Reference documents and sites:
The Companies Act, No. 71 of 2008
Income Tax Act, No. 58 of 1962
Value Added Tax Act, No. 89 of 1991
http://www.cipc.co.za/za/
In this follow up article, we look at the basics of company taxation.
The system of taxation in South Africa is based on a combination of direct and indirect taxation. Direct taxes are imposed on persons (natural and legal “persons”, being individuals, trusts, companies, close corporations and deceased estates) and include income tax, donations tax, estate duty, capital gains tax and dividends tax.
Indirect taxes are levied on transactions, for example valued added tax which is a tax on sales, customs and excise duties, transfer duty and securities transfer tax. Mining royalties are also payable by mining companies.
South Africa’s income tax is based on residence. This means that residents are subject to certain exclusions, taxed on their worldwide income, irrespective of whether that income was earned outside of South Africa. Non-residents are taxed on their income from sources within South Africa. Foreign taxes are credited against South Africa tax payable on foreign income, and South Africa has concluded Double Taxation Agreements with many other countries.
A resident is defined in the Income Tax Act as any:
• Natural person who is ordinarily resident in South Africa; or
• Natural person who is not ordinarily resident but who is physically present in South Africa during the relevant year of assessment for at least 91 days and who has been physically present for a period of 91 days during each of the preceding five years and for periods exceeding 915 days in aggregate during the five preceding years of assessment (physical presence test); or
• Juristic persons, i.e. a company, corporation or trust that is incorporated, established, or formed in South Africa or which has its place of effective management in South Africa.
A resident excludes:
• A natural person, who was previously regarded as a resident in terms of the physical presence test, if physically absent from South Africa for a continuous period of at least 330 days from the date of departure; and
• A person who is deemed to be exclusively a resident of another country for the purposes of the application of any Double Taxation Agreement.
Due to the fact that tax systems differ between countries, it is possible that double taxation may occur in the collection of taxes between two countries. The result of double taxation would be negative on any economy
as it would result in a deterrent to investment and business. To encourage trading between countries, South Africa has entered into a number of Double Taxation Agreements to prevent the double taxation of income of South
Africans as well as foreign taxpayers.
Administration
The assessment and collection of taxes is administered by the South African Revenue Service (SARS), which was established by legislation to collect revenue and to ensure compliance with tax laws. SARS is an
administratively autonomous organ of state, which is outside the public service, but which falls within the public administration.
Income tax
The tax system in South Africa is governed in terms of the Income Tax Act, No. 58 of 1962. Tax is levied on taxable income, which is gross income less exempt income and allowable deductions. There are four forms of
tax regulated in terms of the Income Tax Act namely, normal tax, dividends tax, donations tax and other withholding taxes. Other forms of taxes are discussed below:
Normal tax
Every year, normal tax for individuals is calculated for the period known as “the year of assessment” which commences on 1 March each year and concludes on the last day of February of the following year. For a company, the year of assessment will be the same as its financial year-end.
Tax rates
The rate of tax applicable to an individual depends on the taxable income of the person. An individual’s taxable income is the gross income, less any exempt income. Deductions and allowances are also subtracted from income while any taxable capital gains are added to taxable income. The final sum is the taxable income of the person concerned.
For income tax purposes, a company is treated as a person. Normal tax is payable by South African companies on their worldwide taxable income, at 28%. This tax is payable by public and private companies and close corporations.
Small-business corporations (a close corporation or a private company, with only natural persons as members or shareholders) whose gross income does not exceed R20 million in a year of assessment, subject to certain conditions, benefit from a graduated tax rate of 0% to 28.
Donations tax
Donations tax is levied on the transfer of assets and is aimed at imposing a tax on persons who donate their assets to others so as to avoid liability for income tax or estate duty. Donations tax is levied at 20% of the
value of any property disposed of gratuitously by a South African resident or domestic company, excluding donations exempt from the tax. As from 1 March 2018, where a donation or the cumulative donations exceed R30 million, the excess is taxed at a rate of 25%. Donations made prior to 1 March 2018 are excluded from the determination of the R30 million threshold.
The tax is payable by the end of the month following the month in which the donation takes effect.
Exempt donations include:
• Donations by natural persons up to ZAR 100,000 per annum after 1 March 2007;
• Donations by companies not considered as public companies up to ZAR 10,000 per annum;
• Donations between spouses not separated;
• Bona fide maintenance payments;
• Donations to Public Benefit Organisations and qualifying traditional councils and committees;
• Donations where the donee will not benefit until the death of the donor;
• Donations cancelled within 6 (six) months of the effective date;
• Property disposed of under and in pursuance of any trust;
• Donations between companies forming part of the same group of companies;
• Donation of property or a right in property situated outside South Africa if acquired by the donor:
— Before becoming a South Africa resident for the first time; or
— By inheritance on donation from a non-resident.
Withholding taxes
Certain payments made by South African residents to non-residents are subject to withholding taxes. There are five main withholding taxes, namely, withholding tax on royalties, withholding tax on interest, withholding tax
on dividends, withholding tax on payments for fixed property disposed of by non-residents, and withholding tax on non-resident entertainers and sports persons.
