27 February 2013 Compiled by Group Taxation This document is distributed as a service to the Liberty group via the internal e-mail system. It deals with broad-ranging tax developments of relevance to the group. It is not intended for distribution outside the group. Hope and confidence come from energetic involvement and a willingness to make a direct contribution to change. (Pravin Gordhan, Budget Speech, 27 February 2013) Individuals Businesses and Trusts Retirement savings reforms Non-retirement savings reforms Miscellaneous changes 1
Individuals Tax thresholds for individuals LAST YEAR TAX YEAR 2014 Rebates and thresholds Primary rebate R11 440 R12 080 Secondary rebate(over 65s) R6 390 R6 750 Tertiary rebate (over 75s) R2 130 R2 250 Tax threshold for under 65 R63 556 R67 111 Tax threshold for 65s and over R99 056 R104 611 Tax threshold for 75s and over R110 889 R117 111 Interest and foreign dividend exemption Interest income under 65s R22 800 R23 800 Interest income over 65s R33 000 R34 500 Foreign interest-income R3 700 Exemption falls away Tax deductible monthly medical aid tax credits (as a credit against tax payable) For member and first dependant R230 R242 For each additional dependant R154 R162 Capital gains tax Effective rate (individuals) 13.3% (Max) No change Annual exclusion for individuals R30 000 No change Exclusion for deceased estates R300 000 No change Primary residence exclusion R2 million No change 2
LAST YEAR TAX YEAR 2014 Retirement fund lump sum- Withdrawal benefits Lump sum amount Rates of tax No change 0 - R22 500 0% R22 501- R600 00 18% of each R above R22 500 R600 001 R900 000 R900 001 + R103 950 + 27% of each R above R600 000 R184 950 + 36% of each R above R900 000 Retirement fund lump sum- Retirement/death benefits Lump sum amount Rates of tax No change 0 - R315 000 0% R315 001 - R630 000 18% of each R above R315 000 R630 001 - R945 000 R945 001 and above R56 700 + 27% of each R above R630 000 R141 750 + 36% of each R above R945 000 Estate duty Tax exemption of net estate R3.5m No change Donations tax Annual amount exempt from tax for natural persons R100 000 Transfer duty No change Value of property Rate No change 0 - R600 000 0% R600 001 - R1 000 000 3% of value above R600 000 R1 000 001 - R1 500 000 R12 000 + 5%of the value above R1 000 000 R1 500 001 and above R37 000 + 8%of the value above R1 500 000 3
Income tax rates for individuals and special trusts LAST YEAR TAX YEAR 2014 Taxable income Rate of Tax Taxable income Rate of Tax R0 R160 000 18 % of each R1 R0 R165 600 18 % of each R1 R160 001 R250 000 R28 800 + 25% of the amount above R160 000 R165 601 R258 750 R29 808 + 25% of the amount above R165 600 R250 001 R346 000 R51 300 + 30% of the amount above R250 000 R258 751 R358 110 R53 096 + 30% of the amount above R258 750 R346 001 R484 000 R80 100 + 35% of the amount above R346 000 R358 111 R500 940 R82 904 + 35% of the amount above R358 110 R484 001 R617 000 R128 400 + 38% of the amount above R484 000 R500 941 R638 600 R132 894 + 38% of the amount above R500 940 R617 001 and above R178 940 + 40% of the amount above R617 000 R638 601 and above R185 205 + 40% of the amount above R638 600 Commentary Disability or income protection policies National Treasury proposed a significant departure from the current tax treatment of non-retirement fund disability and income protection policies. Contributions to disability or income protection policies that conform to section 11(a) and 23(m) of the Income Tax Act, are currently deductible. National Treasury proposes that all disability and income protection policies however, conform to the tax paradigm on non-deductible contributions with exempt benefits. No clarity has been provided on the tax status of current disability and income protection policy contributions and whether they will be able to retain their deductible status into the future. While these policies form part of taxpayers much-needed comprehensive risk cover, the deductibility of their contributions is an entrenched feature. It remains to be seen whether such a fundamental change in their tax treatment will impact their current marketability. 4
Relief for low-cost employer-provided housing Some employers opt to provide their low-income earning employees with accommodation assistance. This assistance may include subsidised rental accommodation, employer provided home loans or the construction of houses by employers for their employees (initially on rental terms) with ownership passing to the employee at a later stage. The transfer of the home ownership usually occurs at a price below market value, and gives rise to a taxable fringe benefit. Since the arrangement associated with the transfer of ownership is designed to assist low-income employees, the fringe benefit tax is unaffordable. Fringe benefit tax relief will be provided for lowerincome earners under these circumstances. Employer-provided bursaries to relatives Anomalies exist with the rules surrounding the exemption of fringe benefit taxation for bursaries granted to relatives. To rectify these anomalies, the current rules that apply to the exemption of fringe benefit taxation for bursaries granted to relatives will be wholly reviewed. The relevant monetary thresholds under the regime will be increased. Employment tax incentives To combat the high youth unemployment level, National Treasury proposes introducing a tax incentive to encourage the employment of young people in South Africa. A graduated tax incentive at the entry level wage will be introduced, falling to zero when earnings reach the personal income tax threshold. In this vein, a similar tax incentive will also be introduced to assist workers (of all ages) within special economic zones. Taxpayers with multiple sources of income Individuals receiving income from different sources are often burdened with a higher-than expected tax liability on assessment. Examples of individuals falling within this category include annuitants receiving annuities from different sources. Employers under these circumstances are unaware of these multiple income sources and therefore only calculate PAYE as if one income stream exists consequently giving rise to the deduction of too little PAYE. There are a number of proposals to address this issue, including introducing higher levels of withholding tax to cater for the aggregation effect. Liberty already applies tax aggregation to its annuitants but the full impact of these proposals is awaited. 5
