After the decline in the value of the Rand, the slowdown in the economic growth of the country and the double replacement of the Minister of Finance in December 2015, the whole of South Africa waited with bated breath for the shocks that Minister Pravin Gordhan were to bestow on them during his National Budget Speech on 24 February 2016.
Leading up to Budget Day, there was wide-spread speculation about increases in tax rates, including the possibility of a hike in the VAT rate. Quite surprisingly there were no drastic increases in tax rates.
True to form - and to which we have become accustomed - the Minister announced a number of tax proposals that will be introduced this year and other aspects of the tax legislation that will be subject to further analysis in an attempt to tighten-up the tax compliance process and curb certain perceived abusive tax arrangements and structures.
In 1997, the then-Minister of Finance, Mr Trevor Manuel said:
“The simplification of the Income Tax Act is an important part of our vision. This year the Ministry of Finance will embark on a project to consolidate and simplify the Income Tax Act in a manner that ensures that the contents are easily understandable by all South Africans.”
Almost 20 years later, South Africa is burdened with very complex tax legislation, which at most times even the experts battle to read and understand.
Here is a summary of some of the more significant tax announcements made in this year’s Budget Speech.
Income tax rates
The rates for companies and trusts will remain unchanged.
The top marginal rate for individuals remains at 41% for earnings exceeding R710 300 per year. However, the relief for fiscal drag, i.e. the adjustment of tax rates to compensate for the effect of inflation on taxpayers’ earnings, has been slowed down. This means that in terms of real value taxpayers’ after tax income will buy less. Marginal increases in the primary rebate and medical credits will apply.
Capital Gains Tax
The capital gains tax inclusion rates have been increased.
- For individuals, the inclusion rate will increase from 33.3% to 40%, increasing the effective tax rate to 16.4%.
- For companies and trusts the inclusion rate increases from 66.6% to 80%. This increases the effective tax rates to 22.4% for companies and 32.8% for trusts.
The chances of capital gains becoming taxable in full, for non-individuals at least, is a real possibility.
Retirement fund savings
With effect from 1 March 2016 the deduction of pension, provident and retirement annuity fund contributions are treated in the same manner and subject to one universal threshold. The Minister announced that some elements of the retirement reforms previously announced will be delayed until 1 March 2018. This only relates to the annuitisation of provident fund pay-outs.
For provident fund members that are under the age of 55 on 1 March 2018 the annuitisation of benefits will only apply in respect of contributions made after that date. Provident fund members that are over the age of 55 on 1 March 2018 will be allowed to continue making contributions to that fund and will not be required to purchase an annuity when they retire.
Taxation of trusts
A couple of years ago Treasury issued a draft Bill containing proposed amendments that would have changed the manner in which income and capital gains that flow through trusts would be taxed.
Essentially the proposal was that trusts would have had to pay tax on all income even if the income was distributed to beneficiaries. After consultation from various stakeholders, these proposals were shelved.
Following on recommendations from the Davis Tax Commission, SARS and Treasury are now once again looking at the manner in which income distributions from trusts are taxed and also the manner in which personal wealth is transferred to trusts to avoid estate duty and donation tax.
The tax proposal documents make it clear that the legislation will be changed to counter the transfer of wealth and to limit income-splitting opportunities. It is also proposed that interest-free loans should be regarded as donations and that the value of assets acquired by a trust by way of interest-free loans be included in the estate of the lenders / donors on death.
We wait with interest to see the proposed legislation because some of these changes could have a significant impact on persons that placed their assets in trusts. It is unlikely that these changes would affect transactions that took place before the implementation of the new legislation, though. In fact, retrospective application of any new legislation would be hugely problematic.
Employee share-based incentives
Certain dividends received on restricted equity instruments are not exempt from tax. Currently employees that receive these dividends are subject to tax on assessment. The legislation will be amended to classify these dividends as remuneration and employers will have to deduct PAYE when these dividends are paid to employees.
Currently bursaries provided to employees and their relatives are exempt from tax if the employees earnings do not exceed R250 000 per annum and the bursaries do not exceed R10 000 for NQF levels 1 to 4 and R30 000 for NQF levels 5 to 10. It is proposed to increase the earnings threshold to R400 000 per annum and the bursary thresholds to R15 000 and R40 000 respectively.
If a company buys back shares from a shareholder, the payment for the shares is generally classified as a dividend and subject to 15% Dividends Tax. If the shareholder is a company, the dividend is not subject to tax. Because of the difference in the effective tax rates, transactions involving the sale of company shares are often structured to involve a buy-back of the exiting shareholder’s shares rather than the outright sale of shares. SARS does not like such arrangements and indicated that they will review the current legislation and possibly introduce counter measures.
Tax and exchange control voluntary disclosure
Between October 2016 and 31 March 2017 SA residents with undisclosed foreign investments and income will be provided with an opportunity to come clean. This will be a joint SARS and SARB initiative. Successful application under this programme will exonerate errant taxpayers from criminal prosecution and understatement penalties, but applicants will have to pay a fairly substantial penalty and income tax bill when disclosing these investments and income.
The draft legislation that was published is very restrictive. Successful applicants will be required to pay an exchange control levy of 5% or 10% of the value of unauthorised assets, depending on whether they repatriate the funds or elect to leave it offshore. They will also be required to pay income tax on 50% of the seed capital that was used to fund the purchase of the foreign assets and pay income tax on income and capital gains derived from 1 March 2010. Unravelling all of the information required to meet the requirements to obtain approval could be a very costly and time consuming exercise, which unfortunately may force certain potential applicants to look at alternative resolutions or to remain under the radar and rather chance their luck.
We all know that our Government is on a very tight budget and one of the ways to increase revenue is to implement tighter tax laws to prevent leakage, counter tax avoidance arrangementsand impose penalties to enforce better compliance. Unfortunately, this legislation, which was once envisioned to be simplified to the extent that the man of the street would be able to understand it, has become more complex than ever before. Together with a very strict and sometimes overly authoritarian enforcement of these laws by SARS, this is placing a greater burden and cost on taxpayers and businesses to remain compliant.
*This article was written exclusively for SA Banker and appears in Edition 17, April 2016.