Finance Minister Pravin Gordhan delivered his 2014 Budget Speech on 26 February 2014. KPMG gives a summary of the most notable tax proposals.
While we did not anticipate major Tax changes in the current year, the complexity and challenges of the existing Tax environment means that it is time for Tax to be a board room level topic again. KPMG is committed to assisting you navigate these turbulent waters and we will be sharing our thought leadership and new service offerings in this regard over the coming weeks and months.
General corporate tax proposals
- Limitation of interest deductions for reorganisations and acquisitions: In order to address certain anomalies relating to interest deduction limitations on reorganisations and acquisitions, it is proposed that such limitations be relaxed by ignoring assessed losses brought forward from prior years. Further, interest deductibility should increase when the average repo rate exceeds 8% (instead of the 10% currently legislated) and by taking into account the level of adjusted taxable income in the year prior to the transaction date.
- Dividends tax refinements: New provisions are to be introduced to address an anomaly concerning the operation of the refund mechanism for non-cash dividends.
- Research and development (R&D) tax incentives: Further changes to the R&D tax incentive legislation have been proposed, relating to the extent to which activities in respect of clinical trials may qualify as eligible R&D. In addition, further amendments to address unintended consequences relating to companies that fund R&D activities carried out by another party, can be expected. These changes will be retrospective from 1 January 2014.
- Debt reduction rules: Where debt is partially or fully discharged through the implementation of a business rescue plan, a tax charge may be triggered in terms of the Income tax Act. It is proposed that tax relief measures be considered for companies undergoing business rescue and other forms of debt compromise in order to ease their burden.
- Venture capital company regime: Government is proposing certain relaxations to the venture capital company regime in order to encourage uptake thereof. Such relaxations/amendments may include making deductions permanent if investments are held for a certain period of time, the transferability of tax benefits when investors dispose of their holdings, the increasing of the total asset limit for qualifying investee companies and the waiver of capital gains tax in respect of the disposal of assets.
- Public-private partnerships: The Income Tax Act requires that land be owned in order to claim capital allowances on qualifying improvements. When Government enters into public-private partnerships, it makes land available to the private party. The inability to claim a capital allowance on improvements to the land because the land is not owned, affects the financial viability of the project. It is proposed that the merits of allowing deductions where the taxpayer is not the owner of the land will be considered.
- REITs (real estate investment trusts): The definition of a "property company", used in the context of REITs, will refer to annual financial statements prepared in accordance with International Financial Reporting Standards, instead of the Companies Act, to take foreign property companies into account.
- Contributed tax capital roll-over for deferred shares: It is proposed that contributed tax capital roll-overs be extended to include instances where deferred shares are converted to ordinary shares.
Third-party backed shares: The current
exceptions to the anti-avoidance rule only include the direct
investment in preference shares used to fund the acquisition of
equity shares in operating companies. The proposed refinement to
the exceptions to the anti-avoidance rule will include:
- the refinancing of debt that were initially used to fund equity share acquisitions in operating companies;
- the inclusion of an 'exploration company' in the definition of an 'operating company'; and
- pledges provided to the funder (i.e. the preference share holder) is limited to equity shares held by the acquiring company's (i.e. the preference share issuer) equity shareholders directly or indirectly in the underlying operating company.
Industry specific corporate tax proposals – financial services
- Long-term insurance: The reform of the income tax regime was announced in the 2013 Budget, particular with regard to risk business no longer being taxed in the policyholder funds, but rather in the corporate fund. No legislation was tabled to give effect to this announcement in 2013, and this specific reform was reiterated in the 2014 Budget. In addition, the taxation rate of 30% being applied irrespective of the income level of policyholders in the individual policyholder fund, is also being reviewed.
- Foreign reinsurance: Reinsurance benefits are not taxed in South Africa because reinsurance premiums and claims are disregarded in determining the tax liability of a long-term insurance company. Government proposes that net returns from reinsurance be included in the tax calculation of the South African long-term insurer, as policyholders of the South African long-term insurer often elects the underlying offshore investments to which the growth on their policies are linked and the returns earned on the investments held by the reinsurer are paid as reinsurance benefits (and are currently not taxed in South Africa).
