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TAX RELIEF MEASURES PROPOSED FOR COMBATTING THE ECONOMIC AND FINANCIAL CONSEQUENCS OF THE COVID-19 PANDEMIC
Eckaard Le Roux and Lesego Mmatli
8 May 2020

The Ministry of Finance published both the draft Disaster Management Tax Relief Bill (“TRB”) and the draft Disaster Management Tax Relief Administration Bill (“TRAB”) on 1 April 2020 (“April Proposal”). These draft Bills propose introducing certain tax relief measures for businesses in respect of the employment tax incentive programme (“ETI”), pay-as-you-earn (“PAYE”) and various other support measures.

On 1 May 2020 National Treasury and the South African Revenue Service (SARS) published, for public comment by 15 May 2020, the revised 2020 TRB and 2020 TRAB. These Bills provide for further tax measures (“May Proposal”) aimed at combating the COVID-19 pandemic after having considered public comments received on the initial draft Bills.

Simultaneously with such publication, Treasury also issued a briefing statement dealing with the financial implications of Covid-19 on the economy and the budget. The statement provided a summary of the new Tax Policy Measures which have been introduced in line with the President’s 21 April announcements. The support package amounts to approximately R70 billion which has been made available for businesses to continue operating and to pay employees and suppliers.

This article provides a brief overview of some of the most significant tax relief measures  made available to businesses by Government. The article also highlights some of the key principles and qualifying criteria relating to the various forms of relief to assist the business sector in determining their eligibility to share in the support package.

The detail of the support package is summarised by Treasury as follows:

  1. An increase in the maximum ETI that may be claimed from R500 to R750 per month per qualifying employee;
  2. An increase in the turnover threshold (previously R50 million) for businesses that can automatically defer a portion of their PAYE and provisional tax liabilities;
  3. An increase of 15% in the amount of PAYE that can be automatically deferred to 35%;
  4. SARS to consider deferrals for tax for all businesses (including those with turnover above R100 million) on a case by case basis;
  5. A 4-month holiday of skills development levy contributions from 1 May 2020;
  6. Fast tracking of value added tax (VAT) refunds;
  7. A 3-month deferral for filing and first payment of carbon tax liabilities;
  8. Payment deferral for excise taxes on alcoholic beverages and tobacco products;
  9. Increasing deductions allowed for donations to the Solidarity Fund; and
  10. Expanding access to living annuity funds.

1. Increase in the Expanded Employment Tax Incentive Programme (ETI)

Background

The general rule is that an eligible employer may claim an ETI for a maximum period of 24 months per qualifying employee.

An eligible employer (i.e. an employer which may receive ETI benefits) is a private sector employer[1] who:

  • is registered as an employer with SARS; and
  • is not disqualified by the Minister of Finance due to redeployment within the same group for purposes of accessing the incentive) or by not meeting such conditions[2] as may be prescribed by the Minister.

A qualifying employee[3] is not an independent contractor but is an employee who:

  • has a valid South African ID (i.e. South African citizens or permanent residents), a valid Asylum Seeker permit or an ID issued in terms of the Refugee Act;
  • is 18 to 29 years old at the end of the month in which the ETI is claimed.; or
  • is of any age but renders services mainly (more than 50%) within a special economic zone[4] (SEZ) to an employer that trades from a fixed place of business located within a SEZ; or
  • is of any age but is employed in an industry designated by the Minister;
  • Was newly employed by the employer or a person associated to the employer on or after 1 October 2013;
  • is not a connected person[5] in relation to the employer;
  • is not a domestic worker;
  • is paid the minimum wage applicable to the sector in which the employer operates; or
  • if no minimum wage applies to the employer, is paid at least R2 000 per month (a month being at least 160 hours),[6] but not more than R6 500 per month.

The incentive is available for a total period of twenty-four months (need not be consecutive) per qualifying employee (both previous employment and employment with an associated person must be taken into account).

According to the explanatory memorandum issued by SARS in 2013, the value of the incentive is determined by a formula, which has three components for different wage levels. For monthly wages of R2 000 or less the incentive value is 50% of the wage, in respect of  wages that are above the applicable sectoral minimum wage. For monthly wages that range from R2 001 to R4 000 the value of the incentive is fixed at R1 000 per month per qualifying employee in the first twelve months. For monthly wages between R4 001 and R6 500 the value of the incentive tapers down from R1 000 pm to zero. The value of the incentive is halved for the second year of employment.

