South Africa: 2013/2014 Budget Proposals - Tax Overview

From a tax perspective, it must be said that the number of proposed changes to the various fiscal Acts (mainly the Income Tax Act and the VAT Act) are considerably fewer than in prior years. If this results in a reduction in the number of amendments to be made to the various Acts, this will certainly be welcome, as the extent of the changes in the past few years has simply been overwhelming.

Contrary to widespread speculation there were no increases in direct taxation, but rather there was some tax relief. However that is not to say that there were no surprises, which bring an end to the light touch with which certain transactions have been dealt with. In particular, we note the announcement of much tougher rules relating to the taxation of trusts, and the extent to which interest deductions will be limited by use of interest cover rules.

On the personal side there has been some tax relief, as well as relief for small business corporations. A number of proposed tax amendments were announced, many of them of a highly technical nature. We have thus attempted to limit ourselves to matters which are likely to be of more general and widespread interest.

INDIVIDUALS

Retirement and non-retirement savings

Incentives to increase savings were proposed.

• Retirement savings reforms seek to treat pension, retirement annuity fund and provident funds in a uniform manner (currently contributions to provident funds are not deductible, and the full credit may be taken as a lump sum, unlike in the case of pension retirement annuity funds). Deductibility thresholds will increase to 27.5% of the greater remuneration and taxable income, though there will be an annual cap of R350 000. Excess contributions may be carried forward and claimed in future years, and any unclaimed amount at retirement can be deducted from the lump sum. Vested benefits will be protected (i.e. accumulated balances in provident funds will not be subject to the new rules, and only future amounts paid in will be so subject). In addition, the potential requirement to ensure that benefits from provident funds are taken by way of annuities will not apply to provident fund members older than 55 years.
• Non-retirement savings will be encouraged by introducing tax-preferred savings and investment accounts in April 2015. All returns within, and withdrawals from, these accounts will be exempt from tax. The annual contribution limit will be R30 000, with a lifetime limit of R500 000.

Donations to Public Benefit Organisations (PBOs)

Currently, tax-deductible donations (section 18A of the Income Tax Act) are limited to 10% of taxable income. Excess donations may not be claimed. It is proposed to allow the excesses to be carried forward and claimed in a later year. (These rules will also apply to corporate donors).

Disability and income protection policies

There has been considerable confusion regarding which premiums are deductible and under which circumstances, and which pay-outs are taxable. Different tax treatments have been (inadvertently) given by the SARS to different products offered by different insurers. It is proposed that all non-retirement fund disability and income-protection policies will have a consistent treatment, in terms of which none of the premiums will be deductible, and all of the pay-outs will be exempt.

Trusts

The use of trusts as tax planning vehicles has long been the target of the authorities. The following legislative measures are proposed this year and next year:

• The flow-through principle will no longer apply to discretionary trusts, but income and capital gains will be taxed in the trust's hands. Distributions to beneficiaries will, however, be allowed as deductible payments up to the amount of the current year's taxable income, and beneficiaries will be taxable thereon (but other distributions will be exempt). Thus, apparently, it will no longer be possible to award different types of income to different beneficiaries.
• Similar rules will apply to trading trusts. These will be defined by reference either to trusts which conduct a trade, or if beneficial ownership interests are freely transferable.
• Distributions from offshore foundations will be treated as ordinary income. No details are given, but using the word "foundations", whereas previously the word "trusts" was used, is presumably intentional, i.e. the new rule will not apply to foreign trusts, but rather the trust rules above will apply.

