By Jana Botha, Consultant, Baker McKenzie, Johannesburg
The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The draft Bill, together with its explanatory memorandum, provides clarity with regards the tax relief measures President Cyril Ramaphosa announced on 23 March. The following is a summary of the relief measures and, importantly, the relevant timelines during which these measures will apply.
Employment Tax Incentive
Ramaphosa indicated that the government would provide a tax subsidy of ZAR500 per month under the Employment Tax Incentive (ETI) scheme for those private sector employees who earn below ZAR6 500 – for the next four months.
The aim of the ETI, introduced in January 2014, is to encourage employers to hire young people between the ages of 18 and 29 by assisting with the cost of employment, without affecting the wage received by the employees. The ETI can be claimed for a total of 24 months and the maximum ETI claimable per qualifying employee is ZAR1 000 for the first year of employment and ZAR500 for the second year of employment.
With the aim of minimising job losses, the government proposes to expand the ETI programme for a limited period of four months, effective 1 April 2020 to 31 July 2020, by increasing the maximum ETI amount claimable to ZAR1 500 per qualifying employee for the first year of employment and ZAR1 000 for the second year of employment. In addition, employers are able to claim a further ETI amount of ZAR500 for each of the four months (from April to July) for employees between the ages of 18 to 29, where the initial 24-month period has lapsed, as well as for employees aged between 30 to 65 who earn a monthly remuneration of ZAR6 500 or less.
To assist with cash flows, the government is also proposing to accelerate the payment of ETI reimbursements, generally paid bi-annually at the end of February and August, to monthly payments to compliant employers.
Deferral of Employees Tax Payment
To further aid businesses with cash flows, the government is proposing to allow compliant small to medium sized businesses (SSMEs), being businesses with a gross revenue of ZAR50 million or less, to pay only 80% of their employees tax (PAYE) liability for the four months of April to July 2020, thereby deferring 20% of the liability without incurring penalties and interest. Businesses that take advantage of this proposed relief measure are required to pay the deferred amounts to SARS in six equal instalments over the six month period starting 1 August; thus the first repayment would be due with their PAYE returns, which are due on 7 September.
Businesses are tax compliant if they do not have any outstanding tax returns or tax debts. Businesses that have outstanding tax debts, but have entered into a deferred payment arrangement with SARS to pay the debt over a period of time, or the debt has been suspended by SARS pending the outcome of an objection or appeal, are also regarded as compliant.
Deferral of Provisional Tax Liability
Compliant SSMEs are also able to defer a portion of their provisional tax payments without incurring penalties or interest for a period of 12 months from 1 April 2020 to 31 March 2021. Businesses that take advantage of this relief measure need only pay 15% of the estimated total tax liability in respect of the first provisional tax payment due between 1 April and 30 September 2020 and 65% of the estimated total tax liability due in respect of the second provisional tax payment from 1 April 2020 to 31 March 2021. The deferred amount, i.e. the full tax liability, must however be paid with the third provisional tax payment, which is due within six months after the business’ financial year-end, to avoid interest charges.
The eligibility of individuals who carry on a business have not been finalised. It is however likely that sole proprietors with a turnover of less than ZAR5 million, where no more than 10% of their turnover is derived from interest, dividends, foreign dividends, rental from the letting of fixed property or remuneration received from an employer, would qualify for this relief.
Special Dispensation for Covid-19 Disaster Relief Funds
In his address to the nation on 23 March, President Ramaphosa indicated that private donors have pledged funding with the aim of providing assistance to the public. Currently receipts and accruals (other than from certain business activities or trading activities) of public benefit organisations (PBOs) that provide disaster relief are exempt from income tax, while donations made to or by those PBOs are exempt from donations tax. Donations, limited to 10% of the donor’s taxable income, made to PBOs are tax deductible in the hands of the donor.
The government is proposing a streamlined special tax treatment for funds established to assist with COVID-19 relief measures, similar to the current special dispensation that applies to PBOs that provide disaster relief. Accordingly, COVID-19 disaster relief funds that apply for and obtain approval from the Commissioner for the South African Revenue Service (SARS) will be deemed to be PBOs. The approval by the Commissioner will be subject to the same criteria prescribed for all PBOs and will only apply for the four-month period from 1 April to 31 July. Consequently, upon receipt of approval, these funds will qualify for the relevant tax exemptions applicable to PBOs, i.e. the funds’ receipts and accruals would be exempt from income tax, and donations to or by the fund will be exempt from donations tax. Donors who donate to COVID-19 disaster relief funds will also qualify for a tax deduction limited to 10% of their taxable income.
A further proposal is that COVID-19 disaster relief funds that are not dissolved at the end of the four-month period, and that have not distributed their assets to approved institutions on or before 31 July 2020, will be deemed to be small business funding entities, which qualify for tax exemption subject to the provisions of the Income Tax Act.
Something to take cognisance of is that individual employees will be impacted where the funding structure to assist with COVID-19 relief takes the form of loan funding to SSMEs. Although the loan obligation would remain with the SSME, the funds would be paid directly to employees in terms of weekly allowances, to ensure jobs are retained. In these cases, the SSME would not be able to withhold employees’ tax from the payments made by the funds directly to employees. The government has therefore proposed that the payments not be subject to employees’ tax. While this is the case, the amounts received will form part of the individual employees’ taxable income and will be taxable on assessment.