Category Archives: Tax

DEATH AND TAXES

“…in this world nothing can be said to be certain, except death and taxes

Benjamin Franklin, in 1789

Have you considered seeing a professional regarding your Estate Planning?

Estate Duty is levied at 20% on all property in your estate over the cumulative value of R 3 500 000.00. Unfortunately an estate is not only subject to Estate Duty, but also Capital Gains Tax on certain assets. This could have a negative effect on the liquidity of your estate.

Proper Estate Planning, done timeously, can limit the exposure of your estate to the legal minimum.

At Delport van den Berg Estate & Trust Services, we offer holistic Estate Planning solutions to ensure that your Assets are transferred to your loved ones in a stable and tax effective manner, thereby guarding your Legacy.

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)

TAXATION LAWS AMENDMENT BILL 2017

Interest free loans or low interest loans to trusts and related companies – sec 7C revisited.

In our circular dated the 10th of January 2017 we discussed the newly introduced Section 7C of the Income Tax Act, which has since been promulgated into law. We made the following statement:

It seems from the wording that an interest free loans or low interest loans to a company, even if the trust owns all the shares, will not fall foul of these provisions. As legislation stands at the moment, this seems to create an opportunity to circumvent the provisions of Section 7C.

Unfortunately and, in our opinion, due to a variety of avoidance schemes utilised by certain practitioners in order to circumvent Section 7C, it was announced in the 2017 Budget Speech that Section 7C will be amended to include interest free loans or low interest loans to companies owned by a trust.

The Draft Taxation Laws Amendment Bill, 2017, which is still open for comments, contains the following amendments to Section 7C:

Section 7C (a) has been redrafted to include a loan, advance or credit made by:

  • a natural person; or
  • at the instance of that person, a company in relation to which that person is a connected person in terms of paragraph (d)(iv) of the definition of connected person,
    • trust in relation to which-
      • (aa) that person or company, or
      • (bb) any person that is a connected person in relation to the person or company referred to in item (aa),
    • to a company that is a connected person to the trust referred to in subparagraph (i) of this section.

With reference to the explanation contained in the Explanatory Memorandum to the Bill, it is clear that there must have been an oversight in the wording of the new paragraph 7C(1)(b)(ii). As the paragraph stands at the moment, and due to the very wide definition of “connected person” in the Income Tax Act, even a loan to a company that has nothing to do with a trust can fall under Section 7C due to the fact that, for instance, the sole director of the company is also a beneficiary of a trust. Clearly this could not have been the intention of the legislator and we are confident that subparagraph (ii) will be amended to refer to a loan to a company that is a connected person as envisaged in paragraph (d)(iv) of the definition of connected person, to the trust referred to in subparagraph (1)(b)(i).

That would mean that only a company where the trust individually, or jointly with any connected person in relation to the trust, holds directly or indirectly at least 20% of the company’s equity share capital or voting rights, will fall foul of these provisions.

To counter certain further avoidance schemes a new subsection (1A) was introduced stating that:

  • If a natural person acquires a claim to an amount owing by a trust or a company in respect of a loan, advance or credit referred to in subsection (1), that person must for purposes of this section be treated as having provided a loan, advance or credit to that trust or company –
  • On the date on which the person acquired that claim; or
  • If that person was not a connected person on that date in relation to-
    • that trust; or
    • the person who provided that loan, advance or credit to that trust or company, on the date on which that person became a connected person in relation to that trust or person, that is equal to the amount of the claim so acquired.

This was brought into the act to counter certain avoidance schemes where a person, who made a loan to a trust, entered into an arrangement in terms of which the claim for the loan against the trust is transferred to another natural person (i.e. a beneficiary of the trust) in order to try and ensure that the link between the natural person who advanced the loan and the loan itself is severed.

Certain other subsections were amended to provide for the inclusion of loans to a company as mentioned above.

A new sub section 5(h) was added providing exemption from the provisions of Section 7C to a trust that was created solely for purposes of giving effect to an employee share incentive scheme under certain circumstances and provided that a person who is a connected person in terms of paragraph (d)(iv) of the definition of connected person in relation to any scheme company would not be entitled to participate in that scheme.

These amendments will come into effect on the 19th July 2017 and will apply in respect of any amount owed by a trust or a company as envisaged in respect of a loan, advance or credit provided to that trust or that company before, on or after that date.

The provisions of sub section 5(h) (employment share incentive trust) is deemed to have come into operation on 1 March 2017 and applies in respect of any amount owed by a trust in respect of a loan, advance or credit provided to that trust before, on or after that date.

