The Minister of Finance read his budget speech today. It covers both immediate changes to the tax regime, and areas that will receive attention over the coming 1 or 2 years. In general terms, the current and future proposals are very modest in their scope and this could be regarded as the most low-key set of tax proposals to have been put forward for many years, at least from a technical perspective. It is noteworthy that the maximum marginal tax rates applicable to individuals, trusts, companies and dividends remain unchanged.
The ENSafrica tax team has set out a non-exhaustive summary of the highlights below:
- Third party backed shares
- Several changes are proposed in relation to the tax treatment
of third party backed shares. In general terms these relax the
hurdles which the taxpayer must overcome to avoid falling foul of
the anti-avoidance rules (which re-characterise dividends as
interest). Briefly, the changes affect the re-financing of such
shares; or such shares used to acquire equity shares in exploration
companies; and finally, limited pledges in respect of such
- Several changes are proposed in relation to the tax treatment of third party backed shares. In general terms these relax the hurdles which the taxpayer must overcome to avoid falling foul of the anti-avoidance rules (which re-characterise dividends as interest). Briefly, the changes affect the re-financing of such shares; or such shares used to acquire equity shares in exploration companies; and finally, limited pledges in respect of such shares.
- Interest deduction for re-organisation and acquisition
- The last few years have seen a number of different measures
aimed at limiting the interest deductibility arising from such
transactions. Currently we are moving from a discretionary to a
formula based system. Certain proposals were made to revise the
formula which will be used to calculate the allowable interest
- The last few years have seen a number of different measures aimed at limiting the interest deductibility arising from such transactions. Currently we are moving from a discretionary to a formula based system. Certain proposals were made to revise the formula which will be used to calculate the allowable interest deduction.
- Dividend tax
- An apparent anomaly concerning the refund mechanism for
non-cash dividends will be addressed.
- An apparent anomaly concerning the refund mechanism for non-cash dividends will be addressed.
- Contributed tax capital
- Rules relating to the rollover of CTC will be introduced to cater for the conversion of deferred shares to ordinary shares.
- Certain insurance products may inadvertently fall within the
ambit of section 24J which deals with taxation of interest and it
is proposed that these policies will be excluded from the scope of
- A technical change will be made to deal with the determination
of whether a company is a property company where foreign companies
- A technical change will be made to deal with the determination of whether a company is a property company where foreign companies are involved.
- Oil and gas companies will be permitted to make part
assignments of their fiscal stability rights, for example, if they
enter into a joint venture.
- Anomalies in relation to the research and development incentive
relating to clinical trials will be dealt with.
- With regards to lines or cables used to transmit electronic
communication, the conditions and period for claiming depreciation
allowances will be reviewed.
- With regards to environmental conservation in terms of an
agreement with government to declare land as a nature reserve or
national park, a proposal is under consideration to allow a
straight line deduction of the land over 25 years.
- With regards to transfer pricing contraventions, the nature of the secondary adjustment is to be revisited so that it ceases to take the form of a deemed loan and instead will be deemed to be a dividend or capital contribution depending on the circumstances.
- The effective tax rate in respect of a taxable foreign dividend received by a controlled foreign company (CFC) in which resident individuals hold participation rights will be adjusted.
- Treasury acknowledged the difficulties arising in having to perform the hypothetical South African tax calculation to determine if the so-called high tax exemption for CFCs applies where the CFC has a foreign business establishment (FBE). The interaction between the FBE exemption and the high tax exemption will be revisited to address the practical difficulties.
- Cessation of South African residence gives rise to a deemed
disposal and reacquisition of shares in a SA property owning
company. A change will be introduced to deal with the currency of
such deemed disposal.
- With regards to SA registered fishing vessels, the inadvertent
deletion of the repair allowance will be reinstated.
- Debt reduction rules are under consideration in the case of
companies undergoing business rescue and other forms of debt
compromise. The current rules are seen as undermining the purpose
of business rescue.
- With regards to Public Private Partnerships, the current
requirement of ownership of land in order to allow depreciation or
capital allowances will be re-examined to improve the financial
viability of projects. The requirement of land ownership also
limits the incentive for improvements in UDZ and industrial policy
projects. Consideration will be given to allowing deductions where
the taxpayer is not the owner of the land.
- With regards to Tax Treatment of Insurers, it is proposed that
the profits from the risk business of an insurer be taxed in the
corporate fund similar to the manner in which short term insurers
are taxed. This is to ensure that the corporate fund rather than
one of the policy holder funds will be taxed on the risk policy
business and profits. A review will also be undertaken of the
fairness of taxation of the IPF where a 30% tax rate is applied
irrespective of the actual income level of policy holder.
