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South Africa: Tax Law Amendments Affecting Individuals and Employers
The Taxation Laws Amendment Act 2009 and the Taxation Laws Second Amendment Act 2009 have now been signed into law by the President of South Africa, thereby enacting a number of changes to the current taxation laws.
The following discussion focuses on changes that affect individuals and employers.
Learnership Agreements
Section 12H of the Income Tax Act has been revised, and effective 1 July 2009, these changes replace those that had regulated an employer deduction in respect of learnership agreements. The new measures are intended to simplify the learnership provisions. A few of the definitions have been amended—most notably the definition of “learner” that now simply provides that a learner includes an apprentice. The definition of “remuneration” has been deleted, since the deductions are no longer determined based on the remuneration received by a learner.
In keeping with the goal of simplicity, the distinction between apprenticeships and learnerships has also been done away with when determining the amount of the deduction. However, a deduction may still be claimed in respect of both apprenticeships and learnerships.
The allowable deductions are now as follows:
- R30,000 on entering into a learnership agreement, to be pro-rated accordingly if the learnership is for a period of less than 12 months (i.e., effectively R2,500 per month)
- R30,000 on successful completion of the learnership agreement if the period of the learnership agreement is less than 24 months. Where the period exceeds 24 months, the deduction constitutes an amount of R30,000 multiplied by the number of consecutive 12 month periods
- When the learnership agreement has been concluded with a person with a disability, the amounts must be increased by R20,000
The deductions apply irrespective of the salary paid to the learner, as long as the learner enters into a registered learnership agreement with the employer, and that agreement is entered into pursuant to a trade carried on by the employer.
The deductions will not be granted if the learner was previously a party to another incomplete learnership agreement, containing the same education and training component as the current agreement. Furthermore, the learnership agreement must be entered into pursuant to a trade carried on by the employer, and must be registered with the relevant SETA (Skills Education Training Authorities) in order that the SETA may supply required information to the Minister of Labour. These requirements must be met before the deduction may be claimed
Medical Lump Sum Payments
New section 12M was enacted to provide employers may deduct from taxable income the amount of certain medical lump sum payments made to former employees (or their dependents) during a year of assessment. This measure applies to lump payments made on or after 1 September 2009.
The deduction is allowed only to the extent that the amount is paid for the purpose of making any contribution to a medical plan or fund, as contemplated in section 18 of South Africa’s income tax law. In addition, the taxpayer must retain no further obligation in respect of the mortality of the former employees or their dependents.
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Pay Now, Argue Later—with Interest
Section 88 of South Africa’s income tax law has been amended to provide that the payment of tax due in respect of an assessment is not suspended due to an objection or appeal. Previously, this section referred to appeals only, leaving some uncertainty as to why the South African Revenue Service (SARS) referred to this section in respect of objections.
Taxpayers may request that the Commissioner suspend payment when an assessment is being disputed. SARS retains the right to disallow such requests in specific circumstances.
When a taxpayer has settled the liability, and the objection or appeal is subsequently upheld, the amount paid in excess of the liability as finally determined will be refunded with interest.
These amendments will come into effect on a date to be determined by the Minister of Finance in the Government Gazette.
Taxation of Lump-Sum Payments Due to Termination of Employment
Taxpayers who receive lump sums or to whom lump sums accrue on or after 1 March 2009, due to the termination of their employment, will be afforded the benefit of a R300,000* tax exemption—previously only available to a retirement lump-sum benefit taken at the proper retirement age.
*Approximately US $40,700 as of October 13, 2009
The termination of employment must arise from the employer having ceased to carry on the trade in respect of which the taxpayer was employed, or due to the fact that the taxpayer became redundant in terms of the employer effecting a general reduction in personnel, or personnel of a particular class.
This exemption will not be allowed if the employer is a company, and the taxpayer was at any time a director of the company or at any time held more than 5% of the issued share capital or members’ interest in the company.
To the extent that the R300,000 exemption is used on termination of employment, it will not also be available for set off against a retirement lump-sum benefit received when the taxpayer retires in the future—that is, it is a once-off exemption per taxpayer, per lifetime.
