THE Minister of Finance tabled some tax proposals that will
have an impact on business owners, including:
Special economic zones
In certain special economic zones, the Minister of Finance
will authorise the following tax incentives, after consultation with the
Minister of Trade and Industry:
- A 15%
corporate income tax rate for businesses in such areas;
- An
employment incentive allowing a tax deduction for employment of workers earning
less than R60 000 per year;
- An
accelerated depreciation allowance for buildings in these areas, based on the
existing regime for urban development zones - in order to encourage developers
to invest more in industrial premises.
Government’s intention is clearly to stimulate business
activity in these areas and business owners should seriously consider making
use of these opportunities.
Small business corporation relief
Government proposes that the R14m turnover threshold for small
business corporations be increased to R20m and that the graduated tax structure
for such corporations is revised as follows:
Business owners should seek advice from reputable tax
advisers to find out if and how they can utilise these rules to their
advantage.
Reforming the taxation of trusts
To curtail tax avoidance associated with trusts, Government
is proposing several legislative measures during 2013/14. Certain aspects of
local and offshore trusts have long been a problem for global tax enforcement
due to their flexibility and flow-through nature. Also of concern is the use of
trusts to avoid estate duty, which will be reviewed.
The proposals will not apply to trusts established to attend
to the legitimate needs of minor children and people with disabilities. The
proposals are as follows:
- Discretionary trusts should no longer act as flow-through
vehicles. Taxable income and loss (including capital gains and losses) should
be fully calculated at trust level with distributions acting as deductible
payments to the extent of current taxable income. Beneficiaries will be
eligible to receive tax-free distributions, except where they give rise to
deductible payments (which will be included as ordinary revenue).
- Trading trusts will similarly be taxable at the entity
level, with distributions acting as deductible payments to the extent of
current taxable income. Trusts will be viewed as trading trusts if they conduct
a trade or if beneficial ownership interests in these trusts are freely
transferable.
- Distributions from offshore foundations will be treated as
ordinary revenue. This amendment targets schemes designed to shield income from
global taxation.
With the help of knowledgeable professionals, business owners
should review their estate plans and related structures to ensure that they
comply with all relevant tax laws. They must also make sure that arrangements
made in the past still have the desired outcomes after the proposed changes
have been implemented.
Business taxes
Restricting debt to prevent base erosion
Although debt financing is a feature of all healthy
economies, debt is often used to erode the tax base. Closure of artificial and
excessive debt has been on the tax policy agenda for more than two years. To
bring this matter to a conclusion, Government proposes the following:
- Artificial debt: Some debt instruments will be
re-characterised as shares (along with the underlying yield) if they contain
certain features. The main concerns are so-called debt instruments that do not
have a realistic possibility of being repaid in 30 years, or debt that is
convertible into shares at the request of the issuer. Banks and insurers will
be excluded from this re-characterisation.
- Connected person debt: Excessive debt issued to connected
person creditors is of concern if the creditor is exempt from tax on the
interest, because connected persons can often use debt and equity
interchangeably without serious economic consequence. Limits will be imposed so
that the interest on this form of debt does not exceed 40 % of earnings after
interest on other debts has been taken into account. Excess interest will be
allowed to roll over for up to five years.
- Acquisition debt: In corporate restructuring, use of
acquisition debt against future earnings effectively eliminates taxable profits
for years to come (with the debt often renewed via a new acquisition in later
years). Interest on excessive debt will be allowed to roll over for up to five
years. This system will replace the discretionary system applied to interest on
discretionary debt.
Business owners should take heed of these proposals and
ensure that the capital structures of their businesses, after the
implementation of these proposals, continue to serve their best interests.
Employment tax incentives
A youth employment tax incentives will be introduced to
encourage the hiring of young people. This will create a graduated tax
incentive at the entry-level wage, falling to zero when earnings reach the
personal income tax threshold. As mentioned earlier, similar tax incentives
will be made available to eligible workers of all ages within special economic
zones.
Tax administration
It is also proposed that various measures be launched to
assist with tax administration, including a single registration process to
simplify registration for all businesses, streamlined processes and forms, and
automated tax clearance certificates.
It is also very positive to hear that the (very punitive)
understatement penalty provisions under the new Tax Administration Act will be
refined and relief will be provided for bona fide errors.
*Kobus Engelbrecht is head of marketing at Sanlam Business Market
Follow Fin24 on Twitter, Facebook, Google+ and Pinterest.