Three taxation changes that will affect your clients

Gareth Stokes, FAnews Online Editor

At 2pm, 22 February 2012, the Minister of Finance stepped to the podium to deliver South Africa’s 2012 National Budget. Pravin Gordhan’s address included sweeping references to the state of the global economy, the outlook for domestic growth, the need to

Most of us will also welcome National Treasury’s tough stance on corruption and other forms of financial mismanagement. “We will strengthen financial management in the public sector, pursue value for money with the greatest possible vigour and ensure that taxpayers’ money is well used,” said Gordhan. He also announced that fraud and corruption would be combated through changes to procurement policies and practices and tough enforcement of the law! But we’re not going to focus on the “big picture” issues. Instead we’ll use today’s newsletter to inform of three taxation changes that are likely to affect your clients.

Equalising the medical aid taxation benefit

The first deals with the tax treatment of medical aid contributions. “As from 1 March 2012 the tax credit for contributions to medical schemes will be introduced, at a rate of R230 a month for the first two beneficiaries and R154 each for additional beneficiaries,” said Gordhan. “Taxpayers 65 years and older and people with disabilities will be included in the second phase of this reform, which will be implemented in 2014.”

The change came about to bring fairness to a system which previously benefited wealthier taxpayers more. Johan Lombard, Actuarial Specialist at Momentum Health explains: “Up to now, taxpayers qualified for a set monthly deduction on their taxable income, based on their family composition. As an example, if you paid tax at a rate of 40%, your medical tax benefit was 40% of the set deduction (R720 x 40% = R288), whereas a taxpayer with a tax rate of 18%, only received (R720 x 18%= R129).”

The new system ensures the same monetary benefit to everyone in the form of a tax credit. This will operate in a similar fashion as the tax rebates afforded to individuals in that it reduces the tax payable by an individual (and not the taxable income). The tax credit amounts have been set to closely replicate the level of benefit a taxpayer in the 30% tax bracket was receiving within the 2011/2012 tax deduction system. Therefore individuals in lower tax brackets will receive slightly more than before and individuals in higher tax brackets slightly less in monetary terms.

One criticism of the Budget Speech is its failure to address National Health Insurance (NHI) from a taxpayer perspective. “It is worrying that the taxpayer is still in the dark as to how NHI is going to be funded,” observed Barry Visser, Senior tax manager at Grant Thornton, Johannesburg. Gordhan made no reference to how much the total NHI implementation would cost except to allocate R1 billion to NHI pilot projects over the Medium Term Expenditure Framework (MTEF). He also allocated R450 million to improve health infrastructure by upgrading nursing colleges and R426 million for initial work on rebuilding five major tertiary hospitals. As for sources of funding, he stuck with “tried and tested” possibilities, including an increase in the VAT rate, a payroll tax on employers, a surcharge on the taxable income of individuals, or some combination of the above.

Greater Capital Gains Tax (CGT) inclusion

A second change likely to affect your clients is to Capital Gains Tax (CGT). “In order to reduce the scope for tax arbitrage and broaden the tax base further, the CGT inclusion rate for individuals and special trusts will be increased with effect from 1 March 2012 from 25% to 33.3%, and for companies and other trusts from 50% to 66.6%,” said Gordhan. “While the relief is encouraging regarding the exclusions for primary homes, the CGT inclusion rates have increased with the result individuals will pay 3.3% more while companies’ contribution will increase by 4,6%,” noted Visser. The exemption for primary residences will increase from R1.2 million to R2 million, on death from R200 000 to R300 00 and the annual general exclusion will go up to R30 000.

It appears that National Treasury used every “trick” possible to increase the personal tax burden on those earning more than R260, 000 per year while still masquerading as a “people friendly” budget. “The CGT announcement was an obvious means of generating additional revenue, notwithstanding the stated reason being to reduce tax arbitrage and broaden the tax base,” opined Des Kruger, Director: Tax at Webber Wentzel. “The effective tax rate payable by an individual (at top marginal rates) will increase from 10% to 13.32% (an increase of 33.2%), while the effective CGT rate for companies and trusts will increase from 14% to 18.65% (a 33% increase).” This change is effective from 1 March 2012.

A shocking dividend tax decision

“Secondary tax on companies will be terminated on 31 March 2012 and a withholding tax on dividends will be implemented on 1 April 2012,” said Gordhan, before announcing that the tax would be introduced at 15% rather than the expected 10%. This represents a shift from a system under which companies paid a tax on the dividends they declared to one where dividends are taxed in the taxpayers’ hands. The implementation of this tax change is long overdue, but there will be many objections to its quantum.

“This has come as quite a shock given that all previous announcements and the law as it stands at present indicate a 10% rate,” noted Kruger. “The proposed 50% increase in the dividends tax rate to 15% so late in the day will no doubt cause considerable administration burdens on those companies and regulated intermediaries that have to account for the tax.” The only good news is that retirement funds are exempt from this tax. “A rough calculation – assuming a retirement fund with 60% of its assets invested in dividend earning equity and an average dividend yield of 3% – suggests an increased investment return of 0.18%,” said Craig Aitchison, MD of OMAC Actuaries & Consultants. He assumes a similar level of dividend paid.

The 2012 National Budget contains reams of information on changes to social grant payments and other categories of state expenditure. If you’d like to find out more about these changes then a good place to begin is the National Treasury website (http://www.treasury.gov.za/). You can immerse yourself in the myriad documents published there. Over the next couple of weeks FAnews will take a closer look at 2012 National Budget issues of relevance to financial services intermediaries.

Editor’s thoughts: They say nothing is certain but death and taxes. The 2012 National Budget proves once again that the taxpayer can always offer up just a little bit more. The three changes discussed today will certainly hit high income taxpayers where it hurts! Are you happy with the 2012 National Budget? Add your comment below, or send it to gareth@fanews.co.za