 

April Proposal

The first tax measures proposed by the Minister on 1 April 2020 made provision for the expansion of the ETI programme for a limited period of four months, beginning 1 April 2020 and ending on 31 July 2020. Eligible employers may on a monthly basis for a period of 4 months beginning 1 April 2020 claim an increased incentive for qualifying employees, The claim is made by reducing the PAYE payable by the employer to SARS but without affecting the remuneration payable to the employee. The proposed expansion will only apply to employers that were registered with SARS as at 1 March 2020.

The detail of the increased incentive is as follows:

i. Increasing the maximum amount of ETI allowable during this four month period for employees eligible under the current ETI Act from R1 000 to R1 500 in the first qualifying twelve months and from R500 to R1 000 in the second twelve qualifying months;

ii. Allowing a monthly ETI claim in the amount of R500 during the abovesaid four month period for employees from the ages of:

  • 18 to 29 who are no longer eligible for the ETI as the employer has already claimed ETI in respect of those employees for the full 24 month period; and
  • 30 to 65 who are not eligible for the ETI due to their age;

iii. Allowing the above mentioned monthly ETI claim to apply to employees previously not classified as “qualifying employees” to apply for a limited period of four months irrespective of their date of employment (employees employed before 1 October 2013 will therefore also qualify for the relief); and

iv. Accelerating the payment of employment tax incentive reimbursements from twice a year to monthly.

 

May Proposal

The First Proposal was replaced on 1 May 2020 with the Second Proposal to the effect that:

  • the amount of R500 per month for each employee that earns less than R6  500  per  month  be  increased  to  R750  per  month  for  a  limited  period  of  four  months starting  from 1 April  2020  and  ending on 31 July 2020; and
  • in view of the  fact  that this  increase will only come into effect after the April payroll run, it was proposed that the  additional R250 not claimed as part of the April payroll run may be claimed during the May payroll run.

2. PAY-AS-YOU-EARN (PAYE) RELIEF MEASURES

April Proposal

The PAYE relief measures proposed by the Minister on 1 April 2020, made provision for certain tax relief for a limited period of four months, beginning 1 April 2020 and ending on 31 July 2020. In order to qualify for the tax relief, the following conditions were to be met:

i. the employer or  representative  employer must be a small to medium-sized business, i.e. a company, partnership, individual or trust with a gross income not exceeding R50 million for the year of assessment within which the four-month relief period falls;

ii. gross income must  not  include  more  than  10%  of so-called passive income (i.e. income derived  from  interest,  dividends, foreign dividends, rental from letting fixed property and any remuneration received from an employer);

iii. the taxpayer must be tax compliant, i.e. he must have submitted all tax returns that are due and he must not have any outstanding tax debt which is more than R100 but excluding debt, the payment of which has been suspended or postponed or compromised by agreement.

The nature of the proposed tax relief is as follows:

  • deferral of  payment  of  20%  of  the  PAYE  liability,  without  risking administrative penalties and interest for late payment (interest and penalties will however apply if the employer has understated the PAYE liability for any of the four months); and
  • The postponed PAYE liability is to be paid to SARS in arrears in six consecutive equal monthly instalments commencing on  7  August  2020,  e.  the  first  payment  must  be  made on 7 September 2020.

 

May Proposal

The First Proposal was revised on 1 May 2020 with the following proposal, viz that:

i. the 10 per cent limit on passive income be increased to 20%;

ii. passive income should also include income derived from royalties and annuities;

iii. passive income received in respect of the lease of immovable property should exclude rental income received by a landlord whose main trading activity is the letting of immovable property;

iv. the 20% deferral on PAYE is increased to 35%; and

v. the turnover threshold for small or medium sized businesses is increased from R50 million to R100 million.

 3. PROVISIONAL TAX PAYMENT RELIEF MEASURES

 

April Proposal

The payment of Provisional Tax relief measures proposed by the Minister on 1 April 2020, made provision for certain tax relief for a limited period of twelve months, beginning 1 April 2020 and ending on 31 March 2021. In order to qualify for the tax relief, the following conditions were to be met:

i. the employer or  representative  employer must be a small to medium-sized business, i.e. a company, partnership, individual or trust with a gross income not exceeding R50 million for the year of assessment within which the four-month relief period falls;

ii. gross income must  not  include  more  than  10%  of so-called passive income  (i.e. income derived  from  interest,  dividends, foreign dividends, rental from letting fixed property and any remuneration received from an employer);

iii. the taxpayer must be tax compliant, i.e. he must have submitted all tax returns that are due and he must not have any outstanding tax debt which is more than R100 but excluding debt, the payment of which has been suspended or postponed or compromised by agreement.

