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Thread: National Treasury on Revenue Laws Amendment and Securities Transfer Tax Bills

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    National Treasury on Revenue Laws Amendment and Securities Transfer Tax Bills

    Revenue Laws Amendment and Securities Transfer Tax Bills 11 September 2007

    The Ministry of Finance released the 2007 Revenue Laws Amendments for public comment and these may be obtained from the National Treasury (http://www.treasury.gov.za) and South African Revenue Services (SARS) (http://www.sars.gov.za) websites.

    This is the second set of bills normally released to give effect to the annual budget every year. The first set of tax bills known as the Taxation Laws Amendment Act, 2007 were promulgated on 8 August 2007. These Bills therefore give effect to the 2007 Budget as tabled by the Minister of Finance on 21 February 2007.

    The second set of bills known as the Revenue Laws Amendments delivers on the more complex policy proposals announced in the 2007 Budget, particularly those related to business tax issues, as follows:

    1. Base broadening for the Secondary Tax on Companies (STC)

    The STC rate on dividends will be dropped from 12,5 percent down to 10 percent as of 1 October 2007. The proposed amendments will also deal with a number of schemes designed to avoid the STC through artificial distributions of share capital and share premium.

    2. Capital versus ordinary treatment of shares

    Capital gains face a much lower rate of tax than ordinary revenue (e.g. in the case of individuals, the top capital gains rate is 10 percent; whereas, the top ordinary rate is 40 percent). Subject to anti-avoidance rules of limited application, the proposed legislation clarifies that the disposal of all shares will be treated as having a capital nature as long as those shares are held for at least three years.

    3. Depreciation incentives

    The proposed amendments provide depreciation incentives for various assets that are currently ineligible. Depreciation incentives will be added to rolling stock, railway lines, port infrastructure assets, commercial buildings and environmental manufacturing assets.

    The legislation also deals with the following issues

    1. Work death benefits

    Employees are entitled to tax exemption when receiving death or disability benefits in terms of the Compensation for Occupational Injuries and Diseases Act, 1993 (Act No. 130 of 1993). The proposed amendments allow an additional R300 000 exemption when employers pay an additional amount to the families of former employees who die from a work related injury.

    2. Professional sports funding and amateur sports

    The Revenue Laws Amendments facilitate the funding of amateur sports activities by professional sports. This form of funding will be deductible to the extent both the professional and amateur sports arms fall within the same taxable entity. This proposal should assist in the effort to have amateur sports operating as a feeder to professional sports in respect of future talent and fans.

    3. Banking Co-operatives

    National Treasury recently introduced the Banking Co-operatives Bill to facilitate banking access to rural communities and individuals. The proposed amendments support these efforts by ensuring that banking co-operatives will be potentially eligible for small business tax relief (e.g. which has a current R43 000 taxable income exemption and a 10 percent rate up to R300 000 with a 29 percent rate above R300 000).

    4. Merger of Stamp Duty and the Uncertificated Securities Tax

    Two sets of tax regimes currently apply to transaction taxes falling on the transfer of shares. The Stamp Duties Act (Act No. 77 of 1968) applies to unlisted shares and the Uncertificated Securities Tax Act, 1998 (Act No. 31 of 1998) applies to listed shares. In order to simplify compliance and administration, both taxes will be merged into a new transactional tax pursuant to the Securities Transfer Tax and Securities Tax Administration Bills. The new regime also modernises various sets of relief measures relevant to this form of taxation.

    Public comments and informal hearings

    The comment period for the draft legislation closes on 8 October 2007. The initial Parliamentary briefing on the draft legislation to the Portfolio Committee on Finance is scheduled for 18 September 2007 and hearings by the Committee will be set for a date after 8 October 2007, to be set by Parliament.

    National Treasury and SARS will consider all comments submitted to them and Parliament, as well as any recommendations arising from the hearings by Committee, when finalising the Bill for tabling.

    More...
    Last edited by Dave A; 11-Sep-07 at 09:41 PM.

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    Site Caretaker Dave A's Avatar
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    Not quite my normal bag, but are there any comments on this worthy of putting forward?
    The trouble with opportunity is it normally comes dressed up as work.

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    just me duncan drennan's Avatar
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    Generally they seem to all be good things, just this one that I'm wondering about:

    Quote Originally Posted by I Robot View Post
    the disposal of all shares will be treated as having a capital nature as long as those shares are held for at least three years.
    Is three years reasonable? What if you bought shares with the intention of holding them, but ended up selling within 3 years, will this automatically be considered as income?
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    Site Caretaker Dave A's Avatar
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    That sounds worthy of debate.

    Strangely enough, the one that got me wondering was the reduction of STC.

    Now it might seem odd to oppose a reduction in any tax, but I'd rather see this reduction being applied against the company tax rate. The bare bones of my wondering is that STC is essentially a tax on distributed reserves; company tax is a tax on profits including undistributed reserves.

    One of the hurdles to overcome in growing a company is the taxation of "undistributable profits", particularly growth in working capital. To my mind, this was the genius of introducing STC in the first place - it was drawing tax from the distributable profits where funds were by definition clearly available, and reduced the burden of taxing profits where the funds are actually tied up in the operation of the company.