- Instruments: It is proposed that certain policies issued by insurers, such as endowment, smooth or stable bonus products that have a guaranteed value for policyholders be excluded from the scope of the provisions of the Income Tax Act which deal with the incurral and accrual of interest on instruments.
- Top-up retail savings bond: A new top-up retail savings bonds will be introduced by National Treasury this year, and a Shariah compliant version (Sukuk) is also being explored.
Industry specific corporate tax proposals – oil and gas industry
- Oil and gas incentives: An oil and gas company holding an exploration or production right, and that has entered into fiscal stability agreement with the government, is currently allowed to assign all of its fiscal stability rights to another oil and gas company. However, it was uncertain whether that oil and gas company could assign only a portion of its fiscal stability rights if it wanted to enter into a joint venture with another oil and gas company. To alleviate the uncertainty, it has been proposed that part assignments of fiscal stability rights would be allowed.
Industry specific corporate tax proposals – fishing industry
- Fishing vessels registered in South Africa: It is proposed that the allowance for repairs to ships, which has inadvertently been deleted from the Income Tax Act, be reinstated from the date of its repeal (12 December 2013).
Cross-border tax proposals
- Secondary adjustment for transfer pricing: It is proposed that the so-called "secondary adjustment" in the form of a deemed loan be removed. Transfer pricing legislation will be amended to deem the secondary adjustment to be a dividend or capital contribution, depending on the facts and circumstances, and no longer a loan. This is similar to the previous treatment of transfer pricing adjustments.
- Foreign dividends of controlled foreign companies owned by individuals: If a controlled foreign company in which a resident individual holds shares receives a taxable foreign dividend, the effective tax rate on the dividend is 21%. It is proposed that the ratio be changed to reflect the fact that an individual, not a company, is taxed with reference to the foreign dividend.
- High tax exemption for controlled foreign companies: For a South African resident company that owns many foreign companies, it is cumbersome to establish whether the high foreign tax exemption applies if most of the income of the controlled foreign companies is attributable to a foreign business establishment. It is proposed that an option be provided to deem the net income of a controlled foreign company to be nil if either the high foreign tax or the foreign business establishment test, when applied to aggregate taxable amounts, is met.
- Currency of reacquisition of assets of individuals ceasing to be resident: Where an individual holding shares in a property company that owns property in South Africa ceases to be a resident, there is a deemed disposal and reacquisition of the shares. It is proposed that the currency in which the shares are reacquired is to be clarified.
- The Income Tax Act provides a tax incentive for donations to qualifying public benefit organisations, including philanthropic foundations. These foundations aim to build up and maintain sufficient capital to provide financial support to worthy causes carried out by public benefit organisations. They have been required to distribute up to 75% of the money they generate within a year, unless they can demonstrate that the funds accumulated will be used for specific qualifying purposes. Because this requirement has been affecting the sustainability of these foundations, it is proposed to relax this requirement while ensuring that foundations distribute accumulated capital to worthy causes within a reasonable period.
Small and medium enterprise development
- It is proposed that the turnover tax regime for micro business should be retained, but that the requirements should be simplified, that turnover up to R335 000 should not be taxed and that the maximum tax rate should be reduced from 6% to 5%. Other suggestions include doing away with the requirement for businesses to opt in to the regime for three years and requiring annual, rather than bi-annual tax returns. It is further recommended that the reduced tax regime for small business corporations be replaced with an annual refundable tax compliance rebate (subject to certain conditions).
- It is proposed that grants received by small and medium-sized enterprises should be tax exempt, regardless of the source of the funds.
- Acid mine drainage: Measures to address acid mine drainage, such as a potential environmental levy on the mining sector, will be explored in an attempt to compliment current efforts to address the serious environmental consequences of acid mine drainage.
