Tax costs of barter transactions

Barter transactions are commonplace in today’s commercial environment. Parties exchange goods or services without a cash transaction underpinning it. The question is, “What happens when I sell the asset in future? Do I have a tax cost for it?”

Paragraph 20(1)(a) of the Eighth Schedule to the Income Tax Act refers to ‘the expenditure actually incurred in respect of the cost of acquisition or creation of that asset’. The word ‘expenditure’ includes expenditure in cash or in kind. In ITC 1783 the court established the following about the meaning of the word ‘expenditure’:

“Expenditure” in its ordinary dictionary meaning is the spending of money or its equivalent e.g. time or labour and a resultant diminution of the assets of the person incurring such expenditure.”

The court cited the following extract from the authors of Silke:

“It is submitted that the word “expenditure” is not restricted to an outlay of cash but includes outlays of amounts in a form other than cash. For example, if a merchant were required to pay for his goods by tendering land or shares in a company, the value of the land or shares would constitute expenditure in terms of s 11(a) and would be deductible.”

This principle confirms that the expenditure in a barter transaction is the amount by which each party’s assets are diminished. For example, in South Atlantic Jazz Festival (Pty) Ltd v C: SARS the taxpayer staged annual international jazz festivals during the period in question. During its enterprise it concluded sponsorship agreements with various suppliers in which the sponsors paid money towards and provided goods and services for the festivals in return for which the taxpayer provided goods and services to the sponsors in the form of branding and marketing. The transactions under the sponsorship agreements were essentially barter transactions despite their part-cash components. The court found that:

“In consequence, and accepting, as one may, that the transactions were at arms’ length, the value of the goods and services provided by the appellant to the sponsors in each case falls to be taken as the same as that of the counter performance by the relevant sponsor. … ‘In an ordinary arms’ length barter transaction, the value that the parties to it have attributed to the goods or supplies that are exchanged seems to me, in the absence of any contrary indication, to be a reliable indicator of their market value.” 

In general, therefore, it can be accepted that when assets or services are exchanged for assets or services under a barter transaction, the market value of the assets or services will, absent any contrary indication, be the market value of the assets or services as agreed between the parties and would be of equal value. In most instances the market value of the assets or services to be exchanged between the parties is reflected in the relevant agreement.

Should you engage in barter transactions on a regular basis, it is advisable to speak to your financial/tax adviser to determine the specific factors relevant to these transactions.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Budget 2021: Corporate tax amendments

Finance Minister Tito Mboweni delivered his third annual budget address on 24 February 2021. The corporate tax rate reduction from 28% to 27% for years of assessment commencing on or after 1 April 2022 was arguably the most significant windfall for corporate taxpayers, although the actual cash benefits thereof will only be seen in the 2023 calendar year. Below, we highlight some of the other significant proposals, which will likely be contained in the Draft Taxation Laws Amendment Bill to be published for public comment in June or July this year.

Refining the interaction between antivalue shifting rules and corporate reorganisation rules

The Income Tax Act curbs the use of structures that shift value between taxpayers free of tax. The anti-value shifting rules apply to transactions involving asset‐for‐share exchanges. Asset‐for‐shares base cost rules prescribe that a base cost for assets acquired by a company in exchange for its shares should be equal to the sum of the market value of the shares it issued and the amount of the capital gain triggered by the application of the anti‐value shifting rule to ensure that there is no double taxation on the future disposal of the assets.

Clarifying the interaction between early disposal antiavoidance rules and degrouping antiavoidance rules in intragroup transactions

In addition to the early disposal anti‐avoidance rules outlined above, the intra‐group transaction rules contain de‐grouping anti‐avoidance rules, which apply when the acquirer and the party disposing of an asset in terms of an intra‐group transaction cease to form part of the same group of companies within six years of the transaction. The de‐grouping anti‐avoidance rules apply to reverse the tax benefit that was obtained in terms of the intra‐group transaction by triggering the greatest capital gain, gross income, or taxable income that would have arisen between the date of the intra‐group transaction and the date of de‐grouping. Because both of these anti‐avoidance rules apply to reverse the deferred tax benefit of an intra‐group transaction, it is proposed that changes be made to the tax legislation so that if one of the anti‐avoidance rules applies in respect of an asset, the other will not subsequently apply.

Reviewing the venture capital company tax incentive regime

National Treasury has determined that the incentive has not adequately achieved its objectives. The incentive has instead provided a generous tax deduction to wealthy taxpayers and most support has gone to low-risk ventures that would have attracted funding without the incentive. The incentive will therefore not be extended beyond its current sunset date of 30 June 2021.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Don’t suffer the tax consequences of waived debt

Many natural persons or trust shareholders in companies are confronted with the unintended tax consequences of owing an amount on a loan account to the company in which they hold those shares. These tax consequences specifically relate to the “deemed dividend” which arises on interest-free loans (related to so-called “debit loans” in companies). In many cases, there is no intention to ever repay the loan account, and shareholders and companies often consider simply waiving these loan accounts.

The issue typically arises when the shareholder is not immediately subject to any of the adverse debt waiver provisions of the Income Tax Act. The shareholder often opts to absorb any tax recoupments or base cost adjustments as a result of the debt benefit which it received as a result of the waiver. On face-value, in such a case, it is therefore often presumed that a debt waiver does not have any tax consequences.

However, when debts are waived, it is critical that not only the debt waiver provisions of the Income Tax Act are considered, but also the dividends tax provisions and the donations tax provisions.

Dividends Tax

The definition of a “dividend” for income tax purposes includes any amount which has been transferred or applied for the benefit of any person, in respect of the shares of that company. Although a debt waiver is unlikely to constitute an amount transferred in respect of shares, a strong argument can be made that a debt waiver would constitute an amount applied for the benefit of a shareholder.

