TAXATION - Sage
TAXATION
The 2012 Budget sees an uncompromising shift from the Minister of Finance’s previous subtle balancing act of endeavouring to pacify all taxpayers, to an outright targeting of the so-called wealthy. With the needs of funding the looming National Health Insurance and the currently idle toll systems and the attentive eyes of the global rating agents fixed on the 6% budget deficit, the Minister was clearly under pressure to increase Government’s tax revenue. At the same time there is the need for significant job creation in an economy affected by European debt concerns. The apprehension of the upcoming ANC elections could not have been too far in the back of his mind either when contemplating where to source such additional income.
Considering the fact that an estimated 10% of Government’s tax revenue is lost due to inefficiencies and corruption on all levels of Government, it is unfortunate that the deficit is being addressed by increasing the tax burden on the very drivers of our economy.
The 2012 Budget proposals of interest include:
• Increased withholding tax rate on dividends to 15%
• Reduction of the window period for the utilisation of STC credits
• Increased withholding tax rates on royalties and interest
• Increased effective capital gains tax rates for all
• Increased fuel levies
• Increased sin taxes
• Income tax relief for individual taxpayers amounting to R9.5 billion.
PROPOSED AMENDMENTS TO THE TAXATION OF INDIVIDUALS
Personal income tax rates and bracket adjustments
• Low income earners (taxable income up to R260 000) have benefitted most from the R9.5 billion personal tax relief with a share of 54%, while high income earners (taxable income above R1 million) will have a 6.5% share.
• The primary rebate has been increased from R10 755 to R11 440, increasing the income tax threshold to R63 556 for taxpayers below age 65.
• The secondary rebate has been increased to R6 390, increasing the income tax threshold for taxpayers aged 65 and older from R93 150 to R99 056.
• The third rebate for taxpayers aged 75 and older has been increased to R2 130, increasing the income tax threshold for these taxpayers from R104 261 to R110 889.
Interest and dividend income exemption
• The interest exemption for taxpayers below age 65 will remain at R22 300 and for taxpayers aged 65 and older will remain at R33 000.
Contributions to retirement funds
• The proposals mentioned in the 2011 Budget have been amended and the implementation date also extended from 1 March 2012 to 1 March 2014.
• It is now proposed that contributions made by an employer to retirement funds on behalf of employees will be deemed to be a taxable fringe benefit in the hands of the employees. However, such contributions will also be deemed to have been paid by the employee.
• Taxpayers, below age 45, will be allowed to deduct up to 22.5% of the higher of their taxable income or employment income for contributions to pension, provident and retirement annuity funds. A minimum annual deduction of R20 000 and a maximum annual deduction of R250 000 will apply.
• Taxpayers, aged 45 and older, will be allowed to deduct up to 27.5% of the higher of their taxable income or employment income for contributions to pension, provident and retirement annuity funds. A minimum annual deduction of R20 000 and a maximum annual deduction of R300 000 will apply.
• The proposal mentioned in the 2011 Budget regarding the limiting of provident fund withdrawals to one-third of the fund value, similar to pension and retirement annuity withdrawals, remains under consideration.
Medical scheme contributions and medical expenses
• The 2011 Budget proposal of converting medical scheme contributions into non-refundable tax credits while qualifying medical expenses may be deducted from taxable income will be implemented with effect from 1 March 2012.
• However, the tax credit amounts initially proposed are now to be replaced by:
- R230 per month for each of the first two dependents, and
- R154 per month for each additional dependent.
• It is proposed that with effect from 1 March 2014 these qualifying medical expenses will also be converted into tax credits at a rate of 25% for taxpayers below age 65 and for taxpayers below age 65 with a disability, or dependents with a disability, at a rate of 33.3%.
• Taxpayers aged 65 and older will not be affected by any 1 March 2012 changes. However, it is proposed that with effect from 1 March 2014 medical scheme contributions in excess of three times the total tax credits plus qualifying medical expenses will be converted into a tax credit of 33.3%.
National Health Insurance (‘NHI’)
• The 2011 Budget announced the introduction of the NHI system. This will be phased in over 14 years beginning in 2012/2013 with funding options under consideration to include a payroll tax (payable by employers), an increase in the VAT rate and a surcharge on individuals’ taxable income. A discussion paper will be available by the end of April 2012.
