South African national budget 2012

22 February 2012

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Introduction

The Budget proposals announced by Minister Gordhan reflect the themes foreshadowed in the mid-term Budget speech and the State of the Nation address. It is no surprise, therefore, to see a policy of investment in infrastructure and upliftment of the population through education, health and social assistance.

However, reduced revenue collections as a result of the slower economic environment, not only here but in most of South Africa’s main trading partners, have meant that the Minister has had to look elsewhere for the necessary additional revenues. The two most visible increases are in capital gains tax and in the new dividend withholding tax.

So, as was the case last year, the taxpayer will provide the funding for Government’s key objectives.

Main tax proposals

The main tax proposals for the 2012-13 fiscal year are:

  • personal income tax relief of R9.5 billion, predominantly to counter the effects of inflation.;
  • a proposal to invigorate household savings, by 2014;
  • a clarification of the anticipated carbon tax;
  • an increase in the dividends withholding tax from the expected 10% to 15%, and confirmation of 1 April 2012 as its inception date;
  • an increase in the taxable proportion of capital gains, mitigated by a small increase in the exclusion thresholds;
  • an increase in the tax-free threshold for small business corporations, and some administrative relief for micro businesses;
  • a planned revision of the tax regime applicable to insurers;
  • the proposed introduction of new corporate tax measures, mainly with an anti-avoidance theme;
  • firm proposals on a national tax on gambling from April 2013, applied at the provincial gambling and national lottery level; and
  • the inevitable sin tax increases.
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Important rate adjustments

Withholding taxes

The Dividend Withholding Tax will come into effect on 1 April 2012, replacing the secondary tax on companies (STC) regime. The proposed rate, universally expected to be 10% in line with its STC predecessor and in terms of numerous announcements, will now be levied at a rate4 of 15%.

The increase in the dividend tax rate will include the following collateral adjustments –

  • reduction of the 33% rate for foreign companies reduced to the corporate 28% rate;
  • reduction of the 33% rate for personal service providers to 28%;
  • removal of the higher gold formula rate;
  • removal of the proposed passive holding company regime; and
  • reduction of the period during which unused STC credits may be used in the dividends tax regime from five years to three.

The withholding tax on royalties and withholding tax on interest income applicable to non-residents have both been increased to a rate of 15 per cent.  The interest withholding tax will be introduced in 2013 as anticipated.

Capital gains tax

The net effect of this proposal is that there will be an increase in the effective rate of CGT from –

  • 10% to 13.3% for natural persons and special trusts; and
  • 14% to 18.6% for companies; and
  • 20% to 26.7% for trusts.

The Capital gains tax rate has been unaltered for the past ten years.  The CGT rate has historically been calculated as a 25% inclusion of gain in taxable income in the case of taxpayers who are natural persons, special trusts, deceased estates or insolvent estates, and 50% for other taxpayers. The inclusion rates will increase to 33.3% and 66.6% respectively, with effect from 1 March 2012.

The increase in capital gains tax rates will undoubtedly have an impact on middle income earners and, in order to mitigate this impact, the exemption thresholds will be increased as outlined below:

Proposed capital gains exclusions, 2011/12 – 2012/13

Description

Current thresholds
2011/12

Proposed thresholds
2012/13

Annual exclusion for individuals and special trusts

R20 000

R30 000

Exclusion on death

R200 000

R300 000

Exclusion in respect of disposal of primary residence (based on amount of capital gain or loss on disposal)

R1.5 million

R2 million

Maximum market value of all assets allowed within definition of small business on disposal when person over 55

R5 million

R10 million

Exclusion amount on disposal of small business when person over 55

R900 000

R1.5 million

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Corporate Tax Proposals

Limiting excessive debt in businesses

The legislative focus on debt versus equity in funding arrangements continues.  Government will enact a revised set of reclassification rules deeming certain debt to be equivalent to shares. In 2013 Government will also consider an “across-the-board” percentage ceiling on interest deductions, relative to earnings before interest and depreciation, to limit excessive debt financing.

