NOTES ON THE TAX GUIDE

Transcription

1 NOTES ON THE TAX GUIDE This Booklet is an easy reference, pocket-sized overview of the South African Tax System incorporating announcements made in the Budget delivered on 26 February The Guide is designed to inform and assist clients in light of the number of tax changes proposed in the budget. IMPORTANT NOTE The information contained in this Booklet is a summary of current legislation and budget proposals. We suggest that you do not act solely on material contained in this Booklet as the nature of the information contained herein is general and may in certain circumstances be subject to misinterpretation. In addition, the budget proposals may not include all legislative adjustments which could be made in the near future. Consequently we recommend that our advice be sought when encountering these potentially problematic areas. While every care has been taken in the compilation of this Booklet, no responsibility of any nature whatsoever shall be accepted for any inaccuracies, errors, or omissions. 1

2 CONTENTS 2003/2004 BUDGET REVIEW 4-7 NORMAL RATES OF TAX 8-9 REBATES 9 TAX THRESHOLDS 9 DEDUCTIONS 10 EMPLOYEES TAX & S.I.T.E 11 PROVISIONAL TAX 12 PERSONAL SERVICE COMPANIES & TRUSTS 13 CASUAL / PART-TIME EMPLOYMENT FRINGE BENEFITS 16 Travelling Allowance Use of Company-owned Vehicle 17 Holiday Accommodation provided by Employer 17 Subsistence Allowance 18 Residential Accommodation supplied by the Employer 18 Low interest / Interest Free Loans 18 Other Benefits 19 Exemptions 19 CONTRIBUTIONS to PENSION, RETIREMENT ANNUITY & PROVIDENT FUNDS 19 2

3 CONTENTS continued CAPITAL GAINS TAX DONATIONS TAX 22 ESTATE DUTY 23 COMPANY TAX 24 Close Corporation 24 Trusts 24 SECONDARY TAX on COMPANIES 25 VALUE ADDED TAX 25 WEAR & TEAR ALLOWANCES CAPITAL INCENTIVE ALLOWANCES EXCHANGE CONTROL 31 FARMING TAX STAMP & TRANSFER DUTIES RETENTION OF RECORDS 38 PRIME BANK OVERDRAFT RATES 39 COMPARATIVE TAX RATES 40 3

4 2003/2004 BUDGET REVIEW PERSONAL INCOME TAX The primary rebate is raised to R5 400, increasing the income tax threshold by R3 000 to R The tax threshold for taxpayers age 65 and over is raised to R Brackets are adjusted to provide relief across the entire income spectrum The maximum marginal tax rate remains at 40% for taxable income in excess of R INTEREST AND DIVIDEND INCOME EXEMPTION It is recommended that the domestic interest and dividend income exemption be raised to R for taxpayers under the age of 65 and to R for taxpayers age 65 and over from 1 March TRANSFER DUTY Proposed rates of transfer duty Property value Rates of tax R0 - R % R R % on the value above R R and above R9 000 plus 8% on the value above R TAX ON RETIREMENT FUNDS It is proposed that the retirement fund tax rate should be reduced to 18% from the current level of 25%. ACCELERATED DEPRECIATION FOR URBAN DEVELOPMENT ZONES It is proposed that taxpayers investing in underutilised designated urban areas receive special depreciation allowances for investment undertaken for construction or refurbishment of buildings. Taxpayers 4

5 refurbishing a building within a zone will receive a 20 per cent straight-line depreciation allowance over a 5-year period. If taxpayers construct a new commercial or residential building within such a zone, they will receive a 17-year write-off period with a 20 per cent write-off in the first year and 5 per cent write-off thereafter. This benefit will be available to owners as users of the building or as lessors/financiers of these investments. EXTENSION OF ACCELERATED DEPRECIATION WINDOW PERIOD FOR MANUFACTURING The 4-year regime, introduced in the 2002/2003 budget, was limited to investments occurring on or before 28 February 2005, due to cost considerations. It is proposed that the 28 February 2005 sunset limitation be removed. COMPREHENSIVE BUSINESS ASSET REINVESTMENT RELIEF With a view to stimulating business reinvestment, comprehensive tax relief will be provided for ordinary income and capital gain when the sale proceeds of movable depreciable business assets are reinvested in other movable assets within an 18-month period. FOREIGN EXCHANGE AMNESTY AND ACCOMPANYING TAX TREATMENT Government is of the view that a joint foreign amnesty, in relation to both exchange controls and the Income Tax Act should be offered. The general principles of this amnesty are outlined below. All applications for relief must be filed from 1 May 2003 until 31 October 2003 A 5% Exchange Control one-time levy to the extent any foreign assets are repatriated back to South Africa; or A 10% Exchange Control one-time levy to the extent any foreign assets remain offshore In both cases a 0% levy will apply for all assets that can be held legally offshore under the normal Exchange Control limits Individuals filing for Exchange Control amnesty relief are released 5

