Enoch Godongwana, Minister of Finance delivered his budget speech on 21 February, and his opening remark reaffirmed what all South Africans are so acutely aware of – South Africa must grow faster and create more job opportunities. This can be achieved by allowing for bulk investments in the private sector, and of course tax structures that are conducive to such bulk investments.
Personal income tax rates:
A key aspect of the budget speech was that personal income tax brackets and the primary, secondary and tertiary rebates will not increase in order to account for inflation.
However, this non-adjustment of the rates may render taxpayers, with salary increases in 2024/2025 subject to a tax bracket creep.
| 2024/25 | 2023/24 | ||
| Taxable Income (R) | Rates of tax | Taxable Income (R) | Rates of tax |
| 0 – 237 100 | 18% of each R1 | 0 – 237 100 | 18% of each R1 |
| 237 101 – 370 500 | R42 678 + 26% of the amount above R237 100 | 237 101 – 370 500 | R42 678 + 26% of the amount above R237 100 |
| 370 501 – 512 800 | R77 362 + 31% of the amount above R370 500 | 370 501 – 512 800 | R77 362 + 31% of the amount above R370 500 |
| 512 801 – 673 000 | R121 475 + 36% of the amount above R512 800 | 512 801 – 673 000 | R121 475 + 36% of the amount above R512 800 |
| 673 001 – 857 900 | R179 147 + 39% of the amount above R673 000 | 673 001 – 857 900 | R179 147 + 39% of the amount above R673 000 |
| 857 901 – 1 817 000 | R251 258 + 41% of the amount above R857 900 | 857 901 – 1 817 000 | R251 258 + 41% of the amount above R857 900 |
| 1 817 001 and above | R644 489 + 45% of the amount above R1 817 000 | 1 817 001 and above | R644 489 + 45% of the amount above R1 817 000 |
TABLE 1: PERSONAL INCOME TAX RATES
Two‐pot retirement reforms:
Another aspect highlighted by the Minister of Finance was that, effective from 1 September 2024, individuals' contributions to retirement funds will be split – this is referred to as the "two-pot retirement fund system".
One third of contributions will be earmarked as a "savings component" and another two-thirds will constitute the "retirement component". This will allow for an individual to access and withdraw a portion of his or her retirement funds from the so-called "savings component", pre-retirement date. Contributions to the retirement funds will still be deductible from normal tax and growth in the fund will remain tax-free.
| 2024/25 | |
| Taxable Income (R) | Rate of tax (R) |
| 0 – 27 500 | 0% of taxable income |
| 27 501 – 726 000 | 18% of taxable income above 27 500 |
| 726 001 – 1 089 000 | 125 730 + 27% of taxable income above 726 000 |
| 1 089 001 and above | 223 740 + 36% of taxable income above 1 089 000 |
TABLE 2: RETIREMENT FUND LUMP SUM WITHDRAWAL BENEFITS
| 2024/25 | |
| Taxable Income (R) | Rate of tax (R) |
| 0 – 550 000 | 0% of taxable income |
| 550 001 – 770 000 | 18% of taxable income above 550 000 |
| 770 001 – 1 155 000 | 39 600 + 27% of taxable income above 770 000 |
| 1 155 001 and above | 143 550 + 36% of taxable income above 1 155 000 |
TABLE 3: RETIREMENT FUND LUMP SUM RETIREMENT BENEFITS OR SEVERANCE
BENEFITS
Employees:
As it currently stands, an employee may receive remuneration and other forms of remuneration (for example, paid maternity or sick leave benefits, or retention bonuses) which subsequently have to be repaid to the employer, often because of contractual breach or termination of employment. Section 11(nA) of the Income Tax Act, Act 58 of 1962 (hereinafter ("ITA") allows an employee to claim a deduction in those instances where the employee was forced to repay an amount to an employer.
However, the employer is not allowed to take such a refund into account for employee tax purposes. The Budget Speech alluded to the fact that amendments in the context of employment refunds received or accrued during the same tax year.
