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COVID-19: Disaster management tax relief

1 April 2020
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The Draft Disaster Management Tax Relief Bill (Draft DMTR Bill) and the Draft Disaster Management Tax Relief Administration Bill (Draft DMTRAB) were released earlier this afternoon. 

The preamble to the Draft DMTRAB describes its purpose as providing for tax measures to assist with alleviating cash flow burdens on tax compliant small to medium sized businesses arising as a result of the COVID-19 pandemic and lockdown.

The two Bills contain further details of the COVID-19 tax relief measures announced towards the end of March. A number of these relief measures will apply only during the period from 1 April to 31 July 2020 (the four-month period).

While the willingness of Government to accommodate struggling business is appreciated, it is highly concerning that very limited relief is provided to larger businesses with a turnover exceeding ZAR 50 million. Larger business are hit as hard by the COVID-19 pandemic as smaller businesses. The collapse of large businesses would have a catastrophic effect on the economy, including on unemployment. 

The imposition of penalties and interest on large businesses struggling to meet their tax obligations (such as employees’ tax, Value Added Tax (VAT) and provisional tax) will simply pile another significant financial burden on a distressed taxpayer. We thus urge Government to extend the proposed tax relief to large, compliant taxpayers and to consider extending the relief to other tax types such as VAT.

PAYE deferral: Tax compliant businesses with a turnover of less than ZAR 50 million

Qualifying taxpayers will be allowed to defer 20% of their pay-as-you-earn (PAYE) liabilities in respect of the four-month period (remuneration paid in respect of April to July 2020) without incurring penalties or interest. 

A ‘qualifying taxpayer’ is a company, trust, partnership or individual who conducts a trade and who has a gross income of ZAR 50 million or less during the year of assessment ending on or after 1 April 2020 but before 1 April 2021. Not more than 10% of its gross income may be derived from interest, dividends, rental from letting fixed property or remuneration.

The deferred PAYE liability must be paid to the South African Revenue Service (SARS) in equal instalments over the six-month period commencing on 1 August 2020 (i.e. the first payment must be made by no later than 7 September 2020).

It is very important that employers who wish to defer their PAYE liabilities in terms hereof, do not understate their PAYE liability for any of the four months, as this will result in the imposition of penalties and interest. Instead, the full PAYE liability must be reflected, together with the payment of not less than 80% thereof.

Non-compliant taxpayers who have failed to submit returns or who have an outstanding tax debt of ZAR 100 or more (except if payment has been suspended, or it it is being dealt with in terms of an instalment payment agreement or compromise arrangement) will not qualify for the deferral of PAYE.

Deferral of provisional tax payments

One of the measures announced by President Ramaphosa in March was in relation to the payment of provisional tax. The Draft DMTRAB now provides the detail of the proposed measure.

The deferral of provisional tax payments is available only to qualifying taxpayers. A qualifying taxpayer that is a provisional taxpayer can pay:

  • 15% instead of 50% of its estimated liability as its first provisional tax payment; and
  • 65% instead of 100% of its estimated tax liability as its second provisional tax payment.

No interest or penalties will be imposed in respect of the deferred amount. The provisional tax that is deferred must be paid after the end of the year of assessment, as an additional (third) provisional tax payment in order to avoid interest running. 

Qualifying micro businesses qualify for similar relief in respect of their interim payments as required in terms of the Income Tax Act (the ITA).

Taxpayers who submit provisional tax estimates must remember that they may be called upon by SARS to justify their estimates. Should SARS be dissatisfied with the estimate, SARS could increase the amount to what it considers to be reasonable.  It is to be anticipated that many businesses will have to adjust their estimates downward in light of the current crisis. It will now be more important than ever to have a calculation that supports the provisional tax payments.

Employment Tax Incentive (ETI) relief

All businesses, irrespective of whether or not they currently qualify to claim an ETI, can derive a tax subsidy of up to ZAR 500 per month during the four-month period for those private sector employees between 18 and 65, earning below ZAR 6 500 per month. 

In terms of the normal ETI rules, an employer can claim ETI relief only in respect of eligible employees, such as employees between the ages of 18 and 29. The ETI claims are available only for a period of 24 months per eligible employee.  Accordingly, an employer normally cannot claim ETI relief in respect of employees who have already been included in the employer’s ETI claim for a period of 24 months. 