Taxation of gambling winnings
• The 2011 Budget proposed the introduction of a 15% withholding tax on gambling winnings in excess of R25 000.
• It is now proposed that a national gambling tax in the form of an additional 1% national levy on a uniform provincial gambling tax base will be introduced with effect from 1 March 2014.
• It is also proposed that a similar tax base will be used to tax the National Lottery.
Increase in monetary thresholds
• The annual donations tax exemption has remained at R100 000.
• The estate duty exemption has remained at R3.5 million (spouses may combine their exemption to allow the surviving spouse the use of the unutilised portion).
Encouraging household savings
• With the aim of encouraging a culture of saving a new generation of tax exempt savings products will be introduced by April 2014 as an alternative to low yielding interest bearing investments.
• Returns on such products including interest, dividends and capital gains, as well as withdrawals will be exempt from tax.
• The incentive however will ensure higher earners will not benefit disproportionately as contributions to such products will be limited annually to R30 000, coupled with a lifetime limit of R500 000.
• A discussion document will be published by May 2012 for consultation purposes before implementation.
PROPOSED AMENDMENTS TO THE TAXATION OF CORPORATES
Turnover tax for micro businesses
• With effect from 1 March 2013 taxpayers registered for the turnover tax will only have to file a single combined return twice a year thereby decreasing the number of returns required for these taxes from approximately 18 per year.
Special economic zones
• The introduction of special economic zones, which will build on the current industrial development zone (‘IDZ’) policy, have been proposed.
• The main aim is to improve governance, streamline procedures and provide more focused support to businesses operating within these zones.
• In the light of this proposal the following possible tax incentives will be explored:
- A reduction in the corporate income tax rate for businesses within selected zones (as determined by the Minister after consultation with the Minister of Trade and Industry).
- An income tax exemption for the operators of special economic zones.
- An additional deduction from taxable income for the employment of workers earning below a pre-determined threshold.
Small business corporations
• The taxation thresholds applicable to qualifying small businesses will be increased with effect from 1 April 2012 in alignment with the threshold applicable to natural persons. The tax rate applicable to the first taxable R350 000 of income is reduced to 7% (previously 10% of R300 000).
Excessive debt limitation
• A revised set of rules will be introduced to effectively regard certain corporate interest bearing debt structures as equity for the purpose of the tax deductibility of interest incurred on such structures.
• The implementation of blanket percentage ceilings on interest deductions relative to earnings before interest and depreciation will be considered in 2013.
• These proposals are aimed at addressing the problems associated with certain section 45 (intra-group) transactions and the receipt of exempt interest income by parties involved in private equity transactions.
Funding of share acquisitions
• Currently interest incurred on debt obtained to fund the acquisition of shares generally does not qualify for tax deduction.
• Acknowledging the fact that certain transactions structured by using section 45 have effectively overcome this principle, coupled with the fact that this limitation is rather unique to SA, it is proposed that interest incurred on the acquisition of an interest of 70% or more should be deductible.
• Such form of debt funding will be subject to similar controls applicable to section 45.
Property loan stock companies
• While effective tax neutrality is achieved by property loan stock companies incurring interest on the debenture leg of dual-linked ownership structures, reliance is generally placed on excessive debt in achieving this.
• Similar results are achieved by property unit trusts relying on the pass-through mechanism in the form of the distribution of rental income to beneficiaries.
• As the latter practice enjoys official sanction it is proposed that the former also be governed by application of the pass-through regime and the elimination of the dual-linked ownership structure.
CAPITAL GAINS TAX (‘CGT’)
• One of the proposed amendments, which may or may not come as a surprise to taxpayers, is the need to increase, according to the Minister, the relatively modest CGT inclusions rates as follows:
- Natural persons and special trusts: from 25% to 33.33%. Resulting in a maximum net effective rate of 13.33%.
- Companies: from 50% to 66.67%. Resulting in a net effective rate of 18.67%.
- Trusts (other than special trusts): from 50% to 66.67%. Resulting in a net effective rate of 26.67%.
