Government eases up on tax bill proposals
Interest exemptions for informal investments remain
The National Treasury has softened its stance on a number of tax proposals affecting individuals in the tax bills due to be tabled this year.
Announcements made in parliament this week are good news for those using the interest exemptions for interest earned from more informal sources than bank deposits, listed bonds or unit trusts, and for those who drive company cars.
The Treasury this week reported back to the National Assembly’s Finance Committee on how it plans to deal with comments it received on the draft Taxation Laws Amendment Bills, which were released for comment in May this year. It outlined how it planned to amend the draft bills and table them in parliament by the end of this month.
The new bills will have no restrictions on the type of interest against which you can use the interest tax exemption and has a lower rate than initially proposed for fringe benefits tax arising from your use of a company car.
At the finance committee meeting this week, Cecil Morden, the chief director of economic tax analysis at the Treasury, said the Treasury would withdraw the proposal in the draft bill to restrict the tax exemption you enjoy on interest from investments to interest earned from certain defined investment instruments.
The draft bill proposed restricting the interest exemption to interest earned from or paid by an investment listed on the JSE, a |government, a bank, a registered friendly society, a medical scheme, a collective investment or a dealer or brokerage account.
The memorandum to the draft bill said the aim of the exemption is to encourage savings, but increasingly it is being used to reduce the tax on existing arrangements such as family loans.
The Treasury is particularly concerned that some shareholders offer a business a loan and then earn tax-free interest on that debt (while the business enjoys a tax deduction on the interest), instead of the shareholder holding more shares in the business.
However, commentators said restricting the interest exemption would put an end to family and friends lending money to small businesses, and would in particular have a negative effect on less wealthy business owners who have no interest income from other sources.
Morden said the Treasury accepted these comments and would therefore withdraw the proposal and in future consider alternative proposals to offer you more effective tax incentives to encourage you to save.
COMPANY CAR DRIVERS GET SOFTER TREATMENT
Another major softening of the original tax bills proposals was a reduction in the increase in the percentage your employer uses from next year to determine the taxable fringe benefit you enjoy by having the use of a company car.
In the draft bills the Treasury proposed increasing the amount used to determine the monthly taxable fringe benefit that is added to your income from 2.5 percent of the value of the vehicle to four percent of the value from March 1 next year. Currently, the |four-percent rate is used only if you have a second company car.
Morden announced this week that the Treasury accepted that the rate it initially proposed was too high. The tabled bills will propose a rate of 3.5 percent for any car your company provides for you.
Tax companies and others who commented on the draft bills said the four percent proposed by the Treasury was higher than the cost of the vehicle to the employer and it also exceeded the monthly cost of leasing the vehicle.
As proposed in the draft bills, the the taxable fringe benefit is calculated as if the company car is purely for your private use. Any business travel you do undertake that is recorded in a log book can reduce the taxable fringe benefit. This is achieved by claiming a deduction for an amount calculated from your mileage and the deemed costs of that mileage, or the portion of your actual costs that relate to your business mileage.
Currently you are taxed on the full fringe benefit calculated at 2.5 percent of the value of the vehicle (excluding VAT), and this tax is reduced on assessment only if your private travel is less than 10 000 kilometres.
The draft bills had also proposed that, from March 1 next year, as a company car user, you must pay tax on 80 percent of the fringe benefit you enjoy through Pay As You Earn (PAYE) deductions from your remuneration and any further tax (or tax refund) be calculated when your income tax return is assessed by the South African Revenue Service.
Should your actual business mileage amount to more than 20 percent of your total mileage, the tax you pay on the fringe benefit should be refunded when your tax return is assessed.
The aim of this proposal is to bring the tax treatment of company cars in line with travel allowances paid to employees who use their own vehicles for work-related travel.
From March this year, employees who receive a travel allowance must pay tax on 80 percent of the allowance through PAYE deductions. Any further tax or tax refund is calculated on assessment.
As of March this year, travel allowance recipients are also only able to claim deductions for business travel recorded in a log book. The deemed mileage system of the past cannot |be used for travel allowance deductions for the 2010/11 and subsequent tax years.
But the proposed change was labelled unfair to those who use company cars extensively for work purposes, and the Treasury has softened its stance here too.
Employees such as sales representatives, who use company vehicles as “tools of trade” and whose private use of a company car is minimal, will now qualify for special relief from this provision, Morden said.
