Company Comment - Budget Speech 2007

Historically, tax allowances pertaining to buildings were only available to taxpayers that used the buildings in a process of manufacture or a similar process.  Therefore, no tax allowances were available to a taxpayer that erected a commercial building, such as offices and warehouses or retail space, for the use in its trade.

In the 2007 budget speech, Trevor Manuel proposed that a new tax allowance on commercial buildings be introduced. The budget proposal gives recognition to the fact that commercial buildings do not last forever.  The wear and tear allowances will apply to newly constructed buildings as well as to upgrades to existing buildings.  It is proposed that the write off period be 20 years, 5% per year, which is in line with the tax allowance provided in respect of manufacturing buildings.

Although this is a welcome move, it is apparent that no tax allowance will be made in respect of the purchase of existing commercial buildings. In this respect, it is worth noting that the tax legislation dealing with manufacturing buildings makes provision for the claiming of allowances on previously qualifying purchased buildings. We hope to see that when the allowance is introduced, it is extended to these fore mentioned buildings.

Life industry welcomes end of retirement fund levy

The Life Offices' Association (LOA) has welcomed the abolishment of the retirement fund levy as from March this year.

The long awaited elimination of the levy, announced by Finance Minister Trevor Manuel in his 2007 Budget speech this afternoon, follows its halving from 18% to 9% last year.

Gerhard Joubert, CEO of the LOA, says the elimination of the 9% levy means that consumers saving for their retirement will see their nest eggs enhanced significantly at retirement.

"We believe that significant strides have been made in terms of reforming the South African retirement savings environment in the past year. The combination of the much improved early termination values on retirement annuity funds implemented by the life industry as from December last year and the abolishment of the levy on retirement funds provide consumers with a strong incentive to save for their retirement."

Joubert says the life industry, as represented by the LOA, is looking forward to engaging with National Treasury and other stakeholders on the retirement reform and social security tax consultative process.

Investec welcomes moves to open rand futures market

Investec today welcomed the advent of a rand futures market announced today in the Finance Ministers budget speech.
 
"We applaud the Minister for introducing greater transparency in South Africas financial markets and allowing domestic investors to further broaden and diversify their portfolios," commented Grant Barrow, Head of Investec's Currency and Derivatives Trading division in South Africa. 
 
"Introducing a rand futures market is a step in the right direction as it allows for South African investors to hedge currency exposure in a transparent market.
 
Investec Intends to play a meaningful role in this innovative product, as it does in all major derivative markets.

Boost for retirement funds - Abraham Jansen van Nieuwenhuizen, principal tax consultant at Ernst & Young

Every dog has its day! 21 February 2007 was that day for the South African retirement-funding industry. After numerous years of promised reform around the taxation of the industry, a number of changes and reforms were announced by Finance Minister, Trevor Manuel in the delivery of his 2007 Budget Speech.
 
The most important announcement was the abolishment of the Tax on Retirement Funds Act with effect from 1 March 2007. This tax was introduced as an interim tax, with effect from 1 March 1996, and it taxed retirement funds and certain business in a long-term insurer on their gross interest income, net rental income and foreign dividend income. The rate of taxation was introduced at 17%, increased to 25% in 1998, reduced to 18% in 2002 and finally reduced to 9% in 2006. Over its life, the retirement funds tax collected approximately R51.4 billion, which represents a substantial outflow of individuals' retirement savings.
 
The reform will see a move towards international best practice in the taxation of retirement savings where only the benefits ultimately received by the individual are taxed. The growth in the value of the retirement savings housed within retirement-funding vehicles will now be exempted from taxation.
 
It has been argued in the past that the tax in question was a deterrent for long-term savings. This reform, along with the abolishment of the requirements to withhold taxes on withdrawal lump sums paid to individuals with taxable income less than R43 000, will certainly go a long way to achieve governments objective to maintain sufficient incentive for individuals to provide adequately for their retirement. This will also be supported by the proposal to streamline the complex regulatory framework in the near future, resulting in reduced administrative costs. The effect of a reduction in costs and taxation savings should result in increased returns for future beneficiaries.
 
The retirement funding industry, which includes long-term insurers, will be happy to see the back of the Tax on Retirement Funds Act which was fraught with inequities and complexity and was an administrative burden. Listen to those champagne corks popping!

Change in taxation of dividends - Sean Kruger, Tax director at Ernst & Young

The 2007 Budget proposes a significant change in the way dividends are taxed. This reform will be in two phases. Phase one, effective 1 October 2007, will result in secondary tax on companies (STC) being reduced to a rate of 10%, down from the current rate of 12,5%. Phase two, commencing in 2008, will involve the imposition of a dividend tax on shareholders.
 
As background to this change, certain companies with foreign shareholders were claiming the group relief provision in respect of STC, on dividends distributed to foreign shareholders. In appropriate circumstances, this relief is available where the shareholders are local, but, in SARS view, is not available where the shareholders are not resident in South Africa. A number of taxpayers took issue with this, claiming that the various double tax treaties prevented SARS from discriminating against foreign shareholders. The proposed change seems to indicate that SARS acknowledges that its interpretation may have been incorrect.
 
Although the reduction in the rate of tax applicable to dividends will decrease to 10%, it is envisaged that the base of taxable distributions will broaden beyond the current interpretation of dividends and deemed dividends. Phase one will apply to all distributions made on or after the effective date, even if those distributions are funded partly or wholly from pre-effective date profits.
 
The implementation of phase two will be enforced through a withholding tax at company level, which will necessitate the renegotiation of several international tax treaties.
 
It is expected that these reforms will help lower the cost of doing business in South Africa and also bring the taxation of dividends in line with that of other countries.