South African Reward Association Budget Update 2013 Tax Law Changes 01 March 2012 Jerry Botha jerry@taxconsulting.co.za 082 899 6118
Revenue Information
Tax Rates
Tax Rebates 2012/13 2013/14 (March 2013 onwards)
Tax Adjustments Travel Allowance Fixed Cost Schedule Reduce Car Value Old New 60,000 19,492 19,310 240,000 66,440 65,667 360,000 91,873 90,668 480,000 119,683 118,078 with effect from 1 March 2013.
Tax Adjustments Travel Allowance Fuel and Maintenance (cent per kilometre) increased Car Value Old New 60,000 73.7 / 25.7 81.4 / 26.2 240,000 89.6 / 36.9 98.7 / 39.4 360,000 117.1 / 53.7 130.3 / 54.4 480,000 133.6 / 68.3 147.7 / 70.5 with effect from 1 March 2013.
Tax Adjustments Tax Free Reimbursement Rate R3.16 to R3.24 per kilometre Rules on 8,000km business and no travel allowance unchanged Effective 01 March 2013
Tax Adjustments Medical Aid Credit Effective 01 March 2013
Tax Adjustments Housing Formula Effective 01 March 2013
Tax Adjustments Subsistence Meals and incidental costs of R319 per day deemed expended Incidental costs only of R98 for each day SARS published table applies to travel outside South Africa
Speech Observations A review will be initiated this year of our tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability The government relies on resources derived from the wider economy, and the best way to generate resources is to grow the economy faster and increase the tax base
Speech Observations Over the past five years, the South African Reserve Bank has approved nearly 1 000 large investments into 36 African countries. These are mutually beneficial, as they support development in those countries, and also generate tax revenue, dividends and jobs both abroad as well as in South Africa I will announce simpler rules that will reduce the time and costs of doing business in Africa
Speech Observations The initial phase of NHI development will not place new revenue demands on the fiscus. Over the longer term, however, it is anticipated that a tax increase will be needed The National Treasury is working with the Department of Health to examine the funding arrangements and system reforms required for NHI. A discussion paper inviting public comment on various options will be published this year
Tax Proposals Impacting Remuneration Relief for low-cost employer-provided housing Employer-provided bursaries to relatives Retirement savings reforms Taxpayers with multiple sources of income Employment tax incentives Special economic zones Disability or income protection policies
Low-cost employer-provided housing Employees with subsidised rental accommodation or home loans. Employers build houses for their employees, initially on a rental basis, with the understanding that the house will become the property of the employee over time. Where an employer transfers a house to an employee at a price below market value, a taxable fringe benefit is triggered.
Low-cost employer-provided housing The fringe benefit tax is often unaffordable for lowincome employees. Proposal to provide fringe-benefit tax relief for lowerincome earners in such cases.
Employer-provided bursaries to relatives The rules covering the exemption of fringe benefit taxation for bursaries given to relatives will be reviewed. Government proposes to increase the relevant monetary thresholds. Differential monetary thresholds for bursaries to students attending tertiary institutions and to learners at schools are shown in Table C.6 in Annexure C.
Table C.6 in Annexure C
Retirement savings reforms Employer contributions taxed 2015 onwards (appears not 01 March 2014) Employee deductibility increased to 27.5% Overall R350,000 per annum cap Same rule pension, provident and retirement annuity Note below and above 45 appears removed, no more special dispensation for below R20,000 contributions per year and generally more streamlined approach.
Retirement savings reforms Vested benefits will be protected: balances in provident funds at the date of implementation, and growth thereon, will not be required to be annuitised (compulsory retention). Future contributions made to provident funds after an agreed date be subject to the same annuitisation requirements applicable to retirement annuity and pension funds. This requirement will not apply to provident fund members older than 55 years at the date of implementation.
Retirement savings reforms Contributions in excess of the annual caps may be rolled over to future years. At retirement, where any non-deductible contributions remain, they will be set off against any lump sum or annuity income before tax is calculated to avoid double taxation. Specific provisions will need to be made for definedbenefit pension plans and will require further engagement with industry.