6 from all civil penalties and criminal liabilities stemming from the illegal shift of funds offshore in contravention of Exchange Controls on or before 28 February RESEARCH AND DEVELOPMENT It is proposed that the regime for scientific expenditures be modernised in favour of a more accommodating approach to research and development. Among other changes, a 40/20/20/20% four-year write-off period for capital expenditure is proposed, consistent with manufacturing sector provisions. ENHANCED START-UP EXPENSES It is proposed that the tax law be amended with respect to the income tax deductibility of start-up expenses (including pre-production interest) in order to create a unified statutory regime. Start-up expenses would generally be allowed if undertaken for a set period before actual business operations begin. It is also proposed that all these start-up expenses generally be ring-fenced against future income from the same business in which they arise. Changes will also be made to the tax treatment of pre-incorporation expenses as VAT input credits during the start-up period. In order to stimulate small businesses, it is proposed that taxpayers receive a double deduction for expenses initially incurred with respect to a new business, capped at the first R of available deductions. ENLARGEMENT OF SMALL BUSINESS CATEGORY Under the new definition, the turnover limit will be increased to R5 million. Also, companies will not be prevented from receiving small business tax relief merely because these companies have shareholders with de minimis levels of ownership in another company. EXTENDING LIST OF PUBLIC BENEFIT ISATIONS ELIGIBLE FOR DEDUCTIBLE DONATIONS 6 ORGAN- It is now proposed that the list of public benefit activities eligible for tax-deductible donations be expanded further.

7 REMOVING TAX ON CERTAIN FOREIGN DIVIDEND REPATRIATIONS The current system of taxing foreign dividends has the unintended effect of discouraging dividend inflows. This is most readily apparent in situations where taxpayers holding a material interest in a foreign subsidiary delay or avoid the repatriation of dividends to avoid the tax. In order to eliminate this disincentive, the tax on foreign dividends will be removed where a South African taxpayer has a meaningful interest in the foreign subsidiary paying the dividend. DEPARTURE CHARGES FOR SHIFTING RESIDENCE OFFSHORE Government has adopted several initiatives to tax individuals and companies who shift their tax residence offshore. Currently, South African law imposes a capital gains tax as the only exit charge. The tax rules need to be modified for companies that shift their tax residence by moving their effective management to a tax treaty country. First, these companies should be subject to Secondary Tax on Companies as if they distributed all of their available profits. Second, the income tax definition of resident needs to be aligned with ratified tax treaties. This change takes effect on 26 February REMOVAL OF STAMP DUTIES ON INSURANCE AND FIXED DEPOSITS It is proposed that Stamp Duty on insurance policies and fixed deposit receipts will be eliminated. This proposal will come into effect from 1 April LIMITING LOSSES FROM SECONDARY TRADES Many individuals engage in secondary trades that have the effect of generating losses that eliminate tax on salary or professional income. These secondary businesses come in many forms such as farming, letting of holiday accommodations, as well as from hobbylike activities such as yachting and car collecting. In order to counter the revenue loss associated with such practices, it is proposed that losses from secondary trades be ring-fenced. 7

8 NORMAL RATES OF TAX PAYABLE BY NATURAL PERSONS FOR THE YEAR ENDED 29 FEBRUARY 2004 TAXABLE INCOME RATES OF TAX R 0 R R R R R R R R R R and above + 18% of each R1 R % of the amount over R R % of the amount over R R % of the amount over R R % of the amount over R R % of the amount over R NORMAL RATES OF TAX PAYABLE BY NATURAL PERSONS FOR THE YEAR ENDED 28 FEBRUARY 2003 TAXABLE INCOME RATES OF TAX R 0 R R R R R R R R R R and above + 18% of each R1 R % of the amount over R R % of the amount over R R % of the amount over R R % of the amount over R R % of the amount over R

9 NORMAL RATES OF TAX PAYABLE BY NATURAL PERSONS FOR THE YEAR ENDED 28 FEBRUARY 2002 TAXABLE INCOME RATES OF TAX R 0 R R R R R R R R R R and above + 18% of each R1 R % of the amount over R R % of the amount over R R % of the amount over R R % of the amount over R R % of the amount over R REBATES NATURAL PERSONS Amounts deductible from taxes payable: Primary Rebate... R R Additional Rebate (Applicable to taxpayers 65 years and older)... R R TAX THRESHOLD TAXABLE INCOMES on which no tax is payable: Natural Persons under R R Natural Persons 65 years and older... R R

10 DEDUCTIONS From 1 March 2002, it is proposed to simplify the taxation system of employment income by limiting employee deductions to the following: Business travel deduction against car allowance Certain medical expenses Contributions to pension and retirement funds Donations to certain public benefit organisations Specific expenditure against allowances of holders of public office Wear and tear allowances on equipment. The following currently represent certain standard deductions which may be utilised by taxpayers - MEDICAL EXPENSES: For taxpayers under 65 years of age, this deduction is limited to expenditure (including contributions) which exceeds 5% of taxable income. For taxpayers over 65 years of age, there are no limitations and all expenses are deductible. Where the taxpayer qualifies as a handicapped person, the taxpayer may deduct all qualifying medical expenditure in excess of R500 for the year. CURRENT PENSION FUND CONTRIBUTIONS: This deduction is limited to the greater of R or 7.5% of remuneration from retirement funding employment. CURRENT RETIREMENT ANNUITY FUND CONTRIBUTIONS: This deduction is limited to the greater of 15% of taxable income from non-retirement funding employment, R1 750 or R3 500 less Pension Fund contributions. 10

11 EMPLOYEES TAX & SITE STANDARD INCOME TAX ON EMPLOYEES (SITE) SITE is a procedure through which the normal tax in respect of the first segment of an Employee s remuneration (R in all cases) is finally determined by the Employer and deducted under the PAYE system. SITE constitutes either a final or minimum liability, and is thus not refundable, except in certain instances. The most important exclusions from SITE systems are: Director s remuneration 50% of any Travel Allowance Self-employed practitioners Remuneration that may be set off against any assessed loss All taxpayers who receive remuneration as defined will thus have an element of SITE in their tax deductions but only amounts which are PAYE in excess of the SITE liability will be refundable. From an administrative point of view, the SITE liability is only calculated at the end of a tax period, but on a monthly basis, tax deductions are made in terms of the PAYE tables. PAYE : Any Employee s remuneration which is not net remuneration as defined or exceeds SITE limits (R60 000) is subject to monthly deductions according to the PAYE tables. With effect from 1 March 2002 payment made to directors of private companies (including members of close corporations) in respect of services rendered are subject to PAYE. With effect from 1 March PAYE should be withheld from remuneration paid to labour brokers unless an exemption certificate is obtained ANNUITIES from Annuity Funds are subject to PAYE and SITE. 11

