Page 1123 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
I. Background
The Act provides for a deduction in respect of any bona de donations made to –
i. a public bene t organisation (PBO) approved by the Commissioner;
ii. an entity which has been approved by the Commissioner as being exempt;
iii. any public bene t organisation approved by the Commissioner under (i) above which provides funds or assets to any
PBO, institution, board or body contemplated in section 18A(1)(a); or
iv. the government, any provincial administration or municipality to be used for the purpose of any activity contemplated
in Part II of the Ninth Schedule of the Act.
The deduction in respect of all qualifying bona de donations is limited to 10 per cent of the taxpayer’s taxable income as determined before that deduction. The donation must be supported by an of cial receipt issued under section 18A by the PBO, institution, board or body or the government, provincial administration or municipality concerned. Any amount of the qualifying donation that exceeds the 10 per cent limit may be carried forward to the following year for a deduction but will also be subject to the 10 per cent limit in the following year.
Some Real Estate Investments Trust (‘REITs’) or controlled companies make donations in order to promote local communities in areas where a REIT or its controlled company’s buildings are situated. These deductions are no longer effectively deductible by virtue of the 10 per cent net income limitation under section 18A as a result of a special tax dispensation for REITs.
Section 25BB(2)(b) provides that a REIT or a controlled company that is a resident must deduct ‘qualifying distributions’ made by it during the year of assessment which does not exceed its taxable income for that year of assessment excluding taxable capital gains which is included in terms of section 26A. In essence, a REIT or a controlled company is granted a deduction in respect of any of its rental income that it distributes to its shareholders or pays as interest to its investors.
II. Reason for change
Due to the current wording of section 25BB(2)(b), a REIT or a controlled company has no or little taxable income after the deduction of a ‘qualifying distribution’ since REITs and controlled companies in practice distribute the majority (if not all of) their rental income to their shareholders, very minimal levels of taxable income is expected in any given year after the deduction of a ‘qualifying distribution’. As such, a REIT or controlled company will have a very low or no limit for a section 18A qualifying donation deduction. This presents a disincentive for these entities as they do not bene t from a deduction when they fund projects that uplift the surrounding communities.
Example 1:
Under the current legislation if a REIT or controlled company has a taxable income (before taking into account deductions under qualifying distributions) of R20 million, which includes a taxable capital gain of R1 million under section 26A, it can distribute qualifying distributions of R19 million. If it distributes the whole amount of R19 million, it will have R1 million capital gains as taxable income. Since section 18A provides that a REIT or a controlled company of a REIT may only distribute 10% of its taxable income before allowing a deduction under section 18A, the REIT or controlled company’s section 18A deduction will be limited to R100 000. The REIT or controlled company will have to pay tax on R900 000.
Example 2:
If the REIT or controlled company has taxable income of R20 million but no taxable income under section 26A, it distributed R19 million under section 25BB(2) and made a donation of R1 million to a section 18A organisation, its deduction under section 18A will still be limited to R100 000 since it may only claim a deduction of 10% of its taxable income before making the section 18A donation. The REIT or controlled company will still have to pay tax on the R900 000. The tax of R252 000 (R900 000 x 28%) will probably be funded out of capital of the REIT or controlled company.
III. Proposal
It is therefore proposed that a REIT or a controlled company should be allowed to determine their limit for a section 18A deduction with reference to its taxable income before taking into account its deduction in respect of a qualifying distribution but after taking into account the deductions contemplated in section 2A(a) and (b).
IV. Effective date
The proposed amendments will come into operation on 1 January 2016 and will apply in respect of years of assessment commencing on or after that date.
3.3 ALLOWING REITS TO DEDUCT FOREIGN TAXES PAID BY FOREIGN VESTING TRUSTS
[Applicable provision: Insertion of subsection (2A)(a) in section 25BB]
I. Background
South African (‘SA’) residents are taxed on their world-wide income. However, SA residents are entitled to tax credit (i.e. rebates) against SA normal tax in respect of foreign sourced income proved to be payable. On the other hand, non- residents are only subject to tax on the basis of income earned from sources within or deemed to be within SA. A foreign tax credit is provided in terms of section 6quat and applies if the following requirements are met:
i. income received or accrued to SA resident from a non-SA source;
ii. proportional amount in terms of controlled foreign company;
iii. taxable capital gain from a non-SA source;
iv. any amount referred to item (i) or (ii) above that is attributable to the resident in terms of section 7 of the Act;
SAIT CompendIum oF TAx LegISLATIon VoLume 2 1115