Taxpayers with multiple sources of income Two or more income streams and each calculates pay-asyou-earn (PAYE) as if there is only one. The result is that too little PAYE is deducted. Government will address this issue during 2013/14. Options - Higher levels of withholding by employers; holding employees responsible for PAYE at a higher tax rate to take into account the aggregation effect
Employment tax incentives The introduction of a youth employment tax incentive will help young people enter the labour market, gain valuable experience and access career opportunities. The administratively simple incentive will create a graduated tax incentive at the entry-level wage, falling to zero when earnings reach the personal income tax threshold. A similar tax incentive will be made available to eligible workers of all ages within special e economic zones
Special economic zones In certain special economic zones, the following tax incentives - 15 per cent corporate income tax rate An employment incentive allowing for a tax deduction for employment of workers earning less than R60 000 per year. Accelerated depreciation allowance for buildings in these areas, encourage developers to invest more in industrial premises.
Disability or income protection policies Disability insurance policies that fall outside the ambit of retirement funds are treated differently, depending on whether they compensate for the loss of future income (deductible for employees when premiums are incurred) or compensate against loss of personal capital, such as the loss of an arm (not deductible). Government proposes a more consistent treatment: all non-retirement fund disability and income protection policies will conform to the overall tax paradigm of non deductible contributions and exempt pay outs.
Other Noteworthy Proposals Reforming the taxation of trusts Employment share schemes Uniform cross-border withholding to prevent base erosion Mining taxation review Streamlining registration and filing for businesses and individuals
Reforming the taxation of trusts Use of trusts to avoid estate duty, which will be reviewed. No impact on trusts established to attend to the legitimate needs of minor children and people with disabilities. Discretionary trusts should no longer act as flow-through vehicles. Taxable income and loss (including capital gains and losses) should be fully calculated at trust level with distributions acting as deductible payments to the extent of current taxable income. Beneficiaries will be eligible to receive tax-free distributions, except where they give rise to deductible payments (which will be included as ordinary revenue).
Employment share schemes Some employers offer staff equity schemes as part of their compensation packages. Some of these arrangements are also used as a tool to lower overall tax rates for executives and other high-income earners. Schemes for lower-income taxpayers, however, are sometimes subject to anomalies that may give rise to double taxation. A special dispensation is proposed to ensure uniform tax treatment of these schemes. The way that employers claim deductions will be examined.
Uniform cross-border withholding Cross-border withholding regime on interest and royalties be extended to cross-border service fees, subject to treaty relief. To facilitate administration, all three sets of withholding regimes (interest, royalties and cross-border service fees) will become effective from 1 March 2014. Prior changes to interest and royalty withholding will also be deferred until this date.
Mining taxation review The mineral and petroleum royalty regime has broadened the tax base and allowed for increased revenue during periods of high commodity prices, while providing relief to marginal mines when commodity prices and profitability are low. The broader review of the tax system will consider whether this approach is sufficiently robust and assess what the most appropriate mining tax regime is to ensure that South Africa remains a competitive investment destination.
Registration and tax filing A single registration process for multiple tax products will be launched to simplify registration for all businesses. Individuals with a single source of taxable employment income currently do not have to submit tax returns if their taxable income is below a threshold of R120 000 per year. The threshold is raised to R250 000.
Penalties How much is the fixed-amount penalty 32
Expatriate Taxation Cross-border services - South African residents are generally subject to worldwide tax, except for long-term services provided offshore (for example, for at least 183 days or more in any 12 month period). At issue is whether the worldwide tax regime of South African services should be extended (subject to appropriate credits), especially if a South African employer is involved.
Expatriate Taxation Cross-border pensions - South African residents working abroad and foreign residents working in South Africa regularly contribute to local and foreign pension funds, which gives rise to a variety of tax issues. Will be considered with overall retirement reform The main issue is whether the tax focus should rely solely on the national source of the services provided or the national origin of the pension fund serving as the savings vehicle.