Drinkers, smokers, and vapers:
- Increase of between 6.7 and 7.2% in excise duties on alcoholic beverages.
- Increase of between 4.7 and 8.2% in excise duties on tobacco products.
- Electrical and hydrogenpowered vehicle tax incentive to be introduced for manufacturers in 2026
- Increase of the excise duty on electronic nicotine and non-nicotine delivery systems, known as vapes, to R3.04 per millilitre.
Cross-border loans to non-resident trusts:
Section 7C of the Income Tax Act, 1962, is a specific anti-avoidance provision that limits the ability of natural persons to transfer wealth on a tax-free basis to trusts through the use of low-interest or interest-free loans. The concept of a low interest loan is benchmarked with reference to the "official rate of interest" (being the prevailing repurchase rate of the currency of denomination of the loan plus 100 basis points).
The effect of section 7C is, inter alia, to deem the natural person to have donated to the trust on the last day of the trust's year of assessment in an amount equal to the interest forgone by the natural person during the relevant year of assessment as a result of the lender not charging interest on the loan at the official rate of interest.
Anti-avoidance provisions and third-party backed shares
The term 'third – party backed share' and its related concepts are defined in s 8EA(1) read with s 8EA(3) of ITA. It means any preference share or equity instrument in respect of which the holder has an exercisable enforcement right (whether fixed or contingent) to require any person other than the issuer to acquire the share or equity instrument, or to make payment in respect of the share or equity instrument in terms of a guarantee, indemnity or similar arrangement, or to procure, facilitate or assist with the foregoing.
Any dividend or foreign dividend received by or accrued to a person in respect of a share or equity instrument, which is received or accrued during any year of assessment in which that share, at any time during that year, constitutes a ' third – party backed share' (as elaborately defined),is deemed to be an amount of income received by or accrued to that person (but only in respect of that person).
Third-party backed preference shares are deemed a debt for income tax purposes as any dividend on such shares is deprived of its tax exemption.
There are exceptions to this provision. The Explanatory Memorandum on the Taxation Laws Amendment Bill, 2012 explained that shares guaranteed by third parties may avoid the anti-avoidance rule if the consideration for the issue of the shares is applied directly or indirectly for the purpose of acquiring, for example, equity shares in an operating company An operating company may include a listed company.
A further requirement to the exemption is that the equity shares in the operating company need to be held by the person that acquired the shares at the time of the receipt or accrual of any dividend on the preference shares.
As of current, in the event where the funds from the disposal of such shares are used to declare and pay a dividend on the preference shares the dividends will be taxed as income. The proposal is thus for a legislative amendment to allow the disposal proceeds to be utilised as any dividends, foreign dividends or interest in respect of the redemption of those preference shares.
Intra-group transactions – the de-grouping charge:
Section 45 of the ITA provides rollover relief for the tax neutral transfer of assets between companies forming part of the same group of companies. When referring to a group of companies for purposes of section 45 of the ITA, it means two or more companies in which one company (referred to as the "controlling group company") directly or indirectly holds shares in at least one other company (referred to as the "controlled group company"), to the extent that: "...at least 70% of the equity shares in each controlled group company are directly held by the controlling group company, one or more other controlled group companies or any combination thereof; and the controlling group company directly holds at least 70% of the equity shares in at least one controlled group company...".
However, in terms of section 45(3A) of ITA, if the transferee company cease to form part of the group of companies within 6 years from the implementation of the intra-group transaction, the tax roll-over relief is forfeited (i.e. the so called "de-grouping charge").
Ultimately, the de-grouping charge can find application even in the event where there is a change of shareholding in a controlling group company (despite the fact that the transferee- and transferor company still forms part of the group). It is proposed that the legislator restrict the implementation of the de-grouping charge, exempting cases where the transferee and transferor companies involved in the original transaction remain within the same corporate group.
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.
