PFK: Perspectives on the budget

No surprises for this year’s Budget

“I would have been surprised if there were any surprises in the budget this year,” says Eugene du Plessis, a director at PKF Chartered Accountants and Business Advisers, and head of the firm’s tax department, “but as expected – because of worsening economic conditions – there was really nothing out of the ordinary in Trevor Manual’s speech.”

The biggest shock to companies and individuals will be the steep increases in the fuel and road levies. “It has been proposed that the fuel levy on petrol be increased by 23 cents a litre, and on diesel by 24 cents a litre,” says Du Plessis. In addition, the road accident fund levy increases by 17.5 cents a litre. “The combined effect of these levels will increase the price of petrol and diesel by over 40 cents a litre, so at a time when fuel prices have been coming down, we get slapped with this hefty increase.”

Thus, while there were no increases in direct taxes, explains Du Plessis, this increase in the fuel price seems to largely negate many of the small benefits coming out of the budget. “Although tax brackets have been raised and the interest exemption threshold has been increased, the net effect on individuals will largely be to compensate them for the past year’s inflationary increases,” he says.

As far as companies are concerned, there was neither good nor bad news for them, and there was no rocking of the boat for investors either. Two of the biggest changes announced by Manuel relate to what he called environmental fiscal reform, and a deferment to March next year of the petroleum and mineral royalty which mining companies were going to have to pay from May this year. This latter announcement should help alleviate what is for most mines particularly tough economic times.

Environment-related changes are some of the most significant elements to come out of this year’s budget. “Government has previously introduced allowances for infrastructure costs incurred for environment-related investments,” says Du Plessis, “but now the Minister has added additional allowances of 15% for spending related to the attainment of energy efficiency.” The infrastructure allowance related to large projects such as bio-fuel plants, but this additional allowance introduces energy-saving incentives for smaller projects, allowing claims to be made for investments in energy-saving equipment, for example.

Another announcement that will benefit the environment relates to greater tax certainty regarding projects that generate carbon offsets for South Africa in terms of the Kyoto Protocol’s carbon emission standards. “Carbon offsets are likely to be exempt from tax, or at least subject only to capital gains tax,” concludes Du Plessis.” So even if there’s not much to celebrate in the budget, at least it’s green.

INTRODUCTION

· The 2009 budget was never going to be easy for Manuel, facing as he did a global economic slowdown which has negatively affected revenue collections and left him with a budget deficit, while at the same time having to appease the voting public.

· In playing a balancing act Manuel has on the face of it managed to put money back in the pockets of individual taxpayers, while providing little relief for corporate taxpayers.

· The 2009 budget proposals of interest include:

- Income tax relief for individual taxpayers amounting to R13.6 billion with further review of the tax treatment of travel allowances and contributions to medical schemes

- Amendments to support dividends tax reform

- Various environmental incentives

- Increases in sin taxes

PROPOSED AMENDMENTS TO THE TAXATION OF INDIVIDUALS

Personal income tax rates and bracket adjustments

· Low income earners (taxable income below R150 000) have benefitted most from the R13.6 billion personal tax relief with a share of 45%, while high income earners (taxable income above R500 000) will have a 12% share.

· The primary rebate has been increased to R9 756, increasing the income tax threshold by R8 200 to R54 200.

· The secondary rebate has been increased to R5 400, increasing the income tax threshold for taxpayers age 65 and older from R74 000 to R84 200.

Interest and dividend income exemption

· Interest exemption for taxpayers below age 65 will be increased from R19 000 to R21 000 and for taxpayers age 65 and older from R27 500 to R30 000.

· The foreign interest and dividend income exemption will be increased from R3 200 to R3 500.

Medical scheme contributions and medical expenses

· With effect from 1 March 2009 the monthly monetary caps for tax-free medical scheme contributions will be increased from R570 to R625 for each of the first two beneficiaries and from R345 to R380 per additional beneficiary.

· SARS will review the medical scheme contribution deduction and release a consultation paper during 2009 to allow for public comment.

Travel allowances

· It is proposed that the ‘deemed business kilometre’ formula be scrapped from 2010/11.