    Personally, I'd rather see another 1% reduction in the company tax rate than a 2.5% reduction in STC. (The 1% is a bit of a shot in the dark - there'd need to be a calculation to determine what percentage would have a similar effect on the fiscus).

    One factor that needs to be considered in arguing this is that there are a number of BEE deals which are pretty reliant on dividends to make them fly. There might be a thought that reducing STC will result in better dividends, but there is a deeper layer that sets the boundaries of what can be considered for awarding dividends.

    Dividends are made from ditributable reserves. And company tax has a direct impact on those distributable reserves. Reducing company tax might well have a bigger impact on increasing dividend receipts for BEE deal beneficiaries than reducing STC.
    Last edited by Dave A; 12-Sep-07 at 05:58 AM.
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    just me duncan drennan's Avatar
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    From what I remember from the budget speech, the reduction in STC is not about reducing the taxation on companies, but more about moving that taxation away from the company and into the shareholders hands. Currently dividends are not taxed, but the STC + no tax on dividends is (I think) a bit of an anomaly. The intention is to eventually do away with STC and have dividends taxed in the hands of the shareholders. I think this has some implications for attracting international investment.

    My understanding is that STC was always about trying to get companies to invest their earnings in capital growth rather than just dishing it out to shareholders. This will allow companies to be more discretionary about how they distribute their earnings.
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    Site Caretaker Dave A's Avatar
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    I think we run the risk of being sidetracked from the core of the concept. My thinking here is more around holistic strategy than direct trade-offs or historical justification. My suggestion is that putting the tax relief closer to the source generator of the profits could produce multiplied benefits, that might prove to have a better impact on a downstream point than offering tax relief at that downstream point.

    It also better applies the maxim "Those that can afford shall pay."

    But that being said...
    Quote Originally Posted by dsd View Post
    the reduction in STC is not about reducing the taxation on companies, but more about moving that taxation away from the company and into the shareholders hands.
    I'd question whether STC is a tax on companies. I'd describe it as a tax on dividends. Which means it's ultimately coming out of the beneficiary's slice, whether it's collected via the company or directly from the beneficiary.
    Quote Originally Posted by dsd View Post
    My understanding is that STC was always about trying to get companies to invest their earnings in capital growth rather than just dishing it out to shareholders.
    Maybe, or maybe not. Once you've got funds available, whether it's used for re-investment or for dividends is a decision of the company. But the real windfall for business is STC is a tax on distributed profits. Which means funds are available for paying the tax. This is substantially different from income tax on companies, which will be raised on taxable profits whether those profits are distributable or not.

    Fluctuations in working capital is my favorite one here. Bad enough a growing business has to finance increases in working capital, they get taxed on it (and have to finance that tax) too.
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    just me duncan drennan's Avatar
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    I think I'm missing you here. I definitely agree that STC is a tax on dividends. I don't understand why it matters whether the company pays it, or the individual tax payer does.

    I think we might be talking about different issues, and I'm not sure how they cross over. You are talking about working capital money (i.e. pre-income tax money), and wanting to see the income tax rate reduced, but isn't that a totally separate issue?

    Assuming the individual tax payer ends up paying the same amount as they would have via STC, isn't it a zero sum from SARS perspective? They still collect the same amount of tax money. The only case I can think that this would not be true is if the dividend now becomes taxable under a different county's tax laws, in which case the money leaves South Africa.

    Where are we missing each other?
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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by dsd View Post
    I don't understand why it matters whether the company pays it, or the individual tax payer does.
    It doesn't, unless there is a difference in the rate at which the dividend is taxed. There was a time when dividends were taxed as normal income in the hands of the shareholder. And in those days an average income had a marginal rate of 35% and beyond.

    Quote Originally Posted by dsd View Post
    You are talking about working capital money (i.e. pre-income tax money), and wanting to see the income tax rate reduced, but isn't that a totally separate issue?
    Superficially yes. They are different taxes. But they are derived from the same source - a profitable business. The different taxes are essentially whittling away from the same resource - but by different criteria.

    Quote Originally Posted by dsd View Post
    Assuming the individual tax payer ends up paying the same amount as they would have via STC, isn't it a zero sum from SARS perspective?
    Pretty much - except I'm looking at the tax "food chain" as a whole. Shifting where and how you are measuring the tax burden shifts the load.

    Let's try this a different way - using the goose that lays the golden egg.

    Look after the goose - more golden eggs.
    Stress the goose - fewer golden eggs.
    And the whole food chain lives off those golden eggs.
    The trouble with opportunity is it normally comes dressed up as work.

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    just me duncan drennan's Avatar
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    Quote Originally Posted by Dave A View Post
    It doesn't, unless there is a difference in the rate at which the dividend is taxed. There was a time when dividends were taxed as normal income in the hands of the shareholder. And in those days an average income had a marginal rate of 35% and beyond.
    What makes this interesting is all the new BEE set ups, in which low income earners are receiving shares (typically via a trust). Now if the taxable part is passed on to the beneficiaries (conduit principle) then it will be taxed at the beneficiaries income tax rate. With individuals taxation is a sliding scale, with a rebate, so it is theoretically possible that low income earners will pay zero tax on dividends earned.

    Two things occur then, 1) SARS collects less tax, and 2) the low income earner maximises their return (or more technically, their return is not diluted due to tax). Does this change help to create a better environment for wealth creation?
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