2007 income tax amendments – part 3

In this series of articles, Cameron Kotze – the Tax Partner at Ernst and Young – discusses some topical tax issues for our readers.

THIS is the last article on the income tax amendments that were tabled in the National Assembly in October. The 2007 Income Tax Amendment Bill includes a change to the definition of the word dividend.The intention of the law is clear but technically the proposed wording is flawed.The intention of the proposed change is to tax the interest component of a distribution by a registered unit trust.The Income Tax Act goes out of its way to define a registered unit trust as a company but it appears to me that the proposed change to definition of the term dividend ignores this definition and treats a registered unit trust as an ordinary trust where the conduit principle referred to in the Armstrong case was fixed.The fact is a company does not distribute interest to its shareholders by way of a distribution of profits.No matter what the technical arguments in this regard are, all taxpayers should take note that it is the intention of the Minister of Finance to tax the interest component of distributions by registered unit trusts and appropriate wording to achieve this objective will be legislated for in due course.The long term effect of this amendment (as from 1 March 2008) is that companies will be taxed at the normal corporate tax rate (currently 35 per cent) on the interest component of distributions by such a trust where the distribution previously would have been exempt from income tax because the distribution was deemed to be a dividend for purposes of the Income Tax Act.The opportunity for companies to earn tax-free income by investing their excess cash resources in registered unit trusts will no longer be there once the 2007 Income Tax Amendment Bill is accepted by the National Assembly.The long-term effect of the amendment (as from March 1 2009) for taxpayers other than companies will be that these taxpayers pay tax at a rate of 10 per cent on the interest component of distributions by a registered unit trust.Previously they would also have earned tax-free income in the form of dividends.For the tax year ending 28 February 2009 the interest component of distributions by a registered unit trust will be taxed at the marginal rate of taxpayers other than companies.I expected the Income Tax Act to be amended after the outcome of the De Beers Marine tax court case last year.The court ruled in favour of the taxpayer on a technical point on the interpretation of the wording of the Income Tax Act in so far as it concerns the recoupment arising on the sale of assets on which tax depreciation was previously claimed.In short the court ruled that when assets are sold by a diamond mining services company the recoupment that arises on sale of the assets must be taxed at the normal corporate rate (being 35 per cent) and not the rate that applies to a diamond mining services company (being 55 per cent).The amendment proposed is that the recoupment arising on the sale of assets by any mining company or any mining services company will be taxed at the same rate as the mining income is taxed.The amendment for diamond mining services companies is backdated to the start of financial years ending on or after January 1 1981.The reason for the backdating is probably because the Receiver of Revenue does not want to entertain further claims for a refund of tax overpaid arising from the interpretation of the law as a result of the judgement of the De Beers Marine case.Other mining services companies should also take note that previously the tax rate that was applied to their taxable income was 35 per cent.With effect for any tax year commencing on or after January 1 2008 the tax rate will change to 37,5 per cent.At this stage the Tax Amendment Bill has been debated in the National Assembly and representations have been made to review some of the proposed amendments with specific reference to the introduction of the withholding tax on interest and the change in the definition of dividend referred to above.The outcome of the debate and representations made are not certain at this stage.”Watch this space” for any changes to the proposed amendments once the Income Tax Amendment Act is published in the Government Gazette.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.comThe 2007 Income Tax Amendment Bill includes a change to the definition of the word dividend.The intention of the law is clear but technically the proposed wording is flawed.The intention of the proposed change is to tax the interest component of a distribution by a registered unit trust.The Income Tax Act goes out of its way to define a registered unit trust as a company but it appears to me that the proposed change to definition of the term dividend ignores this definition and treats a registered unit trust as an ordinary trust where the conduit principle referred to in the Armstrong case was fixed.The fact is a company does not distribute interest to its shareholders by way of a distribution of profits.No matter what the technical arguments in this regard are, all taxpayers should take note that it is the intention of the Minister of Finance to tax the interest component of distributions by registered unit trusts and appropriate wording to achieve this objective will be legislated for in due course.The long term effect of this amendment (as from 1 March 2008) is that companies will be taxed at the normal corporate tax rate (currently 35 per cent) on the interest component of distributions by such a trust where the distribution previously would have been exempt from income tax because the distribution was deemed to be a dividend for purposes of the Income Tax Act.The opportunity for companies to earn tax-free income by investing their excess cash resources in registered unit trusts will no longer be there once the 2007 Income Tax Amendment Bill is accepted by the National Assembly.The long-term effect of the amendment (as from March 1 2009) for taxpayers other than companies will be that these taxpayers pay tax at a rate of 10 per cent on the interest component of distributions by a registered unit trust.Previously they would also have earned tax-free income in the form of dividends.For the tax year ending 28 February 2009 the interest component of distributions by a registered unit trust will be taxed at the marginal rate of taxpayers other than companies.I expected the Income Tax Act to be amended after the outcome of the De Beers Marine tax court case last year.The court ruled in favour of the taxpayer on a technical point on the interpretation of the wording of the Income Tax Act in so far as it concerns the recoupment arising on the sale of assets on which tax depreciation was previously claimed.In short the court ruled that when assets are sold by a diamond mining services company the recoupment that arises on sale of the assets must be taxed at the normal corporate rate (being 35 per cent) and not the rate that applies to a diamond mining services company (being 55 per cent).The amendment proposed is that the recoupment arising on the sale of assets by any mining company or any mining services company will be taxed at the same rate as the mining income is taxed.The amendment for diamond mining services companies is backdated to the start of financial years ending on or after January 1 1981.The reason for the backdating is probably because the Receiver of Revenue does not want to entertain further claims for a refund of tax overpaid arising from the interpretation of the law as a result of the judgement of the De Beers Marine case.Other mining services companies should also take note that previously the tax rate that was applied to their taxable income was 35 per cent.With effect for any tax year commencing on or after January 1 2008 the tax rate will change to 37,5 per cent.At this stage the Tax Amendment Bill has been debated in the National Assembly and representations have been made to review some of the proposed amendments with specific reference to the introduction of the withholding tax on interest and the change in the definition of dividend referred to above.The outcome of the debate and representations made are not certain at this stage.”Watch this space” for any changes to the proposed amendments once the Income Tax Amendment Act is published in the Government Gazette.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com