Businesses will get substantial new tax incentives to support the development of skills and the creation of jobs, in a change to tax laws that will boost the government’s New Growth Path. Included in proposals from the Treasury Thursday are incentives for industrial development zones, new measures to cut tax avoidance, and incentives for venture capital companies. Analysts said the incentives could be a substantial boost for jobs and industrial development.

The Tax Laws Amendment Bill released by the Treasury yesterday gives effect to tax proposals contained in Finance Minister Pravin Gordhan’s February budget. The draft legislation is intended to broaden the tax base and close loopholes by introducing anti-avoidance measures to curtail practices such as issuing shares to disguise taxable interest as tax- free dividend income. Foreign companies setting up in SA could be allowed to establish themselves in the country without significant tax exposure.

Keith Engel, chief director of legal tax design at the Treasury, said the government was seeking to renew its efforts to enhance the industrial development zone regime — announced earlier this year by President Jacob Zuma. The incentive was aimed at supporting industrial development by attracting large projects. The existing 55% additional allowance for greenfield industrial projects would be increased to 100%, the bill proposes. A 35% allowance for brownfield projects would be raised to 75%, with effect from next January.

Bernard du Plessis, a tax director at corporate law advisers Edward Nathan Sonnenbergs, said the new thresholds were welcome and "will boost new industrial development". The draft bill also contains incentives for investing in local venture capital companies. Mr Engel explained that the existing investment benefits for venture capital companies were too small, and the criteria for small businesses and junior mining too restrictive. There were too few applications and no venture capital company had been successfully initiated since the concept was introduced to SA in 2008. A relaxation of requirements was proposed so that investor pooling of equity funds through venture capital companies could be achieved as intended.

Prof Osman Mollagee, a director for tax at Pricewaterhouse- Coopers, said: "This is a big move on the part of the government. It may just do the trick to encourage investors to put their money into small businesses." There were some remaining restrictions in the draft legislation, such as the criteria for qualifying companies, Mr du Plessis said. "However, the regime has a realistic chance of at least going forward," he said. The bill also revised incentives for research and development (R&D). A lack of a concrete and precise definition of R&D in existing legislation had given rise to difficulties. Mr Engel said the R&D incentive would now require a pre-approval system to curtail avoidance and to provide certainty for legitimate projects. The bill proposed the establishment of an approvals committee appointed by the minister of science and technology and the minister of finance.

Prof Mollagee said the approval process caused an obstacle for companies. "We would have thought that the purpose of a tax regime was to remove barriers to doing business. However, we keep finding provisions that put up obstacles in places for companies and other taxpayers." The draft legislation also provided clarity on the new dividends tax, which is to replace secondary tax on companies on January 1 next year. It proposed taxing foreign dividends at 10%. Mr du Plessis said this was a sensible approach. "The government has taken cognisance of the discrepancies between the foreign and local tax." The bill also expanded on the regional holding companies regime, which allowed foreign companies to set up their headquarters in SA without any significant tax exposure. Mr Engel said it removed the potential for double taxation of South African multinationals operating abroad through a variety of measures — such as a revised source system and the addition of special tax credits in the case of foreign withholding taxes imposed on South African- sourced management fees. The biggest surprise in the bill was the introduction of new anti - avoidance measures designed to clamp down on transactions using share issues to disguise otherwise taxable interest as tax-free dividend income.

The bill proposed to place an immediate moratorium on section 45 of the Income Tax Act relating to intra-group rollovers. Mr Engel explained that the common use ofthe section involved "debt push-down structures" — the trigger for connecting excessive debt. He said that section 45 rollover relief would be wholly suspended for about 18 months while the continued need for this relief would be re-evaluated, along with concerns relating to excessive debt. Mr du Plessis said this was a drastic measure. "It is going to disrupt much group activity in the short term."

The bill also gives effect to the February budget proposal to convert expenditure associated with medical aid contributions into tax credits. Ismail Momoniat, acting director-general of the Treasury, said a discussion paper on a more comprehensive conversion into credits for all other current medical deductions would be published for comment next week. The draft legislation also contained proposals to open up the provision of living annuities to promote competition, and not restrict policyholders to costly policies. Under the proposed new regime, collective investment scheme licences would be extended to the government.

The Treasury and the revenue service are scheduled to brief Parliament’s standing committee on finance on the draft legislation within the next fortnight. The Tax Laws Amendment Bill is available on the Treasury’s website for public comment, which should be submitted by July 5. Further details on the planned taxation of gambling winnings — also announced in the budget — would be issued later this year. This would focus on the design and administrative aspects of the tax. Issues relating to the tax treatment of contributions to retirement funds would also be addressed later this year, after which legislation would be considered. Nicky Weimar, an economist at Nedbank , said the income tax relief in the bill would not make an enormous difference to consumers. "They’re really just adjusting for the effect of inflation ... and focusing on relief for the low income spectrum," she said. "The attempt to promote small business through a bigger tax exemption is a step in the right direction, but it doesn’t address the problem of making it more attractive to start a business. That’s where you should focus your energies."