- Climate change: As part of South Africa's commitment to reducing greenhouse gas emissions, the proposed carbon tax and incentives, such as the energy-efficiency tax incentive, will provide price signals to encourage the economy on a path of low-carbon growth over the long-term.
- Carbon Tax: The implementation of carbon tax is postponed to 2016, to allow for adequate time for consultation on draft legislation.
- Environmental conservation: The incentive for land owners to enter into an agreement with Government to declare land as a nature reserve or a national park will be streamlined, by proposing a straight-line deduction over a period of 25 years of the adjusted value of the land at the time of entering into the agreement.
Value-Added Tax proposals
- Going concerns: VAT legislation and Interpretation Note No 57 relating to the VAT treatment on the disposal of a going concern will be clarified. According to the Interpretation Note, the recipient must agree that at the effective date it will be a vendor. The legislation will be amended to remove the uncertainty regarding whether a person must be a vendor before the acquisition of the going concern.
- Documentation: 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 to substantiate the VAT treatment of cross-border transactions will be aligned with the modernised customs processes and procedures.
- Tax invoices, debit and credit notes: A supplier, being a registered vendor (the principal), is required to issue a tax invoice within 21 days of the date of the supply. This time limit will be extended to agents. The legislation will be similarly amended to set a time limit in which a credit or debit note must be issued.
- Agents: There has been uncertainty as to which documentation is acceptable as proof of payment to entitle a vendor to deduct input tax in respect of VAT paid on the importation of goods. Clarity will be provided in this regard.
- Contract prices: A supplier of goods or services is able to recover from the recipient an amount of VAT "imposed" on the supply after the agreement is concluded. The legislation will be amended to exclude suppliers who failed to register as VAT vendors.
- Bargaining councils: Goods and services provided by a bargaining council to its members, based on membership contributions, are exempt from VAT. This will be amended to include the supply of administration services for which the bargaining council receives a separate fee (the interest that it is entitled to in terms of the main collective agreement).
- Zero-rating of goods for agricultural, pastoral or other farming purposes: The VAT Act provides for zero-rating where a supply of goods is used or consumed for agricultural, pastoral or other farming purposes. This concession was intended to provide cash-flow relief to the agricultural sector. This zero-rating provision will be reviewed in consultation with relevant stakeholders for possible replacement with VAT at the standard rate, as a result of past abuse of the provision.
- Four-monthly VAT category: Government proposes to eliminate this category and to bring registered vendors under this category into the bi-monthly VAT system.
- VAT interest calculations: Interest is charged on late VAT payments for a period in excess of the actual number of days between the due date and the date of payment. It is proposed that the interest rules under the Tax Administration Act (excluding monthly compounding) be activated for this circumstance, ensuring that interest is imposed and paid on a fair basis.
Individuals, employment and savings
- Personal tax rebates: It is proposed that with effect from 1 March 2014, the following rebates will apply to individuals' tax liabilities: Primary rebate R12 726 (previously: R12 080); secondary rebate R7 110 (previously: R6 750) per individual 65 and over; tertiary rebate R2 367 (previously: R2 250) per individual 75 and over.
- Tax threshold: It is proposed that with effect from 1 March 2014, income below which individuals are not subject to income tax: R70 700 (previously: R67 111) per individual under 65; R110 200 (previously: R104 611) per individual 65 to 74; R123 350 (previously: R117 111) per individual 75 and over.
- 40% marginal rate of tax: The marginal rate will apply to individuals with annual income of R673 101 (previously: R638 600) and above.
- Medical tax credits: It is proposed that from 1 March 2014 medical credits will be increased from R242 to R257 for the first two beneficiaries and from R162 to R172 for each additional beneficiary.
- Tax-preferred savings accounts: Banks, asset managers, life insurers and brokerages will be able to offer individual savers a tax-preferred saving account in order to encourage household savings. An initial annual contribution limit of R30 000 will apply, which will be increased annually in line with inflation, with a current maximum lifetime contribution limit of R500 000.
