During February 2016, the beleaguered South African Minister of Finance, Pravin Gordhan made a serious attempt to balance government’s books. Being an election year, the increase in wealth taxes went down well with the grassroots support base of the ruling ANC.
On February 24, 2016, said Gordhan then increased the effective Capital Gains Tax rate as of 1 March 2016. Alternatively, did he not? The effective date of the CGT increase has caused many taxpayers and their trusted auditors some nightmares. What is the tax rate applicable for corporate tax years ending on or after 1 March 2016? How is it possible to sell an asset before 24 February 2016, yet pay the “2017 tax year CGT rate” for year ends ending on or after 1 March 2016?
Because the 2016 budget, presented by Minister Gordhan on February 24th, included another tax and exchange control (excon) amnesty to be known as a Special Voluntary Disclosure Program (S-VDP or Special VDP similar to the USA’s OVDI), most accountants overlooked the impact of the CGT rate increase. Now, during June 2016, most corporates not following the last day of February end of year tax regime, has to pay provisional (interim) tax. June is very popular tax year end for SA corporates, and their final provisional tax payment is due. For other, with a December year end the first provisional tax return is now due. Most listed companies with September year end are now approaching their interims auditor preparing their interim JSE reports. Accordingly, tax managers are called upon to quantify the tax cost due end September.
Suddenly, as never before, the writer is called upon by the auditors and their clients, to settle the tax rate disputes. Do we provide and pay over at the old rate of 18,64% or do we pay over at the newly announced rate at 22% of the taxable capital gain? What is the understatement penalty should we use the incorrect tax rate? Is the most prevalent question, while writer suggests the true question should be: What is the underpayment of Provisional Tax penalty and interest charge?
Needless to remind the reader, Gordhan had less than three months to prepare his 2016 budget speech. Add to this the fact that the S-VDP draft tax bill was so badly worded and had to be re-issued in April 2016, and many accountants and auditors are most concerned about the fact that the tax amendment laws, has not yet been passed. It is an election year, and most politicians are canvassing grassroots and not attending to the normal parliamentary processes, the writer is told. We need the uncertainty on the effective CGT rate to be dealt with by parliament, the EFF disruptions despite.
Not so, argues writer! There is no uncertainty, the Minister’s documents (dated 24 February 2016) and Treasury’s subsequent draft bill (dated 12 April 2016) are quite clear, all the tax year ends up to end January 2017, will pay the OLD (read lower) CGT rate. It cannot be, is the immediate response of most accountants and auditors.
Writer respectfully suggests the confusion is not caused by neither Treasury nor Gordhan, but by the profession itself.
In the past 15 years, we fell into the bad habit of publishing CGT rates without the accompany inclusion rate, lead most of us to believe the CGT rates changes will follow the same pattern as a change in corporate tax rates.
Typically, the tax draft tax bill dealing with tax rates reads, and very few of us ever noticed the subtle differences:
The rate of tax referred to in section 2(1) to be levied in respect of the taxable income of a company … in respect of any year of assessment ending during the period of 12 months ending on 31 March 2017 is, subject to the provisions of paragraph 10, as follows:
(a) 28 percent of the taxable income of any company
Complicated wording to say all companies with a year end on or after 1 April 2016 (current year) will pay the changed tax rate i.e. June year end companies will pay the new corporate tax rate. This year there was no change in the corporate tax rate, it stayed 28%, yet the effective CGT (capital gains tax) rate changed.
Practically explained, a corporate with a tax year end on or after 1 April of this year, would have paid current tax rates on income partly earned in the previous calendar year. A June 2016 year-end company will only know, in February 2016 what the effective tax rate as of 1 July 2105 will be i.e. the December 2015 provisional tax is paid at the old rate and on the last day of June 2016, we have to pay not only the last 6 month’s tax but also the shortfall because of a tax rate increase assuming there was one).
Not so in the case of an increase in the effective CGT tax rate!
The devil is in the detail. There was no change in the tax rate; there was a change in the inclusion rate. A capital gain as defined in the 8th Schedule to the SA Income Tax Act (the act), is only added to the taxable income (as defined in section 26A of the Act) after applying the so-called inclusion rate. If we look at Gordhan’s Chapter 4, page 50 of the 2016 budget proposal tabled in Parliament on 24 February 2016, and he wrote, and we overlooked it completely:
Government proposes to increase the inclusion rate for capital gains for individuals from 33.3% to 40%, and for companies from 66.6% to 80%. This will raise the maximum effective capital gains tax rate for individuals from 13.7% to 16.4%, and for companies from 18.6% to 22.4%. The annual amount above which capital gains become taxable for individuals will increase from R30 000 to R40 000. The effective rate applicable to trusts will increase from 27.3% to 32.8%. These new rates will become effective for years of assessment beginning on or after 1 March 2016. [Writer added the emphasis]
In the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Amendment Bill, 2016 issued on April 12th, 2016 section 11(1) read with the sub-section (2) effective date, amends the 8th Schedule’s paragraph 10 inclusions rates and reads:
Section 11(1): ….by the substitution for subparagraph (c) of the following subparagraph [in Para 10 of the the Schedule]:
“(c) in any other case, [66,6] 80%,”
(2) Paragraphs (a) and (c) of subsection (1) are deemed to have come into operation on 1 March 2016 and apply in respect of years of assessment commencing on or after that date. [Writer added the emphasis]
It is the CGT inclusion rate that is changed, and unlike the tax rate amendment rules, the tax year must commence after 1 March 2016. If we use the same June 2016 year-end example, the new increase CGT effective tax rate, only kicks in on 1 July 2017 (and not 1 July 2015 as in the case of a normal tax rate increase).
On reading this careful analysis of SA tax law, the writer attempts to bring clarity to many clients having called in the last month or two, asking what CGT rate should be applied, the old or increased new rate.
The good news is that companies with a year-end until 31 January 2017 (yes 2017) need not apply the increase CGT rate.
The take home message is that corporates had a longer planning period as individuals and local trusts, suffered their increase CGT rate on transactions as of 1 March 2016.
Yes, there is time to reduce the end June provisional tax payments, and if you have a September 2016 or December 2016 year end, there is even time to crystallize the pending sale to ensure the lower effective CGT rate is enjoyed.