FEATURE - Without Prejudice

1 TAX 2020 TAX LAWFEATUREINTRODUCTIONIf there is one thing on which South African tax payers are all inagreement, it is that we pay far too much for what we get in return. For those who have not read the 2019 tax revenue collection fig-ures, National Treasury and SARS figures show that the amount col-lected was R1 billion. The growth year-on-year was billion and, of that, personal income tax provided bil-lion. The three largest sources of tax revenue, amounting to ,were personal income tax at , corporate income tax at VAT at Africa has approximately 56 million people, 53 million aresupported by three million. Of those three million tax payers, two mil-lion paid 44% of the tax collected in the 2018/2019 tax reality is that, as resentment grows, so does the likelihood ofpeople evading tax for those who fall in the top bracket, 45% oftheir earnings disappear into public coffers, where we might hopethey improve South Africa in a myriad ways but where we fear, withjustification, that the corrupt make off with the were some interesting figures: of assessed tax pay-ers were male while were female and were registeredin Gauteng.

2 From a Corporate Income Tax perspective, 814 151 companieswere assessed by the end of August for the 2017 tax year. Of thosecompanies, only had positive taxable income; the remainderhad either taxable income which equalled zero ( ) or an as-sessed loss ( ). Companies and close corporations make of active VAT vendors and they contributed of DomesticVAT payments and accounted for of VAT refunds. Interestingly,sole proprietors make up of those registered, but they onlycontribute 3% of Domestic VAT and received of VAT government faced a huge problem finding income beforeCOVID-19, it is an even greater concern now. Tax revenue will un-doubtedly be down for the 2020/2021 tax year.

3 For the short term,Treasury drafted Bills for temporary tax relief for small and mediumsized businesses. In addition, according to the AfrAsia Bank NewWorld Wealth 2020 Global Wealth Migration Review, South Africalost another 500 high net worth individuals (defined as those withR17 million or more and who certainly help the PIT figures) during2019 they cited tax as one of the reasons they were leaving. It willbe up to the tax man to ensure that all those who should be payingtax, both in their personal and corporate capacity, do so. And, giventhat the AfrAsia NW Report indicates that, due to the impact of thecoronavirus, global private wealth levels dropped 14% in the first halfof 2020, government should expect to receive less from this smallgroup.

4 Our FEATURE this year makes for very interesting reading. Did legis-lators really intend to lay traps for taxpayers? Why take away tax ben-efits that encourage people to help others? This area of law iscomplex; there are many pitfalls and, having read the articles, Irather think that people will come to the conclusion I did it s bestto get help from experts before visiting SARS offices. Myrle VanderstraetenTax pitfalls when issuing shares at a discount 1 Ben Strauss | Cliffe Dekker HofmeyrLife in a remote world - tax enforcement in transfer pricing 2 Joon Chang and Karen Miller | Webber WentzelNew tax legislation proposed for REITS 4 Jerome Brink | Cliffe Dekker HofmeyrLimiting the powers of SARS Estimated Additional Assessments6 Wayne Pocock | Maisels ChambersThe demise of bursary benefits7 Jackie Arendse | Rhodes UniversityNew Tax Proposals for Employees 9 Natalie Napier | Eversheds SutherlandThe invalid VDP application trap 10 Graeme Palmer | Garlicke & BousfieldE-Commerce and Value Added Tax 12Ri tte Engels-Van Zyl.

5 Marissa Wessels and Zaheer Moosa | Lawtons AfricaFATCA and CRS in the South African context four common misconceptions 14 Neil Montgomery | MaitlandWhen can losses on shareholders' loans be claimed as a tax deduction? 15 Ernest Mazansky | WerksmansCONTENTSOCTOBER 2020 TAX LAWFEATURE1 TAX PITFALLS WHEN ISSUING SHARES AT ADISCOUNTBEN STRAUSSU sually, in the case of a private company, the board of directors has thepower to issue shares. In terms of s40 of the Companies Act (71 of 2008),the board must issue shares for adequate consideration . The term adequate consideration is not defined in the Companies , as long as the directors comply with their fiduciary duties (for exam-ple, they act in good faith, for a proper purpose, and in the best interests ofthe company) their determination as to the adequacy of the considerationcannot be board may, for instance, decide to issue shares at a discount to a broad-based Black Economic Empowerment (BEE) partner to improve the com-pany s BEE rating.