12 PROVISIONAL TAX Provisional taxpayers are required to make two payments during a tax year, i.e. every six months. In addition, provisional taxpayers with taxable income in excess of R per annum (Companies and Close Corporations: R per annum) should pay a third top-up payment to avoid interest leviable in terms of Section 89 quat of the Income Tax Act. Under normal circumstances, this 3rd provisional payment is due 6 months after a taxpayer s year-end. In the case of a taxpayer with a February year-end, the top-up payment can be made by the end of September of every year. TAXPAYERS DEFINED FOR PROVISIONAL TAX PURPOSES Income earners not deriving remuneration as defined Directors of private Companies Members of Close Corporations Companies PERSONS EXEMPT FROM MAKING PROVISIONAL TAX PAYMENT Income earners with net remuneration not exceeding R with effect from 1 March 2002 Non-residents Certain farming, fishing and diamond-digging operators Natural persons over 65 years of age not carrying on a business with taxable income not exceeding R Non-resident ship or aircraft charterers 12

13 PERSONAL SERVICE COMPANIES AND TRUSTS With effect from 1 August 2000, any personal services company or trust, as defined below, will be taxed on income at a rate of 35 percent. Furthermore, the only allowable deduction will be limited to the amount of remuneration paid to the shareholders, members or other employees of the company or trust. A personal service company or trust is characterised by the following: a) the person rendering the service to a client is a connected person in relation to the company or trust, and b) such person would be regarded as an employee of the client were it not for the entity, or c) such person would be subject to the control and supervision of the client, or d) the amounts payable consist of earnings payable at regular daily, weekly, monthly or other intervals, or e) more than 80 percent of the entity s income is received from any one client or associated entity of the client. An exception applies to the above, if the entity employs more than three full time employees throughout the year of assessment who are not connected to the company or trust. 13

14 CASUAL / PART-TIME EMPLOYMENT PAYE must be deducted at a rate of 25% in respect of all employees who: Work for an employer for less than 5 hours per day (i.e. 22 hours per week) OR Who work for an employer without reference to a period EXAMPLES: Workers employed on a daily basis, who are paid daily and whose remuneration exceeds R75 per day Casual commissions paid e.g. spotters fees Casual payments to casual workers for irregular/occasional services Fees paid to part-time lecturers Honoraria paid to office bearers of organisations/clubs EXEMPTIONS: If an employee works regularly for less than 22 hours per week and provides the employer with a written undertaking that they do not render services to any other employer, then they will be regarded as being in standard employment and tax must be deducted in accordance with the appropriate weekly or monthly tables. An employee who is in standard employment (i.e. works for one employer for at least 22 hours per week). 14

15 CASUAL / PART-TIME EMPLOYMENT Continued EXEMPTIONS (CONTINUED): Pensions paid to pensioners Commission agents not in possession of a tax directive (i.e. tax must be deducted according to the appropriate tax tables unless the South African Revenue Service has issued the agent with a specific and current tax deduction directive) If an employer employs part time/casual employees they are required to issue the employee with an IRP5 certificate when their services are terminated. Where however, regular use is made of an employee and the employer and employee agree, a tax certificate (IRP5) need only be issued at the end of the particular year of assessment. The tax deducted must be reflected as PAYE on the certificate as the income earned is not regarded as being net remuneration from standard employment. No employees tax is required to be deducted from the remuneration of a full time student/scholar who is employed on a casual basis unless the remuneration will exceed the tax threshold for the relevant year of assessment. This provision does not however apply to a student/scholar who works for more than 5 hours per day as they are deemed to be in standard employment and will be subject to the deduction of SITE/PAYE in accordance with the appropriate tables. 15

16 FRINGE BENEFITS TRAVELLING ALLOWANCE with effect from 1 March 2000 Unless accurate records are kept by the employee, it is presumed that : The first km travelled per annum is in respect of private travel and Maximum business kilometers which may be claimed is limited to km The following table is used for determining the costs of travelling: WHERE THE VALUE OF THE VEHICLE (Including either GST or VAT) FIXED FUEL MAINTENANCE COST COST COST R c c Does not exceed R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R Exceeds R but not R

