer or by withdrawing funds from pre-existing retirement funds – both sums will be subject to the special rates table for lump sum retirement withdrawals (including the R300 000 exemption) with the same principle of lifetime aggregation.
Narrowing of the interest threshold exemption
The interest exemption is to be only applicable to savings that flow into the general SA economy and all other forms of interest are to be taxable at marginal rates. The threshold exemption will be limited to interest bearing products on the JSE (e.g. corporate bonds); interest paid by any one of the three spheres of government; interest paid by any Bank; Collective Investment (money market) schemes and interest from dealer or brokerage accounts. The foreign interest and dividend exemption will remain the same. The effective date is from the commencement of years of assessment ending or after 1 January 2010.
Post retirement commutation of small annuities into lump sums
Currently small Living Annuity commutations are treated as gross income. We have argued in the past that there is a contradiction in the Income Tax Act, between the Second Schedule (which deals with the definition of a lump sum benefit) and the definition of "gross income", which we believed meant that a commutation should rather be taxed as a lump sum benefit than as gross income. All lump sum commutations of annuities on retirement or death which arise on or after 1 March 2011 will receive the same tax treatment as a lump sum payout on retirement or death i.e. the R300 000 tax exemption will apply. All exemptions will be aggregated so that one will only enjoy the R300 000 tax exemption once in a lifetime.
Ongoing refinements to Dividends Tax
In 2008, the Government announced its intent to switch from Secondary Tax on Companies ("STC") in respect of dividends to a new system of withholding rules (the 10% Dividends Tax) on an effective date to be announced by the Minister of Finance (this may only be in 2011/2012). Revised relief for the transfer of residential properties from Trusts/Companies/CC's – extended to 31 December 2012 Before 2001, certain individuals used companies or trusts to purchase residences so as to avoid the payment of transfer duty. In 2002 this was curbed by a transfer duty anti-avoidance rule and two year window period was given to taxpayers to transfer certain residences out of pre-existing companies or trusts. In 2009, relief was given to taxpayers under a restored window period, part of which was to eliminate unnecessary companies and trusts but the 2009 relief failed to require the termination of the entity and Revenue felt that with taxpayers seeking the continued use of the entity, this undermined estate duty and other tax charges associated with death. The 2009 relief also failed to take account of changed circumstances where for example a residential property company was transferred to new shareholders after formation, as part of the sale. The revised relief (will apply to transfers from 1 October 2010 to 31 December 2012) contains the same core objectives – to assist taxpayers with simple standardised structures have a residence was placed in a company or trust solely to avoid transfer duty.
The qualifying criteria for the relief where the property is held in a company are:
- The company must dispose of the residence in the course of its liquidation/winding up or deregistration;
- The terminating company disposing of the residence must solely be owned by a single shareholder throughout the window period and the residence must be disposed of to the same shareholder; and
- The residence must represent at least 90% of the value of the company throughout the period in which the natural person to whom the residence is disposed of held shares in the company. The residence must be used mainly for residential domestic purposes by the shareholder, spouse, and/or relatives throughout the same period. Also the relief only applies in relation to the portion of the residence that does not exceed two hectares. All these requirements ensure that the property in issue is mainly dedicated to private use as opposed to investment use.
Where the property is held in a Trust, the qualifying criteria for the relief are:
- The Trust must dispose of the residence in anticipation of or in the course of the Trust's liquidation. The Trust must be wound up within 18 months;
- The donor (or together with a spouse) alone must have disposed of that residence to the Trust by way of a donation, settlement or other disposition or have financed all the expenditure that was actually incurred by the Trust to acquire and improve the residence. On disposal, the residence must be transferred to the same donor (and/or spouse); and, as with companies
- The residence must represent at least 90% of the value of the Trust throughout the period in which the Trust held the residence. The residence must be used mainly for residential domestic purposes by the donor, spouse, and/or relatives throughout the same period. Also the relief only applies in relation to the portion of the residence that does not exceed two hectares. All these requirements ensure that the property in issue is mainly dedicated to private use as opposed to investment use.
If the disposal qualifies for relief, no taxable gain/loss applies to the company disposing of the residence and the disposal of the residence will also be exempt from transfer duty, STC (or the new dividends tax, if the disposal occurs after the new dividends tax comes into effect). Clients who elect to take advantage of the extended window period will benefit from no taxable gain; no transfer duty and no STC or dividends tax.
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