Editor’s Note:
In this fifth newsletter for 2025 we consider the following:
Tax and ConCourt Jurisdiction
Foreign Pensions – Tax Exemption Withdrawal Proposal
Section 20A Ringfencing of Assessed Losses Tightening Proposal
Hybrid Equity Instrument Proposal Reprieve – Section 8E
Trust Vesting must be done in Real Time
SARS Ins, Draft Ins and Guides Noter-Up
Tony Davey – Editor | Duncan McAllister – Co-Editor
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TAX AND CONCOURT JURISDICTION
In two consolidated applications for leave to appeal against a SCA and High Court judgments re gambling tax matters before the Constitutional Court (ConCourt) (Sunvest International vs Western Cape Gambling Board and Emfuleni Resorts v Eastern Cape G.B., ConCourt case (2025) ZACC18 (29 August 2025)) the ConCourt considered two issues, namely, its own jurisdiction constitutionally to hear the tax matters and secondly, the substantive tax matter.
The ConCourt thus addressed sections 167(3)(b)(i) and (ii) of the Constitution pertaining to its jurisdiction.
In disallowing leave to appeal, the ConCourt held that the ’general public importance‘ criterion test as required in the Constitution was not satisfied in these instances. This strict interpretation applied to the specific facts of these cases which were of interest only to the parties concerned as distinct from the facts in the Thistle and Coronation cases which were heard by the ConCourt on the basis that the outcomes were of general public interest and importance.
FOREIGN PENSIONS – TAX EXEMPTION WITHDRAWAL PROPOSAL
The draft Taxation Laws Amendment Bill (TLAB) was published on 16 August 2025. We addressed this proposal originally contained in the Budget Review 2025, in Newsletter 3.2025.
The draft TLAB proposed amendment to remove the exemption under section 10(1)(gC)(ii) is as stated in the Budget Review. In essence, if enacted, lump sums, pensions and annuities received by RSA residents from foreign retirement funds as consideration for past employment outside the RSA will become subject to tax in the RSA.
We note that if such amounts emanate from the social security system of a foreign country (as distinct from consideration for past employment), such amounts remain tax free under section 10(1)(gC)(i) of the Income Tax Act.
SECTION 20A RINGFENCING OF ASSESSED LOSSES TIGHTENED
The existing section 20A of the Income Tax Act is designed to preclude natural person hobbyists from masquerading as business persons, by precluding losses from hobby-type trades being offset against the taxpayer’s other income, thereby reducing taxable income.
Various precluded trades include sport, collectibles, rental of vehicles, aircraft and boats, animal showing, part-time farming, creative arts, gambling/betting and the acquisition or disposal of Crypto assets.
The current legislation applies only to natural persons who are in the maximum marginal rate tax bracket (45%), being taxable income above R1,817 million. The draft TLAB proposes to expand the provisions of this section 20A ring-fencing of losses to apply to natural persons whose taxable income exceeds R673 000. This proposal will significantly broaden the net of affected taxpayers as it is no longer confined to high net worth individuals.
HYBRID EQUITY INSTRUMENT PROPOSAL REPRIEVE – SECTION 8E
The Draft TLAB proposed that the definition be revised to include a financial instrument as debt, as distinct from preference share equity, if it is categorised as a debt liability for accounting purposes under International Financial Reporting Standards (IFRS). Various consequential definitions were also to be revised, for example, it was proposed that the previous three-year safe-haven redemption period no longer apply. The effect of this would have been that effective for years of assessment commencing 1 January 2026, dividends would have been deemed to be income in the preference shareholder’s hands. Thus the 20% Dividend Withholding Tax (DWT) would be replaced with the normal marginal tax rate of the recipient preference shareholder. This would have severely negatively impacted upon the use of preference shares as a financing method.
Fortunately, in a subsequent Media Release dated 3 September 2025, National Treasury reversed the proposal and thus the current status quo of preference share income being treated as a dividend remains.
TRUST VESTING MUST BE DONE IN REAL TIME
In practice, trustees frequently vest income or capital gains in resident beneficiaries a few months after the end of the year of assessment after the annual financial statements have been drawn up. They then backdate the relevant resolutions to make it appear that the decision was taken during the preceding year of assessment.
SARS’s view is that any decision to vest income or a capital gain in a beneficiary must be made within the tax year in real time. If SARS detects that resolutions have been backdated, it is likely that the trust will face understatement penalties and interest. In addition, SARS will disregard the vesting and tax the trust on the income at 45% or capital gain at 36%.
Some support for the practice can be found in ITC 1033 (1959) 26 SATC 73(C) in which the court opined in relation to the Income Tax Act 31 of 1941 as follows:
‘While the trustees might be able, in terms of the trust deed and in relation to the beneficiaries, to postpone a decision in regard to capitalization or distribution, they will, in so far as the income tax law is concerned, be obliged to make their decision, if not within the tax year itself, at any rate, within a reasonable period of its termination so as to enable the incidence and amount of tax for that year to be determined. A trustee could not avoid the incidence of, or delay the payment of, the tax on the revenue of the trust for a particular year by postponing, at any rate, beyond the time for making his return under section 55(4), his decision as to whether he should capitalize or distribute. To allow him to do so would be to do something in conflict with section 8.’
The equivalent sections under the current Act are section 66 (Notice by Commissioner requiring returns for assessment of normal tax) [section 55(4)] and section 7(1) (when income is deemed to have accrued or to have been received [section 8] [1941 Act sections shown in square brackets].
While the court’s view may be a practical one, it is in conflict with the principle established by Botha JA in Caltex Oil (SA) Ltd v SIR 1975 (1) SA 665 (A), 37 SATC 1 at 15 in which he stated that –
‘events which may have an effect upon a taxpayer’s liability to normal tax are relevant only in determining his tax liability in respect of the fiscal year in which they occur, and cannot be relied upon to redetermine such liability in respect of a fiscal year in the past’.
Any resolution vesting the income or a capital gain of a trust in resident beneficiaries should be passed before year-end.