Business Tax and Company Law Quarterly
A quarterly journal that provides invaluable, practical and highly accessible opinions on relevant issues pertaining to tax in the business environment and to company law, particularly as it impacts the conduct of business in SA. The journal is edited by three of South Africa’s leading tax and corporate consultants.
|Coverage||Vol 1 Issue 1 Mar 2010 - current|
The retrospective operation of statutory amendments to taxation laws : interpreting the amendments to section 8EA of the TLAA, 2016
Statutory amendments of the tax laws in the annual Taxation Law Amendment Acts (‘TLAA’) now often provide for an effective date for the coming into operation of the amendment that precedes the promulgation date of the TLAA. There is usually also a provision that the amendment is to apply in respect of years of assessment that completely or partially fall into a prior year of assessment.
This can lead to difficult issues of interpretation as to the retrospective operation of the amendment and may raise questions of constitutionality if the existing rights and expectations of taxpayers are retroactively affected in a manner that runs counter to established notions of fairness and equity.
The article discusses the various language formulations used in the TLAA 2016 as to the effective or operative date of the amendment. It shows that where the amendment is to operate from a date that clearly falls into a previous tax year that has already elapsed, the formulation customarily used is that the amendment is deemed to have come into operation on that prior date and that it applies in respect of years of assessment commencing on that date. On the other hand, where the amendment is to come into effect more or less contemporaneously with the promulgation of the TLAA, it is provided simply that it comes into operation on the date in question and applies in respect of years of assessment ending on or after that date. There is in that case no deeming provision.
The rules relating to the interpretation of retrospective statutory provisions are explored, including the important 2007 decision of the Constitutional Court in Veldman v Director of Public Prosecutions, Witwatersrand Local Division. The article concludes that, in the light of this decision, even though it related to the retrospective application of a penal statute, retroactive amendments may well be unconstitutional if they do not meet the standards of certainty and accessibility and conform to notions of fairness and justice that underlie the rule of law. Even where a retrospective amendment passes constitutional muster, it must be restrictively interpreted and will not affect completed actions or transactions, according to established precedent.
The article discusses the problem of retrospectivity in the context of the application of the amendments to section 8EA of the Income Tax Act, as contained in the 2016 TLAA promulgated on 19 June 2017. These amendments expanded the ambit of section 8EA to include third-party backed ‘equity instruments’, so that a taxpayer-beneficiary’s right to receive the proceeds of dividends paid to a trust on preference shares held by the trust will cause the proceeds to be treated as income in the hands of the investor concerned from the date the amendment applies.
The author’s analysis leads to the conclusion that, on a proper construction of the amendments in question, and considered in the light of the applicable legal principles, they will not affect amounts accrued to or received by such investors from dividends prior to 1 January 2017 (the date prescribed by the relevant amendment as the date on which the amendment comes into operation), irrespective of the fact that the taxpayer’s year of assessment ends on 28 February 2017 and such earlier payments fall into that tax year.
The introduction of section 12J into the Income Tax Act in 2008 was necessitated by Government’s desire to incentivise the venture capital market and small business. The provisions of section 12J provide a taxpayer with an upfront deduction of the cost of so-called venture capital shares in a venture capital company.
The article examines the various definitions within the section, including a ‘venture capital share’, a ‘venture capital company’ and a ‘qualifying company’. These definitions constitute the qualifying criteria for deduction under section 12J.
The article distinguishes between the concepts of venture capital and private equity, which lay the foundation for analysing the benefits and shortfalls of the section.
The section provides for particular deduction limitations, primarily in respect of shares owned by ‘connected persons’, one of the constraints evident in the section, and where a share is funded by a loan or advance and no economic loss is anticipated in future years from the disposal of the share. The article succinctly explains a rather complex anti-deduction provision where, after 36 months of the first issue of a venture capital share, and at the end of any tax year thereafter, certain book values of investee companies are in excess of particular thresholds.
Failure to comply with the various approvals required in order to qualify for deduction may result in the approval being withdrawn. Various remedies are offered to taxpayers and the venture capital company to rescind the withdrawal.