The Treasury has recognised that deducting tax upfront on 80 percent of the company car fringe benefit will be unfair to these employees because they will have high claims against the benefit for business travel, but will get a tax refund only on assessment.
The revised tax bills will propose that people whose private travel is expected to be less than 20 percent of their total mileage pay PAYE on a monthly basis on only 20 percent of the company car fringe benefit.
However, Morden said to avoid abuse of this concession, should your use of a company car for private purposes exceed 20 percent of the total mileage recorded on that car, and the need to pay additional tax arise, the South African Revenue Service (SARS) would be able to recover that tax jointly from you and your employer and to impose a penalty on your employer.
The cost of maintenance
Another proposal in the original draft bills was that the cost of the vehicle, which is used to determine the fringe benefit, should include the cost of any maintenance plan.
Commentators said this was unfair because the increase in the percentage used to calculate the taxable fringe benefit took into account the benefit of the company paying the maintenance costs.
Morden said the Treasury accepted this and that if the cost of your company car includes a maintenance plan, your employer can reduce the percentage used to calculate the benefit you are entitled to by 0.25 percent to 3.25 percent.
In a document responding to comments on the draft tax bills, the Treasury said it would not exclude the VAT on the company car when calculating your taxable fringe benefit.
Commentators said companies could often claim the VAT on company cars back from SARS.
But the Treasury says that this is rarely the case and that, in any event the VAT should be included when calculating the value of the benefit you, as an employee, enjoy, because if you had bought the vehicle, you would have had to pay the VAT.
OTHER AREAS RE-EXAMINED
Proposals in the draft Taxation Laws Amendment Bills on a number of other issues are likely to be tweaked when the final bills are tabled in Parliament later this month. Among others, the National Treasury indicated it had changed its stance on the following:
If it is a condition of your employment that you belong to a professional body or association and your employer pays the fees for you to belong, this fringe benefit will remain exempt from tax. The treasury originally proposed that only those who practise in the relevant profession enjoy this exemption as of next year, but it has now withdrawn this proposal.
The bills will still propose that professional indemnity insurance premiums paid by your employer on your behalf also be exempt from fringe benefits tax.
The proposals to tax as income distributions (such as dividends) paid to employees who hold shares that they are restricted from selling will be amended and limited solely to dividends in respect of restricted non-equity instruments such as restricted preference shares.
Ordinary shares, including those held by black economic empowerment partners, will be unaffected by the amendment.
The treasury is concerned that employers are disguising salary payments as executive share schemes in order to reduce the employee’s tax.
To qualify for relief from transfer duty, secondary tax on companies and capital gains tax when moving a residential property out of a company or trust into your own name between October this year and December 2012, you will have to terminate the company or trust.
However, the requirements regarding to whom the property must be transferred will be relaxed to cater for transfers to family members of the person who originally put it in a company or trust.
The requirement that the property should have accounted for 90 percent of the value of the assets in the trust or company will also be relaxed.
The South African Revenue Service (SARS) will retain some discretion to waive interest imposed on you if you pay too little provisional tax and you have reasonable grounds for doing so.
The original tax bills proposed amending the Income Tax Act so that SARS would have no discretion when it came to interest, and anyone who paid too little provisional tax would have to compensate SARS for the use of this money by paying interest.
However, Franz Tomasek of SARS said in some limited circumstances your underpayment of provisional tax may have been out of your control – for example, if you were severely injured, were seriously ill, or caught up in a natural disaster. The revised proposal is that in these limited circumstances SARS be entitled to waive the interest for underpaid provisional tax.
There were some proposals on which the treasury held firm. One of these relates to a tax on new passenger vehicles based on their carbon dioxide emissions.
Following a comment period, a final schedule containing details of a carbon emission tax will be published under the Customs and Excise Act on the National Treasury and SARS websites this coming week.
The tax will take effect from September 1.
The treasury’s Cecil Morden said the motor industry had objected to the inclusion of double cabs and small bakkies as passenger vehicles for the purposes of this tax, but the treasury believes they are mainly used as passenger vehicles. The motor industry wants these vehicles to be classified as light commercial vehicles.
Commercial vehicles are excluded from the first phase of the tax, as carbon emission data is not yet available for them. However, Morden said this data is available for double cabs and small bakkies.
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