BUSINESS ISSUES

Interest limitation

Measures to limit deductibility of interest incurred on debt used to finance corporate restructurings were introduced in 2011 and were designed to expire at the end of this year, when more permanent rules are introduced. The purpose is to prevent erosion of the tax base by the borrower deducting interest where the lender is not taxable thereon (e.g. is exempt or a non-resident). Measures proposed are as follows:

• Certain debt will be re-categorised as equity, e.g. loans that are not likely to be repaid within thirty years, or debt that is convertible to shares at the instance of the issuer. (These rules will not apply to banks and insurers).
• Limits will be imposed on deductibility of interest paid to connected persons who are exempt from tax on the interest, by use of interest cover rules. Thus the deductible interest may not exceed 40% of earnings after paying interest on other debt. Excessive amounts may be carried forward to be claimed in later years, for a maximum of five years.
• Acquisition debt arising in corporate restructurings will also be limited, with the interest on the excessive debt being allowed to roll over for up to five years.

Low-cost housing

Fringe benefits arise for employees with subsidised rental accommodation or home loans, or where employers build houses for their employees which ultimately become owned by the employees. The fringe benefits tax is often unaffordable for them. It is proposed to provide tax relief for lower-income earners in these cases.

Bursaries

The rules relating to fringe benefits taxation on bursaries granted to relatives of employees will be reviewed. The monetary thresholds will be increased, and differential thresholds will apply to students attending tertiary institutions as opposed to schools.

Employment incentive

A youth employment tax incentive will be introduced, and is intended to be administratively simple. There will be a graduated tax incentive at the entry-level wage, reducing to zero when earnings reach the income tax threshold.

Special economic zones

Additional tax incentives will be granted to taxpayers operating in these zones as follows:

• Corporate tax at the rate of 15%.
• An employment incentive for workers earning less than R60 000 per annum.
• An accelerated depreciation allowance for buildings, similar to the allowance for urban development zones.

Share schemes

Once again these are being targeted as they are being seen to be "used as a tool to lower overall tax rates for executives and other high-income earners." Lower-income taxpayers are said sometimes to be subject to anomalies that give rise to double taxation. It is proposed that a special dispensation will be given to ensure uniform tax treatment. The way that employers claim deductions will also be examined.

Tenant installations

Recognising that commercial tenants often undertake substantial improvements to the landlord's fixed property, but none of these is depreciable because the improvements are not owned by the tenant (in law they become owned by the landlord), it is proposed that the ownership test for depreciation be replaced with a "possession and use" test. It is not stated whether the landlord will be taxable on the value of the improvements.

FINANCIAL SERVICES AND INVESTMENT

Hedge funds

The collective investment scheme legislation will now also apply to hedge funds and as a result regulated hedge funds will be treated similarly to other collective investment schemes. However, unit holders will be required to treat their earnings as ordinary revenue (and be taxed as such) when realised. It is also proposed that a similar regime be implemented for interest-income funds.

Unlisted real estate investment trusts (REITs)

Tax legislation to provide for REITs was introduced during 2011 and will come into effect on 1 April 2013. The provisions allow REITs, who are required to invest in immovable property, to deduct their distributions to investors provided at least 75% of the REIT's gross income is attributable to rental income. Currently though this dispensation only applies to listed companies.

The REIT regime will now be extended to include unlisted REITs once they are subject to similar regulation as listed REITs (listed REITs will be regulated by the JSE). The regulation will initially be extended to wholly-owned entities of private and government pension funds as well as long-term insurers.

A further proposal relates to the introduction of property syndication legalisation, and the REIT tax relief will be extended to include other real estate entities once such entities become subject to property syndication regulation.

INTERNATIONAL ASPECTS

Withholding tax on service fees

It was proposed that a withholding tax at the rate of 15% be applied to service fees paid to a non-resident. This is a departure from the accepted principle that non-residents pay tax only on income from a South African source, and usually these fees will be derived from a foreign source. In many cases, however, a relevant double tax agreement will preclude the withholding of the tax.

It was proposed to introduce the tax from 1 March 2014. To facilitate administration, it is proposed that the new withholding tax on interest, and the changed withholding tax on royalties, will also become effective on that date, instead of on 1 July 2013.

