Treasury proposes major tax reforms to align with court rulings

Following several court defeats, notably in the Constitutional Court, National Treasury has proposed several changes to align current legislation with these court judgments.

It has also proposed several anti-avoidance measures to curb abusive behaviour by certain taxpayers in continued efforts to avoid further tax leakage. 

A notable proposed amendment relates to a clampdown on “aggressive tax schemes” under the Employment Tax Incentive (ETI). Treasury is proposing punitive measures to address the “abusive behaviour” of certain taxpayers.

Treasury and cases

Government introduced the incentive in 2013 to encourage employers to hire young work seekers. The incentive will expire in 2029. 

In the Draft Taxation Laws Amendment Bill (DTLAB), Treasury notes that the incentive reduces the cost of hiring young people through a cost-sharing mechanism with the government while leaving the wage the employee receives unaffected. Since its inception, the government has been amending the ETI Act to curb abuse of the incentive through aggressive tax schemes. 

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“These schemes often involved training institutions claiming the incentive for students classified as employees under the act, who, however, never received cash pay-outs in their bank accounts.”

Treasury adds that the training institutions would instead deduct training fees from their wages. The government’s position is that training costs should be the responsibility of the employer. 

“The misuse of the ETI for creating fictitious employment, primarily to exploit the incentive, contradicts the policy’s intention,” Treasury says in its reasons for the proposed amendment.

Joon Chong, tax partner at law firm Webber Wentzel, says employers who misuse the incentive could be on the receiving end of a proposed punitive penalty of 100% of the ETI received for each employee for each month received. The penalty is proposed to apply to years of assessment commencing on or after 1 March 2025.  

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Treasury says it is essential to emphasise that millions of young South Africans are excluded from economic participation, resulting in high levels of unemployment, discouragement, and economic marginalisation. 

“This high youth unemployment rate prevents young people from acquiring the skills and experience necessary to drive economic growth, potentially leading to long-term adverse effects on the economy.”

Taxpayer confidentiality 

National Treasury has also proposed changes to the Tax Administration Act (TAA) related to taxpayer confidentiality following the Arena Holdings case.

The case stemmed from an application to the high court by Arena Holdings, AmaBhungane, and financial journalist Warren Thompson when the South African Revenue Service (Sars) denied Thompson’s request for access to former president Jacob Zuma’s tax records.

The Constitutional Court confirmed a decision by the Pretoria High Court that certain sections of the Promotion of Access to Information Act and the TAA are constitutionally invalid.

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The judgment meant the absolute confidentiality placed on taxpayer information had been lifted.

The proposed change is to align the legislation with the court’s findings. 

“The confidentiality and secrecy rules in these tax statutes have been amended to allow disclosure in line with the Promotion of Access to Information Act,” says Chong.

She also refers to a proposed amendment to the TAA that will allow alternative dispute resolution procedures at the objection stage. “This should significantly reduce the length of time that tax disputes would be finalised.”

Layman representation

The Candice van der Merwe tax case against Sars has also led to an amendment of the TAA.

The Cape Town High Court reaffirmed the principle that a tax court is not a court of law.

Therefore, taxpayers can be represented by a layperson, making the legal system more accessible and potentially more affordable.

Van der Merwe and her father Gary have been embroiled in legal battles with Sars for many years. Her tax affairs came under the spotlight in 2013 when she received a gift of almost R143 million from a foreign friend.

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Sars assessed her on the amount, and the Tax Court confirmed the original assessment. However, the court’s orders were made without hearing her or her father, who was her authorised representative.

Following the high court decision, persons who are not admitted legal practitioners are also allowed to appear on behalf of the taxpayer in a tax court, provided the president of the court is satisfied that such persons are fit and proper, Chong notes. 

The Coronation case 

The draft TLAB is silent on any changes following the Coronation judgment, with no proposed amendments to the foreign business establishment exemption.

For now, the Constitutional Court has had the last say.

“As envisaged, Treasury and the South African Revenue Service (Sars) did not have enough time to include proposals in this legislative round,” says Chong.

The judgment brought to an end tax uncertainty for South African companies with foreign entities that are subject to controlled foreign company rules. 

These rules were introduced to prevent South African multinationals from avoiding SA tax, but had a carve-out in the form of the foreign business establishment exemption.

This article was republished from Moneyweb. Read the original here