Business Tax and Company Law Quarterly - Volume 1, Issue 2, June 2010

The draft Taxation Laws Amendment Bill, 2010 was recently released for comment. By the time this journal hits the streets, time for comment and discussion will probably be over, but hopefully sanity will have prevailed in relation to certain of the proposed amendments. The draft legislation contains a number of significant amendments to our tax laws and space does not permit me to comment on all of them. However, the following proposed two amendments require some comment.

The new Companies Act 71 of 2008, which extensively reforms and overhauls our company law, is not yet in force, but is expected to come into operation in the near future. When it does so, it will repeal the existing Companies Act61 of 1973. Section 224(1) of the new Act, however, provides that the repeal of the 1973 Act does not affect the transitional arrangements set out in Schedule 5 to the new Act. This article is intended to provide a guide to the transitional provisions in Schedule 5. It discusses their scope and effect and assesses their impact on pre-existing companies incorporated or recognized under the 1973 Act.The transitional provisions dealt with include the following subjects : (a) the continuation of pre-existing companies under the new Act; (b) provisions relating to the Memorandum of Incorporation and the rules which respectively replace the traditional Memorandum and Articles of Association of the 1973 Act; (c) the retention for a 2-year period of a pre-existing company's Memorandum and Articles (under their new names, during which their provisions prevail in the event of a conflict with the Act); (d) the continuation of par-value shares issued by a pre-existing company until such time as the Minister makes regulations providing for their conversion, subject to the rights of shareholders; (e) the proposed draft regulations published for comment pertaining to the conversion of par-value shares; (f) continuity of the board of directors and financing of pre-existing companies; (g) the application to pre-existing companies of the stricter standards of directors' conduct and duties and the takeover provisions in the new Act; (h) the continued application of the winding-up and liquidation provisions of the 1973 Act until a date determined by the Minister; (i) the preservation of rights, duties and notices under a provision of the 1973 Act, where there is a corresponding provision under the new Act; (j) the transition of regulatory agencies and their officers and staff from Companies and Intellectual Property Registration Office (CIPRO) to the newly established Companies and Intellectual Property Commission and from the SRP to the new Takeover Regulation Panel.

While most vendors are aware that they are required to issue valid 'tax invoices' in respect of every taxable supply made by them that exceeds R50 in value, few seem to be aware that in order to claim zero-rated status, the supply must not only meet the requirements of section 11(1) and (2) of the VAT Act, but the vendor must also obtain and retain certain prescribed documentation. In absence of this documentation, the supply will not qualify for zero-rating. SARS Interpretation Note 31 prescribes the documentation that must be held by the vendor to generally substantiate zero-rating. However,when it comes to the export of goods, separate documentation is required, depending on the manner in which the goods are exported. In the case of a so-called 'direct export', the documentation prescribed in SARS Interpretation Note 30 must be available, while in the case of an 'indirect export', the documentation prescribed by the VAT Export Incentive Scheme must be held by the vendor to substantiate zero-rating. The importance of a vendor meeting these documentary requirements cannot be overemphasized. This aspect of zero-rating provides a happy hunting ground for SARS auditors, who easily re-characterize zero-rated supplies as standard-rated supplies on the basis of a single prescribed document being absent. This article highlights the documentary requirements that apply in the case of the export of goods and points out areas that need special attention by vendors.

The Companies Act 71 of 2008, upon becoming effective, will present challenging income tax issues for taxpayers. In addition, the recent draft Taxation Laws Amendment Bill, 2010 seeks to cater for some of the changes to the Companies Act. This article scans the Companies Act and highlights some of the key tax issues that will require consideration as a result of specific changes to the Companies Act as well as variations of shareholder rights that may be necessitated by the advent of the Companies Act. The article also examines relevant proposed tax amendments as they relate to the Companies Act. The article examines the tax consequences of the variation of rights in relation to shareholders, particularly from a Capital Gains Tax (CGT) perspective, and includes a discussion on whether a change in voting rights could result in a CGT disposal. The concept of 'adequate consideration' for the issue of shares is discussed,as well as how this will impact shares issued to employees, and the quantification of employees' employment gains.The formalities around share buy-backs for company-law purposes appear to have been reduced. The tax consequence thereof in terms of the timing of the recognition of Secondary Tax on Companies may vary.