Several proposals in the 2025 draft Taxation Laws Amendment Bill (TLAB) reek of desperation to squeeze more out of taxpayers but potentially stifling innovation and economic growth.
Stakeholders have called for earlier consultation with industry players and affected parties before drafting legislation that erodes investor confidence and potentially undermines growth initiatives.
The retraction of a highly contentious proposed amendment to the definition of hybrid equity instruments highlights the tendency in recent years to draft legislation aimed at increased revenue collections rather than incentivising economic growth, says Tertius Troost, senior international tax manager at Forvis Mazars.
National Treasury continues to draft legislation to plug “perceived gaps” in legislation rather than considering pro-growth legislation, he adds.
Tax practitioners have also raised concerns about the fact that Treasury and the South African Revenue Service (SARS) introduce proposed amendments that were not announced in the Budget Review.
Leon Fourie, director at Fourie Fintax, says it creates the perception that the government is trying to get them passed “quietly”. The draft TLAB was only published on 16 August, containing a plethora of amendments that will impact infrastructure funding and the savings culture the country desperately needs. Industry players and stakeholders have less than a month to respond to sweeping amendments.
Stealth tax
Webber Wentzel tax executives Joon Chong and Graham Viljoen note that the Bill hides a “stealth tax” in unit trust investments. Millions of South Africans use a unit trust, or a portfolio of a collective investment scheme (CIS) as a crucial savings vehicle.
However, with the latest proposed amendment in the draft bill CIS investors could face an unexpected tax bill on their holdings even if they have not sold any units.
Chong and Viljoen explain that Treasury proposes the exclusion of CIS mergers from the definition of an “amalgamation transaction” under the Income Tax Act. This means that the exchange of participatory interests in a CIS during a fund merger will no longer qualify for tax-neutral treatment.
In terms of the current rules, there is roll-over relief in fund amalgamations, with capital gains tax (CGT) deferred until there is a sale of the units. However, with the proposal, this roll-over relief will be scrapped. A fund merger would have the same tax impact as though investors had sold their units in the one fund for the market value of the new units in the second fund, triggering an immediate CGT liability for the unitholder on any capital gain.
For a detailed analysis of the impact of this proposal, read: Draft tax bill hides a ‘stealth tax’ in your unit trust investments
Hybrid equity instruments
Following immediate pushback on a proposed change to the definition of hybrid equity instruments, Treasury decided to retract the amendment.
The definition forms part of anti-avoidance provisions to determine whether a preference share has debt-like features. If it does, the preference dividend is deemed to be taxable income in the hands of the holder to ensure the correct tax treatment.
“However, numerous commentators have raised concerns with National Treasury and SARS that the current broad wording in the draft TLAB in relation to this proposal will effectively eliminate preference shares as a viable means of financing,” Treasury noted.
It acknowledged that the uncertainty surrounding the proposal is impacting current transactions, particularly black economic empowerment, renewable energy projects, and mergers and acquisitions, with a potential delay in investments.
Ring-fencing of ‘suspect trades’
Another controversial amendment is the lowering of the threshold for the ring-fencing of assessed losses for taxpayers engaged in a “suspect trade”, such as part-time farming.
Fourie finds this proposal particularly perturbing. Treasury intends to lower the threshold from the current R1.8 million to R673 000.
“Previously, SARS could only apply the ring-fencing provision if taxpayers had taxable income from other income sources in the 45% tax table, which started at R1.8m. That threshold will now be lowered to the 39% tax table, which will mean a massive increase in potential targets for SARS.”
The ring-fencing targets habitually loss-making trades and certain defined suspect trades, such as farming, rental of certain residential accommodation, and trading in cryptocurrencies.
Kyle Mandy, partner at PwC, says things such as hobbies and holiday homes that are not carried on as serious businesses are being targeted. However, some relief is available where it can be demonstrated that there is a prospect of deriving taxable income from the trade within a reasonable period.
South Africans who partake in a side-hustle to augment their income and are engaged in the so-called “suspect trades” should take note of the proposed amendment.
Troost says South Africa is unique with the number of legislative amendments taxpayers face each year. “It feels as if everything is being rewritten every year. It is probably because government always needs more revenue.”
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and should not be used as a substitute for professional tax advice.