6 In that case, the subscription price will most likely be seenas being adequate consideration , despite the fact that it may not be , from tax perspective, even if shares are is-sued at a discount for sound commercial reasons, it mayhave adverse tax consequences for the company or theperson to whom the shares are , such a transaction may have donations tax con-sequences. In terms of s56 of the Income Tax Act (58 of 1962)(ITA), donations tax is levied on the value of property dis-posed of under a donation . The term donation is de-fined in s55 of the ITA as any gratuitous disposal ofproperty including any gratuitous waiver or renunciationof a right .In terms of section 58(1), even if a person disposesof property otherwise than out of gratuity, if SARS is ofthe opinion that the consideration for the disposal is not adequate consideration , then the disposal may triggerdonations courts have held, in relation to provisions that are materially similar tothose in s58(1) of the ITA, that there is a disposal of property when a com-pany issues shares (See, for example, Estate Furman & others v CIR25 SATC 4).

7 While this view appears to be counter-intuitive, as the company is not trans-ferring one of its assets to the subscriber, and the company is not being im-poverished, that is the legal position. Accordingly, if a company issues shares for inadequate consideration ,the company may become liable for donations tax on the difference betweenthe actual consideration and a notional market-related , it appears that in practice, SARS considers that the term ade-quate consideration used in s58(1) of the ITA does not necessarily mean fair market value ; that SARS is entitled to have regard to all the circum-stances surrounding a particular transaction, and that as long as the consid-eration is adequate in the circumstances and in the light of the require-ments of the transaction, SARS will not apply the provision (Silke on SouthAfrican Income Taxat paragraph ).

8 For example, in Binding Private Ruling: BPR 095dated 24 February 2011and Binding Private Ruling: BPR 253dated 19 October 2016, SARS ruled thatwhere shares were disposed of or issued at a discount in the context of aBEE transaction, no deemed donation and, accordingly, no donations taxarose. Perhaps SARS ruled in that manner because it was of the view thatthe intangible benefits that the BEE transaction brought to the company (forinstance, in the form of a higher BEE rating) constituted consideration which was adequate in light of all the surrounding issue of shares for a subscription price that is below a market-relatedprice may also have dividends tax consequences. In terms of s24BA of theITA, if a person disposes of an asset to a company in exchange for the issueof shares by that company and, if the value of the shares after the issue isworth more than the value of the asset before the disposal, the company isdeemed to have distributed an asset in specie to that person.

9 The distribu-tion may give rise to dividends tax in the hands of the 25BA of the ITA does not apply where the person disposing of theasset and the company form part of the same group of companies; wherethe person disposing of the asset holds all the shares in the company afterthe issue of the shares; or where paragraph 38 of the Eighth Schedule to theITA applies to the shares at a discountmay also have capital gains tax(CGT) consequences where theparties to a transaction are in aspecial relationship, that is,where they are connected per-sons in relation to each otheras defined in s1 of the 2020 TAX LAWFEATURE2 Issuing shares at a discount may also have capital gains tax (CGT)

10 Conse-quences where the parties to a transaction are in a special relationship, thatis, where they are connected persons in relation to each other as defined ins1 of the terms of paragraph 38 of the Eighth Schedule to the ITA, if a person dis-poses of an asset to a person who is a connected person, and if the consider-ation does not reflect an arm s length price then the person is neverthelessdeemed to have disposed of the asset for proceeds equal to the marketvalue of the , for example, if X holds 30% of the shares in company Y (and there isno majority shareholder) and X disposes of an asset worth R100 to companyY in exchange for shares worth R80, X would still need to account for CGT ondeemed proceeds of may also arise in the case of a so-called value-shifting easiest way to explain this is by way of example: Say that P owns 100% ofthe shares in a valuable company Q; and say further that P arranges thatcompany Q issues shares for a nominal price to his daughter, R, such that,after the issue, R holds 90% of the shares in company Q.