On 26 February Finance Minister Trevor Manuel presented the 10th Budget since the advent of democracy in South Africa. Thanks to years of fiscal discipline, which has enabled South Africa to be a notable exception to the general global gloom, he was able to give further tax relief to the poor and middle class sectors, offer incentives to business, and at the same time allocate substantial funds for infrastructural improvement. As tobacco and luxury goods magnate Johann Rupert said in a speech at an evening presentation on the Budget, the South African Treasury and Reserve Bank are "world class", and the effects are there for all to see and reap. Amongst the beneficiaries will be thousands of individuals who spirited funds offshore in contravention of exchange regulations over the past three decades, who will now be able to disclose them without penalty, but with a small charge. A major change for global operators, discussed in more detail below, is relief in respect of foreign dividends earned from companies in which residents have "meaningful interests".

Business incentives

Urban renewal

Taxpayers investing in certain designated urban areas will enjoy special depreciation allowances for refurbishment or construction aimed at reversing urban decay. The cost of refurbishment may be written off in five equal annual instalments. The intention is to encourage slumlords to eliminate the blight of abandoned buildings that have affected many inner city areas. This initiative goes hand in hand with the current policy of several municipalities to close down such buildings and evict tenants from what have become health hazards. The cost of constructing new buildings in such areas may be claimed over 17 years – 20% in the first year and 5% per annum for the next 16 years.

Business assets

The temporary accelerated depreciation allowance of 40:20:20:20 for manufacturing assets has been made permanent. In respect of business assets in general, where there are taxable recoupments or capital gains on disposal, these will not be taxed immediately provided the assets are replaced within 18 months, in which case the gains will be taxed over the life of the new asset.

Research and development

An antiquated set of provisions for deducting such expenditure has been replaced with one that applies the same ratio as that for business assets. The benefits will not apply to "research and development of dubious scientific or technological value, such as marketing research"!. No doubt this term will be defined, because one man’s vital research is another man’s waste of time. Equally certain is that the market research industry will react to this perceived slur.

Biodiesel plant and machinery

In a gesture towards encouraging the production of renewable and environmentally friendly forms of energy, the cost of plant and machinery used in such processes on farms may be written off at the 50:30:20 rate applied to normal farm equipment.

Small business

As an incentive to persons to start up new businesses, the first R20 000 of deductible expenses incurred by a start-up business may be claimed twice. In addition, the annual turnover limit for small business corporations (which are entitled to special rate concessions) has been increased from R3 million to R5 million.

Offshore interests

Capital flows

Over the past few years there has been considerable development in the provisions relating to offshore activities by residents. One of these has been to include foreign dividends in taxable income. Minister Manuel conceded that the effect of this provision had been that resident companies were simply not permitting their offshore subsidiaries to declare dividends, thus trapping funds offshore when they could have been used productively onshore. To overcome this disincentive, foreign dividends will now be exempt in the hands of a South African taxpayer who has a "meaningful interest" in the foreign subsidiary paying the dividend. This concession will not affect portfolio investors, who will continue to be taxed on their foreign dividend income, but it will be welcome news for corporations with offshore interests. The meaning of "meaningful interest" has not yet been spelt out, but the reference to subsidiary suggests that the South African investor will have to hold a controlling interest.

This decision has rendered redundant the "designated country" provisions, in terms of which about 30 countries enjoyed this status on the grounds that their tax regimes were broadly similar to that of South Africa. This meant that income would have been taxed in those countries and was therefore exempt in the hands of South African shareholders. Because foreign dividends are no longer taxable, the need for this provision disappears and the concept of "designated country" falls away.

Change in residence

At present, when a resident company becomes a non-resident, there is only a capital gains tax charge on the move, in the sense that all assets are deemed to have been disposed of at current market values. This means, however, that reserves may be shifted without penalty. This is to change with the extension of the Secondary Tax on Companies to such reserves as if they had been declared as dividends. This is an unfortunate development; there have been repeated calls in recent years for STC to be abolished, and instead here its operation is being extended.


The tax tables have been amended by extending the bands while retaining the rates in each band. The effect is that the tax threshold for persons under 65 years old is R30 000 and R47 222 for older persons. The tax saving reaches its peak of 3.76% at an income level of R150 000 per annum, which is pretty much at the lower end of the middle income category.

The first R10 000 of interest income is now exempt (R15 000 for persons over 65), up from R6 000 and R10 000 respectively.

The transfer duty on fixed property has been reduced by R2 600 per transaction, but smokers and drinkers will pay more for their pleasures.

Foreign exchange amnesty

Perhaps the most exciting aspect of the Budget is the foreign exchange amnesty, something for which there have been pleas for several years. During the Apartheid era, with the strict exchange controls required to counter international sanctions, untold numbers of South Africans spirited funds offshore. Holiday allowances were never repatriated, transfer pricing became an art form, complex round-tripping devices were used, the holidays of visiting relatives were funded in return for payments into illegal foreign banks, and sometimes funds were simply smuggled out.

South Africa is now an increasingly attractive place in which to invest and the country is riding an economic and financial crest in comparison with most of the world. Moreover, far from the feared implosion after 1994 taking place, the opposite has happened and there is no longer any reason to maintain financial boltholes in "safer" countries. At the same time, international fiscal co-operation is improving, and many residents, fearful of detection, have for some time been looking for ways to bring their money home and disclose it without being taxed, penalised and possibly even charged with criminal offences.

They are now able to do so, in terms of the amnesty announced by the Minister. Any person who repatriates tainted funds may do so free from the fear of official retribution, on payment of a 5% charge. If persons wish to leave their funds offshore, they may do so but the charge will then be 10%. Both charges are but a small price to pay for peace of mind.


This summary is based on the contents of the Budget speech and accompanying documents. The amending Bill has not yet been published. When this happens, there will no doubt be more detail concerning these and other changes. They will be dealt with in later articles.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.