30 April 2021
NEWS & OPINION
‘Proposed Reg 28 amendments the opposite of prescription’ BY JANICE ROBERTS Editor: MoneyMarketing
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he proposed amendments to Regulation 28, to encourage private sector investment in infrastructure, are the opposite to prescribed assets, says Janina Slawski, Head of Investment Consulting at Alexander Forbes. “There is no proposed change to the sense of Regulation 28, which is to make sure that investment strategies are prudent, that they include diversification, that they are not a concentration of individual asset classes, etc,” she adds. “Anyone applying Regulation 28 has a fiduciary responsibility and they need to take into account risk and return. If anything, these proposed changes are the opposite of prescription, as they do not introduce minimum investment into infrastructure – which is something we have always been concerned about. Prescription would require a minimum investment, but the proposed amendments introduce bigger maximum investments.” While posts on social media after the Regulation 28 proposed amendments were released, stated that members of pension funds are going to be forced to hold up to 55% of their investments in infrastructure, Slawski tells MoneyMarketing that this is “an overreaction”. She explains that proposed amendments introduce a definition of infrastructure that references the Infrastructure Development Act of 2014, which in turn refers to “public installations, structures, facilities, systems, services or processes in respect of which projects may be designated as strategic integrated projects”. The amendments propose introducing subcategories of infrastructure across several asset classes such as equities, bonds, property, own employer, hedge funds and private equity. The overall limit on infrastructure across all these assets classes is proposed at 45% for domestic exposure, plus an additional 10% for the rest of Africa. The private equity limit would increase from 10% to 15%, and the current 15% limit that applies across the private equity, hedge fund and other categories would be removed.
“What the Government is trying to achieve is more investment into the big infrastructure projects – by that I mean the whole Sustainable Infrastructure Development Symposium (SIDS) process and the R340bn projects that have already been gazetted. It’s renewable energy, dams, toll roads, etc. “These would tend to be illiquid investments, so normally investors would invest into them through an infrastructure fund that is usually a private equity structure. You don’t put your money in and take it out the next day – it’s locked in for ten years minimum.” Slawski says the drive to get pension funds to invest long term into illiquid private equity infrastructure funds makes sense. “There are funds out there that want and can invest into these types of investments, particularly some of the biggest defined benefit funds. They can get good returns and they can take a 20- or 30-year view because they are supporting pensioners for those sort of time frames.” The reality is that the majority of South African retirement funds haven’t invested more than 2% to 5% in illiquid investments. “Most have invested nought and the current 10% limit was nowhere close to being an issue. Even the 15% overall across private equity, hedge funds and alternatives wasn’t an issue. So, we’re supportive of increasing that overall. While some funds would use it, it’s unlikely to shift the dial substantially in terms of actual investment into illiquid investments.” She emphasises that the decision around whether or not pension funds should invest in infrastructure will remain the prerogative of a retirement fund’s board of trustees. “If the board of trustees is not happy with the governance of a project, they won’t invest in it. With the limit on private equity increased, the board can invest more into all sorts of unlisted corporates – like those companies that have delisted from the JSE and have nothing to do with infrastructure.”
Janina Slawski, Head: Investment Consulting, Alexander Forbes
Withholding PAYE on salaries of non-tax residents BY BOBBY WESSELS Associate, AJM Tax
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he emergence of a global workforce that can perform services to any employer from any part of the world, has challenged many of the legal norms under which society has operated. It is becoming increasingly important for advisers to consider these challenges and concerns in providing advice. One such consideration relates to the liability of a South African employer to withhold pay-asyou-earn (PAYE) on salaries paid to non-tax resident employees who perform those services abroad. A knee-jerk reaction would infer that PAYE would not need to be withheld. However, that reaction must be grounded in law. The liability for withholding PAYE on remuneration paid by an employer to an employee is imposed by paragraph 2 of the Fourth Schedule to the Income Tax Act No. 58 of 1962 (the Act). Notably, there is no mention made of the tax residency status of the employee. All that is required is the existence of an employee-employer relationship and that the employer is liable to pay that employee an amount that constitutes ‘remuneration’. If it is assumed that an employee-employer relationship exists, what remains to be ascertained is whether the amounts payable by the employer to the employee amounts to ‘remuneration’. The term ‘remuneration’ is defined as ‘any amount of income’, and further, the term ‘income’ is defined to mean the amount of ‘gross income’ after deducting any exemptions therefrom. For non-tax residents, amounts will only be included as part of gross income if they are derived from a source within South Africa. The source of the employment in the current scenario is not derived from within South Africa, as the employment is physically exercised elsewhere. For that reason, the salary paid in the current scenario does not fall within the definition of gross income. By extension, this would exclude those salaries from the ambit of income and, as a result, the salaries paid would not constitute remuneration as defined in the Fourth Schedule of the Act. There has been some debate as to whether the meaning attributable to income, as used in the context of ‘remuneration’, should be the ordinary meaning of the word or the specific meaning as defined in the Act. However, given the context and purpose of the provision of the Act, it would be more appropriate to rely on the definition that the Act provides, as opposed to favouring the general understanding of the word. Therefore, the inability of the salaries payable in the current context to fit comfortably within the definition of remuneration would absolve the employer from the corresponding obligation to withhold PAYE. As a result, where a non-tax resident derives salary income, or income of a similar nature, in respect of their employment services rendered abroad, the South African employer would not need to withhold PAYE from the employee’s salary. The above is of paramount importance for financial advisers in advising their clients – both corporate and individual. The monetary tax implications notwithstanding, there may be some practical difficulties that accompany the compliance related to the above-mentioned scenario. Furthermore, the impact of exchange control must also be considered in advising on the flow of funds from the employer to the employee. As with any professional advice, there is a myriad of factors that must be considered; however, the liability of the employer to withhold PAYE, in the current context, may be mitigated.
“The impact of exchange control must also be considered in advising on the flow of funds from the employer to the employee”
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