On 11 February 2009 the South African Minister of Finance delivered his national budget speech for the 2009/10 fiscal year, accompanied by the release of a number of informative documents.
Below we highlight the more significant tax proposals and the indicated likely future tax changes. In view of the limited focus of this publication, no action (or inaction) should be based solely on it.
Customs and excise proposals are not covered.
INCOME TAX
INDIVIDUALS
The changes relating to individuals, as discussed below, will be effective from 1 March 2009 unless indicated otherwise.
Rate, Bracket and Cap Changes
The comparative tax tables, rebates, thresholds, exemptions and other tax rates for the 2008/9 and 2009/10 tax years are set out in more detail in the Appendix.
Notwithstanding the tough current economic climate, income tax relief was granted to all taxpayers. The bottom bracket will extend to all individuals with a taxable income up to R132 000, while the top rate of tax of 40% will only kick in for taxable income in excess of R525 000.
Inflationary adjustments will be made to income tax rebates and thresholds applicable to individuals, as a result of which the income tax threshold for individuals under 65 will be increased to R54 200 and for individuals over 65 to R84 200.
The interest exemption will be increased to R21 000 for people under 65 and to R30 000 for people over 65. Foreign dividends and interest of up to R3 500 will be exempt, but this amount will need to be set off against the interest exemption, if utilised.
The tax-free or deductible portion of contributions to medical aids will be increased to R625 (currently R570) for each of the first two members and to R380 (currently R345) for each additional member. Replacement of the tax treatment of medical scheme contributions with a non-refundable tax credit system is under consideration. In the new dispensation, all contributions paid by an employer will be regarded as taxable and the employee will be permitted to claim a tax deduction (or a credit) for contributions up to the cap.
The annual capital gains tax (CGT) exclusion applicable to disposals during a person’s lifetime will be increased to R17 500.
As the income tax threshold for taxpayers under 65 is approaching R60 000 (the current SITE ceiling) SITE may be repealed from the 2011 tax year. It is considered that it will sufficiently be replaced by the pre-populated tax returns and the waiver of the annual filing requirement for most taxpayers with single employers and employment related income only.
Individuals over 65 are exempt from provisional tax if they are not directors and receive only employment income, interest, rental or dividends not exceeding R80 000. This threshold entitling them to exemption from provisional tax liabilities will be increased to R120 000.
Deemed Kilometres Travel Allowance Going
Currently, employees who travel 32 000 kilometres or more per year are allowed to claim a deduction against their travel allowances of up to 14 000 kilometres under the deemed business kilometres allowance, regardless of the actual business kilometres travelled. The option to use the deemed kilometre allowance will fall away with effect from the commencement of the 2011 tax year (i.e. 1 March 2010). A deduction against a travel allowance will, then, only be available to employees based on actual business kilometres travelled. Taxpayers will therefore need to keep a logbook in order to claim for business travel.
Retirement Annuity Funds
Currently, where retirement annuity fund (RAF) contributions are paid by an employer for the benefit of employees, the contributions are included in gross income of the employees but are not eligible for deduction by the employees. After 1 March 2009, employer funded RAF contributions will follow the treatment of RAF contributions made directly by individuals and will thus be eligible for deduction, subject to existing limits on direct RAF contributions.
CGT
Currently, an individual selling a primary residence is exempt from CGT on the first R1.5 million of gains realised. After 1 March 2009, where the sale proceeds of an individual’s primary residence do not exceed R2 million no CGT will be levied on the disposal of the residence. Where the sale proceeds exceed R2 million, the existing exclusion will continue to apply.
An unattended CGT charge that arises in certain instances for heirs who acquired assets that already attracted CGT for the deceased, will be rectified.
Estate Duty
Currently, the first R3.5 million of a deceased person’s estate is exempt from estate duty. There is also an exemption for inter-spousal bequests. A common estate planning technique is to bequeath the exempt amount of R3.5 million to a family trust and for the residue of the estate to the surviving spouse, otherwise the R3.5 million exemption is, effectively, lost on the first dying spouse’s death because it will be included in the estate of the second dying. From 1 March 2009, the current R3.5 million exemption will be “portable” between spouses, so that a first-dying spouse can leave his or her entire estate to the surviving spouse and both spouses’ combined R7 million exemption can be claimed on the death of the surviving spouse.
In terms of a common estate duty planning mechanism a life-time usufructuary interest is granted to a surviving spouse (free of estate duty due to the inter-spousal exemption) with the bare dominium going to the children. Upon the death of the surviving spouse the usufructuary interest is transferred for one year to a third person, and thereafter it is transferred to the children. The reason for interposing the one-year usufructuary interest is based on a perception that the value of the usufruct, which must be included in the estate of the surviving spouse, is reduced by avoiding its termination as a result of death. Legislative intervention to stop this planning must be expected.
CORPORATES AND OTHER TAXPAYERS
Dividend Withholding Tax
Confirmation was given that the introduction of the new dividends withholding tax can be expected during the second half of 2010. Prior to the legislation becoming effective further refinements, anti-avoidance provisions and the application of the tax to foreign dividends will be introduced.