The nature of the proposed tax relief is as follows:

  1. deferral of a portion of the payment of the first and second provisional tax liability,  without  risking administrative penalties and interest for late payment (interest and penalties will however apply if the taxpayer did not qualify for the said relief); and
  2. the first provisional tax payment which is due from 1 April 2020 to September 2020 will be based on 15% of the estimated total tax liability, while the second provisional tax payment from 1 April 2020 to 31 March 2021 will be based on 65% of the estimated total tax liability;
  3. Provisional taxpayers with deferred payments will be required to pay the full tax liability when the third provisional tax payment may be made in order to avoid interest charges.

 

May Proposal

The First Proposal was revised on 1 May 2020 with the following proposal, viz that:

i. the 10 per cent limit on passive income be increased to 20%;

ii. passive income should also include income derived from royalties and annuities;

iii. passive income received in respect of the lease of immovable property should exclude rental income received by a landlord whose main trading activity is the letting of immovable property; and

iv. the turnover threshold for small or medium sized businesses is increased from R50 million to R100 million.

4. OTHER DEFERRALS

SARS to consider deferrals for tax for all businesses (including those with turnover above R100 million) on a case by case basis.

5. SKILLS DEVELOPMENT LEVY CONTRIBUTION HOLIDAY

Every  employer taxpayer that has  an  annual  payroll  (total salaries   and   wages   including   bonuses,   commission,   etc.)   in excess   of   R500 000 (approximately  R41  000  per  month)  is  required  to contribute to the Skills  Development  Levy Fund on a monthly basis These contributions  are  calculated  at  one  per  cent  of the  monthly  payroll  and must be paid on/before the  seventh  day  of  the following month.

 

May Proposal

Government proposes  a  four-month holiday  (non-payment)  for  skills  development  levy contributions with effect from 1 May 2020 until 31 August 2020. This is a suspension and consequently employers are discharged from payment of these amounts after 31 August 2020.

6. FAST-TRACKING OF VALUE-ADDED TAX (“VAT”) REFUNDS

Vendors  are  generally required to register for VAT under Category A or B which provide for  returns  to  be  submitted  every 2 calendar months.

Vendors  registered  under Category C account for VAT on a monthly basis. This category applies to vendors making supplies in excess of R30 million per year.

 

May Proposal

In order to assist businesses with liquidity, Government proposes that:

i. Category A and B vendors be allowed to temporarily (while still remaining registered under Category A or B) file returns on a monthly basis with a view to unlocking refunds faster;

ii. Category A  vendors (at their election)  be  permitted  to  file  monthly  returns  for  the  April,  May, June and July 2020 tax periods; and

iii. Category B vendors (at their election)  be  permitted  to  file  monthly  returns  for  the May, June and July 2020 tax periods, but if a Category B vendor elects to file a monthly return for July 2020, a monthly return for August 2020 will be required to return the vendor to the normal bi-monthly return cycle.

 7. DEFERRAL OF FIRST CARBON TAX PAYMENT AND FILING OF TAX RETURNS

The  Carbon  Tax  Act No.  15  of  2019 makes  provision  for  the  filing  of  tax  returns  and payments annually by 31 July.

 

May Proposal

Government proposes a three-month deferral of the first period for submission of accounts and carbon tax payments until 31 October 2020.

 8. DEFERRAL FOR  THE  PAYMENT  OF  EXCISE  DUTIES  ON  ALCOHOLIC  BEVERAGES AND TOBACCO PRODUCTS

Government  levies  excise  duties  on  tobacco  products  and  alcoholic  beverages. Although the duty to pay excise  duties is with  the  manufacturer, there is a  general  liability imposed on all participants throughout the supply chain. The payment periods vary for the different products,  ranging  from  30  days  to  130  days.

 

May Proposal

Government proposes that excise duty payments due to SARS be deferred for a period of 90 days without incurring interest or penalties. Manufacturers will only qualify for such deferment if they have no outstanding excise accounts or payments (unless an arrangement has been made for such payments).

9. INCREASING THE DEDUCTION AVAILABLE FOR DONATIONS MADE TO SOLIDARITY FUND

Background

Section  18A  of  the  Income  Tax Act  allows a deduction from taxable income for a taxpayer  who  has made a bona fide donation to  a  section  18A-approved  organisation but only if  the  donation  is  supported  by a section 18A receipt issued by the organisation. The tax deduction is limited to 10% of the taxpayer’s taxable income. Any  portion of  the  donation  which  does  not  qualify  for a deduction  in a particular year may be carried forward to the succeeding year of assessment. Any amount carried forward is also subject to the 10% limitation in the succeeding year.