These increased inclusion rates are applicable in respect of the disposal of assets from 1 March 2012.
• The annual capital gains/loss exclusion has been increased from R20 000 to R30 000.
• The exclusion on death has been increased from R200 000 to R300 000.
• The primary residence exclusion has remained at 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 has been increased to R2 million.
• The exclusion amount on the disposal of a small business when a person is over age 55 has been increased from R900 000 to R1.8 million.
• The maximum market value of assets allowed for a small business disposal for business owners over 55 years increases from R5 million to R10 million.
DIVIDENDS TAX AND COLLATERAL AMENDMENTS STEMMING FROM THE IMPLEMENTATION OF DIVIDENDS TAX
• The dividends tax, which represents a tax at shareholder level, as opposed to secondary tax on companies (‘STC’) which is a tax at company level, will effectively replace STC on 1 April 2012.
• The dividends tax will, ultimately, apply to individual and non-resident shareholders.
• The current rate of STC is 10% of the amount of the dividend declared by a company and up until the Minister’s Speech, taxpayers were under the impression that this would also be the rate applicable to dividends tax. However, it has been announced that, with effect from 1 April 2012, the rate of dividends tax will be 15%. The reasons provided for this increase are the following:
- To align SA’s treatment of dividends with that in most other countries.
- Pension Funds are exempt from dividends tax, which exemption did not apply under the STC regime.
- High-income earners tend to receive a larger portion of their income in the form of dividends and capital gains.
- The mitigation of the estimated R1.9 billion net loss to the fiscus as a result of the change from the STC regime to the dividends tax regime.
• The tax rate, applicable to SA branches of a foreign company, of 33% will be reduced to 28% as a result of the repeal of STC.
• Similarly the rate applicable to personal service companies of 33% will be reduced to 28%.
• The proposed passive holding company regime will be deleted as a result of the increased withholding tax rate.
• Under the new dividends tax legislation taxpayers were afforded the opportunity to utilise existing STC credits to reduce the dividends tax liability within five years from 1 April 2012. However, the Minister has announced that, given the delayed implementation of the dividends tax (and the fact that the new regime has a higher rate), this period has now been reduced to three years.
INTERNATIONAL TAXATION
Dual listed companies and other offshore reorganisations
• Following the introduction during 2011 of certain offshore reorganisation provisions allowing SA multinationals flexibility when restructuring offshore subsidiaries, an offshore section 45 provision will be introduced. Such reorganisations will be subject to similar local section 45 scrutiny however.
• The effective stripping of value from a SA multinational in unbundling foreign operations currently allowed in dual listed structures will be curtailed going forward as this erodes SA’s tax base.
Rationalisation of withholding tax on foreign payments
• Royalties paid to non-residents are currently subject to withholding tax at a maximum rate of 12%, unless a tax treaty provides otherwise.
• As from 1 January 2013 non-residents will also be subject to withholding tax on interest income. The rate which would have been applicable was 10% unless a tax treaty provides otherwise.
• Government proposes to coordinate and streamline the procedures, rates and times for all of these withholding tax regimes, including the adoption of a uniform rate of 15 %.
South African investment into Africa
• SA loans to foreign African subsidiaries essentially operate as additional share capital contributions, the purpose being to provide for a more flexible use of capital, not to avoid SA tax.
• However, the formal use of a loan often gives rise to transfer pricing concerns because these loans do not generate annual interest.
• It is proposed that these loans be treated as shares in line with the decision to treat certain forms of debt as shares.
Residency of foreign funds
• The fact that SA fund managers are often involved in the managing of foreign investment funds raised concern as to whether such funds are effectively managed in SA and therefore resident, which would subject it to tax in SA on its worldwide funds. This anomaly will be addressed to ensure local fund managers are not deprived of business.
PROPOSED AMENDMENTS TO THE TAXATION OF VALUE ADDED TAX
Square kilometre array
• South Africa (in cooperation with other African countries) is bidding to host the Square Kilometre Array (SKA), an international collaboration to build the world’s largest radio telescope.
• SKA is eligible for income tax exemption under the existing public benefit provisions.