Deductibility of interest on loans raised to acquire shares

South Africa does not permit the deduction of interest on funds borrowed to acquire shares.  This has led to the use of indirect acquisition techniques employing the intra-group relief provisions in ways that led to the temporary suspension of this relief in 2011.  Where debt is used to acquire a direct equity interest of at least 70% in a company, interest on the loan funding raised will be deductible.

Property loan stock companies and property unit trusts

The use by property loan stock companies of dual linked units consisting of a debenture and a share, with a distribution in the form of interest, is to be eliminated so that other entities do not undertake the same structure to avoid tax by relying on excessive debt.  The treatment of property loan stock entities from a tax perspective will be placed on a par with property unit trusts.

Debt cancellations and restructurings

Given the potentially high number of distressed companies, it is proposed that a simplified regime will be created to alleviate the tax impact on the debtor when debt is unilaterally reduced or cancelled, without full consideration, and to eliminate adverse tax consequences when the debt relief merely restores the debtor to solvency.  At present, these activities lead to tax liability for the debtor.  Special rules will also be required to address the situation where creditors agree to convert their debt interest into an equity stake as partial compensation.

Company law reform and company restructurings

Various provisions, including the company reorganisation and other restructuring roll-over relief provisions will be reviewed to bring them into line with the provisions of the new Companies Act, 2008.  This is a welcome development, as we, and other commentators, have for some time been concerned about anomalies between the two Acts.

Mark-to-market taxation of financial instruments

The tax treatment of financial instruments on a mark-to-market basis has been considered for some time.  This tax treatment aligns with financial accounting.  It is proposed that a revision of the taxation of financial instruments and derivatives will be undertaken and, in certain circumstances, will bring the tax treatment in line with standards in terms of international financial reporting standards.

Securities Transfer Tax (STT)

STT is payable at the rate of 0.25% of the value of any shares purchased, whether the shares are listed or unlisted.  This tax is subject to certain exemptions, one of which is where a broker purchases shares for its own account and benefit.  With effect from 1 April 2013, the above exemption will fall away and the purchase of shares by a broker for its own benefit will be subject to STT, albeit at an appropriate lower rate to be announced.  Government is also investigating the possibility of bringing derivatives within the STT net.

Share block conversions to sectional title

The conversion of a share block company into a sectional title scheme has previously generated a host of tax problems.  It is proposed that conversions in the form of company liquidations, which is merely a change to direct interest from an indirect interest, will receive tax-free roll-over treatment.

Relief for small businesses

With effect from 1 March 2009 a turnover tax for micro businesses was introduced in terms of which small or micro businesses are taxed on a turnover basis at a very low rate.  Currently, a micro business does not pay tax on the first R150 000 of its turnover.  In order to improve cash flow for micro businesses they will now have an option of paying turnover tax, VAT and employees’ tax six monthly, with effect from 1 March 2012.

Small business corporations were previously taxed at a rate of 10% for a taxable income of up to R300 000.  As from 1 April 2012 the tax-free threshold for small business corporations will be increased to R63 556 resulting in a 7% tax rate being applicable to taxable income of up to R350 000.  In the case of taxable income above R350 000 the normal corporate tax rate of 28% will apply to that entity.

Review of tax system for insurers

The global insurance industry is undergoing reforms associated with solvency assessment and management projects. These rules will change the way insurers determine their reserves. There are several related tax issues:

  • In the case of short-term insurers, the ability to regulate the use of reserves, which are deductible for tax purposes and form the basis for tax deductions while providing a safety cushion for the insurers, have not been fully co-ordinated. In addition, the fiscus has had difficulties with captive insurers for years.
  • In the case of long-term insurers, the four funds system of taxation has long been in need of review for various reasons.

These concerns necessitate a comprehensive review of the tax system for insurers. The tax system for calculating short-term insurance reserves will be addressed in 2012, and that for long-term insurers in 2013.  A short paper on long-term insurers will be circulated for comment by mid-2012.