Provisional tax

· The monetary threshold exempting taxpayers age 65 and older from payment of provisional tax will be increased from R80 000 to R120 000.

Increase in monetary thresholds

· The annual donations tax exemption has remained at R100 000.

· The estate duty exemption has remained at R3.5 million. It is proposed that spouses may combine their exemption to allow the surviving spouse the use of the unutilised portion.

Capital gains

· The annual capital gains/loss exclusion will increase from R16 000 to R17 500.

· The exclusion on death has remained at R120 000.

· The primary residence exclusion will increase to R2 million in respect of properties with a gross value below R2 million. For properties valued above R2 million the R1.5 million capital gain/loss exclusion still applies.

TAX REFORM MEASURES UNDER REVIEW

· Simplification of the employment income tax base

- To develop a uniform definition of employment income to be used across all tax instruments and to provide alignment with Unemployment Insurance Fund (‘UIF’) contributions and the skills development levy (‘SDL’).

· Retirement reform

- To consider whether to phase provident funds into pension funds as a prelude to broader social security reforms.

MEASURES TO STIMULATE GROWTH, BUSINESS DEVLOPMENT AND JOB CREATION

Completion of the dividend reform process

· The dividend tax legislation replacing secondary tax on companies (‘STC’) was enacted in 2008. The dividend tax will come into effect once the double taxation treaties, which have been renegotiated, are ratified. Manuel announced that the likely implementation date would be during the second half of 2010.

· Briefly, in terms of the dividend tax regime, local individual taxpayers are taxed at 10%; domestic retirement funds, public benefit organisations and domestic companies are exempt; and non-residents are eligible for tax-treaty benefits (i.e. a potential reduction in the dividend tax rate). The dividend tax represents a withholding tax to be withheld by the paying company (or paying intermediary for example in the case of listed companies).

· Provision is made for the utilisation of STC credits against the dividend tax within a five year period.

· Further legislative amendments during 2009 will provide for the completion of the dividend tax reform.

Collective investment scheme (‘CIS’) distributions

 

Distributions from a CIS will in future retain its character. The distribution of interest income for instance will consequently be viewed as an interest distribution rather than a dividend distribution.

Mineral and petroleum royalties

In light of ongoing retrenchments in the mining sector the implementation of the Mineral and Petroleum Resources Royalty Act (2008) will be postponed from 1 March 2009 to 1 May 2010 which should result in gross savings for mining companies of R1.8 billion in the coming year.

Environmental fiscal reform

With the need for global and domestic policy change caused by environmental degradation, domestic policy intervention is required to manage these challenges. The following measures are proposed:

• Company investment in energy efficient equipment proven to be efficient should qualify for an additional 15% wear and tear allowance over and above the 50:30:20 accelerated allowance currently in place.

• An increase in the plastic shopping bag levy to 4 cents per bag, to assist in waste reduction.

• An environmental levy of R3 per bulb will be introduced from 1 October 2009 on the manufacture or import of incandescent light bulbs to incentivise the use of energy saving bulbs.

• Making certified emission reduction credits tax exempt or subject to capital gains tax, instead of normal income tax.

• The adjustment of existing ad valorem excise duties on motor vehicles incorporating a duty for CO2 emissions from 1 March 2010, in an effort to improve fuel efficiency.

• The increase of international air passenger departure tax from R60 to R80 for flights to certain African countries and R120 to R150 for all other international flights.

PROPOSED AMENDMENTS TO INDIRECT TAXES

Value Added Tax (‘VAT’)

· The voluntary registration threshold for VAT has been increased from R20 000 to R50 000 with effect from 1 March 2010.

· It is proposed that false statements on any VAT form submitted to SARS and not just returns, be considered an offence in order to deter those who seek to register for VAT without being eligible to do so.

· In order to assist in combating VAT fraud, it is proposed that enabling provisions are introduced permitting the use of biometric measures to verify the identity of applicants for VAT registration.

· An interpretation note will be issued by SARS clarifying the VAT implications in respect of assets transferred in terms of the company reorganisation rules.