• Government is considering the extension of this relief to VAT. This relief may take the form of either a refund mechanism or the zero rating of consideration received by the project and for imported goods and services.
Review of VAT on indirect exports and temporary imports
• The VAT treatment of the following exports/imports will be reviewed:
- Indirect exports of goods by road to ensure that exporters are not prejudiced and that the fiscus continues to be protected against potential abuses.
- Temporary imports to promote local processing and beneficiation, while protecting the fiscus.
VAT double charge for goods removed from an IDZ
• In certain circumstances movable goods imported into a customs controlled area (CCA) of an IDZ, if temporarily removed, gives rise to a double VAT charge. It is proposed that this double charge be eliminated.
Political parties
• It is proposed that the receipts and accruals of political parties be exempted from VAT.
Imported goods sold prior to entry for home consumption
• It is proposed that the VAT provisions relating to goods sold by foreign companies prior to entry for home consumption be reviewed.
Miscellaneous
• Clarification will be provided on the liability date for VAT in respect of the requirement to register for VAT. This will address the technical requirement to charge VAT before actual registration has been effected.
• Legislation will be clarified to ensure bargaining councils will not be liable for VAT on administration fees received from employees.
• The legislation governing the supply of goods through instalment credit agreements will be amended to accommodate products compliant with Shariah law.
• The specified circumstances under which debit and credit notes can be issued will be expanded to simplify the correction of incorrect tax invoices issued.
PROPOSED AMENDMENTS TO INDIRECT TAXES
Excise duties
• The changes to excise duties include:
- Cigarettes up 58 cents (5.95%) a pack of 20 cigarettes.
- Wine up 17.5 cents (6%) per bottle.
- Ciders and alcoholic fruit beverages (330ml) up 8.6 cents (9.59%).
- Spirits up R6 (20%) per 750 ml bottle.
• The targeted tax burden (excise duty plus VAT) on alcoholic beverages after the aforementioned increases is 23% of the retail price on wine products, 35% of the retail price on clear beer and 48% of the retail price on spirits.
Carbon emissions tax
• Changes are proposed to Government’s concept design for a carbon tax which will be contained in a draft policy document to be published for comment during 2012. The proposed design features include:
- A percentage base, rather than absolute base, emissions threshold mechanism of quantifying carbon emission taxes.
- Additional relief for trade exposed sectors.
- Phased implementation.
- Higher tax free thresholds applicable to certain sectors.
Electricity levy
• The electricity levy will be increased by 1 cent per kilowatt hour to 3.5 cents per kilowatt hour to fund energy efficiency initiatives currently incorporated in Eskom’s annual tariff application. This increase should accordingly not impact on the electricity tariffs.
Petrol levies
• The general fuel levy and the Road Accident Fund levy will be increased by 20 cents per litre and 8 cents per litre respectively with effect from 4 April 2012.
Luxury goods tax
• Ad valorem taxes will be introduced at 7% and 10%, respectively, on the following items:
- Aeroplanes and helicopters with a mass exceeding 450kg but not exceeding 5 000kg.
- Motorboats and sailboats longer than 10m.
MEASURES TO ENHANCE TAX ADMINISTRATION
• The Tax Administration Bill, which incorporates into one piece of legislation generic administrative provisions from different tax acts, has been approved by Parliament and is expected to be promulgated in 2012.
• SARS will increase its focus on cross-border cooperation with other Revenue authorities.
• SARS will also focus on improving its service offered to high net-worth individuals.
• Corporate income tax modernisation will see SARS improving its audit capabilities and the alignment of declarations to International Financial Reporting Standards.
• A tax ombud will be established during 2012 with the idea of providing taxpayers with a mechanism to address administrative difficulties that cannot be resolved by SARS.
MISCELLANEOUS PROPOSED TAX AMENDMENTS
Corporate taxes
• A tax incentive for developers for the construction of affordable housing (at least five units for sale below R300 000 per dwelling) is under consideration. This is to address the gap where middle-income earners do not qualify for RDP-type housing as their income exceeds the qualifying threshold but who also cannot afford high mortgage finance.