The issue of non-executive directors (NEDs) has previously been discussed in an article in this journal. The author concluded that the fees paid to NEDs do not constitute remuneration as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act of 1962, and that accordingly no employees’ tax liability arose in relation to such fees. This conclusion was predicated on the provisions of paragraph (ii) of the definition of ‘remuneration’, which in essence excludes from the ambit of that definition any income derived by so-called independent contractors. While an independent contractor who is subject to the control or supervision of the company (in this instance) as to the manner in which the director’s duties are to be performed and the director’s hours of work is brought back into the ambit of the definition of ‘remuneration’, the author argued that this is not the case in respect of NEDs, as they are not subject to the control or supervision of the company in this manner. This being the case, the author further argued that the NEDs would be regarded as carrying on an enterprise in relation to their directorship activities and may be required to register and account for VAT on the fees paid to them.
SARS has now issued Binding General Rulings (BGRs) 40 (income tax) and 41 (VAT) to clarify the position. The BGRs are welcome and provide certainty on the interpretation of the relevant provisions that will be adopted by SARS. The BGRs are effective from 1 June 2017. No indication is given of the stance SARS will adopt in relation to contrary positions adopted by taxpayers prior to that date.
In short, the BGRs confirm that the fees paid to NEDs (other than nonresident NEDs) are not subject to employees’ tax, but could be subject to VAT if the aggregate consideration derived by an NED from carrying on ‘enterprise’ activities (which, in SARS’s view, is the case in relation to NEDs) exceed R1 million in any continuous 12-month period. SARS’s conclusion in regard to employees’ tax is predicated on the view that an NED is not subject to the requisite control or supervision of the company so as to fall outside the ambit of the independent contractor inclusion provided for in paragraph (ii) of the definition of ‘remuneration’. As regards VAT, SARS confirms that, as NEDs are not in receipt of remuneration in relation to their directorship activities, they carry on enterprises in relation to those activities and would need to register for VAT if their income from all their taxable activities exceeds the registration threshold. While the author is in agreement with the approach generally adopted by SARS in the two BGRs, he questions the approach adopted by SARS in relation to VAT and non-resident NEDs.
The position of non-resident NEDs is also clarified in the article. The employees’ tax position is clear: non-resident NEDs are liable for employees’ tax. It is apparent that such non-resident NEDs will not be able to claim any relief under any tax treaty (DTA), as the usual DTA article dealing with directors’ fees allows the country in which the payor company is resident to impose tax on the fees. While SARS has adopted a similar stance in relation to VAT and non-resident NEDs, the author explores the alternate argument that non-resident NEDs may not in fact be subject to VAT. Based on the interpretation of a very similar provision in the New Zealand VAT law, it is arguable that a non-resident NED that does not accept the office in carrying on a separate enterprise falls outside the exclusion provided for in paragraph (iii)(bb) of the proviso to the definition of ‘enterprise’ in section1(1) of the Value-Added Tax Act of 1991. As the non-resident NED would be in receipt of remuneration, the directorship services rendered by the non-resident NED would be excluded from the definition of ‘enterprise’, and the NED would accordingly not be regarded as carrying on an enterprise in relation to the NED’s directorship services (paragraph (iii)(aa) of the proviso to the definition of ‘enterprise’ in section 1(1) of the VAT Act).
An NED who now registers as a vendor for VAT purposes is, in the view of the author, entitled to recover the VAT that the NED must now account for from the company under section 67(1) of the VAT Act, notwithstanding the provisions of sections 66(8) and (9) of the Companies Act, which place limitations on the ability of the company to pay a director remuneration.
This issue of the BTCLQ contains articles on such diverse topics as Nonexecutive Directors and Tax, Incentive to Invest in Venture Capital under section 12J of the Income Tax Act, and the Retrospective Operation of Statutory Amendments to Taxation Laws with special reference to section 8EA of the Income Tax Act. These are all subjects of interest and importance to those embroiled in the challenging, complex and fast-changing tax landscape in South Africa.