- With regards to Foreign Re-insurance, it is proposed that the
net returns from foreign re-insurance will be included in the tax
calculation of the insurer.
Individuals and employees
- The top marginal rate for individual taxpayers has remained at
40%. The usual inflationary adjustments in the tax brackets have
also been made.
- Medical tax credits will increase from R242 to R257 per month
for the first two beneficiaries and from R162 to R172 per month for
each additional beneficiary with effect from 1 March 2014.
- The previously announced tax-preferred savings accounts will
proceed. There is also a continued focus on retirement fund
taxation reforms in line with the Taxation Laws Amendment Act
(2013). The methodology for calculating the deductible
contribution amount to defined benefit plans will be detailed in
- With effect from 1 March 2014, the bottom bracket for
retirement lump-sum benefits will be increased to R500 000,00 to
avoid instances where lower-income workers may be required to pay
tax on their lump sum.
- Reforms for company car fringe benefits will be phased in over
four years. It is proposed that actual retail market value be used
to calculate the fringe benefit. This will align the
treatment of company car benefit for all employees (including those
of vehicle manufacturers).
- SARS is developing a refund system that allows for
reimbursement where the employment tax incentive exceeds the PAYE
payable. It can currently be set off against future PAYE
liabilities. This refund mechanism will become effective in the
fourth quarter of 2014.
- Life and disability premiums: It is proposed that the wording
prohibiting the deduction be clarified so that premiums paid on all
personal insurance policies will not be deductible and that such
policy proceeds be tax free.
- Keyperson insurance policies will not qualify for either the
elected deduction or default non-deductible premium with tax-free
proceeds if the employer is not insured against the
"loss" due to death, disablement or severe illness of an
employee or director.
- The valuation of the fringe benefit resulting from
employer-provided residential accommodation will be reviewed.
The focus will be on accommodation rented from unconnected third
parties and it is proposed that the value of the fringe benefit
should be the cost to the employer and not the current formula in
the 7th Schedule to the Income Tax Act. A form of apportionment is
also considered for employees sharing employer-provided
- Cross-border pension issues will be reviewed over a proposed
period of two years. It is also proposed that provisions in the
Income Tax Act referring to "pension" or "pensions
or an annuity" be amended to apply equally to annuities and
- It is proposed by the Unemployment Insurance Amendment Bill
that the Unemployment Insurance Act be amended so that learners in
learnership training, civil servants and foreign workers in South
Africa also receive unemployment insurance benefits.
- The notional input tax credit will be abolished in the case of
second hand goods made from precious metals.
- The zero rating of goods acquired for farming purposes will be
reviewed for possible replacement with the standard rate.
Trusts and Estate Duty and Public Benefit Organisations
- Despite suggestions which were made last year relating to the
taxation of trusts and foundations, no proposals are mentioned in
- The requirement that philanthropic foundations distribute up to
75% per annum of the money they generate will be relaxed to allow
them to build up and maintain sufficient capital.
- Government is considering options to provide tax relief to
organisations involved in the promotion of small business
development through grants. It is proposed that the grants received
by small and medium sized enterprises will be tax exempt regardless
of the source of funds.
- The turnover tax regime for micro business with an annual
turnover of up to R1million will be retained but certain
adjustments will be made in line with the recommendations of the
Tax Review Committee. In addition the current small business
corporation regime will be changed. The reduced tax rate regime
will be replaced with an annual refundable tax compliance rebate,
subject to public consultation.
Excise duties on alcohol and tobacco
- The targeted tax burdens (excise duties plus VAT) expressed as
a percentage of the weighted average retail selling price for wine,
clear beer and spirits are 23, 35 and 48 per cent respectively. In
line with these targets, government proposes to increase the excise
duties on alcoholic beverages by between 6.2 per cent and 12 per
cent in 2014. This is higher than the current inflation rate of 5.8
- The specific excise duty rate for traditional African beer will
- The targeted total consumption tax burden for tobacco products
(excise duties plus VAT) is 52 per cent of the retail selling price
of the most popular brand within each product category. Government
proposes to maintain this benchmark by increasing the excise duties
on tobacco products by between 6.2 and 9 per cent on cigarettes,
cigarette tobacco and cigars. This is higher than the current
inflation rate of 5.8%.
- The below-inflation (2.5 per cent) excise duty increase for
pipe tobacco is due to the 2013 Budget excise adjustment for this
category exceeding the targeted tax incidence.