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International Tax

African investment

While South African residents have for some years been encouraged to invest in Africa and have been granted incentives, practical problems of management and investment have arisen.  Active South African management over controlled foreign subsidiaries may trigger dual-residence tax status, even though all day-to-day operational activities are being conducted abroad.  This has the effect of double tax, which will be addressed if the foreign country is roughly on a par with South African tax.

Foreign investment fund

Foreign investment funds often rely on active managers in South Africa for guidance regarding African fund assets.  The difficulty is that the activities of the local fund managers can result in the funds being treated as being effectively managed in South Africa, and hence being subject to tax on their worldwide income.  This serious disincentive is to be removed by providing for what is described as a legislative carve-out for foreign investment funds.

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Personal income tax

The proposed R9,5 billion relief for individuals is largely in the form of adjustment for the effects of inflation or “bracket creep”.

The tax relief for individuals is reflected below:

 

2011/12

 

2012/13

Taxable income (R)

Rates of tax

Taxable income (R)

Rates of tax

R0 – R150 000

18% of each R1

R0 – R160 000

18% of each R1

R150 001 – R235 000

R27 000 + 25% of the amount above R150 000

R160 001 – R250 000

R28 800 + 25% of the amount above R160 000

R235 001 – R325 000

R48 250 + 30% of the amount above R235 000

R250 001 – R346 000

R51 300 + 30% of the amount above R250 000

R325 001 – R455 000

R75 250 + 35% of the amount above R325 000

R346 001 – R484 000

R80 100 + 35% of the amount above R346 000

R455 001 – R580 000

R120 750 + 38% of the amount above R455 000

R484 001 – R617 000

R128 400 + 38% of the amount above R484 000

R580 001

R168 250 + 40% of the amount above R580 000

R617 001

R178 940 + 40% of the amount above R617 000

 

 

 

 

Rebates :

2011/12

Rebates :

2012/13

Primary

R10 755

Primary

R11 440

Secondary

R6 012

Secondary

R6 390

Third

R2 000

Third

R2 130

 

 

 

 

Tax threshold :

2011/12

Tax threshold :

2012/13

Below age 65

R59 750

Below age 65

R63 556

Age 65 and over

R93 150

Age 65 and over

R99 056

Age 75 and over

R104 261

Age 75 and over

R110 889

Medical deductions

As from 1 March 2012 a tax credit for contributions to medical schemes will be introduced.  Taxpayers 65 years and older and people with disabilities will be included in the second phase of this reform, which will be implemented in 2014.
In the first phase, income tax deductions for medical scheme contributions for taxpayers below 65 years will be converted into tax credits. A person without a disability can claim medical scheme contributions in excess of four times the total credits and out-of-pocket medical expenses combined, in excess of 7.5% of taxable income, as a deduction from taxable income.

Monthly tax credits will be R230 for each of the first two beneficiaries and R154 for each additional beneficiary. Further relaxations apply to taxpayers 65 years and older.

Employer contributions to medical schemes on behalf of ex-employees will be deemed to be taxable fringe benefits and such ex-employees will be able to claim the appropriate tax credits.

Household savings

To encourage greater voluntary savings among South Africans, the Government proposes to introduce tax-preferred savings and investment vehicles by April 2014.

Returns generated within these savings and investment vehicles (including interest, capital gains and dividends) and withdrawals will be tax exempt.  Aggregate annual contributions could be limited to R30 000 per year per taxpayer, with a lifetime limit of R500 000, to ensure that lower-income earners benefit.

Retirement reforms

The Government wishes to encourage South Africans to save for retirement.  To this end, a new dispensation will take effect from 1 March 2014.

Contributions by employees to pension, provident and retirement funds will be tax deductible by individual employees.  Individual taxpayer deductions will be set at 22.5 per cent for those below 45 years and 27.5 per cent, for those above 45 years of the higher of employment or taxable income.  Annual deductions will be limited to R250 000 and R300 000 for taxpayers below 45 years and above 45 years respectively.

