The Draft Taxation Laws Amendment Bill 2018 (TLAB) and the Draft Tax Administration Laws Amendment Bill 2018 (TALAB) were published on 16 July 2018 for public comment.
Amendments proposed to debt benefit rules
The debt benefit rules are contained in section 19 of the Income Tax Act and paragraph 12A of the Eighth Schedule to the Income Tax Act respectively. The aim of the debt benefit rules is to provide for the tax treatment of debt benefits resulting from a reduction in debt. In terms of these rules, where there is a concession or compromise resulting in a debt benefit, such benefit will be subject to income tax or capital gains tax, depending on whether or not the debt was incurred to fund expenditure of a revenue or capital nature.
However, the wide definition attributed to concession or compromise, subjected certain transactions to tax even where no true commercial benefit was realised. The proposed amendments in the draft TLAB attempt to address these unintended consequences, by replacing the definition of concession or compromise.
Under the new proposed definition, and effective for years of assessment commencing on/after 1 January 2018, the following should no longer be subject to the debt benefit rules:
- A change in the terms and conditions of a loan as a result of sub-ordination.
- The replacement of bridging finance by permanent funding.
- The granting of non-interest bearing equity loans.
Other noteworthy amendments include:
- More detailed guidance on how the value of a debt benefit should be determined.
- Clarifying that where no donations tax was paid with respect to a qualifying debt benefit, the debt benefit rules should apply to that benefit.
- Provisions to deal with capital or allowance assets that have already been disposed of at the time that the debt benefit arises.
Amendments proposed to dividend stripping rules
The dividend stripping rules are contained in section 22B of the Income Tax Act and paragraph 43A of the Eighth Schedule to the Income Tax Act respectively. Dividend stripping occurs when a company declares a dividend to a shareholder, prior to a share disposal by such shareholder. Effectively, the value of the company is extracted through the dividend declaration, thereby allowing the recipient shareholder to dispose of such shares at lower proceeds. This allows the shareholder to derive tax-exempt dividends and reduce the capital gains tax liability on the disposal of the shares.
The dividend stripping provisions are of the few provisions that override the corporate re-organisation rules. The aforementioned was intended to target those taxpayers that abuse the corporate re-organisation rules in order to extract value through dividends and dispose of their shareholding in a tax-free manner.
Unfortunately, this also affected legitimate corporate re-organisation transactions that were entered into without the intention of extraction of value in a manner that prejudices the fiscus.
The draft TLAB now alters this approach by discerning between legitimate corporate re-organisation transactions and corporate re-organisation transactions that bear the marks of tax avoidance. Therefore, legitimate corporate re-organisation transactions should no longer be subject to the dividend stripping rules. This includes instances where shares that were acquired in terms of a corporate re-organisation transaction are subsequently disposed of in terms of another corporate re-organisation transaction.
However, shares that were acquired in terms of a corporate re-organisation transaction and that are subsequently disposed of in terms of a transaction that is not regarded as a corporate re-organisation transaction could become subject to certain claw-back provisions under the new proposed dividend stripping rules. These provisions aim to continue to subject certain dividends to tax, where the associated transactions bear the hallmarks of abuse of the corporate re-organisation rules. The Explanatory Memorandum to the draft TLAB provides some useful examples of how to determine whether or not these claw-back provisions will apply. The proposed amendments will apply to any disposal on/after 1 January 2019