• SARS will review the various types of employee share schemes to eliminate loopholes and possible double taxation and also to consider the connection between employer deductions and employee share scheme income.
• Employers will be allowed, where practical and possible, to use actual costs to determine the value of the fringe benefit for an employee and not the prescribed value. This should result in a closer match between the PAYE withheld and the normal tax calculated on assessment.
• The deductibility of premiums paid by employers in respect of insurance policies intended to cover the purchase of ownership interest of an employee-shareholder or to repay debt guaranteed by an employee-shareholder as well as related tax issues will be reviewed.
• The taxation of payouts, whether in lump sum or annuity form, from a SA or foreign retirement fund is fraught with anomalies and will therefore be reviewed.
• The taxation of divorce order related retirement benefits, introduced in 2007 to the private sector funds, will equally apply to the Government Employees Pension Fund.
• SARS will review the deductibility of the learnership allowances where a learner did not complete a prior registered learnership.
• The adverse tax implications resulting in the hands of a debtor on the waiver of a loan will be addressed to ensure such implications are eliminated where such waiver is required to restore the debtor to a solvency position.
• The various terminological anomalies between the new Companies Act and tax will be addressed over a two-year period following a series of workshops to be held by Government to obtain a better understanding of affected transactions.
• Certain anomalies affecting the taxation of short and long term insurers will be addressed over the next two years.
• Following the withdrawal of proposed legislation which would govern the tax implications of contingent liabilities associated with the buying and selling of a business, interpretive guidance on the tax treatment will be introduced during 2012.
• Ancillary structures associated with energy projects such as wind, solar and hydroelectric facilities will now equally qualify for the accelerated 50:30:20 wear and tear allowance.
• The current cut-off date applicable for the UDZ allowances of 2014 will come under review for possible extension.
• Certain captive finance schemes entered into to artificially increase deductible expenditure will be reviewed for potential elimination.
• Financial transaction tax reform (securities transfer tax (‘STT’)):
- Currently brokers are exempt from STT of 0.25%. It is proposed that this exemption be abolished and broker transactions, where the broker is the beneficial owner of the security will be taxed at a reduced rate of STT.
- Furthermore, this reduced rate will also apply to the purchase of securities utilised in support of derivative hedging.
- These amendments are effective on 1 April 2013.
- Finally, the feasibility of including derivatives in the base of STT will also be investigated.
• Mark-to-market taxation of financial instruments
- The taxation of financial instruments on a mark-to-market basis has long been under consideration.
- In order to expedite the implementation of this basis it is proposed that the current system of mark-to-market taxation for foreign currency instruments should be moved closer to modern accounting standards.
- It is also proposed that the elective regime currently applicable to the mark-to-market basis be expanded to cover a wider set of financial assets and liabilities.
- The revised system will be subject to SARS approval so that the regime can be fully controlled.
• Currently, there are anti-avoidance provisions relating to the disposal of trading stock between connected persons. It is proposed that these anti-avoidance provisions be deleted.
• Share issue mismatches:
- The issuing of shares by a company does not give rise to a tax liability in the hands of the issuing company.
- However, taxpayers have used this exemption to shift value to new shareholders thereby reducing the tax liability.
- Most of these schemes rely on the receipt of consideration in excess of the value of the shares issued.
- It is proposed that the exemption for the issue of shares be limited to their value, with the excess being subject to tax.
• It is proposed that share block conversions to sectional title be subject to tax roll-over relief.
• Ongoing refinements to headquarter company relief.
TAX POLICY RESEARCH PROJECTS CURRENTLY UNDER WAY
• Reforms to the primary, secondary and tertiary rebates, which will include a review of the means testing for the old age grant and the introduction of a child and/or dependant tax rebate/credit.
• Taxation of financial instruments (including derivatives).
• Long-term insurance companies – review of the taxation, accounting and regulatory practices of the four fund system.
• Taxation of income from capital (interest income, dividends, capital gains, rental) to be reviewed to ensure greater equity and minimize opportunities for tax arbitrage.
• VAT treatment of public passenger transport.
• Taxation of transport fuels – review to determine the equitable treatment of all transport fuels based on their environmental characteristics (for example, CO2 emissions) and energy content.
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