Deferral of expenditure

To prevent acceleration of deductible expenditure in favour of a non-resident connected person (such as a foreign holding company), it was proposed that the deduction will be granted only when the expenditure is actually paid, and not when the liability to pay arises.

Foreign currency rules

The taxation of currency gains and losses is recognised as being extremely complex and not wholly in conformity with accounting principles. The rules are to be simplified in favour of a more practical approach. A longer-term shift is being considered towards an IFRS approach.

Gateway subsidiary

This is more of an exchange control relaxation than a tax issue. Because South African multinationals often require to use offshore subsidiaries to conduct a treasury operation, so that funds can move freely cross-border, it creates an incentive to move offshore. It was thus proposed that listed South African multinationals will be allowed to treat a single local subsidiary as a non-resident company for exchange control purposes, so that the treasury operations can remain in South Africa. This entity will also be able to use a foreign currency as its functional currency for the purpose of its tax calculation.

INDIRECT TAXES

Carbon taxes

The introduction of a carbon tax has been on Government's radar for quite a while. This tax will now be phased in, with the first phase scheduled to commence on 1 January 2015, and end in 2020. The carbon tax will be imposed at the rate of R120 per ton of CO2 equivalent, with this rate increasing by 10% per year during this first phase of implementation. However, during the first phase, a basic tax-free threshold of 60% will apply, as well as off-set percentages of 5% to 10%. This is to allow emission-intensive and trade-exposed industries to invest in cleaner technology.

As a result of the carbon tax, the gradual phasing out of the electricity levy is also considered.

Gambling tax

Initially proposed in the 2011 Budget, the national gambling tax will now be implemented by the end of 2013. This tax will be imposed at the rate of 1% of gross gambling revenue, and will be in addition to any provincial taxes.

VAT

In an apparent alignment with international trends, foreign entities supplying digital content and services, such as e-books, music, applications etc., in South Africa, will be required to register as VAT vendors. This seeks to address the anomaly that local consumers can purchase the digital goods or services, free of VAT, which would not be the case where physical goods are imported. Whilst the reasoning is fair it is difficult to see how this will be enforced.

RESEARCH PROJECTS

Although not current proposals, the Minister announced certain research projects that will be undertaken during the next year. These include:

Addressing perceived avoidance mismatches in respect of dividend cessions and dividend compensation payments (manufactured dividends), with consideration being given to a single unified treatment for both sets of transactions. Further anti-avoidance rules will be considered to eradicate the shifting of income from taxable to exempt persons.

The review of the tax provisions relating to both domestic and foreign reorganisations will be continued during the year with the focus on urgent matters and anomalies.

In an attempt to attract international shipping, relief in the form of an outright exemption for shipping income is being considered, and further consultations with role players will be undertaken.

Under current VAT provisions a debtor will be required to repay, as output tax, any input tax claimed if that debtor has not within a period of 12 months settled the debt in question. This onerous regime does not allow for debt relief, such as business rescue, and therefore amendments to provide for such circumstances are being evaluated.

In non-financial sectors, the default apportionment method for VAT input tax deductions, which is based on turnover, can at times be inequitable as there may not be a direct correlation between expenditure incurred and turnover generated. As a result the default application of this method will be re-evaluated.

TAX RATES AND THRESHOLDS

Individuals

Relief will be granted by adjustments to the personal income tax table as follows:

The relief, insofar as it applies to individuals younger than 65 years, is illustrated in the following comparative table:

Tax free portion of interest

TRAVEL ALLOWANCE

MONTHLY MEDICAL TAX CREDIT

Corporate income tax rates

Income tax - Companies

For the financial years' ending on any date between 1 April and the following 31 March, the following rates of tax will apply:

Tax regime for small business corporations

For the financial years ending on any date between 1 April and 31 March, the following rates of tax will apply.

Capital gains tax

Effective capital gains tax rates

Proposed capital gains exemptions

TRANSFER DUTY

The transfer duty table, which applies to all types of purchasers, is as follows:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.