Budget Speech – Tax effects in a nutshell

Hylton Cameron Hylton Cameron

This year’s National Budget Speech focused more on amendments and refinements with few big announcements or changes made. Here’s a summary of the biggest pieces of news from the Budget presentation by Minister Nhlanhla Nene.

Increase in individual tax rate! – Rather unexpectedly there has been an increase in the tax rate for individuals by 1%. This applies to anyone earning over R181 900. Correspondingly there has also been an increase in the tax brackets and rebates to allow for inflation.

The rebates and tax brackets for 2015/16 increase by 4.2%, however if one takes a 6% inflation rate into consideration, then all are worse off due to inflation rate increases.

So where does that leave you? If you earn over R500 000 per year then you will pay more tax and correspondingly if you earn less than R500 000 per annum you will pay less tax. However if one takes inflation into account then in real terms most people will effectively be paying more tax due to the inflation rate increase impacting your take home pay.

Government’s positive spin is that they do not get any more or any less in total from individuals, from the individual’s perspective this will depend upon where your income falls.

Booze – yes you will pay more for your drinks, and all other sins too, unless you like traditional beer (which didn’t get an increase).

Share schemes – We have been promised a review of the anomalies in regard to the taxation of share schemes. The law for share schemes can be rather convoluted! This has been a somewhat of an on-going promise without any further action – we therefore wait and see, and hope.

Third party backed shares – For those deep in the know, expect some more changes, if you don’t live tax, then don’t worry about this one.

Unlisted property companies – currently listed real estate trusts (REITs) get special tax dispensations. It is proposed to even the playing field now so that unlisted property companies should also qualify for some tax allowances.

Research & Development (R&D) – in order to get tax incentives for R&D, one needs approval. The Minister has acknowledged the backlog, and the months one has to wait. It is proposed that measures are introduced so that taxpayers are not prejudiced by any delay. This can be difficult to implement as a crucial issue is whether you qualify, and you can only make decisions once you know if you do in fact qualify.

In addition third party funding for R&D will be considered – one hopes this is accelerated as this can allow for highly skilled individuals to provide services in SA, which can only be good for the country.

Electronic communication – currently tax benefits can be provided if the taxpayer uses electronic transmission lines for 20 years or more. The government seems to acknowledge that this period is too long and should be reduced. Hopefully this will provide further allowances to the service providers which should reduce costs for the consumer so that we can pay less for electronic communications!

Withdrawal of foreign tax credit – Currently SA taxpayers who provide services in South Africa to off-shore parties can obtain a tax credit for tax (often incorrectly) imposed by a foreign jurisdiction. It is proposed that this credit be removed because of the significant compliance burden on SARS and the taxpayer – Currently most taxpayers miss the boat in any event (due to compliance issues) and one hopes Treasury does not pursue this proposal.

Cross issue of shares – Company A gives shares to off-shore Company B, and vice versa. This transaction was previously hit by Treasury with a shotgun. It hit the target and caught some innocent by-standers in the process too, unfortunately. It is proposed that leeway be provided for legitimate transactions.

Controlled foreign companies – some “old” rules will be re-introduced to help make the legislation more complicated and help justify tax advisory fees. Further consideration will also be given to taxing offshore “controlled foreign companies” that are held by trusts. About two years’ worth of draft legislation was provided in this regard but then withdrawn. We can but only wait for round two.

Special Economic Zones – legislation is proposed to limit the benefit of the 15% tax rate in the Special Economic Zone, if 20% of expenditure or gross income is from transactions with connected persons. This is a simple anti-avoidance measure, and is to be expected.

Securities lending arrangements – currently when collateral is transferred to a lender (which enables the lender to provide the finance) there is capital gains tax and securities transfer tax. There is a welcome proposal to review such treatment which should allow business to continue without tax providing a limitation. The Minister does caution that they need to be mindful of tax avoidance issues in drafting such legislation.

Withholding tax on interest – this legislation which is only going live next week already has an amendment. In order to reduce confusion with reference to the term“interest”, which one would think would be rather important, will finally be defined in the Act.

Shifting profits offshore – this is a concern worldwide and we are certainly not excluded from this matter. Globally, Governments are concerned with companies shifting profits to low tax jurisdictions. The buzz word for this Base Erosion and Profit Shifting (BEPS). It is proposed that rules will be added to improve transfer pricing documentation and controlled foreign company rules. Currently it is not actually a requirement to have any transfer pricing documentation (although this is not advisable) so this may be the first change.

Buying a house – if your dream home costs less than R2.3m then it is advisable to wait until 1 March 2015, because you will pay less transfer duty. If it costs more then buy right now as the rate will increase from 8% to 11% on any amount over R2.3m.

Exchange Control relating to Companies – for those companies with a lot of money your bank can now authorise investments of up to R1bn per year.

Exchange Control for Individuals – for those wanting to invest offshore, or leave the country the annual allowance has increased from R4m to R10m per year or to a total of R20m per family unit.

And finally, the time has come to take your foot of the pedal and buy a bike – It is certainly good to see that the rest of the country is helping out with the e-tolls. Additional fuel levy (30 cents) and road accident levy (50cents) will be due on a litre of fuel from 1 April 2015.