Collective Investment Schemes in Shares (CISS)
The idea of rendering collective investment schemes transparent to the extent of distributed income will be extended to CISSs. Consequently, income earned and distributed by a CISS will retain its character and will be taxed or exempted as such in the hands of the investors.
Provident and Pension Funds
Consideration will be given to merge provident funds into pension funds. This measure forms part of the bigger social security reforms.
Small Businesses
To prevent shareholders from dividing a single large business into multiple small businesses, the small business tax relief is not available to shareholders owning multiple companies. The current avoidance rules are too wide in that they also deny small business tax relief to all companies which were formed as shelf companies. This will be rectified.
Short-term Insurers
The law will be amended so that reserves relating to offshore short-term insurance operations are eligible for potential deductions, if subject to substantially similar regulation and evaluation by SARS.
Controlled Foreign Companies
The procedure in terms of which SARS could be approached for a ruling to provide relief where a transaction does not represent an erosion of the tax base will be reviewed and may be replaced or amplified by additional objective exemptions.
Converted Section 21 Companies
The tax relief otherwise available to certain companies incorporated under section 21 of the Companies Act does not extend to companies converted to section 21 companies. The anomaly will be removed.
Recreational Clubs
Tax relief for clubs was changed in 2006 from complete exemption to a system of exempting specified activities. Clubs established prior to 30 April 2007 are required to apply for the partial exemption by 31 March 2009. This deadline will be moved to 30 September 2010.
Public Benefit Organisations (PBOs)
Consideration will be given to granting both PBO and deductible donation status to PBOs that support PBOs that enjoy deductible donation status.
OTHER MAJOR TAX CHANGES
Post-retirement Medical Contributions
Where employers follow the trend to settle their obligations for post-retirement medical contributions by either making once-off payments to their retired employees or buying insurance products to take care of these liabilities, they will receive a tax deduction for the full expense in the year during which the payment is made.
Previously it was not clear whether the benefit received in return is not fully enjoyed in the year during which the payment is made, so that uncertainty existed as to whether the deduction could be claimed in full or should be spread over a period (and the further issue was to determine the period over which the benefit is enjoyed).
In order to get the full deduction upfront, the employer must not derive any direct benefits (presumably excluding the relief from compliance with its obligations, which is a benefit for the employer) from the payment and the employer must not be able to receive any return of the funds or redirect the use of the funds.
The Budget documentation specifically refers to companies, but it is assumed that the same rules will apply to all employers and not only employers constituted as companies.
Tax Depreciation of Improvements
The necessary amendments will be made to ensure that improvements are consistently treated similar to underlying initial investments for purposes of tax depreciation. For example, if an initial “new and unused” investment can be depreciated over 20 years, “new and unused” improvements for a similar investment should similarly be depreciable over 20 years (even if the underlying investment is not “new and unused”).
Interest on Overpayments of Tax
Good news to taxpayers is that SARS will finally start paying interest on overpayments of tax at the same rate that applies to underpayments of tax. Also, if tax was collected based on the pay-now-argue-later rule and the dispute with SARS is resolved in the taxpayer’s favour prior to appeal stage, the taxpayer would now also be entitled to interest on the tax overpayment. (Currently, if an objection is allowed, no interest is payable on the tax that was overpaid pending the outcome of the tax dispute – only once appeal stage is reached would SARS become liable for interest).
ANTICIPATED FUTURE TAX CHANGES
Rewriting of the Income Tax Act Commences/Resumes
The long-awaited rewriting of the Income Tax Act (apparently in plain language) will kick off (or resume, as it was postponed a while ago with the important changes to residence basis of taxation and the introduction of CGT) with the retirement reform and social security legislation. It will be interesting to see how the rewriting would impact on existing authority on the legislation.
Tax Administration, Collection and Enforcement Measures
Two further measures will aid the clamp-down on VAT fraud. Firstly, false statements on any VAT form, and not only returns, will be regarded as an offence. Secondly, strict measures to check the identity of applicants for VAT registration will be adopted.
More frequent and extended employer reconciliations of employees’ tax (incorporating other employment taxes) will be required. Employers will also be required to obtain and maintain more extensive information about employees.
Use of taxpayer reference numbers will increasingly be required.
Single taxpayer accounts across different tax types will be considered. With e-filing this is, to an extent, already in place.
New legislation will make it clear that settlement of tax disputes will only be allowed after assessment stage of a dispute.
Company Law Reform
The impact of the revised Companies Bill 2008 on tax laws will be considered. This could, potentially, be far-reaching, as the new Bill substantially changes the corporate law environment, including the types of companies (e.g. section 21 companies).
Liquidating Inactive Entities
Rollover relief will be provided to facilitate liquidations of entities with inactive fixed property.
Securities Lending Arrangements
Consideration will be given to ensure consistent treatment of all forms of securities lending – either as a loan or a disposal, but not a mix of both.
Telecommunication License Consolidation
It is proposed that the various licenses under which the telecommunications industry operates be consolidated, but that such consolidation would be achieved in a tax-free manner.
Judgments on Trading Stock and Restraints of Trade
Two recent court decisions may lead to legislative intervention to preserve the status quo, namely to provide that mining stockpiles constitute trading stock and to deal with multiple restraint payments (to ensure that they are fully taxable).