Lump sum withdrawals upon retirement from pension and retirement annuity funds are restricted to a maximum of one-third of accumulated savings.

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Other taxes

Employee share schemes

Employee share schemes are used to motivate employees and to meet black economic empowerment objectives. Most schemes are based on the use of employee share trusts.  However, some schemes go beyond these simple incentive objectives and employ structures and practices, especially for executives, that go beyond the original intention and adopt or include a tax saving element. To address these concerns, it is proposed that the various types of employee share schemes will be reviewed to eliminate loopholes and possible double taxation.

Carbon tax

A modest carbon tax to be introduced on carbon dioxide emissions, at R120 per ton of CO2e is proposed to take effect during 2013/14.  This creates incentives for a change in behaviour and encourages the installation of cleaner-energy technologies, research and development of low-carbon options.  The proposed design includes –

  • a percentage-based rather than absolute emission threshold, below which a tax will not be payable;
  • a higher tax-free threshold for process emissions, with consideration given to the limitations of the cement, iron and steel, aluminium and glass sectors to mitigate emissions with an additional maximum off-set percentage of 5% to 10% until 2019/20; and
  • in addition it is proposed that energy projects such as wind, solar and hydro electric facilities will be eligible for an accelerated depreciation allowance on a 50:30:20 basis.

Electricity levy increases

Electricity levy generated from non-renewable sources will be increased by one cent per kilowatt hour to 3.5 cents per kilowatt hour.  The levy will replace the current funding mechanism that is incorporated into Eskom’s annual tariff application.

Increase in general fuel levy and Road Accident Fund levy

Government proposes to increase the general fuel levy and Road Accident Fund levy by 20 cents per litre and 8 cents per litre respectively with effect from 4 April 2012.

Revised gambling tax

A revised version of the gambling tax announced in last years’ budget was unveiled.  The tax, effective from 1 April 2013, will comprise a one percent national levy on a uniform provincial gambling tax base.  Similar rules will apply to the National Lottery.

National health insurance

NHI is to be phased in over a 14-year period beginning in 2012/13.  The first five years of NHI will focus on strengthening the public health system.

As the new system progresses, it will require funding over and above current budget allocations to public health, which will depend on the progress of institutional reforms and health service delivery capacity.  As with last year, funding options include an increase in the VAT rate, a payroll tax on employers, a surcharge on the taxable income of individuals, or a combination.

Excise duties on tobacco and alcohol

Excise duties on alcohol (beer, wine and spirits) will rise by between 6 and 20 per cent.  The increase will complement broader efforts to reduce alcohol abuse.  There is no change to the excise duty on traditional African beer and beer powder.  

The proposed adjustments to the excise duties on alcohol and tobacco are:

Product

Increase

340ml can of beer

9,23 cents

1 litre bottle of fortified wine

26 cents

750ml bottle of spirits

R6

cigarettes (per packet of 20)

58 cents

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Value Added Tax

Square Kilometre Array (SKA)

To assist South African in its bid to host the SKA, the world’s largest radio telescope, consideration is being given to provide for VAT refunds or for the consideration received by the SKA to be zero rated.

Financial services

The zero-rating of interest on loans to non-residents is to be eliminated.

Clarification of the date of liability for VAT registration

If a person becomes liable to register for VAT, that person must apply to SARS for registration as a vendor within 21 days.  No VAT can be charged on supplies until the supplier is registered as a vendor.  The liability date for VAT will be clarified to streamline the transition.

Instalment credit agreements

It is proposed that the provisions governing instalment credit agreements in the VAT Act be amended to accommodate products that are compliant with Shariah law.

Imported goods sold prior to entry for home consumption

Currently the recipient (buyer or vendor) is liable for two VAT charges on the same amount.  It is proposed that the VAT provisions relating to goods sold by foreign companies prior to entry for home consumption be reviewed.

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