17 TRAVELLING ALLOWANCE Continued Where the value of the vehicle exceeds R The fixed cost shall be the sum of R plus an amount of R3 874 for every R or part thereof by which the value exceeds R The fuel cost shall be 29.4 cents per kilometre The maintenance cost shall be 26.9 cents per kilometre If the vehicle was used for business purposes for a period of less than 12 months, the fixed cost component must be reduced pro rata on a day-today basis 50% of travel allowance is subject to PAYE Where a reimbursive allowance is paid to the recipient and the distance travelled in the vehicle for business purposes during the year of assessment does not exceed kilometres and provided that no other compensation in the form of an allowance or reimbursement is payable by the employer to the employee in respect of the vehicle, the rate per kilometre shall at the option of the recipient be determined at a rate of 153 cents per kilometre. USE OF COMPANY-OWNED VEHICLE Currently the Employee is taxed each month on 1.8% of the determined value. (Determined value is the actual cost excluding VAT, finance charges and interest.) If the Employee bears the full cost of All fuel used for private use (including travel between place of residence and employment) monthly value is reduced by R120. Maintaining the vehicle (including repairs, servicing, lubrication and tyres) monthly value is reduced by R85. If the Taxpayer has not travelled km for private usage, a deduction may be claimed if accurate records have been maintained. Where an Employee is granted the use of a second or subsequent vehicle and this vehicle is not used primarily for business purposes, the Employee will be taxed each month on 4% of the determined value. HOLIDAY ACCOMMODATION PROVIDED BY EMPLOYER Employee taxed on Lower of R100 per day or prevailing market rate All costs incurred if accommodation is hired by Employer 17

18 SUBSISTENCE ALLOWANCE The unexpended portion of any allowance given to an Employee for expenses for personal subsistence and incidental costs, e.g. Accommodation and meals is subject to tax if required to spend at least one night away from home. In order to simplify the administrative procedures, the amount in excess of the limits described below is taxable. OVERSEAS TRAVEL At the discretion of CIR, who currently allows actual accommodation costs plus $190 per day for meals and incidental costs. This only applies for continuous periods outside the Republic not exceeding six weeks. Where this period is exceeded, allowance paid must be declared in full on Employee s Tax Certificate and Employee must claim his/her actual expenditure as a deduction. LOCAL TRAVEL The deemed expenditure provision will be limited to the subsistence and incidental cost allowance of R173 per day for local travel. RESIDENTIAL ACCOMMODATION Supplied by Employer - DETERMINED BY FORMULA: (A -- B) x C /100 x D /12 : A = Remuneration (excluding any use of motor vehicle, or entertainment or travel allowances) B = R C = 17 (at least 4 rooms) C = 18 (at least 4 rooms, power/fuel supplied by Employer) C = 19 (at least 4 rooms, furnished, power/fuel supplied by Employer) D = Number of months of occupation Any rental payment to Employer by Employee reduces formula determination LOW INTEREST/INTEREST-FREE LOANS Amount taxed is difference between interest payable on the loan by Employee and official interest rate of 15.5% (14.5% WEF 1 March 2003) Subsidies taxed in full Short term loans, not granted regularly, not granted to all Employees, not in excess of R 3 000, are not taxable benefits Study loan to further Employees own studies is not a taxable benefit. 18

19 OTHER BENEFITS The act provides for the taxation of the following fringe benefits - Medical aid contributions Benefits from share incentive schemes Acquisition of any assets at less that market value including marketable securities Right of use of any assets Meals and refreshments Benefits granted to retired Employees Free or cheap services Housing subsidies and subsidy schemes Payment or release from payment of Employees debts EXEMPTIONS The Act provides for the following exemptions from fringe benefit taxes Special uniforms Transfer and relocating costs Share incentive schemes (under certain circumstances) Study loans and bursaries CONTRIBUTIONS TO : Pension, Retirement Annuity & Provident Funds PENSION FUNDS Any person may claim a deduction of his current contributions to a Pension Fund. The deduction is limited to the greater of R or - 7,5% of remuneration from retirement funding employment A maximum deduction of R1 800 per annum is allowable for arrear contributions to a Pension Fund. Arrear contributions may be deducted from non-trade income. RETIREMENT ANNUITY FUNDS A taxpayer may claim his current contributions to a Retirement Annuity Fund as a deduction which is limited to the greater of 15% of income from non-retirement funding employment sources R less any amount allowed for current Pension Fund contributions or R 1750 The maximum deductions of contributions with regard to the reinstatement of membership of a Retirement Annuity Fund is R per annum PROVIDENT FUNDS Contributions to Provident and Benefit Funds are not allowed as deductions from the taxpayer s income. 19

20 CAPITAL GAINS TAX BRIEF SUMMARY OF CGT CGT is payable on the disposal of assets that take place on or after valuation date, i.e. 1 October 2001; in the case of South African residents, the tax will apply to disposals of all assets (including overseas assets); in the case of non-residents, the following assets will be subject to CGT: - immovable property, or any right or interest in a property (this includes a direct or indirect interest of at least 20% held alone or together with any connected person in the equity share capital of a company, where at least 80% of the value of the net assets of the company is, at the time of the disposal, attributable to immovable property in SA); and - any asset of a permanent establishment through which a trade is carried on in SA; a capital gain or loss is determined by calculating the difference between the proceeds i.e. the amount accruing to the seller, and the base cost of the disposed asset; base cost relates to the costs directly incurred in acquiring or improving the asset. CALCULATION OF CGT a capital gain or loss is calculated separately in respect of each asset disposed; once determined, gains or losses are combined for that year of assessment; an annual exclusion of R then applies, in respect of natural persons only, to the sum of all gains and losses (R in the year of death of the person); the resulting capital gain or loss (if not specifically excluded, disregarded or deferred) is aggregated with all other gains or losses in the current tax year, and if it is; 20

21 - an assessed capital loss, it is carried forward to the following year, or - a net capital gain, it is multiplied by the inclusion rate (see example). this taxable capital gain is included in taxable income and taxed at the normal income tax rates applicable. EFFECTIVE TAX RATES Type of taxpayer Inclusion Statutory Effective Rate Rate Rate Individuals 25% 0-40% 0-10% Retirement funds N/A 0% N/A Trusts - unit trusts N/A 30% N/A - special trusts 25% 18-40% 4,5%-10% - other 50% 40% 20% Life assurers - individual policyholder fun d 25% 30% 7,5% - company policyholder fund 50% 30% 15% - corporate fund 50% 30% 15% - untaxed policyholder fund 0% 0% 0% Companies 50% 30% 15% Small business corporations 50% 15-30% 7,5-15% Employment companies 50% 35% 17,5% Permanent establishments (branches) 50% 35% 17,5% Tax holiday companies 50% 0% 0% 21