Paragraph 2(4)(f) of the Fourth Schedule to the Income Tax Act allows an employer to take account of donations of up to 5% of remuneration (after contributions to retirement funds) in calculating an employee’s PAYE where an employer makes a donation on behalf of such employee to a section 18A-approved organisation.

 

May Proposal

In  order  to  encourage taxpayers to contribute to the Solidarity Fund, Government proposes that:

i. the tax-deductible limit for donations be increased to 20 per cent in respect of donations in cash or of property in kind actually paid or transferred to the Solidarity Fund during the 2020/21 tax year. Any donations over the limit may be carried forward; and

ii. the current 5% tax limit in the calculation of monthly PAYE of the employee is to be increased in respect of donations made to the Solidarity Fund. The proposal is that an additional limit of maximum 33.3% for 3 months or 16.66% for 6 months (depending on an employee’s circumstances), be made available which will ensure that the employee gets the deduction that is in excess of 5 per cent much earlier than under normal circumstances.

 10. EXPANDING ACCESS TO LIVING ANNUITY FUNDS

 

May Proposal

In order to assist individuals who either need cash flow immediately or who do not wish to realise living annuity investments that have underperformed, Government proposes expanding access to living annuities for a limited period of 4 months, beginning 1 May 2020 and ending on 31 August 2020 as follows:

i. Allowing holders of living annuities to temporarily immediately either increase (from 17.5% to a maximum of 20%) or decrease (from 2.5% down to a minimum of 0.5%) the proportion they receive as annuity income, instead of waiting until their next contract “anniversary date” (when they could normally revise the drawdown rate);

ii. Allowing individuals to adjust their draw down rates at any time during this period (irrespective of whether or not the contacts’ anniversary date falls within the said period); and

iii. After the 4-month period the adjusted draw down rates will automatically revert to the rates applicable before the adjustment.

 11. LOANS

The National Treasury and the Reserve Bank have been working with commercial banks to provide government guaranteed loans to small and medium sized businesses that may not be able to meet their financial obligations during the lockdown and when the economy reopens. The loan guarantee arrangement will make R 200 billion in new loans available to existing customers, of which R 100 billion will be available in the first phase. The key features are as follows:

 

  • Businesses with annual turnover of less than R 300 million, which are in good standing with their commercial banks, will be eligible for bank loans;
  • Funds borrowed can be used for operational expenses including salaries, rent and lease agreements, and supplier contracts Loans will cover up to three months of operational costs and will be drawn down monthly;
  • Banks are not obliged to extend COVID 19 loans, and those that do will use their normal risk evaluation and credit application processes. Business owners may be required to sign surety for the loan;
  • Each business may accept only one COVID 19 loan;
  • Loans will be offered at a single agreed lending rate, which tracks the repo rate, by all participating banks;
  • A six month repayment holiday will commence from the first drawdown, although interest will accumulate from the date on which the first drawdown occurs; and
  • Interest and capital repayments will start after six months, and businesses have a maximum of 60 months to repay the loans.

[1] An employer who is not in the national, provincial or local sphere of government, who is not a public entity listed in Schedule 2 or 3 of the Public Finance Management Act, 1999 (other than those public entities designated by the Minister of Finance by Notice in the Gazette) and who is not a municipal entity.

[2] These are conditions relating to the training of employees or conditions based on the classification of trade.

[3] The following employees are employees in terms of the ETI Act: Permanent employees, Non-permanent employees (‘casuals’ or ‘temps’); Seasonal workers, Learners under of a learnership agreement (provided they have been employed) and any other person who in any manner assists in carrying on or conducting the business of an employer,

[4] The following six SEZ’s have been designated by the Minister, namely Coega, Dube Trade Port, East London, Maluti-A-Phofung, Saldanha Bay and Richards  Bay.

[5] A connected person or relative means your spouse or anybody related to you or your spouse by blood in the third degree (e.g. great great grandfather etc.), and any spouse of these persons.

[6] The value of the ETI the employer may claim depends on the monthly remuneration paid to the employee. If the employee has worked less than 160 hours in the month, the remuneration amount must be ‘grossed up’ to 160 hours per month to calculate the value of the ETI. The amount can then be calculated and be ‘grossed down’ in the same ratio.