· In terms of the VAT Act SARS has the discretion to waive interest on late payments if there is no loss to the fiscus or there is no financial benefit for the taxpayer. It is proposed that the VAT Act is clarified so as to eliminate the potential for the inconsistent application of this relief provision.

· Currently the transfer of shares held in share block schemes triggers transfer duty, VAT or neither. It is proposed that the law is clarified so that at least one form of indirect tax is triggered.

Customs and excise and fuel levies

· The changes to excise duties include:

- Cigarettes up 88 cents (12.9%) a pack of 20 cigarettes.

- Wine up 24 cents (9.4%) per bottle.

- A can of beer or cider up 7 cents (9.5%).

- Spirits up R3.21 (14.7%) per bottle.

· These increases are in line with government’s ongoing policy to maintain a total tax burden (excise duty plus VAT) of 23% on wine products, 33% on malt beer, 43% on spirits and 52% on tobacco products.

· The fuel levy and Road Accident Fund levy increased by 23 cents and 17,5 cents a litre, respectively. This means that 33.9% of the petrol price consists of taxes compared to 23.7% last year.

· Manuel indicated that the increase in these levies would bring in R6.990 billion as opposed to R2.6 billion last year.

Tax-sharing arrangements with metropolitan municipalities

· In order to replace the Regional Services Council (‘RSC’) and Joint Services Board (‘JSB’) levies which were abolished it has been proposed that 23% of revenue generated from the general fuel levy be earmarked for metropolitan municipalities. The distribution of such revenue, to be phased in over four years, will be based on fuel sales in each metropolitan municipality.

· The intended use of these funds is to boost budgets for roads and transportation infrastructure.

MISCELLANEOUS PROPOSED TAX AMENDMENTS

· The Income Tax Act and Vat Act is to be amended to clarify that payment is not suspended due to an objection; to formalise the circumstances where payment is required despite an objection; and to provide for interest to be paid by SARS when the payment made, pending the outcome of an objection, is refunded.

· Proposed income tax amendments applicable to personal and employment tax include, inter alia:

- To require employer reconciliations of employees’ tax, SDL and UIF more than once a year.

- The introduction of a compound interest rate on under and over payments of tax.

- Contributions paid by an employer for the benefit of employees to retirement annuity funds should receive similar tax treatment as employee contributions to such funds.

- Legislation to be simplified in respect of learnership deductions.

- Amendment to unintended taxation of certain assets the in hands of an heir or legatee.

· Proposed income tax amendments applicable to business include, inter alia:

- Section 21 non-profit companies may be eligible for tax relief if formed or incorporated as a s 21 company. However, this relief is technically not available for the same entity if that entity is a trading company and subsequently converts to a Section 21 company. This anomaly will be removed.

- Tax relief for clubs was changed in 2006 so that only certain specified activities were exempt. This change applied in respect of all clubs created from 1 April 2007 and pre-existing clubs had to apply for the partial exemption system by the close of 31 March 2009. It is proposed that this application deadline be extended to 30 September 2010 due to compliance difficulties.

- It is proposed that supporting public benefit organisations be entitled to receive deductible donations.

- The Department of Trade and Industry (‘DTI’) provides rebates for a portion of the costs incurred for producing a South African-located film. The Income Tax Act also contains an exemption in respect of the receipt/accrual of these DTI rebates. It is proposed that this tax exemption be extended so that the rebate can be assigned to investor-owners without triggering additional tax. Furthermore, the current film scheme anti-avoidance rules may be expanded to address new film schemes which have been introduced.

- The amendment of the Income Tax Act to exclude mining stockpiles from the definition of trading stock and to clarify the fact that restraint of trade payments are fully taxable.

- Previously leasing losses suffered by banks or financiers on non-operating leases could not be used against recoupments from the disposal of assets giving rise to the losses. This has now been rectified as there was no reason for this anomaly.

- Rollover relief is proposed to alleviate pressures on entities with inactive real estate to liquidate.

- The treatment of securities lending arrangements will be reviewed to gain clarity on applicable law ensuring such arrangements are treated either as loans or disposals but not a mix of both.