South Africa: Tax Highlights Of The 2014 Budget Proposals

Last Updated: 4 March 2014
Article by Edward Nathan Sonnenbergs

Most Read Contributor in South Africa, September 2018

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:

Business

  • 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 shares.
       
  • Interest deduction for re-organisation and acquisition transactions
    • 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.
       
  • 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 these rules.
       
  • REITS
    • 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.
     
  • Cross-border
    • 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 2014.  
     
  • 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 accommodation. 
     
  • 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 lump sums.
     
  • 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.
     

VAT

  • 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 budget.
     
  • 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.
     

Small Business

  • 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 per cent.
     
  • The specific excise duty rate for traditional African beer will remain unchanged.
     
  • 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.
     

Biofuels

  • 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.
     

Diesel refunds

  • Government proposes to review the diesel refunds policy and administration system.
     
  • 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 these industries.
     

Environmental taxes

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.

Carbon tax

  • 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 emission-reduction outcomes.
     
  • To allow for this process and ensure adequate time for consultation on draft legislation, implementation of the carbon tax is postponed to 2016.

Customs Administration

  • 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 be increased.
     
  • 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.
     

Disputes

  • 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.

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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