22 DONATIONS TAX Donations Tax is payable by any individual living in the Republic of South Africa, or any South African company or one managed or controlled in the Republic, on the value of any gratuitous disposal of property including the disposal of property for inadequate consideration and the renunciation of rights. PRINCIPAL EXEMPTIONS : 1 Donations between husband and wife. 2 Donations to charitable, ecclesiastical and educational institutions, and certain public bodies in the Republic of South Africa as approved by the Minister of Finance. 3 Casual donations up to R per year by donors other than natural persons. 4 Donations by natural persons on or after 1 March 2002 not exceeding R per year. 5 The donation of assets situated outside the Republic, subject to certain conditions. RATES : Donations tax is payable within 3 months after the donation at a flat rate of 20% on all donations on or after 1 October

23 ESTATE DUTY The general rule is that if the taxpayer is ordinarily resident in the Republic at the time of death, all of his assets, wherever they are situated, will be included in the gross value of his estate for the determination of duty payable thereon. The dutiable amount is arrived at as follows Value of all property at date of death (including limited interests such as usufruct) R... Deemed property R... Gross value of property R... Deductions R... Net Value of Estate R... Abatement R ( ) Dutiable Estate (A) R... Estate Duty 20% of A R... Deemed property includes: Insurance Policies on the life of the deceased as well as property that the deceased was competent to dispose of immediately prior to his death. The most important deductions are Debts due at date of death Bequests to various charities Value of property at date of death bequeathed to a surviving spouse There is relief from Estate Duty in the case of the same property being included in the estates of spouses dying within 10 years of each other. The deduction is calculated on a sliding scale varying from 100% where the taxpayers die within 2 years of each other and 20% where the deaths are within 8 years of each other. South Africa has entered into reciprocal agreements with various countries (eg United States, United Kingdom, Canada) for the avoidance of double estate duty being payable in respect of the same property. RATES : Estate duty is payable at a flat rate of 20% for persons dying on or after 1 October

24 COMPANY TAX The rate of South African Normal Company Taxation applicable to Companies (other than small business corporations and personal service companies) with financial years ending after 1 April 1999 is 30%. Prior to 1 April 1999 the company tax rate was 35% and prior t o 1 April 1994, the company tax rate was 40%. Companies are not entitled to any rebates except for foreign royalty and foreign taxes paid. Companies are also liable for Secondary Tax on Companies (STC) at 12,5% in respect of all dividends declared after 13 March CLOSE CORPORATIONS: Close Corporations are treated as Companies for taxation purposes. TRUSTS: With effect from 1 March 2002 all trusts other than those mentioned below will be taxed at a flat rate of 40%. Special trusts and testamentary trusts will be taxed at individual rates. With effect from 1 March 2000, income vesting in the Trust as a taxpayer (but not the income vesting in any of the beneficiaries of the Trust) will be taxed at a rate of 32% on taxable income up to R and at a rate of 42% on the amount of taxable income in excess of R , with the exception of a trust created solely for a person who suffers from mental illness as defined in section 1 of the Mental Health Act, 1973; or a serious physical disability, where such illness or disability incapacitates the beneficiary from earning sufficient income to maintain himself/herself. SMALL BUSINESS CORPORATIONS: 24

25 SECONDARY TAX ON COMPANIES A dual system for the taxation of Companies and Close Corporations exists in South Africa, one part being levied on taxable income and the other part on distributed profits. The tax is levied as follows Normal income tax as per the various company classifications A secondary tax of 12.5% on all profits distributed by companies in the form of dividends. IMPORTANT POINTS : It will apply irrespective of the recipient The dual tax systems will apply to gold mining companies which will have a choice of the old or new systems The Act re-introduced certain deeming provisions to subject certain distributions to STC: Exempt income declared by Companies Dividends declared by fixed property Companies formed in terms of Section 11(s) Liquidation dividends Unit portfolio dividends of interest or dividends in terms of Section 11(s) VALUE ADDED TAX South African legislation provides for a 2-tier system of VAT : Taxable supplies are levied at a standard rate of 14% or at a rate of 0%. The following are certain of the taxable supplies subject to zero rates Rice Vegetables Fruit Vegetable Oil Milk Brown Wheat Flour Eggs Edible Legumes Illuminating Paraffin Residential rentals are exempt from VAT. 25

