South Africa: Budget Review - 2011 Budget Highlights

Last Updated: 28 February 2012
Article by Edward Nathan Sonnenbergs

1. Introduction

On the whole the tax proposals contained in the 2011 Budget seem fairly evenly balanced between taxpayer and fiscus. As in previous years perceived areas of tax avoidance are to be addressed but on the other hand certain areas of unfairness or inequity are to be reviewed in order to eliminate such effects. In addition the Minister provided progress reports on various tax proposals which have been scheduled for future implementation.

In our analysis below we highlight the areas of particular interest to our commercial clients, without exhaustively considering all of the tax proposals in detail.

2. Commercial and Corporate Tax issues

  • On the individual side, but with possible implications for business, a suggestion is made of a more consistent form of taxation of all forms of income such as interest, dividends and capital gains.
  • The long awaited dividends tax is to take effect on 1 April 2012. Certain technical areas are still under consideration and outstanding issues include:
    • the treatment of inbound foreign dividends; and
    • the treatment of foreign owned South African branches.
  • So called "dividend schemes" are to be tackled by treating the dividends as ordinary revenue. The type of schemes mentioned include certain dividend cessions, dividends from shares in which the taxpayer has no meaningful economic risk and arrangements making use of preference shares paying dividends which are indirectly generated from interest bearing debt.
  • Relief is to be provided for debt cancellation in respect of insolvent debtors.
  • The venture capital company provisions have been poorly received and will be reviewed.
  • Islamic finance products which were the subject of comprehensive legislation last year will receive further attention.
  • Government is to consider expanding incentives for labour intensive projects in Industrial Development Zones.
  • Several tax policy research projects are underway including:
    • taxation of financial derivatives;
    • taxation of long term insurers;
    • income tax credit for developers of affordable housing.
  • An area of significant concern caused by a recent tax case involves the tax treatment of the transfer of contingent liabilities in a business sale. The case in issue gave rise to a denial of certain deductions with a seemingly inequitable result. It is proposed that this issue is to be addressed. In the case of taxable asset acquisitions rules will be established to avoid double taxation or double deductions whilst in tax rollover transactions it is proposed that contingent liabilities be completely transferred from seller to buyer. We welcome the attention of the National Treasury to this issue.
  • Changes are proposed with respect to interest calculations for indefinite or indeterminable repayment dates. The proposal is that a special calculation be used to determine the yield without reference to a fixed date. It is also proposed that sale of debt instruments before maturity is to be treated as ordinary revenue.
  • Film incentives have apparently been abused and in future will be transformed into a form of incentive that encourages profit rather than excess deductions.
  • Income tax relief for international shipping is under consideration. A working group will be formed to focus on this issue and may lead to tax relief.

3. Green Taxes

  • Last year a carbon tax discussion document was published for comment. The design features of a proposed tax and the schedule for its introduction will be announced in the 2012 budget.
  • The levy applied to electricity generated from non-renewable and nuclear energy sources is to be increased. Apparently this should have no impact on electricity tariffs, having already been taken into account.

4. Estate Duty

  • The last few years has seen legislative tinkering with estate duty, measures to curb alleged or perceived avoidance and also an acknowledgement that the tax is problematic for various reasons including a potential double tax effect when combined with CGT. It was anticipated that a substantive announcement would be made regarding the future of this tax but the only mention has been that its effectiveness is being reviewed.

5. Share Incentive Schemes

  • It was recognised that the area of tax continually gives rise to tax issues because of the variety of share schemes and sizeable amounts involved. Two specific issues have been identified by the Minister namely:
    • the application of the skills development levy or the UIF contributions in respect of ex-employees – the intention being to scrap these for such category;
    • the treatment of employer share trusts to the extent that they give rise to unintended double taxation or allow for the conversion of "disguised salary" into tax free dividends.

6. Cross-border tax related changes

  • Headquarter company regime
    • During 2010, the headquarter company regime was introduced in terms of which qualifying entities could rely on certain tax relief. These measures were intended to encourage the development of regional investment banks and holding companies in South Africa and in particular to encourage the use of South Africa as a gateway to Africa. However, current rules could lead to double taxation and concerns have also been raised about manner of imposition of residence based taxation. These concerns will be reviewed.
  • Controlled foreign company legislation
    • The main purpose of controlled foreign company ("CFC") rules is to prevent South African residents from shifting passive income offshore. It is stated that some of these provisions are overly complex and can interfere with normal business conduct, whilst others create unintended loopholes. Amendments will be made to focus the rules whilst still retaining the purpose.
    • It has been acknowledged that the restructure by South African multinationals of their offshore operations often gives rise to immediate tax, even where the restructured offshore entities remain wholly under the South African group. An example is where CFC's, are merged in terms of foreign corporate laws. It is proposed that tax relief be provided in these circumstances.
  • Offshore cell companies
    • It is proposed that offshore cells of cell companies be taxed as multiple investment entities. This will trigger imputed income for each party controlling each offshore cell.
  • Withholding tax on interest
    • During 2010, legislation governing the 10% withholding tax on cross-border interest payable by residents to foreign persons was introduced. This new tax will become effective from 1 January 2013.
  • Double tax agreements - co-ordination of similar taxes
    • Double tax agreements apply to income tax and similar taxes. It is acknowledged that the scope of the term "similar taxes" is an issue, especially when different double tax agreements have different lists of similar taxes. Amendments will be introduced to list all similar taxes (including the impending dividends tax and interest withholding tax) as explicitly eligible for tax treaty relief.
  • Company-structured management investment funds
    • Mutual and private equity funds often use South African management to channel the funds. The use of South African management may trigger significant additional South African tax, even though the investment funds have a foreign origin and destination. Certain tax changes during 2010 sought to alleviate issues for partnership and conduit entities, but do not cater for instances where offshore intermediary companies are used. It is proposed that such companies obtain relief from the "effective management" test to remove the negative tax consequences associated with South African management.