A new Section 7D has been introduced, providing that:

Where it must be determined what amount would have been incurred as interest in respect of any loan, debt, advance or amount of credit provided to a person or an amount owed by a person had that interest been incurred at the official rate of interest, that amount must be determined without regard to any rule of the common law or provision of any act in terms of which –

  • the amount of interest, fee or similar finance charge that accrues or is incurred in respect of a debt may not in aggregate exceed the amount of that debt; or
  • no interest may accrue or be incurred in respect of a debt once the amount that has accrued or been incurred as interest is equal to the amount of that debt.

These measures are aimed at invalidating the effect of the in duplum rule in common law which basically states that the amount of interest recoverable from a debtor could never exceed the capital amount of the debt.

This section comes into operation on 1 January 2018 and applies in respect of years of assessment ending on or after that date.

SUMMARY

  • While the result of the amendments are unfortunate, it had to be expected. We again wish to stress the importance of clients contacting their advisors regarding any trusts or affected companies where loans, as envisaged above exist

Even if amended as suggested above, the provisions are still very wide.

For example:

A and four of his cousins (whether on both sides of the family or not) form a company for a business venture and fund the company with interest free loans.

As long as they are the shareholders, Section 7C will not apply. Should one of them decide to transfer his shares to a trust of which he is a beneficiary (or of which a connected person in relation to him is a beneficiary), Section 7C will apply to all loans to the company. Cousins are connected persons, and for that reason all the shareholders are connected persons in relation to the trust. They are shareholders of the company and as such, connected persons in relation to the company.

I do not think that this could have been the intention but, at the moment, it is the result.

  • This is a further chapter in the trust saga and will have an effect on the use of trusts. However, with careful planning by knowledgeable advisors it would still be possible to utilise the trust as a useful estate planning vehicle
  • Please note that this is still draft legislation open for comments. Further changes might and most probably will occur to the final bill being accepted by parliament.
  • We will inform you on any further development

GPJ van den Berg
Delport van den Berg
Estate and Trust Services (Pty) Ltd
gert@delberg.co.za
T: +27 (12) 361 5001

The validity of tax invoices: It is your responsibility

The audits of Value-Added Tax (VAT) returns by the South African Revenue Service (SARS), have increased the focus on the validity of tax invoices for the purposes of VAT.

A VAT vendor submitting VAT returns is responsible for ensuring that all invoices included in the returns comply with the relevant legislation. If valid tax invoices cannot be provided at the time of a VAT audit, the vendor may lose up to 100% of the input tax being claimed on the invoice, even if an amended valid invoice can be provided subsequent to the audit. Furthermore, serious penalties, interest and other consequences may be imposed on the VAT vendor for errors, intentional omissions and fraud.

The requirements

Section 20 of the Value-Added Tax Act, no 89 of 1991, together with the VAT404 Guide for Vendors as updated in March 2012, sets out the requirements for a valid tax invoice.

A VAT vendor must issue a tax invoice within 21 days of the supply having been made where the consideration for the supply exceeds R50, whether the purchaser has requested this or not. If the consideration for the supply is R50 or less, a tax invoice is not required. However, a document such as a till slip or sales docket indicating the VAT charged by the supplier, will be required to verify the input tax.

The requirements for tax invoices of which the consideration or taxable supply is more than R5 000 are:

  1. the words “tax invoice” should be displayed;
  1. name, physical address and VAT registration number of the supplier name, physical; address and VAT registration number of the recipient;
  1. original serial number of the tax invoice;
  1. the date of issue of the tax invoice;
  1. full and proper description of the goods sold and / or services rendered;
  1. quantity or volume of goods and / or services supplied; and
  1. total amount of the invoice and VAT amount in South African currency (except for certain zero-rated supplies).

The requirements for tax invoices of less than R5 000 are:

  1. the words “tax invoice” should be displayed;
  1. name, physical address and VAT registration number of the supplier;
  1. original serial number of the tax invoice;
  1. the date of issue of the tax invoice;
  1. full and proper description of the goods sold and / or services rendered;
  1. total amount of the invoice and VAT amount in South African currency (except for certain zero-rated supplies).

Second-hand goods

In the case of second-hand goods purchased from a non-vendor, the purchaser has to record the following information:

  1. name, address and identity number of the supplier, confirmed by the person’s identity document or passport. (If the value of the supply is equal to or greater than R1 000, a copy of this document must be retained by the purchaser. If the non-vendor is a juristic person, a letterhead or similar document stating the name and registration number of the juristic person is required);
  1. date of acquisition;
  1. quantity or volume of goods;
  1. description of the goods;
  1. total consideration paid for the supply; and
  1. declaration by the supplier stating that the supply is not a taxable supply.