Rectification to Reflect Intention
A potentially dangerous comment is made towards the end of the Budget proposal to the effect that changes will be made where legislation is “clearly at odds with legislative intent”. We would need to wait and see what these are and one can only hope that they will not be retrospectively amended.
OTHER TAXES
VAT
The entry-level threshold to, voluntarily, register for VAT will be increased from R20 000 to R50 000 with effect from 1 March 2010.
Rollover relief was extended to VAT, but certain interpretational issues arose where changes in use of assets occurred, often where mixed supplies were involved. To remedy and clarify this, an interpretation note will be issued (with possible legislation if required).
VAT/Transfer Duty
The law will be amended to ensure that either VAT or transfer duty would apply to the transfer of shares in a share block. Currently there are instances where a transfer attracts neither VAT nor transfer duty.
Mineral and Petroleum Resources Royalty Act
Very good news to the mining industry is that the implementation of the mining royalty will be postponed for a year until 1 March 2010.
Environmental Taxes and Incentives
Currently, investments in renewable energy and bio-fuel production qualify for a three year depreciation allowance in a 50:30:20 ratio. To increase this incentive, companies will qualify for an additional allowance of up to 15% for investments in energy-efficient equipment, provided the Energy Efficient Agency certifies documentary evidence of energy savings.
The levy on plastic shopping bags will be increased to 4c per bag.
To encourage the use of energy-saving light bulbs, from 1 October 2009 an environmental levy of R3 will be charged on imports and at manufacturing level of incandescent light bulbs.
Certified emission reductions (CERs) issued under the Kyoto Protocol are tradable instruments. It is proposed that income derived on the disposal of CERs for the first time either be tax-exempt or subject to CGT only. Secondary CERs are to be treated as trading stock for tax purposes, though.
An additional ad valorem excise duty will be charged on the sale of new motor vehicles calculated with reference to CO2 emissions. This duty will be charged on new motor vehicle sales after 1 March 2010.
From 1 October 2009, international air passenger departure tax will be increased to R150 per international traveller and to R80 per traveller to Botswana, Lesotho, Namibia and Swaziland.
Road Accident Fund levy
There will be a significant increase in this levy – from 46.5c per litre to 64c per litre to assist the struggling Road Accident Fund.
General Fuel levy
The general fuel levy on petrol is increased by 23c for petrol and 24c for diesel.
Replacement for RSC and JSB levies
After a battle to find an appropriate way to replace the RSC and JSB levies, the plan is to use 23% of the revenues from the general fuel levy for metropolitan municipal budgets for roads and transportation infrastructure.
APPENDIX
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INCOME TAX for INDIVIDUALS: TAX RATES, REBATES AND THRESHOLDS |
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2008/9 |
2009/10 |
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Taxable Income (R) |
Rates of Tax |
Taxable Income (R) |
Rates of Tax |
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R0 – R122 000 |
18% of each R1 |
R0 – R132 000 |
18% of each R1 |
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R122 001 – R195 000 |
R21 960 + 25% of the amount above R122 000 |
R132 001 – R210 000 |
R23 760 + 25% of the amount above R132 000 |
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R195 001 – R270 000 |
R40 210 + 30% of the amount above R195 000 |
R210 001 – R290 000 |
R43 260 + 30% of the amount above R210 000 |
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R270 001 – R380 000 |
R62 710 + 35% of the amount above R270 000 |
R290 001 – R410 000 |
R67 260 + 35% of the amount above R290 000 |
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R380 001 – R490 000 |
R101 210 + 38% of the amount above R380 000 |
R410 001 – R525 000 |
R109 260 + 38% of the amount above R410 000 |
|
R490 001 and above |
R143 010 + 40% of the amount above R490 000 |
R525 001 and above |
R152 960 + 40% of the amount above R525 000 |
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Rebates |
Rebates |
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Primary |
R8 280 |
Primary |
R9 756 |
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Secondary (for persons over 65) |
R5 040 |
Secondary |
R5 400 |
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Tax Threshold |
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Tax Threshold |
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Below 65 |
R46 000 |
Below age 65 |
R54 200 |
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Age 65 and over |
R74 000 |
Age 65 and over |
R84 200 |
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LOCAL INTEREST EXEMPTION AND FOREIGN INTEREST AND DIVIDEND EXEMPTION |
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Below 65 |
R19 000 |
R21 000 |
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Age 65 and over |
R27 500 |
R30 000 |
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Foreign interest and dividends |
R 3 200 |
R 3 500 |
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CAPITAL GAINS TAX |
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Annual Exemption |
R16 000 |
R17 000 |
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Primary Residence Exemption |
R1.5m |
Where the sale proceeds do not exceed R2m, completely exempt |
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Year-of-death exemption |
R120 000 |
R120 000 |
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ESTATE DUTY |
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Rate |
20% |
20% |
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Exemption |
R3.5m |
R3.5m per person or R7m per 2 spouses |
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DONATIONS TAX |
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Rate |
20% |
20% |
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Annual exemption |
R100 000 |
R100 000 |
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