26 WEAR AND TEAR ALLOWANCES WRITE-OFF PERIODS ACCEPTABLE TO INLAND REVENUE ITEM Period of ITEM Period of write-off (no. of years) Adding machines 6 Air-conditioners: window type 6 Aircraft: light pass/ commercial/helicopter 4 Arc welding equipment 6 Balers 6 Battery chargers 5 Bicycles 4 Bulldozers 3 Burglar Alarms (removable) 10 Calculators 3 Cash registers 5 Cellular telephone 3 Cheque writing machines 6 Cinema equipment 5 Cold drink dispenser 6 Compressors 4 Computer (main frame) 5 Computer (personal computer) 3 Computer software (main frames): 2 Purchased 3 Self-developed 1 Computer software (personal computer) 2 Concrete transit mixers 3 Containers 5 Crop sprayers 6 Curtains 5 Debarking equipment 4 Delivery vehicles 4 Demountable partitions 6 Dental and doctors equipment 5 Dictaphones 3 Drilling equipment (water) 5 Drills 6 Electric saws 6 Electrostatic copiers 6 26 write-off (no. of years) Engraving equipment 5 Excavators 4 Fax machines 3 Fertiliser spreaders 6 Fire extinguishers (loose units) 5 Fishing Vessels 12 Fitted carpets 6 Fork-lift trucks 4 Front-end loaders 4 Furniture and fittings 6 Gantry cranes 6 Garden irrigation equipment (movable) 5 Gas cutting equipment 6 Gas heaters and cookers 6 Gear shapers 6 Graders 4 Grinding machines 6 Guillotines 6 Gymnasium equipment 10 Hairdressers equipment 5 Harvesters 6 Heat dryers 6 Heating equipment 6 Hot water systems 5 Incubators 6 Ironing and pressing equipment 6 Kitchen equipment 6 Knitting machines 6 Laboratory research equipment 5 Lathes 6 Laundromat equipment 5 Law reports 5 Lift installations (goods) 12 Lift installation (passengers) 12

27 WEAR AND TEAR ALLOWANCES WRITE-OFF PERIODS ACCEPTABLE TO INLAND REVENUE ITEM Period of ITEM Period of write-off (no. of years) Medical theatre equipment 6 Milling machines 6 Mobile caravans 5 Mobile cranes 4 Mobile refrigeration units 4 Motorcycles 4 Motorised chain saws 4 Motorised concrete mixers 3 Motor mowers 5 Musical instruments 5 Neon signs and advertising boards 10 Ovens and heating devices 6 Oven for heating food 6 Oxygen concentration 3 Paintings (valuable) 25 Pallets 4 Passenger cars 5 Patterns, tooling and dies 3 Perforating equipment 6 Photocopying equipment 5 Photographic equipment 6 Planers 6 Pleasure craft etc. 12 Portable concrete mixers 4 Ploughs 6 Portable generators 5 Portable safes 25 Power tools (hand operated) 5 Public address systems 5 Race horses 4 Radio communication equipment 5 Refrigerated milk tank 4 Refrigerated equipment 6 Refrigerators 6 Runway lights 5 27 write-off (no. of years) Sanders 6 Security systems 6 Seed separators 6 Sewing machines 6 Shop fittings 6 Solar energy units 5 Special patterns and tooling 2 Spin dryers 6 Spot welding equipment 6 Staff training equipment 5 Stainless steel containers 5 Surveyors: Instruments 10 Field equipment 5 Tape-recorders 5 Telephone equipment 5 Television and advertising films 4 TV sets, video machines and decoders 6 Textbooks 3 Tractors 4 Trailers 5 Traxcavators 4 Trucks (heavy duty) 3 Trucks (other) 4 Truck mounted cranes 4 Typewriters 6 Vending machines (inc. video game) 6 Video cassettes 2 Washing machines 5 Water distillation and purification plant 12 Water tankers 4 Water tanks 6 Weighbridges (movable parts) 10 Workshop equipment 5 X-ray equipment 5 * Please note: Items of a value of less than R2000 may be written off in full in year one.

28 CAPITAL INCENTIVE ASSET TYPE CONDITIONS FOR ACCELERATED ALLOWANCE INDUSTRIAL BUILDINGS HOTEL BUILDINGS Not applicable for buildings brought into use or improvements completed after 31 December 1989 Not applicable for buildings brought into use or improvements completed after 4 June 1988 RESIDENTIAL BUILDINGS Cost of buildings erected (Project must consist of at least five family units) intended for letting or occupation by a bona fide full-time employee Erection commenced on or after 1 April 1982 BENEFICATION PROCESS 35% value is added to raw material or any intermediate product (See Note 8 & 9) At least 60% processed products are exported The processed output is internationally competitive AIRCRAFT Cost of aircraft used for transporting persons, livestock, goods or mail for reward Must first be registered in the RSA SHIPS Cost of ship used for prospecting, mining or as a foreign-going ship Must be a South African registered ship PLANT & MACHINERY Not applicable (See Notes 5 and 10.) HOTEL EQUIPMENT Not applicable (See Note 6) 28

29 ALLOWANCES ACCELERATED ALLOWANCE PERCENTAGE Previously 17,5% Previously investment allowance of 10% CONDITIONS FOR ANNUAL ALLOWANCES Cost of erection of buildings or improvements, provided building is used wholly or mainly for carrying on a process of manufacture or similar process Cost of portion of erection or improvements, provided registered as a hotel 5% With effect from 1/7/96 10% 5% ANNUAL ALLOWANCES 10% Same conditions as for accelerated allowance 2% See PLANT & MACHINERY and INDUSTRIAL BUILDINGS Commence write down & deduct interest & finance charges in the year in which expenses are incurred (See Note 8) See PLANT & MACHINERY & IND. BLDINGS Nil Must be used for purposes of trade 20% Nil Nil Nil Must be used for purposes of trade Cash cost of plant & machinery purchased under an agreement formally signed by all parties on or after 15 December 1989 Cash cost of machinery, implements, utensils or articles purchased under an agreement formally signed by all parties on or after 16 December % 20% 33.33% on all new & unused plant & machin - ery acquired on or after 1 July 1996 to 30 Sep % See Notes over-page