7. Indirect Taxes

  • Securities transfer tax
    • No changes are proposed to securities transfer tax.
  • Transfer duty
    • The transfer duty exemption threshold is increased from R500 000 to R600 000.
    • The following rates will apply:
      • Value between R600 000 and R1million - 3%
      • Value between R1 million and R1.5 million – R12 000 plus 5% of the value over R1 million
      • Value over R1.5 million – R37 000 plus 8% of the value over R1.5 million
    • The new rates apply to all purchase agreements concluded on or after 23 February 2011
  • Fuel levies
    • The General Fuel Levy on petrol and diesel will increase from 6 April 2011 by 10 cents per litre. The Road Accident Fund Levy will be increased by 8 cents per litre, also with effect from 6 April 2010.
  • VAT
    • The VAT rate remains unchanged at 14%
    • Other proposed VAT amendments that are under consideration include:
      • the notional input tax deduction on property purchased from non-vendors will be delinked from the transfer duty which means that the notional input tax deduction will be equal to the tax fraction (14/114) of the lower of the selling price, the open market value, the municipal value or the VAT inclusive purchase price plus improvements incurred by the seller.
      • the VAT and customs rules with regard to the temporary importation of goods will be synchronised;
      • a minimum exemption for the importation of services of R500 will be introduced and the minimum threshold to import goods exempt from VAT will be increased to R500;
      • clarification that the value on which import VAT is payable in respect of goods enetere for home consumption where the goods were sold while in a storage warehouse, is the actual sales value;
      • retroactive apportionment method changes will only be allowed for periods within current open years of income tax assessment;
      • input tax regarding rebate coupons issued by manufacturers will only be available for non-coupon consideration actually incurred by the customer;
      • month-end cut-off periods may not be changed more than once in a 12-month period.

8. Customs and excise issues

  • Ad valorem duties
    • The ad valorem duty on passengers vehicles will increase from 20% to 25% from 1 April 2011 for vehicles over R900 000.
    • Ad valorem duty on monitors will be introduced at a flat rate of 7% from 1 April 2011
  • Excise duty rates
    • The following rates of excise duty have been amended with effect from 23 February 2011:
      • Malt beer - increased by 6.4 cents per 340ml can
      • Wine – increase by 13.5 cents per bottle
      • Spirits - increased by R2.86 per bottle
      • Cigarettes - increased by 80 cents per packet of 2

9. Personal income and employees tax

  • Tax Rates
    • Expected annual adjustments have been proposed, most notably is the introduction of the third rebate of R2 000 per year for taxpayers who are 75 years and older.
    • Tax free interest income annual threshold will increase from R22 300 to R22 800 for individuals below 65 years and from R32 000 to R33 000 for individuals 65 years and over.
    • Foreign income threshold will remain at R3 700.
  • National Health Insurance
    • Further comments are being made about the introduction of the National Health Insurance ("NHI") which is intended to be phased in over a period of 14 years. Preliminary indications are that the NHI will be funded by the phasing in of payroll tax (paid by the employer), an increase in the VAT rate and a surcharge on individuals' taxable income as funding options. The feasibility and practicality of co-payments or user charges will also be explored. Further announcements will be made in the 2012 budget.
  • Savings
    • It is proposed that Government will explore the introduction in two incentivised savings schemes, one for housing (deposit for first time home owners) and one for higher education as an alternative to tax free interest income thresholds. The possibility of a more consistent tax treatment of all forms of income from capital such as interest, dividends and capital gains will also be considered.
  • Social security and retirement reforms: Contribution to retirement funds
    • Currently, employers' contributions to retirement funds on behalf of employees are not included in the employees' taxable income. From 1 March 2012:
      • An employer's contribution will be deemed to be a taxable fringe benefit and individuals will be allowed to deduct up to 22.5% of their taxable income for contributions to pension, provident and retirement annuity funds.
      • Two thresholds will be established – a minimum annual deduction of R12 000 and an annual maximum of R200 000.
    • To protect worker's savings, Government proposes to subject lump sum withdrawals from provident funds to the 1-third limit currently applying to pension and retirement annuities.
  • Medical aid
    • Inflation related increases will be made to the monthly threshold for tax deductible contributions to medical aid schemes. From 1 March 2012, these deductions will be converted into tax credits. A discussion document on these credits will be published by the end of March 2011.
  • Compensation from the Road Accident Fund
    • Compensation, whether paid as lump sum payments or annuities, will be exempt from income tax.
  • Taxation of lump sum benefits upon retirement
    • From 1 March 2011, the tax free lump sum benefit upon retirement will increase from R300 000 to R315 000.
  • Capital Gains Tax exclusions
    • The following exclusions will be increased on 1 March 2011:
      • For individuals and special trusts from R17 500 to R20 000 annually.
      • On death from R120 000 to R200 000.
      • On disposal of a small business when a person is over 55 years old from R750 000 to R900 000.
  • Youth employment subsidy
    • It is proposed that a youth employment subsidy in the form of a tax credit will be introduced. It will be administered through the payroll system.
  • Tax audits and non-compliance
    • SARS will make more use of data provided by credit bureaus to build detailed taxpayer profiles and identify non-compliance. SARS is also extending its cooperation with other tax administrations in the areas of information exchange, skills transfer and audit.
  • Withholding tax on gambling winnings.
    • From 1 April 2012, all winnings above R25 000, including payouts from the National Lottery, will be subject to a final 15% withholding tax.
  • Voluntary disclosure programme
    • To date, more than 1 200 applicants have come forward under the programme.

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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