Unpacking the South Africa 2024 draft tax proposals - what does is mean for SA corporates?

This article was originally published on the Regan van Rooy website.

he South African 2024 draft tax proposals were released in August for review and commentary by industry, commerce, tax professionals, and the general public at large. In this article, we draw attention to the more relevant and topical proposals, particularly in so far as they affect corporate taxpayers. It is also noted that, with one or two exceptions, these proposals are merely giving effect to what had already been proposed in the budget speech on 21 February 2024, which we had previously written about here.

Clarifying anti-avoidance rules for low-interest or interest-free loans to trusts

The proposed amendment seeks to eliminate the potential for double tax to arise under section 7C of the ITA where a transfer pricing adjustment has been made. It is therefore a welcomed amendment.

Limitation of interest deductions on reorganisation and acquisitions transactions

There are various provisions in the ITA that seek to limit or prohibit a deduction for interest incurred in various scenarios. One of these provisions, being section 23N applies in certain group restructures and acquisition transactions funded by debt. It is proposed to amend section 23N such that it is aligned with section 23M which in turn is a different interest limitation rule that applies to interest paid to tax-exempt persons and non-residents.

Third-party backed shares

The proposed amendments to section 8EA of the ITA seek to clarify and expand the definition of a “third-party backed share”. To recap, a third-party backed share is a preference share or equity instrument where any payment thereon is guaranteed by a third party. If the issuer fails to pay the expected dividend or return, the holder of the preference share has the right to enforce payment from the third party.

The intended amendment will include scenarios where an enforcement right can be exercised not only by the holder of the preference share but also by any connected person related to that holder. Additional amendments to section 8EA are also proposed to broaden the exemption from section 8EA in certain circumstances, such as corporate actions for example.

Definition of REIT expanded to include listed companies

One of the more interesting proposals is to extend the tax regime for real estate investment trusts (“REITs”) to include unlisted property companies and groups as well. Currently, the REIT regime only applies to companies listed on a stock exchange and this proposal is a very welcome development for unlisted property companies. It is however proposed that these unlisted REITs will be subject to oversight by the Financial Sector Conduct Authority (“FSCA”) under guidelines that must still be introduced, and it is unclear when these guidelines will actually be implemented, and until then the status quo essentially remains for unlisted property companies.

Reviewing the connected person definition in relation to partnerships

Under the current legal framework, paragraph (c) of the definition of “connected person” in Section 1 of the ITA stipulates that within a “partnership” or “foreign partnership”, every partner is considered connected to every other part and to any connected person(s) associated with those partners. This broad definition can create issues for large corporate investors within extensive corporate groups, potentially classifying them as connected to unrelated entities. Of specific concern was the impact this had on undisclosed partners in en commandite partnerships and the proposal seeks to amend the rule such that undisclosed partners will no longer be connected persons under that particular part of the connected person definition.

Investment allowance in respect of buildings, machinery, plant, implements, utensils and articles used in domestic production of electric and hydrogen-powered vehicles

In alignment with the global shift from Internal Combustion Engine (“ICE”) vehicles to a dual platform including electric vehicles (“EVs”), Government proposes the insertion of section 12V into the ITA which will enable vehicle manufacturers to claim 150 per cent of qualifying investment expenditures on production assets, specifically for local electric or hydrogen-powered vehicle production, brought into use for the first time on or after 1 March 2026 and before 1 March 2036.

The cost for tax purposes will be capped at the lesser of the arm’s length market value on the date of acquisition or actual cost. Additionally, if an asset is disposed of within five years from the date it was first brought into use, 50 per cent of its cost must be included in the taxpayer’s income in addition to the inclusion of amounts in terms of section 8(4)(a) of the ITA, but limited to the total amount allowed to be deducted in respect of that asset. Taxpayers receiving this incentive cannot claim other deductions under sections 12C, 13, or 13quat of the ITA for the same assets.

Refining the definition of “exchange item” for determining exchange differences

This is a concerning proposal that seeks to subject exchange rate translations on certain foreign-denominated preference shares to tax.

Relaxing the assessed loss restriction rule under certain circumstances

This is a very welcome and unexpected proposal that removes the restriction on the ability to use an assessed loss for companies that are in the process of being liquidated/deregistered. A similar proposal is also made regarding the use of exchange losses by companies to offset exchange gains in a later year if the company has ceased to trade (e.g. because it is in the process of being liquidated/deregistered).

Prescription period for input tax claims

Currently, VAT vendors are essentially able to claim an input tax credit in any VAT period within a 5-year period. This concession is unfortunately being eliminated in this year’s legislative cycle and, as a result, vendors will have to re-open prior periods where an input tax credit had not been claimed.

If you’d like to chat more about these amendments, please get in touch to discuss.

Meet the author: Lance Collop

Lance Collop is a partner in our Cape Town office, specialising in Corporate Tax and M&A, he can be contacted [email protected].