Amendments to the Income Tax Act and Capital Gains Tax Decree

Introduction

1. Legislative changes have finally been made to give effect to some of the tax changes announced in the 2013 budget in November 2012. These include:

(a) to make PAYE in certain circumstances a final tax

(b) changes in the advance payment mechanism for company tax and

(c) a requirement to file capital gains tax (CGT) returns on disposal of every capital asset, whether a gain is made or not (and, it appears, whether a gain is exempt or not).

Other amendments have also been made which were not part of the 2013 Budget announcement.

2. The relevant amending Decrees were gazetted on 10 May 2013. Most of the changestake effect from 1 January 2013. Poor drafting in some cases means potential for confusion. Clarification may be needed from FRCA on how it interprets its own legislation (but that is not a guarantee that such an interpretation will endure).

PAYE as a final tax

3. It was announced in the 2013 budget that PAYE would be a final tax – meaning, in effect, that those whose income comprised solely of employment income:

(a) will not need to file a tax return and

(b) (it follows) will not receive tax refunds to the extent of overpayment.

FRCA has, since the announcement, issued directions to implement this concept, although there was no legislation to support those directions. Legislation for this has now finally been issued.

4. Income Tax (Amendment) Decree 2013 (Decree No. 16 of 2013):

(a) rewrites Part XI of the Income Tax Act (Act) (PAYE) and

(b) inserts a new Part XVI (Withholding employment or resident interest withholding tax).

5. Some of the critical features of these amendments are as follows: ·

  • the new s.82 of the Act requires an employer to withhold tax from a payment ofemployment income as prescribed. Employment income is defined in s.81 of the Act. Employment income now includes amounts derived by an employee on termination of employment including compensation for loss of employment. This could possibly include any court/tribunal-ordered compensation.
  • no allowances are now claimable by individual taxpayers.
  • taxes withheld are required to be paid by the end of the calendar month following the month in which a person is required to withhold the tax. There are also certain filing requirements.
  • a person entitled to claim the payment of employment income as a deduction cannot do so unless the taxes withheld are paid to FRCA.[1]

6. Section 82A of the Act allows the Minister to make regulations. No new regulations have been made. Nor have there been any consequential amendments to the Income Tax and Social Responsibility Levy (Employments) Regulations (Employments Regulations). Those Regulations have applied (with amendments) since 1964. They were issued under the now-replaced s.81. They have not been revoked or amended. This means that they remain in force as far as they are not inconsistent with the changes to the main Act. There is therefore potential for dispute on what parts of these Regulations (the only ones available) continue to apply and what parts do not.

7. Where a taxpayer has only one source of employment income, the taxes deducted under s.82 are final and his/her employment income is not included in his/her chargeable income.[2] However, if the taxpayer has some other income then the tax payable is calculated by reference to his/her aggregate income (including theemployment income) while giving credit for taxes paid on the employment income.

Advance payment of company taxes

8. Amendments to s.91 of the Act now require companies to pay:

(a) 33.3% of the tax assessed[3] in respect of the income of the previous income year on the last day of the sixth month of the fiscal year and

(b) 33.3% of the tax assessed in respect of the income of the previous income year on the last day of the ninth month of the fiscal year and

(c) 33.4 % of the tax assessed in respect of the income of the previous income year on the last day of the fiscal year.

9. Previously, advance payment calculations were based on the estimate of tax liability for the same fiscal year. There appears to be no provision for a company to make an arrangement different from the requirements of s.91 where it knows that its tax liability will be significantly higher than the previous year (for example, where a company made a loss last year but is expecting to make a profit this year).

10. The new s.92(4) of the Act imposes a penalty (40% of the shortfall) for not complying with the advance payment requirements. However, the provisions are not very clear.

Obligation to file CGT returns

11. The Capital Gains Tax (Amendment) Decree 2013 (Decree No. 14 of 2013) amends s.15 of the CGT Decree. A CGT return is now required to be filed whenever a capital asset is disposed of. Previously, only a person liable for CGT (that is, a person who made a taxable gain on disposal of a capital asset) was required to file a CGT return.

12. The amendment means that a CGT return is required by law to be filed for every sale or transfer of a capital asset. The definition of capital asset is wide (broadly speaking, every asset except a chattel). It includes, for example, a share, security, equity or other financial asset. The drafting of the amendment means, for example:

(a) that even those who make exempt capital gains (for example those who sell shares on the South Pacific Stock Exchange) are strictly required to file CGT returns for every such disposal. Because a CGT return must now be filed whenever a capital asset is disposed of, whether the gain on it is exempt is now irrelevant

(b) even the transfer of a single nominee share will now require a CGT return to be filed.

Previously CGT returns were only filed when there was CGT to pay.

13. The time for filing a CGT Return remains 30 days from the disposal of the capital asset.

Other amendments

14. Other amendments include:

(a) an increase in the required time to maintain records under the CGT Decree (from five years to seven years). This aligns the record-keeping requirement with the Act

(b) resident interest withholding tax has now been renamed “resident interest withholding tax final tax”. It is also now a final tax under certain circumstances. This tax, imposed at 20%, could penalise those below the F$16,000 income tax threshold including retired people living on the interest on their savings.

Issues

15. We have commented above on some of the difficulties that poor drafting will cause. Further examples are as follows:

(a) s. 80(1) imposes a tax to be known as “Income Tax”. This is imposed at the rate specified in the Fourth Schedule on a person’s chargeable income. Section 7 of the Act imposes a “normal tax” on every dollar of chargeable income. Normal tax is also charged with reference to the Fourth Schedule. How sections 7 and 80(1) interact is not clarified

(b) the new s.92(4)(a) of the Act (which seeks to impose a penalty for shortfalls in the payment of the advance company tax) refers to actual Income Tax liability as specified in subsection (1). Subsection (1) of s. 92 however does not contain any reference to Income Tax liability.

It may be possible to take a practical approach to these issues in most cases. In exceptional cases, however, these fundamental flaws may become significant.

Conclusion

16. These amendments impose some additional obligations on taxpayers, especially in relation to advance payment of company tax and the filing of CGT returns. Understanding these amendments is important, to avoid any possible penalties under the relevant laws.

17. Please contact the Munro Leys tax team if you have any queries or wish to discuss anything arising from this Alert.

Richard Naidu
Partner
Direct Dial +679 322 1816
richard.naidu@munroleyslaw.com.fj

Rajnil Krishna
Associate
Direct Dial +679 322 1814
rajnil.krishna@munroleyslaw.com.fj


[1] S.23A of the Act.

[2] S.122 of the Act.

[3] S.91(1)(a) actually reads 33.3% equal to the tax assessed. Presumably that is an error.

Disclaimer

The information and opinions in this Legal Alert are for general information purposes only. They are not intended as specific legal or other professional advice and should not be relied upon or treated as a substitute for specific advice. Munro Leys can accept no responsibility for any loss arising from reliance on the general information contained in this Legal Alert.

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