Conclusion

If a vendor fails to deduct an input tax in respect of a particular tax period, that input tax may be deducted in a later tax period, but limited to a period of five years from the date that the particular supply was made. However, when a vendor becomes aware of an output tax not declared in the relevant period, a corrected VAT return for that specific period should be submitted. It is not acceptable to declare the output tax in the next period and SARS may impose penalties and interest on the output VAT omitted.

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)

Influence on estate planning

The purpose of this communication is to inform clients of certain tax increases and proposals that will have an effect on Estate and Financial Planning. Only those changes and proposals directly affecting Estate Planning will be dealt with.
1. DIVIDEND WITHHOLDING TAX

Dividend income paid to shareholders was taxed at a rate of 15 per cent. The dividend withholding tax rate was increased by 5 percent to 20 percent.

The new rate is applicable to all dividends declared on or after the 22nd of February 2017.

2. CAPITAL GAINS TAX

The inclusion rates, which increased substantially in the 2016 budget, has remained unchanged for the 2017/2018 tax year. However, the increase in the marginal tax rate for individuals and trusts have an effect on the effective rate of Capital Gains Tax.

2.1 Individuals/Special Trusts:

  • Inclusion rate: 40% (remains unchanged)
  • Maximum effective rate: 18% (currently 16.4%)

2.2 Companies:

  • Inclusion rate: 80% (remains unchanged)
  • Effective rate: 22.4% (remains unchanged)

2.3 Trusts:

  • Inclusion rate: 80% (remains unchanged)
  • Effective rate: 36% (previously 32.8%)

2.4 Annual exclusion and exclusion on death:

  • Annual exclusion:R 40 000 (remains unchanged)
  • Exclusion in year of death: 300 000 (remains unchanged)

Effective for years of assessment commencing on or after 1 MARCH 2017.

3. TRANSFER DUTY

There has been certain adjustments to the Transfer Duty rates. The duty free threshold has been increased from R750 000 to R900 000. On transfers of property valued above R10 000 000 Transfer Duty will amount to R933 000 (previously R937 500) plus 13% of the value above R10 000 000.

The rates between R900 000 and R10 000 000 has been adjusted proportionately.

Effective for property acquired on or after 1 MARCH 2017.

4. ESTATE DUTY

No amendments to the rate or legislation was announced.

5. DONATIONS TAX

No amendments.

6. MEASURES TO PREVENT TAX AVOIDANCE THROUGH TRUSTS

In order to curb the use of interest-free or low-interest loans to finance the acquisition of assets by trusts, Section 7C was enacted as discussed in numerous previous circulars.

Section 7C does not apply to interest-free or interest-free loans to a company, even if the shares are held by a trust. This was discussed with SARS and Treasury during discussions of this section, but no changes in this regard ensued.

This “omission” clearly was too obvious to be overlooked by the legislator. For this reason the following statement contained in the Budget Review is, to say the least, perplexing:

“However, some taxpayers have already attempted to circumvent the anti-avoidance measure by making low-interest or interest-free loans to companies owned by a trust. To counter abuse, it is proposed that the scope of this anti-avoidance measure be extended to cover these avoidance schemes.”

At this point in time we have no indication of what the legislation will entail. Suffice to say that it will not be easy to draft.

7. DAVIS TAX COMMITTEE (DTC)

Mention was made that the report of the DTC on Estate Duty will receive attention in the 2018 budget.

8. COMMENTS

“In duplum” rule

The effect of this rule is that interest ceases to accrue when the amount of interest accrued equals the outstanding principal debt. It is proposed that the rules dealing with low-interest or interest-free loans be amended to explicitly exclude the application of the “in duplum” rule in order to ensure the efficacy of these rules.

Future of trusts

We maintain that trusts still have a place in the Estate Planning environment.

Choose your advisor carefully on the basis of:

  • Expertise in the field;
  • Trustworthiness;
  • Ability to keep abreast of new developments affecting your estate plan.

You will be kept up to date on developments in this regard.

For any enquiries contact our specialists below:

GPJ van den Berg | gert@delberg.co.za | T: +27 (12) 361 5001 | F: +27 (12) 361 6311

WC van der Merwe | callie@delberg.co.za | T: +27 (12) 361 5001 | F: +27 (12) 361 6311

Interest Free or Low Interest Loans to Trusts – Draft Taxation Laws Amendment Bill – 8 July 2016 

The Draft Taxations Laws Amendment Bill, 2016 has been made available for comments.