Royalties
Royalties paid to non-residents are subject to a withholding tax of 15%. The amount of tax may be reduced where Double Taxation Agreements exist between South Africa and the non-resident’s country of residence. Double
Taxation Agreements provide relief in respect of royalties and know-how withholding taxes. Residents require the approval of both the Department of Trade and Industry and exchange control for payments of a royalty to a non-resident.
Immovable property
Where a person acquires immovable/fixed property situated within South Africa from a non-resident, the purchaser must withhold an amount, to be determined in relation to the property sold, which must be paid over to SARS.
For a natural person, the withholding tax is 7.5%.
For a company, the withholding tax is 10%.
For a trust, the withholding tax is 15%.
No withholding tax needs to be withheld if the purchase price of the immovable property acquired in aggregate does not exceed R2 million.
Entertainers and sports persons
There is a withholding tax of 15% on any amount received by or accruing to a non-resident entertainer or sports person. The tax is a final tax. It does not apply to a person who is an employer of a South African
resident, or any person who is physically present in South Africa for periods exceeding 183 days in any twelve-month period.
Interest
With effect from 1 March 2015 a withholding tax of 15% is applicable to interest received by or accrued to foreign residents. The withholding tax obligation will be on any resident paying an amount of interest to a
non-resident, other than a controlled foreign company. The withholding tax will be regarded as a final tax on such interest.
The withholding tax will not apply to interest:
• Arising on any government debt instrument;
• Arising on any listed debt instrument;
• Arising on any debt owed by any bank or the South African Reserve Bank;
• Payable by a local stockbroker to a non-resident
• Payable to a headquarter company; or
• Accruing to a natural person who was physically present in South Africa for a period exceeding 183 days in aggregate during that year, or carried on a business through a permanent establishment in South Africa.
Secondary tax on companies (STC)
STC was levied at a rate of 10% on dividends declared by companies. STC was, until 31 March 2012, payable by the company declaring the dividend in addition to the normal tax imposed on companies. STC was replaced with a withholding tax on dividends from 1 April 2012.
Dividends tax
Dividends tax, which is a withholding tax on dividends, became effective from 1 April 2012. Dividends tax is borne by the shareholder on dividends declared by a South African company at a rate of 20% (subject to any
reduction in terms of a Double Taxation Agreement). The liability for dividends tax in respect of dividends in kind is borne by the company declaring the dividend.
The dividends tax is required to be withheld by the company declaring the dividend when the dividend is paid.
Liability for the withholding of dividends tax shifts if the dividend is paid to a regulated intermediary which includes central securities depository participants, collective investments schemes, etc. In such instances the regulated intermediary is required to withhold the dividends tax.
Dividends tax will not be required to be withheld from dividends received by South African resident companies, the Government, Public Benefit Organisations, certain tax exempt bodies, rehabilitation trusts, pension, provident and similar funds, shareholders in a registered micro business (provided the dividend does not exceed R 200,000 in a year of assessment) and a non-resident receiving a dividend from a non-resident company which is listed on the JSE Securities Exchange, i.e. a dual listed company.
Dividends tax can be eliminated or reduced upon the timely receipt by the declaring company of a written declaration that the shareholder is entitled to an exemption or to Double Tax Agreement relief and an
undertaking that the shareholder will inform the company should there be a change in circumstances. As from 1 July 2020, the written declaration and undertaking must be renewed every five years from the date of the original declaration. In the case of a dividend in specie there is no withholding obligation as the tax is the liability of the company declaring the dividend.
Branch profit tax
Where a non-South Africa resident company has a branch in South Africa through which it trades, that branch will be regarded as a South African company for tax purposes. The South Africa branch will be subject to tax in South Africa on the income of the branch. This branch profits tax is currently 28%.
PAYE and provisional tax
Employers are required to withhold employees’ tax (PAYE) from remuneration paid to their employees (including directors) and to pay such employees’ tax over to SARS on behalf of the employee. The amount of
tax payable by each employee is calculated in terms of tables provided by SARS (related to income received by the employee). These payments are considered to be advance payments of normal tax payable by an
employee and are usually deducted on a monthly basis.
Where a taxpayer earns income other than that due to him as remuneration, he may be liable for advance payments of normal tax, known as provisional tax. Provisional tax is generally applicable to companies, directors of private companies (being residents), members of close corporations (being residents) and persons who derive income that is not remuneration.
Capital gains tax
Capital gains tax (CGT) has been applicable in South Africa since October 2001 when it was introduced into the Income Tax Act. CGT is a tax on capital gains made on the disposal (or deemed disposal) of assets and applies to
a resident’s worldwide assets and to immovable property or assets of a permanent establishment of a non-resident in South Africa. Disposal for the purposes of CGT includes, but is not limited, to any event, act, forbearance or operation of law that results in the creation, variation, transfer or extinction of an asset. An example of a deemed disposal is emigration.
