Attention tax professional
The new tax changes are here. Enforced by SARS, these regulations came into effect on 1 March and, according to experts, are an important structural change in tax legislation. And these changes are causing uncertainty and stress.
Ignorance of the law, especially when it comes to taxes you owe SARS, can be fatal to your business!
Here's what regulation 17 reads:
'Any financial instrument or policy that does not comply with these regulations is not a tax free investment for the purposes of section 12T of the Income Tax Act.'
12T investment products must comply 100% with the ALL regulations ALL of the time, otherwise the 12T designation falls away. More surprising, there is no mention of any obligation to inform the taxpayer of this removal – hopefully there are rules applied by the FSB to do so, but 12T mentions nothing.
Imagine getting to filing season, only to be told you have to pay tax on your ex-12T investment because the FSP was under no obligation to inform you he lost the designation on the product after you invested. And now imagine you've been investing in this account for 10 years, and suddenly the investment loses its 12T designation – what happens to the R300,000 you've already invested? Yes Section 12T(9) might alleviate the 10 year story, but will the FSB truly be able to catch non-compliance within a reasonable timeframe? Perhaps, but it still doesn't answer the question about the tax implications.
The legislation and regulations are silent on what happens to money invested in a 12T investment. Does your money itself retains its 12T status despite the actual product losing that designation? The answer appears to be big 'no', as there are no provisions for this.
Perhaps you'll be allowed to transfer your money to another 12T investment then? Another resounding 'no' here – tax free transfers between 12T investments are prohibited to between 12T investments per Section 12T(6). If the product you invested in loses its 12T designation, you're not allowed to cash out tax free and transfer to another 12T investment. You'll have to sell your investment, pay capital gains tax
on any gains made, and then slowly reinvest your money at R30,000 over the next many years, all the while paying tax on all the returns earned on the money you're restricted from putting back into a 12T investment.
There's unfortunately no provision in 12T for this scenario that won't cost you 40% in tax (at least SARS hasn't upped that to 41% like they did with the tax tables this year - yet). SARS must address this type of event by creating a safety mechanism that allows taxpayers to exit an investment that loses its 12T designation without incurring related taxes – adding in an additional sub-section to 12T(6) that allows taxpayers a reasonable time to move their money into a new 12T designated investment if their current investment loses its designation will solve the tax implications, as well as the R30,000 annual limit.
One then considers: how easy is it for a FSP's 12T investment to lose its designation due to regulation 17? It can be quite easy, actually. Take for example regulation 3(1), which states all advertisements of a 12T investment must advertise the product as being 'a tax free investment by virtue of section 12T of the Income Tax Act'. A rather ordinary regulation one would think.
By simply searching online for adverts of tax free investments, we find a number of products that appear to be contravening this regulation already – they lack the mention of 12T entirely. Therefore, the products are contravening regulation 3(1) and have already lost their 12T designation per regulation 17.
Read on to find out what this actually means...
There's nothing better than getting money back from SARS...
But do you know whether you can claim for:
- The cost of new laptops for your business?
- 5% of building costs?
- Stolen assets?
- Gifts you give your clients to say thank you for their business?
Lucky for you, neither did 7 743 other people on our Tax Club Site...
To put this into perspective, the examples I'm referring to include the products of all 4 big banks in South Africa. They're complying with regulation 3(2) by including the words 'tax free' in their product names, but not regulation 3(1).
Before anyone panics, fixing this is as simple as including the words mentioned in regulation 3(1) on the website adverts, and suddenly as if by magic, the products will again be designated as a 12T investment.
The taxpayer would lose out if a contravention is only detected after a lengthy period, by having to pay tax on some part of their income or gains. But tax on what?
Once corrected, does 12T re-apply retroactively to the period an investment had temporarily lost its 12T designation? Does SARS ignore the contravention if temporary? Or will FSPs need to apportion gains and income between non-taxable and taxable depending on whether they were earned inside or outside of the 12T designation period? Section 12T mentions nothing of temporary loss of 12T designation, and in this are we able to see how a scenario such as this will affect your tax.
To read the legislation as it stands now, and to apply it in its simplest form, the effect is that any income or gains earned during a period where the 12T designation was lost will lose their exempt status and be taxed normally. Apportionment will have to be made – an administrative nightmare for the FSPs I'm sure.
Given that investing is inherently an exercise in risk, I hope SARS relooks at both 12T and its regulations to address some real world issues that may prejudice the investing taxpayer unduly, and thereby give clarity on scenarios that will arise in the very near future. Taxpayers planning for the long-term need certainty in this area, and I just don't see this certainty being created in the current legislation or regulations.
As I mentioned in my previous editorial, don't just select any product marked as 'tax free'. You could end up with nothing – less than nothing if there are taxes, penalties and interest due to SARS. A 12T investment is truly a fantastic vehicle, and should be considered by all South Africans looking to invest, but SARS must ensure it addresses what happens if 12T designation is lost, with the aim of minimising the impact on the taxpayer.
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