As far as trusts are concerned a new section 7C is proposed.

The provisions of said section can be summarised as follows:

  • The provisions apply to a loan, advance or credit made by a natural person,or
  • by any company in relation to which that person is a connected person (i.e. any person who individually or jointly with any connected person in relation to himself holds directly or indirectly at least 20% of the company’s equity share capital or voting rights),
  • to a trust,
  • in relation to which that person or company (or any person that’s a connected person (i.e. a beneficiary of a trust, any relative of such beneficiary, any other beneficiary of such a trust)) in relation to that person or company is a connected personand
  • no interest is incurred by the trust in respect of the loan, advance or credit,or
  • interest is incurred at a lower rate than the official rate of interest (contemplated in paragraph 1 of the Seventh Schedule to the Income Tax Act – currently 8%).

Result where abovementioned provisions apply:

  • Imputed interest:
    An amount equal to the difference between the amount incurred by the trust in respect of the year of assessment and the amount that would have been incurred by the trust at the official rate of interest mentioned above will be included in the income of the person making the loan;
  • Interest exemption:
    The imputed interest will not qualify for the interest exemption set out in section 10(1)(i) of the Income Tax Act;
  • Recoverability of the attributable income tax:
    An amount equal to the difference between the amount of normal tax that would have been payable by the person in respect of the year of assessment and the amount payable by that person after inclusion of an amount in terms of this section may be recovered by that person from the trust;
  • Donation:
    Should that person not recover the additional tax paid from the trust within a period of three years, that amount will be treated as a donation by that person to the trust after the period of three years and be taxed as such;
  • Donations tax threshold not applicable:
    Section 56(2) of the Act exempting donations up to an amount of R 100 000 will no longer apply to a loan, advance or credit as contemplated in this section that is disposed of under a donation;
  • Commencement date:
    The section comes into operation on the 1st of March 2017 and applies in respect of years of assessment commencing after the 1st of March 2017.

Summary

  • The introduction of this proposal is a direct result of the intention by National Treasury to curb the use of trusts for the saving of estate duty;
  • The net result will be that any interest free loan or low interest loan to a trust by any connected person in relation to that trust will result in imputed interest being added to the income of the person making the loan. The imputed interest will be the difference between the interest actually charged on the loan and the official interest rate (currently 8%);
  • The typical scenarios relevant to trusts which will be effected by this proposed legislative change (when promulgated) are:
  1. Where a person sells an asset to a trust on an interest free loan or charge interest on the loan at a rate lower than the official rate prescribed by SARS (currently 8%);and/or 
  2. Where the trustees of a trust make a distribution to trust beneficiaries and credit the distribution on an interest free loan account or charge interest on the loan at a rate lower than the official rate prescribed by SARS. Since beneficiaries of trusts qualify as connected persons in relation to the trust, it seems as if a loan to the trust by a beneficiary (as a result of a distribution of income or capital from the trust to the beneficiary which distribution was credited on loan account and not paid out) can invoke the provisions of this section.
  • Any additional tax payable by a person as a result of the application of this section may be recovered by that person from the trust. Should that person decide not to recover the additional tax from the trust for a period of three years the amount of the tax not recovered will be seen as a donation by that person to the trust and taxed as such.
  • The practice of writing off a R 100 000 per tax year on the loan free of donations tax will not be available for as long as the loan is an interest free or low interest loan as envisaged.
  • It is important that clients contact us or their advisors regarding any trusts where loans, as envisaged above, exist. Should such a loan exist it would be advisable to charge interest at, at least, the official interest rate as from the 1st of March 2017. It would be better to actually charge the interest than to allow the imputed interest to be applied since interest actually paid will qualify for the interest exemption.
  • If the trust earns taxable income these provisions should not create too many problems since the trust should then be able to deduct the interest paid for tax
  • Where the trust does not earn any taxable income, the problem will be that the interest will be taxable in the hands of the person making the loan, but no deduction will be allowed in the trust.
  • It seems from the wording that, an interest free or low interest loan to a company, even if a trust owns all the shares, will not fall foul of these provisions. As the legislation stands at the moment, this seems to create an opportunity to circumvent the provisions of section 7C.

General

  • While these new provisions will affect estate planning via trusts it will most definitely not mean the end of the trust as we know it. Careful planning by knowledgeable advisors should still make it possible to utilise the trust as a more than useful estate planning vehicle;
  • We also wish to emphasise that this is draft legislation open for Further changes might occur prior to the final legislation being promulgated;
  • We will inform you of any further developments.