Businesses and Trusts LAST YEAR TAX YEAR 2014 Income Tax Rates Companies 28% No change Employment companies 28% No change Small business corporations R0 R63 556 0% R63 557 R350 000 7% of the amount above R63 556 R350 001 and above R20 051 + 28% of the amount above R350 000 0 67 111 0% of taxable income R67 112 R365 000 7% of taxable income above 67 111 365 001 550 000 20 852 + 21% of taxable income above 365 000 550 001 and above 59 702 + 28% of the amount above 550 000 Long-term Insurers Individual Policyholder Company Policyholder 30% No change 28% No change Corporate 28% No change Untaxed Policyholder 0% No change Trusts 40% No change 6
LAST YEAR TAX YEAR 2014 Capital Gains Tax (Effective Rates) Companies 18.6% No change Trusts 26.7% No change Long-term insurers Individual Policyholder Company Policyholder 10% No change 18.6% No change Corporate 18.6% No change Untaxed Policyholder 0% No change Dividends withholding tax 15% No change Value-Added Tax 14% No change Commentary Taxation of long-term insurers National Treasury has taken the first step in the overall reform of life company taxation. It proposes that policies representing risk business will no longer be taxed within the policyholder funds, but rather in the shareholder fund (Corporate ). Significant amounts of policyholder selling expenses will now be deductible in the Corporate as opposed to the policyholder funds. This change will potentially affect the rates on which investment policies can be offered to individual policyholders. The effective date of the proposed change, as well as any potential transitional arrangements, has not been announced and the nature of the policies affected has not been clarified. Public benefit organizations ( PBO s) Donations to PBO s conducting work in specific areas are deductible up to 10 per cent of taxable income in the year of the donation. Since donations in excess of this limit cannot be carried forward thereby discouraging donations of this nature. To encourage large donations, government proposes allowing donations exceeding the 10 per cent taxable income ceiling to be rolled over as an allowable deduction in subsequent years. The rules surrounding the distribution of funding for PBO s who provide funding will also be reviewed. 7
Reforming the taxation of trusts Legislative measures will be proposed in 2013/14 to guard against tax avoidance associated with trusts. The rules associated with the flow- through nature of local and foreign trusts, and the use of trusts to evade estate duty, will be reviewed. Trusts formed to cater for people with disabilities and minors will however fall outside of the review process. The proposed measures are outlined as follows: Discretionary trusts may not be used as flow-through vehicles and their taxable income and losses will be calculated at the trust level, with distributions eligible for a deduction limited to the corresponding year s taxable income. Beneficiaries will receive a tax free distribution unless a deductible payment (associated with that distribution) was claimed. Trading trusts also will be taxable at the entity level with a similar limitation on the allowable deduction for distributions made. To qualify as a trading trust, the trust must conduct a trade or beneficial ownership interests in the trust must be freely transferable. Distributions from foreign trusts will constitute taxable income to counter schemes designed to prevent income from attracting global tax liability Special economic zones National Treasury will introduce specific tax incentives to encourage investment in special economic zones in South Africa. More specifically, these include (i) a reduced corporate income tax rate (at 15%) for businesses in these zones; (ii) a tax deduction granted to employers for the employment of workers earning not more than R60000 annually and (iii) an accelerated depreciation allowance for buildings in these zones which closely will mimic the existing regime for urban development zones. 8
Retirement savings reforms Deductibility of contributions Employer contributions will become subject to fringe benefits tax. Individuals will be entitled to a deduction for all employer and employee contributions to pension, provident and retirement annuity funds. The deduction limit will be 27.5% of the greater of remuneration or taxable income, with an annual cap of R350,000.00. These changes will come into effect on or after 2015. Contributions may be rolled over Contributions exceeding the annual cap of R350,000.00 may be rolled over to future tax years. Non-deductible contributions will still be taken as tax-free from lump sums or annuities at retirement. Harmonisation of retirement funds The tax deductibility of contributions to pension, provident and retirement annuity funds will be standardised.- provident fund members will be able to claim deductions. Balances in provident funds at the date of implementation, together with subsequent growth will still be available as a lump sum. Contributions (and growth) on provident funds, received after the implementation date will be subject to the same requirements to purchase an annuity at retirement as pension and retirement annuity funds. The requirement to purchase an annuity will not, however, be applicable to individuals older than 55 at the date of implementation. New members will still be able to join existing provident funds, but their contributions and growth will be subject to the new tax regime. Further discussion will be held on the tax treatment for defined-benefit pension plans. 9
Non-retirement savings reforms A tax-preferred savings and investment account will be introduced. All returns and all withdrawals in this savings vehicle will be exempt. The account has a R30,000.00 annual limit and a R500,000.00 lifetime limit which will increase with inflation. The current interest exemption will not be adjusted for inflation in the future, in order to stimulate participation in this savings vehicle. This savings vehicle will be introduced with effect from April 2015. 10
Miscellaneous Tax policy research projects Research will be conducted by National Treasury during 2013/14 on a number of areas, including: The VAT treatment of financial services as well as VAT apportionment within the financial sector. The taxation of various innovative financial instruments. Increase in fuel levies The general fuel levy and Road Accident levy will be increased by 22.5c/l and 8c/l respectively from 3 April 2013. Excise duties Excise duties on tobacco and alcohol will increase between 5.8%-10% and 5.7%-10% respectively. 11