Expatriate Taxation (already law) Deemed disposal of assets when non-resident - On 8 May 2012, the Supreme Court of Appeal ( SCA ) delivered its decision in the matter between CSARS and Tradehold Limited. Tax change to confirm that natural person will be deemed to have disposed of each of that person s assets at market value on the day immediately before ceasing to be a resident and to have reacquired each of those assets at market value on the day on which that person ceases to be a resident. In addition, that person s year of assessment will be deemed to have ended the day immediately before that person becomes a resident of another country.
2013 Retirement Reform Proposals Government has developed revised policy proposals for further consultation. Consultation period in respect of them, with a closing date of 31 May 2013 for written submissions. Draft legislation to give effect to these proposals will be introduced over the course of 2013 after the consultation process has been completed.
Retirement Policy Considerations It is becoming ever clearer that employers which take greater responsibility for the overall financial well-being of their workers, including through the design of their retirement funds, reap the rewards of a more stable and happier work force. The overall approach of these policy proposals is therefore to alter the defaults implicit in retirement fund design, where appropriate, to nudge, rather than force, individuals into making decisions which serve their long-run interests.
Retirement Governance The duties of trustees to act independently, and free from conflicts of interest, will be strengthened by elevating PF Circular 130, which deals with the governance of retirement funds, to a Directive. A draft will be published for consultation later this year. The FSB is to monitor trustee appointments, including ensuring that trustees meet fit and proper requirements.
Retirement Preservation Full vested rights with respect to withdrawals from retirement funds will be protected. Amounts in retirement accounts at the date of implementation of the legislation, called P-day, and growth on these, can be taken in cash, but from a preservation fund, and subject to taxation as currently. After P-day, all retirement funds will be required to identify a preservation fund and transfer members balances into that fund, or another preservation fund, when members withdraw from the fund before retirement. Existing rules on preservation funds will be relaxed to allow one withdrawal per year, but the amount of each withdrawal will be limited. Unused withdrawals in any year may be carried forward to future years. Withdrawal limits will account for vested rights as described above. Payments resulting from divorces will also need to be paid into preservation funds rather than being paid in cash..
Retirement Preservation Given the difficulties many workers currently have in finding and retaining full-time employment, unemployed workers should be permitted some access to their retirement funds in case of need. The vested rights of workers to access their retirement savings should be protected. This will ensure that workers who have made plans based on their retirement savings will be able to realise those plans, and would prevent disruption if workers rushed to cash in their savings before any proposal came into effect. The administrative burden on providers and consequent costs on members should not be too high.
Retirement Annuitisation Members of provident funds who are older than 55 on the date of implementation will not be required to annuitise any of their balance at retirement, provided they remain in the same provident fund until they retire. To lessen the impact on provident fund members, the means test for the old age grant will be phased out by 2016, and the de minimis requirement for annuitisation will be raised from R75 000 to R150 000. Trustees will be required to guide members through the retirement process, to identify a default retirement product in accordance with a prescribed set of principles, and to automatically shift members into that product when they retire, unless members request otherwise. The fund itself may provide the default product, or it may use an externally-provided product.
Retirement Annuitisation Living annuities will be eligible for selection as the default product, provided certain design tests, including on charges, defaults, investment choice and drawdown rates, are met. Trustees that make commission-free financial advice available to members on retirement, paid for out of the fund on a salaried basis, will be given some legal protections in respect of the choice of the default. To increase competition, providers other than registered life offices will be allowed to sell living annuities.
Retirement Broader Reform Government is exploring ways to increase retirement fund coverage to all workers. This is a complex issue, given the large proportion of uncovered workers who earn below the tax threshold, who work for small employers, or who have a tenuous connection to the formal labour force, for instance because they work in construction or domestic service. A process is currently underway to bring public pension funds currently not governed under the Pension Funds Act, including the Government Employees Pension Fund (GEPF), Transnet, Telkom and Post Office retirement funds, into the purview of the Act. Any biases in retirement funds which may discourage individuals from working past the retirement age of their funds will be identified and removed.