A lump-sum withdrawal prior to retirement age, and arising other than in connection with a bona fide termination of employment, will now be taxable in terms of its own scale of tax, with an exempt portion of only the first R22,500 that ranges up to 36% on a lump sum in excess of R900,000.
The intention of the new provision is to encourage individual taxpayers, other than those who have had their employment terminated, to continue to preserve their savings until the proper retirement age, when the R300,000 exemption becomes available to them.
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Compound Interest
Section 89quin of the Income Tax Act has been amended to include a provision for interest to be calculated on the daily balance owing to SARS and compounded monthly.
The Commissioner is authorized to determine the method of calculation of interest (whether to use compound or simple interest), the tax types to which the method will apply, and the date of implementation.
Even though this may be applied to all tax types, it is expected that the first phase of implementation of compound interest will be made applicable to all payroll taxes (including PAYE, SDL and UIF), and customs and excise.
“Remuneration” to Include 80% of Travel Allowances
Paragraph (cA) of the definition of “remuneration” now provides that 80% of a travel allowance will be subject to employees’ tax. Previously, only 60% of such an allowance was subject to employees’ tax. This amendment will apply in respect of tax years that commence on or after 1 March 2010.
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Employees’ Tax Returns
Paragraphs 14(1) and (2) of the Fourth Schedule have been amended to provide that, in addition to the remuneration paid to employees and the employees’ tax withheld thereon, the Commissioner can now require that employers retain records of additional information in respect of their employees. An example of such additional information is the employee’s income tax reference number.
However, the Commissioner may request any other additional information by prescribing a list of such information in the Government Gazette. This information may also be required to be included on employees’ tax returns.
Furthermore, in terms of the amendment to paragraph 14(3) of the Fourth Schedule, the date for submission of employees’ tax reconciliations will be a date prescribed by the Commissioner in the Government Gazette. Therefore, employees’ tax reconciliations may no longer be submitted within 60 days after year-end.
Provisional Tax
The following amendments have been made to the provisional tax rules, and apply to tax years ending on or after 1 March 2009.
- Definition of provisional taxpayer: The definition of “provisional taxpayer” has been amended in relation to the exemption of certain tax-exempt organisations. Previously certain tax-exempt organisations were only exempt from being provisional taxpayers for three years from 1 April 2006. The three-year period is no longer applicable to these tax-exempt institutions, with the effect that the specified tax-exempt institutions are indefinitely exempt as provisional taxpayers. This applies with effect from 1 January 2009.
- Exemption from provisional tax: The exemption contained in paragraph 18 relating to natural persons has been amended to provide that any natural person over the age of 65 years who has taxable income that will not exceed R120,000 for the year of assessment under consideration, will be exempt from provisional tax. This limit has been increased from R80,000.
- Increase in basic amount: In terms of the amended paragraph 19 of the Fourth Schedule, when a provisional taxpayer uses the basic amount in estimating provisional tax, and the basic amount is based on an assessment that is more than one year old, the basic amount must be increased by 8% for each year until the current year of assessment is reached. For example, a provisional taxpayer who was assessed with taxable income of R100 in the 2007 year of assessment, and who wants to use this amount as his or her basic amount in calculating his or her first provisional tax payment for the 2010 year of assessment, must increase the R100 by 8% for the 2008 and 2009 years of assessment. Therefore the basic amount that will be used to calculate the 2010 first provisional tax payment will be R116.64.
- Additional tax on the underestimate of taxable income: SARS has imposed new additional tax penalties in respect of provisional tax payments that have been underestimated, in terms of the amended paragraph 20 of the Fourth Schedule. The penalty that arises depends on the actual taxable income of the provisional taxpayer. This amendment applies to years of assessment ending on or after 1 March 2009. If the actual taxable income of the provisional taxpayer as finally determined is:
- More than R1 million and the estimated taxable income submitted by the provisional taxpayer is less than 80% of the amount of the actual taxable income, SARS may, if not satisfied that the amount of the estimated taxable income was:
- Seriously calculated with regard to the factors having a bearing on the estimate, or
- Deliberately understated, or
- Negligently understated
impose additional tax of up to 20% of the difference between:
- The amount of normal tax as calculated in respect of the estimate; and
- The amount of normal tax calculated in respect of 80% of the actual taxable income
- When the actual taxable income of the provisional taxpayer, as finally determined, is R1 million or less, and the estimated taxable income was less than both 90% of the amount of that actual taxable income and the basic amount, the taxpayer will be liable to additional tax equal to 20% of the difference between the amount of normal tax as calculated in respect of the estimate and the lesser of:
- The amount of normal tax calculated in respect of 90% of the actual taxable income, and
- The amount of normal tax in respect of a taxable income that is equal to the basic amount.