- Retirement savings reforms: A paper summarising changes to date and future anticipated reforms will soon be released. With effect from March 2015, employer contributions to retirements funds will be deemed to be fringe benefits in the hands of the employees. The contributions will be tax-deductible by individuals (to a certain limit). Further, the timing of the accrual of retirement fund benefits will be reviewed to provide certainty and ease practical application.
- Retirement lump sum taxation: The brackets of the pre-retirement lump sum and retirement lump sum tables have been adjusted for inflation over the past several years. A pre-retirement withdrawal will be tax-free up to R25 000 (previously: R22 500). The first R500 000 (previously R315 000) of a retirement lump sum will be tax-free.
- Company car fringe benefit: The taxable fringe benefit will be based on the actual retail market value of motor vehicles in all cases, which will be phased in over four years. A more reasonable treatment of fuel, maintenance, insurance and licence costs which are borne by the employees who have company cars will also be introduced.
- Employment tax incentive: Government introduced the employment tax incentive on 1 January 2014. In the fourth quarter of 2014, SARS will introduce a mechanism for reimbursement of companies in cases where the employment tax incentive exceeds the PAYE liability.
- Personal insurance policies: Legislation is already in effect that from 1 March 2015 the premiums for life and disability insurance will not be tax-deductible, with the concomitant proceeds on these policies being treated as tax-free. Additional legislation will be introduced to clarify the position that premiums paid on all personal insurance policies will not be tax-deductible, and all personal insurance policy proceeds will be tax-free.
- Key-person policies in businesses: Under currently reformed legislation, the taxpayer can either elect to deduct premiums on key-person policies taken out on key employees in the business, or the default will apply with the premiums rendered non-deductible and any consequent proceeds paid on such policies being treated as non-taxable. To be able to elect to deduct premiums, the policy must insure the employer against the loss of the key person due to death, disablement or severe illness. The legislation will be tightened up to confirm that contingent losses or a policy cession will not qualify for election. The policy must insure the employer for a loss of the employee through death, disablement or severe illness.
- Residential accommodation fringe benefit: The fringe benefit for residential accommodation provided by an employer is determined using a formula, incorporating variables such as the employee's remuneration and the period of use. Frequently, the actual cost to the employer of providing the accommodation is less than the value calculated by the formula. It is proposed that where an employer leases residential accommodation from an unconnected third-party, the taxable benefit to the employee should be the cost incurred by the employer in providing the residential accommodation. Furthermore, currently, if a number of employees share the same residential accommodation, there is no apportionment on the taxable benefit of the residential accommodation. Each employee is taxed as if he/she were the only employee occupying the residential accommodation. It is proposed that a form of apportionment should be considered.
- Cross-border retirement saving: South African residents working abroad and foreign residents working in South Africa often contribute to local and foreign pension funds. In light of the overall retirement reform, these situations have to be re-considered. It is proposed that the review will take place over the next two years with extensive consultation.
Customs & excise duties
- Excise Duties of alcohol and tobacco (sin taxes): The excise duties on alcoholic beverages are proposed to increase by between 6.2% and 12% in 2014. The specific excise duty rate for traditional African beer will remain unchanged. The excise duties on tobacco products are proposed to increase by between 2.5% and 9%.
- Alcoholic beverages tariff classification for excise duty purposes: 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 by the liquor manufacturer in order to obtain certainty on the appropriate tariff classification and excise duty applicable to the product.
- Protection of trade information: It is proposed that the Customs and Excise Act be amended to provide for the protection of the merchandise trade information received by SARS from travelers and traders.
Tax policy research projects
The following items are on the National Treasury's research agenda over the next two fiscal years, with some research already started:
- A study of effective tax rates for companies in different sectors, including a review of the effectiveness of some tax incentives;
- A review of the VAT zero-rating provision for housing subsidies to eliminate practical anomalies. VAT standard-rating of these grants is under consideration, with an equal increase in the value of the grant;
- A review of how educational services and public transport are treated for VAT purposes;
- A review of the sustainability of the local government fiscal framework; and
- A review of the taxation of cooperatives.
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.