LAW: Final Special VDP Legislation Contains New Sweetener
Recent Gauteng Business News
During the Parliamentary committee hearings on the draft Special Voluntary Disclosure (SVDP) legislation, two important concessions were approved. “The final Bill recently presented to Parliament also contains an unexpected but very welcome amendment,” says Dan Foster, a director in the Tax practice at Webber Wentzel attorneys.
“The SVDP offers forgiveness of historic tax due, and zero penalties, relating to previously unreported income and donations. In exchange for this relief, the taxpayer must include a fixed percentage of his or her unreported foreign assets, derived from previously untaxed income, in their taxable income. This inclusion rate has been reduced from 50% to 40%,” notes Foster. “The final Bill also extends the SVDP disclosure period from 31 March 2017 to 30 June 2017, giving applicants an extra three months to collect the necessary information and prepare their submissions to SARS and the Reserve Bank,” he adds.
The value of the foreign assets used in the 40% inclusion is calculated as the highest amount, converted to Rands, on the last day of each of the tax years ending 2011 to 2015. This amount is included in the taxable income of the applicant for the 2015 tax year, and taxed at their highest marginal rate. For a highest-rate taxpayer, this results in an effective rate of 16% on the value of unreported foreign assets. Interest will also be due on this additional tax bill.
An exchange control levy is also calculated on the unreported foreign assets where appropriate. “This levy is 5% if the assets or disposal proceeds are brought back to South Africa, or 10% if the assets are kept abroad. If the levy is paid from local funds, an additional 2% levy is charged i.e. 12% in total. In the case of the exchange control levy,” notes Foster, “The value is determined as at 29 February 2016,” he adds.
“One of the main objections that advisors had to the original SVDP legislation was that payment of the additional tax and levy on the foreign assets would not reset the base cost of those assets for the purposes of capital gains tax (CGT). In other words, if the assets on which the SVDP tax was paid were later sold, CGT would be due on the entire capital gain since the asset was acquired (or 2001 value, if later), even though SVDP tax had already been paid on that asset,” Foster explains.
Foster is of the opinion that the final SVDP legislation corrects this potential double tax. “If an asset is regularised in terms of the Tax SVDP, and is later sold, the base cost of that asset will be the value on which the SVDP tax was paid. CGT will therefore only be paid on any increase in value since the SVDP calculation was done. This step-up produces a much fairer result and should encourage more applicants to come forward and use the SVDP,” Foster believes.
According to Joon Chong, also a partner in Webber Wentzel's tax team, two amendments have also been made to the VDP mechanism in the existing Tax Administration Act. “Firstly, the legislation has been clarified to confirm that a person may apply for VDP relief unless they have actually been given notice of the commencement of an audit or criminal investigation. Previously, a person was disqualified from the VDP if they were ‘aware’ of a pending audit or investigation,” explains Chong.
“Secondly, a new category of understatement penalty (USP) has been introduced for tax defaults relating to an impermissible avoidance arrangement in terms of the general anti-avoidance rule (GAAR). This penalty ranges from 75% to 100% of the underpaid tax. As is the case with all other USPs, the penalty is reduced to nil in the case of a valid VDP,” Chong concludes.
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