Staff Writer
·17 Aug 2021
The National Treasury and South African Revenue Service (SARS) have given an overview of some of the draft tax changes being considered for South Africa.
In a presentation to parliament on Tuesday (17 August), Treasury said that the 2021 draft Taxation Laws Amendment Bill includes proposed changes on everything from retirement to addressing loopholes.
These changes are outlined in more detail below.
Tax on retirement (exit tax)
Under the current regulations, whenan individual ceases to be a South African tax resident before they retire and become a tax resident of another country, that individual‘s interest in a retirement fund may be subject to tax in the other country on payment of a lump sum or a monthly pension.
The application of a tax treaty between South Africa and the new tax resident country may, in some instances, result in South Africa forfeiting its taxing rights.
To address this, it is proposed that changes be made in the tax legislation to ensure that when an individual ceases to be a South African tax resident, interests in retirement funds are subject to taxation in South Africa at the same tax rates applicable to either a withdrawal benefit or a retirement benefit.
Government proposes that the following two-pronged approach:
When an individual ceases to be a South African tax resident and withdraws their interest in the retirement fund from a South African retirement fund before retirement or death:
- The individual will be deemed to have disposed of their interest in a retirement fund on the day before they cease to be a South African tax resident as envisaged in the Act.
- The interest in the retirement fund will form part of the assets of the individual subject to tax applicable to withdrawal benefits; however, the tax payment will be deferred until a withdrawal payment is receivable from the retirement fund.
- When the individual receives a payment from the retirement fund, the tax on the withdrawal benefit will be calculated based on the prevailing withdrawal tax tables.
- A tax credit will be provided for the deemed tax as calculated when the individual ceased to be a South African tax resident.
When an individual ceases to be a South African tax resident but retains their investment in a South African retirement fund and only withdraws their interest in the fund when they die or retire from employment:
- The individual will be deemed to have disposed of their interest in a retirement fund on the day before they cease to be a South African tax resident as envisaged in the Act.
- The interest in that retirement fund will form part of the assets of the individual subject to tax applicable to withdrawal benefits; however, the tax payment will be deferred until payments are receivable from the retirement fund.
- When the individual ultimately receives payments from the retirement fund, the tax on those payments will be calculated based on the prevailing retirement fund lump sum tax tables or in the form of an annuity.
- A tax credit will be provided for the deemed tax as calculated when the individual ceased to be a South African tax resident.
Retirement and annuities
Currently, any member retiring from a retirement fund is, upon retirement, allowed to receive a maximum of one-third of the total value of the retirement interest as a lump sum.
The remainder of the retirement interest must be utilised to purchase or provide an annuity in one of three ways, namely, paid directly by the retirement fund to the member, purchased from a South African registered insurer in the name of the fund, or purchased by the retirement fund from a South African registered insurer in the name of the retiring member.
A member is therefore prohibited from utilising the retirement interest to acquire various annuities. This prohibition limits flexibility concerning the types of annuities a member can acquire with their retirement interest following commutation, Treasury said.
To increase flexibility for a retiring member and maximise the retirement capital available to provide for annuities, the government proposes expanding the types of annuities a member can acquire upon retirement.
In turn, the portion of the retirement interest utilised to purchase each type of annuity must exceed R165,000. The R165,000 threshold is required to curb the circumvention of prevailing.
Employment tax incentives
The Employment Tax Incentive was introduced in January 2014 to employ young workers by reducing the cost of hiring young people between 18 and 29 years old.
It allows employers to reduce their pay-as-you-earn (PAYE) tax payments to the South African Revenue Service (SARS) for the first two years in which they employ qualifying employees with a monthly remuneration of less than R6,500, subject to certain limitations.
However, Treasury said some taxpayers have devised schemes where they claim the ETI in respect of individuals who do not work for thembut rather engaged in training programmes, therefore failing to meet the definition of ‘employee’ as outlined in section 1(1) of the ETI Act.
“It is proposed that changes be made in the ETI Act to clarify that substance over legal form will be considered when assessing an employer’s ability to claim the ETI,” Treasury said.
“As such, ‘work’ must actually be performed in terms of an employment contract, and the employee must be documented in the employer’s records as envisaged in the record-keeping provisions contained in section 31 of the Basic Conditions of Employment Act.”
Long-service awards
The Income Tax Act currently permits an employer to grant a long-service award, in the form of an asset or a non-cash benefit, to an employee as a no value fringe benefit provided that the value of this award does not exceed R5,000.
The government said that the current prevailing practise is for employers to grant their employees a wide range of awards in recognition of long service. Such awards can take various forms that can be considered non-cash benefits in terms of the Act.
“It is proposed that changes be made in the Act so that the current provisions as relates to long service awards are not only limited to non-cash assetsbut rather extended to apply to other reasonable awards granted for long service,” the treasury said.
“To qualify as a no value fringe benefit, all the current requirements in the Act should be met, for example, the number of years required to be considered a long service period together with the requirement that the value of long service awards should not exceed R5,000 will still apply.
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