- Addressing non-compliance within the tobacco industry remains a
priority. Consequences for non-compliance will result in withdrawal
of licences and more inspections.
- Budget 2013 introduced changes to tariff heading 22.06 to align
the excise duty rate structure for fruit fermented alcoholic
beverages with the requirements of the Liquor Products Act (1989).
As a result, fermented alcoholic beverages that are not mainly
derived from fruit will be included in the "other" tariff
band. The intention was to increase the excise duty rate of this
band to the highest excise rate – the full spirits rate
– from February 2014 onwards. However, after further
consultation it is proposed that this increase be postponed to
Budget 2015. The possibility of providing for grain fermented
alcoholic beverages will also be explored.
- Liquor manufacturers may currently request tariff
determinations from SARS to obtain certainty on the appropriate
tariff classification and excise duty rate applicable to their
products. These voluntary applications for tariff determinations
will in future be made compulsory to ensure that all alcoholic
beverages are over time accurately and consistently classified. Any
new alcoholic product or modification in the production process or
alteration in the recipe of an existing liquor product will be
subject to a compulsory SARS tariff determination. Proof of
compliance with the requirements of the Liquor Products Act will
also have to be submitted to promote harmonisation with
agricultural legislation. These compulsory tariff determinations
will be phased in to ease its administrative burden.
Increase in fuel levies
- Government proposes to limit the increase in the general fuel
levy in line with inflation in 2014/15.
- The increase in the fuel levy on 93 Octane petrol is 5.65 per
cent and on diesel 6.08 per cent. The increase in the fuel levy on
diesel is in fact higher than current inflation rates and higher
than the increase in the fuel levy on 93 Octane Petrol and will
have a further inflationary effect on goods.
- The proposed increase of 12c/litre is less than the increase
applied in 2013/14.
- The proposed increase for the Road Accident Fund levy of
8c/litre is equal to the adjustment in 2013/14, and at 8.33 per
cent, higher than inflation.
- Taxes as a percentage of pump-price have in fact come down from
25.9 per cent and 26.3 per cent on 93 Octane Petrol and diesel,
respectively, to 24.2 per cent.
- The effective date for both levies is 2 April 2014.
- A biofuels production incentive was announced in the 2013
Budget Review as an "infant industry" support mechanism.
It is expected that the subsidy will take effect in the second half
of 2015 and will work through the fuel levy.
- The exact levy will be determined once the cost structure and
the point at which blending will occur have been decided.
- Government proposes to review the diesel refunds policy and
- Refunds in the electricity sector have grown more than
anticipated, reducing net fuel tax revenues available to be shared
between metropolitan municipalities.
- Amendments will also address equity issues, ensuring that some
sectors do not benefit disproportionately from the system.
- The levies are designed to fund the maintenance and building of
roads and the Road Accident Fund. It should not be motivated by tax
revenue. The refunds are designed to provide a refund of the fuel
levies where the fuel is not used on roads. The higher usage in the
electricity sector is as a result of the inability by Eskom to
provide enough electricity. This should not be addressed be
reducing the refunds on electricity generation.
- Some industries, for example mining, use more diesel off-road
than others, this should not be a basis for reducing the refunds to
Acid mine drainage
- Regulatory and other measures have been put in place to address
the serious environmental consequences of acid mine drainage.
- To complement current efforts and ensure that the mining sector makes a fair contribution to continuing acid mine drainage expenses, consultations will be initiated with all interested parties on the best mechanism to use, such as an environmental levy or equivalent instrument.
- Following public consultation, the National Treasury and the
Department of Environmental Affairs agree on the need to align the
design of the carbon tax and the proposed desired
- To allow for this process and ensure adequate time for consultation on draft legislation, implementation of the carbon tax is postponed to 2016.
- Addressing non-compliance in the clothing, footwear and
textiles sector will remain a priority.
- The number of dogs and handlers trained to detect illegal and
smuggled substances was nearly doubled over the past year and will
- High volume scanners will soon be introduced at the Durban and
Cape Town ports.
- The customs modernisation programme has eliminated the need for
paper-based documents to be generated and issued to taxpayers. The
documents that are legally required will be aligned with the
modernised customs processes and procedures.
- SARS has a responsibility to protect the merchandise trade
information that it receives from travellers and traders. In the
absence of the Protection of Personal Information Bill being
implemented, it is proposed that the Customs and Excise Act be
amended to provide for such data protection.
- Currently, SARS is not able to temporarily write-off a debt while it is under dispute by a taxpayer, in terms of the Tax Administration Act. It is proposed that this prohibition will be lifted.
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