It is hoped that an announcement will be made in the National Budget to the effect that a number of undesirable consequences of recent legislative changes to the Income Tax Act will be undone.
According to David Warneke CA(SA), committee member of the SAICA National Tax Committee and Tax Partner at BDO the three most pressing of these issues are the following:
“First, the recent amendments to the debt reduction provisions to the effect that any change in any term or condition relating to a debt or any substitution of an obligation arising in respect of a debt may trigger a debt reduction with accompanying (negative) income tax consequences for the debtor. If the market value of the debt claim immediately after the change in term or condition or substitution is less than the face value of the debt claim immediately before the change or substitution, then a debt benefit is deemed to arise. This provision is overly broad and can create hardship in triggering income tax payable, for example, in cases in which a debtor is in financial distress.
Secondly, the scope of section 7C that deals with low-interest loans to trusts, has been overly broadened to include loans by individuals to companies in circumstances in which the individual is a beneficiary of a trust and the individual holds an equity or voting interest of at least 20 percent in the company. The provision may thus apply even if there is no equity or voting interest held by the trust in the company.
Thirdly, recent amendments to the anti-dividend stripping rules have had the effect of putting the brakes on amalgamation and intra-group liquidation transactions that were, for reasons of commercial expediency, in contemplation. The main problem is that the relevant provisions of the Income Tax Act, namely section 22B and paragraph 43A of the Eighth Schedule were amended and were also by way of amendments to section 41(2) deemed to over-ride the often-used corporate restructuring rules contained in Part III of the Income Tax Act. The amendments have the effect that additional proceeds may have to be taken into account for normal (revenue) income tax or capital gains tax purposes upon the disposal of shares in a company if various pre-conditions apply. The override of the corporate restructuring rules therefore means that income tax neutrality in the corporate restructuring transactions in question may no longer apply. In essence, the amendment states that any untaxed dividends (local or foreign dividends that were neither subject to income tax nor dividends tax) that were received by or that accrued to a company must, if various pre-conditions apply, be added to the proceeds upon disposal of the shares by the company for normal (revenue) income tax or for capital gains tax purposes. The provision applies to “extraordinary” dividends that accrued to or were received by a company which held a “qualifying interest” in another company. These terms are defined in the legislation. In the majority of cases, the over-ride of the corporate restructuring relief rules is problematic for section 47 liquidation, winding-up or deregistration transactions within a group of companies and section 44 amalgamation transactions.
It is unfortunate that the legislation was promulgated in its current form, notwithstanding that numerous submissions were made in the above regard. My Budget wish-list contains a clear statement by the Minister that the specific problems above will be remedied,” concluded Warneke.