However, during the four-month period and subject to the detailed provisions of the ETI Act:

  • an employer will be entitled to increase the ETI claimed in respect of eligible employees by ZAR 500 per month (e.g. from ZAR 1 000 to ZAR 1 500 in the first qualifying 12 months, and from e.g. ZAR 500 to ZAR 1 000 in the second qualifying 12 months); and
  • an employer may claim an ETI of ZAR 500 per month for employees who are not normally eligible, such as employees who are older than 29 or where the employer has already claimed ETI in respect of an employee for a 24-month period. This will apply to all normally ineligible employees earning less than ZAR 6 500 per month, if they are between 18 and 65.

The payment of ETI reimbursements (to the extent that an employer’s ETI claim exceeds its PAYE liability) will, during the four-month period, be accelerated and ETI reimbursements will be increased from twice a year to monthly to get cash into the hands of compliant employers.  

The relaxation of the ETI rules during this four-month period will only apply to employers that were registered with SARS as at 1 March 2020, and all of the normal compliance requirements of the ETI Act will continue to apply.

Extension of time periods (dies non)

The Tax Administration Act, 2011 (the TAA) and the Customs and Excise Act, 1962 (C&E Act) deal with various tax administrative processes which are subject to specific timelines. The Draft DMTRAB provides for the 21-day national lockdown period to be regarded as dies non, in other words, these days will not be counted for purpose of calculating the respective time periods.

However, it is important to note that this does not apply to all time periods stipulated in these two Acts. For example, the dies non rule will apply to all time periods in respect of dispute resolution under Chapter 9 of the TAA, but it does not apply to other provisions such as the submission of tax returns or a response to a request for relevant material. It also applies to section 99 of the ITA, with the effect that prescription will also be extended.

In respect of the C&E Act, the Draft DMTRAB specifically lists instances where the dies non rule will apply (e.g. relating to dispute resolution), and others where it will not (such as the submission of a bill of entry). Where taxpayers are subject to specific time periods in respect of the TAA or C&E Act, they are therefore urged to refer to the to the Draft DMTRAB to consider whether the dies non rule will apply to the specific timelines.

Also, the Tax Laws Administration Act, 2019, introduced the principle that beneficial ownership declarations for withholding tax purposes, will only be valid for a five-year period. This was intended to come into effect on 1 July 2020, but this date will be extended to 1 October 2020.

COVID-19 Disaster Relief Trusts

Special provision is made for tax relief to be granted to trusts established for the sole purpose of providing disaster relief in respect of the COVID-19 pandemic.  These trusts are referred to as COVID-19 Disaster Relief Trusts (CDR Trusts) and they will be taxed in terms of the special tax dispensation applicable to public benefit organisations (PBOs). However, this special dispensation will only apply during the four-month period.

While the definition of a CDR Trust does not refer to Small Medium and Micro Enterprises (SMMEs), the Explanatory Memorandum to the DMTR Bill creates the impression that the focus of CDR Trusts will (or must) be to provide financial assistance to SMMEs.  The Explanatory Memorandum envisages that the financial assistance could include the provision of loan funding or the payment of weekly allowances directly to employees of approved SMMEs.

The proposed relief measures applicable to CDR Trusts are as follows:

  • CDR Trusts are deemed to be approved PBOs, subject thereto that they comply with the PBO provisions of the ITA. As such, receipts and accruals of CDR Trusts will be exempt from income tax, similarly to PBOs.
  • Donations made to or by CDR Trusts are exempt from donations tax.  Donations made to a CDR Trust will also qualify for a tax deduction as provided for in section 18A of the ITA.
  • In those instances where CDR Trusts pay weekly allowances to employees of SMMEs, there will be no obligation to withhold PAYE, although these allowances will be subject to income tax in the hands of the employees and will be taxable upon assessment.

If, by 31 July 2020, a CDR Trust has not been dissolved and its assets have not been distributed, it will be deemed to be small business funding entities as contemplated in section 30C of the ITA.

The tax relief provided to these kinds of funds is very welcome. However, there is uncertainty regarding the application of these provisions, such as whether these funds must take the form of a trust, and whether they will be obliged to apply to SARS for approval. 

In light of the very short lifespan of these funds, it would be problematic if they had to be structured as trusts (including the obligation for trustees to receive Letters of Authority from the Master’s Office before they can act on behalf of the trust), and if application first had to be made to SARS.  In view of the urgent need to provide funds to struggling business, it would be appreciated if this could be clarified as soon as possible.