The debt waiver is therefore likely to result in an amount applied, which constitutes a dividend for which dividends tax is payable by the natural person or trust shareholder. This is a dividend in respect of the entire amount of the loan, not only of the foregone interest that gave rise to the issue in the first place.

Donations Tax

The debt waiver regime provides for an exclusion from its adverse tax consequences to the extent that the donations tax provisions of the Income Tax Act apply. Importantly though, this is only true if the donations tax is actually payable. By including an exemption for the donations tax provisions, donations tax should be taken into account before considering debt waivers in isolation.

To the degree that the company did not receive “adequate consideration” for a loan waiver, it will be regarded as a donation to the shareholder. When a loan is waived and a company does not receive any consideration for the loan, the argument could be made that “adequate consideration” had not been received by the company.

Therefore, despite the debt waiver provisions not triggering any immediate adverse tax consequences for a natural person or trust shareholders, one must not lose sight of potential dividends tax and donations tax implications when waiving loan accounts. It is always recommended that appropriate advice is sought before merely waiving a loan.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Insuring your tax obligations

In addition to tax liabilities (tax capital amounts), taxpayers are also subject to an array of penalties and interests in respect of late payments, understatements, specific punitive penalties, and compliance-related penalties in terms of various tax Acts, such as the Income Tax Act, and the Value-Added Tax Act. This is often the case when there are uncertain tax positions, where taxpayers had to take a view on specific interpretations on a tax Act, or where assessments have not been finalised and there is a potential threat of penalties.

These uncertainties are often an impediment to the conclusion of transactions and deals, and one often finds in agreements that an amount has to be kept in trust (or escrow) to accommodate any potential or unforeseen tax liabilities which may arise as a result of the transaction. These amounts that have to be withheld (or “parked”) until such a time that a dispute or matter has been finalised, come at a significant interest cost and parties to the agreement do not always favour this as a standard term in agreements.

Internationally, there has been an increase in the number of instances where persons can insure their tax positions as they relate to tax capital, interests, and penalties. In other words, no amounts have to be kept back in trust/escrow, and parties are free to conclude and finalise transactions with full cash flows. Rather, instead of having the escrow amount, taxpayers insure their position by payment of a monthly premium in respects of their exposure to an insurance business. The cumulative premiums in this regard is, firstly, significantly less than the amount that has to be withheld and, secondly, does not mean an immediate cash flow in respect of such amounts. Your tax obligations are therefore fully insured, in a similar fashion to how you would insure your motor vehicle.

The South African insurance industry has not fully caught up with these international trends and there are very few (if any) comprehensive insurance products available to insure tax positions, in respect to unsure tax positions. On face-value, such insurance products appear to cater to “aggressive” or “abusive” schemes, and for taxpayers who want an “out” in respect of abuse of the tax system. However, this is not the case at all – such insurance products accommodate for ease of transaction flow, saving on transaction costs, keeping companies liquid, removing uncertainty from transactions, and facilitating deal flows without fear of adverse tax consequences.

One would hope that the South African insurance market is cognisant of international trends and that they consider making such products available locally, since the risks relating to the product can be proactively managed by both the insurers and the insured party, with the assistance of suitably qualified tax professionals.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Bursaries and scholarships: The tax rules are changing

Over the past several years, many employers and employees have made use of the beneficial tax treatment of bursary and scholarship schemes, as provided for in the Income Tax Act. The Act contains provisions that provide an exemption in respect of bona fide bursaries or scholarships granted by employers to employees or relatives of qualifying employees, subject to certain monetary limits and requirements stipulated in the Act. Essentially, an employee is not taxed on an amount granted to him/her when it meets the criteria as set out in the Act. 

In the case of a bona fide bursary or scholarship granted to a relative of the employee without a disability, the Act makes provision for the exemption from tax to apply only if the employee’s remuneration does not exceed R600 000 during the year of assessment. In addition, the amount of the bursary or scholarship will only be exempted up to a limit of R20 000 for studies from Grade R to 12, including qualifications at NQF levels 1 to 4, and R60 000 for qualifications at NQF levels 5 to 10. These levels are increased where the bursary or scholarship is made to a person with a disability. 

National Treasury has noted that it has come to Government’s attention that a number of schemes have emerged in respect of employer bursaries granted to the employees or relatives of employees. These bursary schemes are developed by an institution other than the employer and marketed to the employer as a means of providing taxexempt bursaries to their employees or relatives at no additional cost to the employer. These schemes seek to reclassify ordinary taxable remuneration received by the employee as a tax-exempt bursary granted to the relatives of employees. As a result, an employee can cater to their relative’s studies by way of salary sacrifice. The portion of the salary sacrificed by the employee is paid directly by the employer to the respective school and is treated as a tax-exempt bursary in the employee’s or relative’s hands.  

It is proposed that the exemption, in respect of a bona fide bursary or scholarship granted by the employer to the relatives of the employee, should only apply if that bona fide bursary or scholarship granted by the employer is not restricted only to the relatives of the employee, but is an open bursary or scholarship available and provided to members of the general publicFurthermore, it is proposed that the requirement that the applicability of the exemption is dependent on the fact that the employee’s remuneration package is not subject to an element of salary sacrifice, be reinstated. 

Lastly, it is proposed that, as a means of further encouraging employers to grant bursaries to relatives of employees without subjecting such bursary to an element of salary sacrifice, that the employer deduction in relation to said bursaries is only afforded if the bursary to the employee’s relative is not subject to an element of salary sacrifice. 

The above proposals are currently open for public debate, and it is yet unclear whether the proposals will be enacted as is currently suggested. We expect the final bill which contained the proposals to be made available during November 2020. 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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