This enables taxpayers with taxable income below R1 million (approximately US $135,800) to continue to rely on the basic amount to determine their tax payments.
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Medical Aid Contributions
The amendments made to paragraph 2(i) read with the amendments made to paragraph 12A(1) of the Seventh Schedule have the effect that the full amount of employer contributions made to a medical aid fund must be treated as a taxable fringe benefit. The cap amounts previously taken into account may no longer be taken into account.
In addition, contributions made by an employer to a foreign medical aid fund must also be taken into account as a taxable fringe benefit in certain circumstances.
Employees may claim the annual cap amounts in their respective individual income tax returns. This amendment is effective with respect to years of assessment ending on or after 1 March 2010.
Employees’ Residential Accommodation
The abatement taken into account to determine the rental value of accommodation, has been increased from R46,000 to R54,200.
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Skills Development Levies Act, No. 9 of 1999
The changes to the Skills Development Levies Act (SDL Act) focus on aligning it with recent changes to the Income Tax Act—most notably to the changes introduced to the interest and penalty provisions.
The definition of “levy” contained in section 1 of the SDL Act has been amended to include administrative penalties, which may now be levied in terms of the SDL Act for non-compliance with certain provisions of the SDL Act. This amendment is consequential to the new administrative penalty framework set out in section 75B of the Income Tax Act (in terms of which the Commissioner may levy penalties for failure to comply with the administrative requirements of the Income Tax Act,
e.g. failure to register as a taxpayer). The effective date of this section is still to be determined.
A new subsection (2A) has been introduced into section 6 of the SDL Act, dealing with the submission of returns to the Commissioner. This new subsection essentially provides that the Commissioner can set the dates by which the SDL return must be submitted by an employer in the Government Gazette. This amendment is in line with a similar amendment relating to the submission of monthly employees’ tax returns in the Income Tax Act, and appears to provide greater flexibility to the Commissioner in respect of the receipt of such returns, with perhaps greater uncertainty to employers. When an employer ceases to carry on business, or ceases to otherwise be viewed as an employer for purposes of the SDL Act, a return must be submitted within 14 days.
The introduction of a new section 7A now enables the Commissioner to estimate the amount of any levy due in terms of the SDL Act when the employer has either failed to furnish monthly returns, or the Commissioner is not satisfied with the submitted reconciliation, or when the employer has failed to pay over the SDL levy due. This aligns the provisions of the SDL Act with similar provisions introduced to the Fourth Schedule of the Income Tax Act. Any such estimate made by the Commissioner is subject to objection and appeal by the employer.
Section 11 of the SDL Act, dealing with interest levied on late payments, has also been amended to make provision for the levying of compound interest, as with the Income Tax Act.
Section 12(1) of the SDL Act—which provides for the imposition of a 10% penalty for late payment of levies—has been repealed. The effective date of this amendment is still to be announced in the Government Gazette. Observers note that this amendment appears to create an anomaly in the SDL Act, since it effectively deletes the charging provision relating to the imposition of penalties in terms of the SDL Act.
A new section 12(5) has also been introduced. This section provides that any decision by the Commissioner not to remit a penalty or to impose a penalty for evasion of payment of levies due, is subject to objection and appeal. This again aligns the SDL Act with the changes to the Fourth Schedule of the Income Tax Act.
For more information, contact a tax professional with KPMG in South Africa:
Zohra de Villiers, +27 21 408 7316,
zohra.devilliers@kpmg.co.za
Susan McCready, +27 21 408 7273, susan.mccready@kpmg.co.za
Anja Finnern, +27 21 408 7383, anja.finnern@kpmg.co.za
Carolyn Freeman, +27 11 647 5764, carolyn.freeman@kpmg.co.za
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