30 NOTES Refer to Table on Page 28 1 Interest or finance charges payable in terms of suspensive sale or hirepurchase agreements concluded for acquisition of assets are deductible when paid and are excluded from the cost on which the above allowances are determined. 2 The above allowances are not apportioned for periods of use less than one year. 3 The above allowances are recoupable on disposal of the assets. 4 Hotel buildings or improvements, erection of which commenced before 4 June 1988, qualified for an investment allowance of 10%, an annual allowance of 2% and an allowance based on the grading of the hotel. 5 New or used plant and machinery brought into use in a process of manufacture or similar process on or after 1 January 1989 and acquired on or before 15 December 1989 may be written off over a period of three years (ie) 50% in the first year, 30% in the second year and 20% in the third year. 6 Machinery, implements, utensils and articles (other than motor vehicles, office equipment or equipment in servants rooms) brought into use by hoteliers on or after 1 January 1989 and acquired under an agreement on or before 15 December 1989 may be written off over a period of three years (ie) 50% in the first year, 30% in the second year and 20% in the third year. 7 Plant and machinery brought into use after 15 December 1989 is depreciated at 20% per annum on the straight line basis. New or used plant used in a manufacturing or similar process qualifies for the allowance. 8 The taxpayer may apply for a negotiable tax credit certificate where there is an insufficient or no tax base. 9 A formula is used to calculate the value added A ( B + C ) / A x 100 / 1 A = Ex-Factory price of intermediate product to final product produced B = Cost of raw materials and intermediate products used in production of output C = Any machinery, implements, utensils and articles purchased after this date may be written off over a period of 5 years. 10 New manufacturing assets aquired within 3 years from 1 March 2002 will be depreciated over 4 years. 40% of the cost will be deducted in the first year, and 20% for each of the following 3 years. 30

31 EXCHANGE CONTROL SOUTH AFRICAN RESIDENT PRIVATE INDIVIDUALS Private individuals who are over 18 and tax payers in good standing have been permitted to invest abroad since 1 July The current limit is now increased to R per person. MISCELLANEOUS South African residents travelling abroad on holiday or business currently have the travel allowance endorsed in their passports. This requirement is, with immediate effect, dispensed with. Companies and individuals will, where appropriate, need to continue to satisfy the authorities that their tax affairs are in good standing. Various other limits will also be adjusted. EMIGRATION LIMITS Household & personal effects, Motor Vehicles, Stamps, coins & Kruger Rands R TRAVEL AND STUDY ALLOWANCES Travel: per adult p.a. (over 12 years) R per child p.a. (under 12 years) R Study: per student p.a. R per student p.a. (accompanied by spouse) R Student Travel Allowance: per student R per student (accompanied by spouse) R Personal transfer limits for domestic purposes Maintenance & alimony transfers per month R Monetary gifts & loans (or Kruger Rands) p.a. R CAPITAL TRANSFERS Capital introduced into the country after 1 July 1997, by resident individuals may be repatriated at any time. 31

32 FARMING TAX TABLE OF STANDARD VALUES Cattle Horses - Bull R50 - Stallions, over 4 years.....r40 - Ox R40 - Mares, over 4 years r30 - Cow R40 - Geldings, over 3 years.....r30 Tollies & Heifers - Colts & fillies, 3 years.....r10 - One to two years R14 - Colts & fillies, 2 years......r 8 - Two to three years R30 - Colts & fillies, 1 year r 6 Calves R4 - Foals, under 1 year r 2 Sheep Donkeys - Wethers R6 - Jacks, over 3 years r4 - Rams R6 - Jacks, under 3 years r2 - Ewes R6 - Jennies, over 3 years r4 - Weaned lambs.... R2 - Jennies, under 3 years......r2 Goats Mules - Weaned kids..... R2-4 years and over r30 - Fully grown R4-3 years r20 Pigs - 2 years r14 - Under 6 months (weaned)r6-1 year r6 - Over 6 months... R12 Ostriches, fully grown r6 Poultry, over 9 months R1 Chinchillas, all ages r1 Produce is valued at a fair and reasonable value (fixed by the Commissioner). 32

33 CAPITAL EXPENDITURE A farmers capital expenditure is deducted either in full (subject to certain limits) under the provisions of paragraph 12 of the First Schedule (capital development expenditure), or as a special depreciation allowance under s 12B, or as wear and tear under s 11(e). CAPITAL DEVELOPMENT EXPENDITURE The following expenditure is allowed as a deduction in determining the taxable income of a farmer, i.e. expenditure incurred during the year of assessment in respect of : (a) the eradication of noxious plants; (b) the prevention of soil erosion; (a) and (b) allowances encourage the protection of the land and may be deducted in full even if an assessed loss is created. The deduction of amounts in (c) to (i) below is restricted to taxable income from farming. (c) dipping tanks; (d) dams, irrigation schemes, boreholes and pumping plants; (e) fences; (f) the erection of, or extensions, additions or improvements (not repairs) to, buildings used in connection with farming operations other than those used for domestic purposes of persons who are not employees of such farmer; (g) the planting of trees, shrubs, perennial plants for the production of grapes or other fruit, nuts, tea, coffee, hops, sugar, vegetable oils or fibres, and the establishment of any area used for the planting of such trees, shrubs or plants; (h) the building of roads and bridges used in connection with farming operations; (i) the carrying of electric power from the main transmission lines to the farm apparatus. 33