The 2016 Budget Speech influences your Estate

DVDB_Blog-Budget2016The purpose of this communication is to inform clients of certain tax increases and proposals that will have an effect on Estate and Financial Planning. Only those changes and proposals directly affecting Estate Planning will be dealt with.

1. Capital Gains Tax

The inclusion rates has been increased substantially.

  1. 1 Individuals/Special Trusts:
    ° Inclusion rate:
    • 40% (currently 33.3%)

    ° Maximum effective rate:
    • 16.4% (currently 13.65%)
  1. 2 Companies:
    ° Inclusion rate:
    • 
    80% (currently 66.5%)

    ° Effective rate:
    • 22.4% (currently 18.6%)
  1. 3 Trusts:
    ° Inclusion rate:
    • 80% (currently 66.5%)

    ° Effective rate:
    • 32.8% (previously 27.3%)
  1. 4 Annual exclusion and exclusion on death:
    ° Annual exclusion:
    • R 40 000 (currently R 30 000)

    ° Exclusion in year of death:
    • R 300 000 (no increase)

Effective for years of assesment commencing on or after 1 MARCH 2016.

2. Transfer Duty 

On transfers of property valued above R10 000 000 (ten million rand) Transfer Duty will amount to R937 500 plus 13% of the value above R10 000 000 (ten million rand).

Below R10 000 000 (ten million rand) the rates remain the same.

Effective for property acquired on or after 1 MARCH 2016.

3. Estate Duty

No amendments to the rate or the basic deduction at this point in time.

4. Donations Tax

No amendments.

5. Measures to prevent tax avoidance through trusts.

It was stated that some taxpayers use trusts to avoid paying Estate Duty and Donations Tax by selling assets to the trust and leaving the purchase price on interest free loan:

“to limit taxpayers’ ability to transfer wealth without being taxed government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder (we assume that it refers to the lender or donor) at death and to categorise interest free loans to trusts as donations.

Further measures to limit the use of discretionary trusts for income splitting and other tax benefits will also be considered.”

6. Davis Tax Committee (DTC)

In a Webinar presented by Judge Dennis Davis in November 2015 he indicated that the DTC will most probably not alter the conduit principle with regard to trusts and will consider legislation to ensure that the use of interest free loans in financing trusts will result in the assets acquired through such interest free loans to be included in the estate of the person who made the loan to the trust.

Reference was also made to the possibility of a higher basic rebate. A figure of R15 000 000 was mentioned.

Judge Davis also indicated that they will not proceed with the recommendation to tax all distributions from off-shore trusts as income but will effect the necessary amendments to Paragraph 80 of the Act with a view to address the problem.

The possibity of a staggered rate of Estate Duty was also mentioned.

7. Comments

Capital Gains Tax

While we expected a hike in the inclusion rate for Capital Gains Tax, the percentage was higher than expected. Capital Gains Tax on death combined with Estate Duty can result in an effective tax rate on death, (on an asset that is subject to Capital Gains Tax and Estate Duty), of more than 32%!

The hike in the inclusion rate will also increase the costs of transferring assets in the process of Estate Planning.

Estate Duty

We are still awaiting the second report of the DTC in this regard and will comment as soon as it becomes available.

Trusts

The wording of the paragraph quoted above is, to say the least, vague and perplexing. Various questions immediately arise.

To name but a few:

  • Will the legislation be applicable only to transfers after date of promulgation? If not, it will amount to retroactive legislation.
  • The paragraph only refers to interest free loans, what about loans at a lower interest rate?
  • Would it be adequate for the taxpayer to start charging interest on a loan that was interest free?
  • What is meant by “to categorise interest free loans to trusts as donations”?
  • How will the value of the donation be calculated – with reference to the interest free part only or with reference to the capital of the loan as well? Surely the intention is not to tax both the loan and the assets acquired by the trust through the loan. That will amount to double taxation!
  • What about an interest free loan to a company of which the shares are held by a trust?

We will have to await legislation in this regard in order to understand the effect thereof on Estate Planning.

You will be kept up to date on developments in this regard.

We do not think that this will mean the end of the trust as we know it, but one must take cognisance of the developments and try to plan accordingly.

Exciting challenges lie ahead for the estate owner and his/her adivisors!

GPJ van den Berg
DIRECTOR – Estate & Trust Services (Pty) Ltd
gert@delberg.co.za
T: +27 (12) 361 5001
F: +27 (12) 361 6311

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)