South Africa: Employees’ Tax Highlight Stemming From The 2013 Tax Amendments

Last Updated: 7 August 2013
Article by Dan Foster

Proposals to Employees' Tax proposed in the 2013 Draft Taxation Laws Amendment Bill

  1. Dividends paid on unvested shares held via employee share schemes will be taxed as remuneration in the hands of the employee, not as exempt dividends. Such dividends will be exempt from the Dividends Withholding Tax and be a deductible expense for the employer, like other remuneration

    What this means:

    Employees receiving dividends from restricted shares acquired from their employer will in future incur employees' tax on this income, instead of the Dividend Withholding Tax (15%). For employees earning over R638 601pa, the tax to be levied will be at the marginal rate of 40%. For lower income earners, earning under R258 750pa, this will be between 0-25%. This change will apply equally to senior management incentive plans as to broad-based schemes operated via BEE trusts. It will also entail additional PAYE compliance processes by employers who operate such schemes. While Treasury understandably wants to stop abuse of the tax system, by for example senior executives being paid exempt dividends instead of salary, the change has very broad and far-reaching consequences. It will be interesting to see how unions, for example, react to their members now suffering income tax on BEE dividends. Many BEE arrangements also relied on funding models which assumed dividends would be tax exempt.
  2. Deduction for premiums paid to income protection policies has been abolished. Proceeds (e.g. disability annuity) will however be exempt from tax

    What this means:

    Individuals are currently incentivised to insure their income-producing capacity by taking out Income Protection Policies, since the premiums are tax deductible (while the annuities received in the event of an accident are taxable). This incentive will be removed in an attempt to cultivate uniformity in the tax treatment of policies that relate to personal cover for individuals. This is difficult to understand from an overall policy perspective. The resulting policy annuity will however be exempt. It is understandable that Treasury should seek consistency in the tax system, but it remains a fact of human behaviour that people will not be encouraged to take out such policies just because the proceeds are now exempt. The issue here is that most people will possibly be discouraged from planning for a future catastrophe such as disability brought on by an accident especially if the tax benefit depends upon the occurrence of some future event that may or may not occur. We shall simply see more uninsured people, which is not good for anyone. The extra tax revenue generated will be minimal, so it is difficult to grasp the rationale Treasury seeks to apply here.
  3. Charitable donations in excess of 10% of taxable income can be carried forward to future years of assessment, not lost as non-deductible. This proposed amendment is therefore likely to encourage high income earners to make charitable donations.
  4. Pension proposals to proceed as outlined in the Budget and Treasury consultation papers. Employer contributions to all funds to become a taxable fringe benefit. Aggregate of employee and employer contributions to be tax deductible for the employee up to a limit of 27.5% of the greater of remuneration or taxable income, capped at R350 000 per annum. No limit on corporate tax deduction for employer contributions to funds

    What this means:

    As expected, the tax system for retirement contributions has been overhauled High-earning individuals will be the most hard hit and will be discouraged from making provision for their retirement in excess of the R350 000 monetary cap per annum. The insurance and retirement fund industries may also suffer from this proposed amendment, which could push up costs for everyone else in the funds. It is also unclear how these changes will impact foreigner nationals working in South Africa, and the interaction with tax treaties, since tax on retirement savings can be a deal breaker for expatriate assignment costs to employers, and to potential immigrants.
  5. New fringe benefit valuation rules for employer contributions to defined benefit retirement schemes
  6. Mandatory retirement annuity requirement extended to Provident Funds from 1 March 2015. Therefore lump sum limited to 1/3rd of fund, as is now the case for Pension Funds. New rules to preserve historic rights, i.e. balance in fund at 1 March 2015 is not subject to compulsory annuitisation.

    What this means:

    The grandfathering provisions are very welcome and should prevent a rush to extract funds.
  7. Extended fringe benefit concession for transfer of low cost housing to employees.

    What this means:

    Extended tax exemption for bursaries provided to relatives of employees.

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.

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