Past Year Tax Law Amendments past year 164 pages Explanatory memorandums 233 pages
Already Law Variable Payments 01 March 2013 onwards A new section 7B provides for the date of accrual of variable remuneration to be the date on which the remuneration is paid to the relevant employee. The deduction or withholding of employees tax by the employer should take place on the same date.
Employer Rented Vehicle 01 March 2013 onwards When employers provide employees with a vehicle for business use, it is proposed that the on-going rental value be utilised as the starting point for the calculation of the fringe benefit. Section 23A ring-fencing provisions relating to finance leases must apply.
Employer Rented Vehicle The employer must rent the vehicle from a lessor in the ordinary course of the lessor s business (other than banking, financial services business or insurance business). The vehicle may be leased by the general public for a period of less than a month. The costs of maintaining the vehicle must be borne by the lessor (including any repairs to the vehicle necessary due to normal wear and tear). The risk of loss or destruction of the vehicle must not be assumed by the lessee.
Employer Rented Vehicle Example An employer calculates that it would be more cost-effective to provide rented vehicles to employees as company cars. After getting quotes, the employer enters into a contract with a vehicle rental company to lease a fleet of 200 vehicles for a period of three years inclusive of maintenance, licence fees, and insurance. Results The contract will qualify as an operating lease if vehicles are also leased to the general public. In order to place the proposed fringe benefit calculation on par with the existing calculation, the monthly value of the rental vehicle will be based on the actual costs incurred by the employer under the operating lease as well as the cost of fuel in respect of that vehicle
Employer Rented Vehicle Where an employee has an unlinked fuel card (i.e. a fuel card not linked exclusively to a particular vehicle), the taxable benefit that results must be reflected separately as a travel allowance. Where the maintenance, license, and insurance in respect of the vehicle has been split from the main rental agreement, the provision of those services to the employee by the employer would result in different fringe benefit that has to be valued separately.
Changes Effective 01 March 2012 Employee Insurance Introduction of sub-paragraph 2(k) into the Seventh Schedule (k) the employer has during any period made any payment to any insurer under an insurance policy directly or indirectly for the benefit of the employee or his or her spouse, child, dependant or nominee. The ambit of paragraph 2(k) of the Seventh Schedule is arguably wide enough to encompass premiums paid by employers in respect of employment related policies (next page). It is not the intention that these policies result in a fringe benefit for the employee.
Exception - employment-related policies Travel insurance for business purposes ordinarily covers a number of different risks. Specific protection/cover offered is often in respect of personal accident, medical assistance, general assistance (e.g. repatriation of remains etc.), trip cancellation, luggage and personal effects, personal liability, and hijack, kidnap, and wrongful detention. Whereas the personal accident portion of the policy does indeed relate to the death, disability or severe illness of an employee, the fact that the cover is limited to an event that arises out of and in the course of employment will ensure that the policy will not fall within the ambit of section 11(w), but may instead qualify for a general deduction in respect of premiums
Exception - employment-related policies No fringe benefit be generated in the case of employer-held employment-related insurance policies (e.g. work accident policies). As a result, a specific exclusion will be inserted so that no fringe benefit will occur if the insured event as per the policy can only occur out of and in the course of employment of the employee. However, pay-outs from these policies will be taxable for the employee upon pay-out.
CESSION OF EMPLOYER-OWNED INSURANCE POLICIES (WITH INVESTMENT VALUES) TO RETIREMENT FUNDS A. Cession to pension or provident funds B. Cession to a retirement annuity fund The proposed amendment is effective as from 1 March 2012.