34 MACHINERY, IMPLEMENTS UTENSILS & ARTICLES SPECIAL DEPRECIATION ALLOWANCE Any machinery, implements, utensils or articles (other than livestock), acquired by a farmer and brought into use on or after 1 July 1988 for farming purposes, are subject to a depreciation allowance on the cash cost of the asset as follows: First year of use: % of such cost Second year: % of such cost Third year: % of such cost The asset must be brought into use for the first time by the farmer. The allowance is therefore claimable on new as well as used assets. In order to qualify for the allowance, the asset must satisfy the requirements set out below: The asset must be brought into use by a farmer The asset must comprise machinery, implements, utensils, or articles (excluding livestock; motor vehicles used mainly for conveying persons; caravans; non-crop-spraying aircraft; office furniture or equipment) It must be brought into use (for the first time by any taxpayer) on or after 1 July 1988 for farming purposes 34

35 FARMER S AVERAGE TAXABLE INCOME The farmer s average taxable income from farming is calculated as follows: (i) Divide the aggregate of the current year s taxable income from farming, plus the previous 4 year s taxable income from farming, by 5 to arrive at an average. If the farmer has only farmed for part of a year, such year is treated as a full year. The taxable income from plantation farming (if any) would be included in this total. (ii) If the farmer has farmed for less than 4 years prior to the current year, the average is taken over as many years as he has farmed. (iii) If the farmer had not carried on farming operations prior to deciding to be taxed on the average method (and neither had his spouse, either before or after their marriage) then (a) if his taxable income from farming for the current year does not exceed R5 000, his actual taxable income from farming will be taken as the average, (b) if his taxable income from farming for the period exceeds R5 000, but not R7 500, the average will be R5 000, and (c) if his taxable income from farming for the period exceeds R7 500, the average will be 2/3rds of such taxable income (iv) Where there have been farming losses in the previous 4 years, such losses are taken into account in the determination of average farming income. (v) The average annual income is limited to a minimum of nil. 35

36 STAMP & TRANSFER DUTIES 1. ON IMMOVABLE PROPERTY : TRANSFER DUTY: If property is purchased by natural persons on or after 1 March 2003 On the first R of purchase consideration % Between R and R % Thereafter % TRANSFER DUTY: If property is purchased by Companies, CC s & Trusts after 1 August 1996 : Flat rate on full purchase consideration % 2. ON SHARES & DEBENTURES: ORIGINAL ISSUE: For every R20 or part thereof of the nominal value and any premium hereafter R 0,05 INCREASE IN AUTHORISED SHARE CAPITAL: For every R1000 or part thereof of the nominal value R 5,00 REGISTRATION OF TRANSFER: For every R10 or part thereof of the consideration (if transfer is delayed for more than 6 months, duty payable is at 3 times normal duty) R 0,025 REGISTRATION OF TRANSFER THROUGH STOCK BROKERS: Marketable securities tax on consideration paid % 3. SALE OF SHARES OF A RESIDENTIAL PROPERTY COMPANY With effect from 13 December 2002 transfer duty at the prevailing rate will be levied on the sale of a residential property company shares. 36

37 STAMP & TRANSFER DUTIES continued: 4. ON LEASE OF IMMOVABLE PROPERTY: ON LEASE OF IMMOVABLE PROPERTY: For every R100 or part thereof of rent and other consideration payable in respect of the lease period: Where period does not exceed 5 years R 0,25 Where period exceeds 5 years but not 10 years R 0,40 Where period exceeds 10 years but not 20 years R 0,55 Where period exceeds 20 years R 0,70 5. DEBIT TRANSACTION: For every debit entry on Cheque, Credit Card, Savings, Transmission Account and Automatic Teller machine facilities at Banks, Building Societies and the Post Office R 0,20 6. ON CREDIT AGREEMENTS: (Hire Purchase/Instalment Sale Agreements & Finance Leases) : WHERE THE TOTAL AMOUNT PAYABLE IS : R R R 2,00 R R R 4,00 R R R 8,00 R R R 16,00 R R R 24,00 R R R 32,00 R R R 40,00 R R R 50,00 R R R 60,00 R R R 70,00 R R R 80,00 R R 100,00 NOTE: With the introduction of VAT, no transfer duty will be chargeable if the transaction is subject to VAT at either standard or Zero rate. Note here that deemed VAT inputs on fixed property are limited to original transfer duty payable. In the case of shares in a share block company the input is limited to the stamp duty which would have been payable. 37

38 RETENTION OF RECORDS It is recommended that all documentation pertaining to potential Capital Gains tax transactions be retained indefinitely. ACCOUNTING RECORDS BOOKS OF PRIME ENTRY: Cash Books, Creditor s Ledgers, Debtor s Ledgers, Fixed Asset Registers, General Ledgers Journals, Petty Cash Books, Purchase Journals, Sales Journals, Subsidiary Journals and Ledgers as well as supporting schedules to such Books of Account, etc Original Microfiche Vouchers, Working Papers, Bank Statements, Costing Records, Creditor s Invoices and Statements, Debtor s Invoices and Statements, Goods Received Notes, Journal Vouchers, Payrolls, Purchase Orders and Invoices, Railage Documents, Salary and Wages Registers, Sales Tax Records, Tax Returns and Assessments, etc EMPLOYEE RECORDS: Expense Accounts, Payrolls, Employee Tax Returns,etc Accident Records, Apprentice Records, Industrial Training Records, Staff Records, etc STATUTORY & SHARE REGISTRATION RECORDS: Annual Returns, Certificates of change of name, Incorporation to commence business, Founding Statements Memorandum and Articles of Association, Minute Books, Notices of Meetings, etc Indefinitely Branch Registers, Registers of: Directors Attendance, Debenture Holders, Directors and Officers, Directors Interests, Members and pledges and Bonds, etc. Cancelled share transfer forms