Tax predictions in upcoming budget
I was requested to do some crystal ball gazing on tax issues at a recent conference hosted by the Gordon Institute of Business Science (GIBS) on the Economic Outlook for 2008. The following are the key issues which I shall attempt to predict. Such predictions are always difficult but it is perhaps helpful to focus on some of the key issues where developments can be expected.
As far as personal Income Tax rates are concerned, I do not expect any major changes to tax rates - we have not seen major cuts for a long time. If there were to be a tax rate cut I would predict that it might be to the corporate rate (to bring it down to 28% from the current 29%) rather than to the individual marginal rate of 40%.
Last year’s Budget Speech announced the introduction of a new social security tax to take effect in 2010. This is intended to benefit low-income employees and assist them in making provision for their retirement and protect them and their families against their death or disability. The Minister stressed the work that would be needed before this system could be implemented and it will be interesting to see what progress has been made. The retirement fund industry will also be intensely interested to know how this new system will work in practice.
In line with the theme of encouraging people to provide for their retirement, another possibility would be a raising of the interest and foreign dividend income threshold, which is currently standing at R18000 for taxpayers under 65 and R26000 for taxpayers over 65. It has also been suggested that, in order to discourage spending, an increase in the VAT rate should be considered. However, this is likely to be politically unpopular since VAT is seen to be a tax which impacts on the poor.
As our income tax system has been standardised to look much like those of our major trading partners, Secondary Tax on Companies (STC) will ultimately be replaced by a withholding tax on dividends. This is a more conventional kind of tax and would be familiar to prospective investors in South Africa. The tax will formally be levied on the shareholder rather than the company distributing the dividends, though it will continue to be the company which withholds the tax when it pays out dividends and pays the tax over to SARS. Some foreign shareholders will be able to claim relief – or partial relief – from the new tax in terms of a double tax agreement (DTA). However, as the government is concerned about the consequent loss of revenue, it intends renegotiating certain DTAs where an undue amount of tax would be lost before it takes the final step of abolishing STC. All corporate taxpayers will be interested to know what the progress is with this process. We are also hoping for more information regarding how the new tax will work. One key issue would be what will happen with unutilised STC credits.
A major development which will happen during 2009 is the introduction of a royalty system involving the payment of royalties to the State by mining companies. There have been two versions of the draft royalty Bill – one published during March 2003 and the later one during October 2006. Mining companies and investors will want to know when this legislation will be finalised and what further changes, if any, can be expected to the draft legislation.
It will also be interesting to know whether the recent Brummeria case will cause the government to consider revisiting the treatment of interest-free loans. These are used routinely for purposes of estate planning - particularly with trusts. The facts of the case were very specific and probably do not apply to such estate planning techniques. However, the case may provoke new legislation dealing with such loans.