CGT also affects assets acquired prior to October 2001 and disposed of after 1 October 2001. In such a case, the gain is calculated as the gain after this date. Refer to the supplementary information to this guide for the
applicable rates.
Value added tax
Value added tax (VAT), introduced by the Value Added Tax Act, No. 89 of 1991, is a tax levied on the supply of goods and services and on all imports of goods, unless specifically excluded by the VAT Act.
The VAT system distinguishes between three types of supplies:
• Standard rated supplies – supplies of goods and services subject to the VAT rate at the time of supply (currently 15%);
• Exempt supplies – supplies of certain services not subject to VAT; and
• Zero-rated supplies – supplies of certain goods or services subject to VAT at zero percent.
Any person (individual, company, trust, partnership or an estate of a deceased or insolvent person) who carries on an enterprise must register as a vendor if its turnover (value of taxable supplies which are standard and
zero-rated) during a twelve-month period are expected to exceed R 1,000,000.
Where the turnover is less than R 1,000,000 in a 12-month period but exceeds ZAR 50,000 or ZAR 120,000 in the case of commercial rental establishments, a vendor can register voluntarily. A vendor is able to claim a deduction of input tax levied on the vendor from output tax charged by the vendor when a VAT return is submitted.
Input tax is defined in the VAT Act as a tax charged and payable by a supplier on the supply of goods or services made by that supplier to the vendor; or the vendor on importation of goods by the vendor.
Customs duty and excise duty
Where goods are imported into or exported from South Africa, Customs duties are levied on the importer or exporter.
Both Customs duties and VAT are payable on all goods purchased abroad and brought into South Africa.
The Southern African Customs Union agreement was entered into so as to facilitate trade between South Africa and its neighbours – Botswana, Lesotho, Namibia and Swaziland. These five countries apply the same
customs and excise legislation and duties on imported and locally manufactured goods, as well as the same import duties on imported goods.
Certain locally manufactured goods and their imported equivalents are subject to Excise duty – notably tobacco and liquor, and there is an ad valorem duty on cosmetics, televisions, audio equipment and motor vehicles. Relief is available on specific farming, forestry and manufacturing activities.
Estate duty
Estate duty is a duty on the transfer of wealth, payable on the death of a person and is based on the value of the deceased’s assets at his/her date of death.
The duty is levied at a rate of 20% on the first R30 million and 25% on the excess above R30 million. The duty is calculated on the dutiable amount of the estate after deducting the exemption from Estate duty
(currently R 3,500,000) of the net value of the deceased’s estate.
The estate consists of all property including deemed property (e.g. life insurance policies and pension fund payments). Bequests to a surviving spouse are exempt from Estate duty. Where the deceased is a South
African resident, Estate duty is applicable to property regardless of its source. Non-residents are only liable for Estate duty in respect of property located in South Africa.
Other taxes
Transfer duty
Transfer duty is imposed on the transfer of immovable property. No transfer duty is chargeable if the transaction is subject to VAT. Where a registered vendor purchases property from a non-vendor, a notional input tax credit is allowed equal to the tax fraction (i.e. 15/115) calculated on the market value of the property. A notional input tax credit is only claimable to the extent to which the purchase price has been paid.
Securities transfer tax
As from 1 July 2008 stamp duty on the transfer of unlisted shares and the un-certificated securities tax on listed shares was abolished and replaced with the securities transfer tax at a rate of 0.25% of the consideration,
closing price or market value (whichever is greater) on the transfer, cancellation or redemption of any listed or unlisted share, members’ interest in a Close Corporation (CC) or cession of a right to receive distributions from a company or CC.
Tax on fringe benefits
This is a tax on fringe benefits granted to employees. The value of the fringe benefit is the cash cost excluding VAT. Examples of taxable fringe benefits are the use of company-owned vehicles, medical aid contributions,
holiday accommodation, low interest/interest-free loans, subsistence allowances, long-service awards and residential accommodation supplied by the employer. The tax is calculated as part of the liability for normal income tax and subject to PAYE.
Mining royalty tax
Any person who transfers a mineral resource (whether through sale or the consumption, theft, destruction or loss of a mineral resource, other than by way of flaring or other liberation into the atmosphere during exploration or production) extracted from within South Africa will be liable to pay a royalty to the state. This does not apply where the mineral resource has previously been disposed of, consumed, stolen, destroyed or lost.
Every person who holds a prospecting right, a retention permit, exploration right, mining right, mining permit, production right or wins or recovers a mineral resource extracted from South Africa, is required to register for the mining royalty tax.
The determination of the royalty is based on a formula and depends on whether the person transfers a refined or unrefined mineral resource. For refined mineral resources the royalty can range from 0.5% to 5% and for unrefined mineral resources from 0.5% to 7%. The royalty is calculated on the gross sales of the transferor, as per a defined formula.
Royalties should be paid at the same time as the corporate provisional tax cycle.
A third article will deal with taxation of property or land and taxation of non-South African income.
Author Craig Tonkin