A number of tax rate increases were announced in the 2017 Budget Review on 22 February 2017. These may impact directly on investment yields and re-investment base of investors. Some of these developments, in particular the gradual increase in the trust tax rates, may require investors to reconsider investment holding structures. A number of aspects up for review by the National Treasury in 2017 may significantly impact on structures that house wealth.

The South African National Treasury published its Budget Review for 2017 on 22 February 2017. This article provides a high level overview of some of the proposals that may directly impact on investors and structures that house investment wealth.

Tax rate related changes

For the 2017/18 tax year, a new personal tax bracket for taxable income above R1,5 million was introduced. Taxable income exceeding this threshold will be subject to tax in the hands of individuals at a rate of 45% (as opposed to 41% in the 2016/17 tax year). A corresponding increase in the trust tax rate to 45% was announced.

The consequential effect of these increases in tax rates is that the effective capital gains tax rates for the two classes of taxpayers increase to 18% for persons who fall into the top tax bracket and 36% for trusts. The gradual increase in the capital gains tax rate applicable to trusts may require investors to seriously re-consider trusts as an entity to house assets as any realisation of a gain on an asset would immediately reduce capital available for reinvestment significantly more than any other form of vehicle that could have held the investments. It is submitted that the nature of assets transferred to trusts as well as the investment holding structure within a trust may require a re-think.

In addition to the increase in income tax rates, the dividends tax rate increased from 15% to 20% with effect from 22 February 2017. When considering the impact of this rate change it is important to note that in broad terms the dividend withholding tax only becomes payable once company profits are distributed to natural persons, trusts or foreign shareholders. An exemption exists for dividends paid by one South African company to another. Foreign shareholders may be shielded from the rate increase as double tax treaties may limit the rate at which dividends tax may be imposed. Investors from non-treaty countries will however feel the impact.

All these rate related changes will impact directly on the after-tax yield but also on the funds available for re-investment, and therefore the investment base, of investors. It would be an opportune time to take a step back and review whether current investment holding structures still provide an optimal investment base in light of these changes.

Investment structure risks and opportunities

Investors and planners should note the following aspects, which impact on investments or wealth holding structures, that are up for review in 2017:

  • Further anti-avoidance rules will be introduced to curb schemes to circumvent the application of section 7C. The schemes targeted are those where interest-free or low interest loans are advanced by natural persons to companies owned by trusts as opposed to directly to trusts.
  • The treatment of foreign companies owned via offshore trusts as controlled foreign companies will be considered by the National Treasury.
  • The venture capital company regime that provides investors with a tax deduction for the investment made into small and medium-sized enterprises will made more accessible by removing impediments to investments.
I recently presented a full analysis of the 2017 Budget and 2016 tax law amendments, including section 7C, for the Institute of Accounting and Commerce (IAC) and 2020SA. You can request a recording of this session from 2020SA at: https://docs.google.com/forms/d/e/1FAIpQLSc2GT8t6KWm8tuiy3xE8Qe3jMGhxLjJaL9f-wQGUHzFP0yxKg/viewform

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.