Medical Scheme Claim (above 65) The standard monthly medical scheme credits for the taxpayer, spouse and dependants; 33.3 per cent credits for medical scheme fees that exceed three times the standard medical scheme credits; and 33.3 per cent credits for all qualifying medical expenses (other than medical scheme contributions). Changes 01 March 2014
Medical Scheme Claim (disabilities) The standard monthly medical scheme credits for the taxpayer, spouse, and dependants; 33.3 per cent credits for medical scheme fees that exceed three times the standard medical scheme credits; and 33.3 per cent credits for all qualifying medical expenses (other than medical scheme contributions).
Medical Scheme Claim (rest) The standard monthly medical scheme credits for the taxpayer, spouse, and dependants; 25 per cent credits of the value of the amount by which the aggregate of the medical scheme fees that exceed four times the standard medical scheme credits, and all qualifying medical expenses (other than medical scheme contributions), exceed 7.5 per cent of the taxpayer s taxable income (excluding any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit).
Other Changes Effective COMPLETION OF THE CLEAN BREAK PRINCIPLE WHEN DIVIDING RETIREMENT INTEREST IN DIVORCE
What records do you need to keep now? (continued) What happens if SARS conducts an audit for a period that goes beyond the period that records are required to be kept for? SARS stipulated that the five year period may be extended if an audit/ investigation is conducted by SARS, and also if an objection/appeal is lodged. Even though the period of record retention may have passed for tax purposes, the information might still actually be available or accessible, or even be required to be retained for a longer period under another law (for instance in terms of the Companies Act, 71 of 2008). The engagement between SARS and a taxpayer will depend on the unique circumstances of the matter. 58
Penalties understatement penalty means a penalty imposed by SARS terms of Chapter 16. 59
Budget Speech Observations From 1 October 2012, a permanent voluntary disclosure programme became effective as part of the Tax Administration Act (2011). Some 700 taxpayers have already come forward. Tax of more than R200 million will be collected before the end of March 2013
Criminal Offence Existence of these statutory offences does not preclude prosecution of a person for an offence committed under the common law. A person may therefore be prosecuted for the common law offences of perjury, theft or fraud in addition to offences committed in terms of TAA. Criminal prosecution may be pursued by SARS in addition to imposing an administrative non-compliance penalty or understatement penalty. Administrative double jeopardy is avoided, an administrative noncompliance penalty may not be imposed where an understatement penalty has already been imposed. 61
Criminal Offence A. Criminal non-compliance relating to non-compliance (Section 234) a. The failure to register and notify SARS of a change to registered particulars b. Notify of appointment of representative or change of representative c. Fail to register as a tax practitioner d. Fail or neglect to submit a return or document to SARS or to issue a document to a person as required by the Act e. Fail to retain records 62
Criminal Offence A. Criminal non-compliance relating to non-compliance (Section 234) f. False certificate issued g. Erroneous / incomplete or false document h. Refuse/neglects to: Furnish information/documentation (as and when required Act) Reply truthfully to questions by SARS (as and when required Act) 63
Criminal Offence Take oath/make solemn declaration (as and when required Act) Attend/give evidence (as and when required Act) i. Non-compliance with directive/instruction of SARS j. Non-disclosure of material facts to SARS k. Obstruction of SARS official s duties l. Refuse to give assistance under section 49(1)
Criminal Offense Section 49(1): The person on whose premises an audit or criminal investigation is carried out, must provide such reasonable assistance as is required by SARS to conduct the audit or investigation, including: a. making available appropriate facilities, to the extent that such facilities are available; b. answering questions relating to the audit or investigation; and c. submitting relevant material as required.
Criminal Offense B. Criminal offences relating to evasion of tax (Section 235) Person intent to evade/assist with tax evasion or undue refund: a. Makes false statement/entry in document b. Gives false answer to request for information c. Prepares/maintains false books/records, or facilitates or authorises this d. Makes use of or authorises fraud / contrivance
Criminal Offense e. Makes false statement to obtain refund or exemption. Is guilty of offence, upon conviction, fine/imprisonment not exceeding two years Any person making such a statement is guilty of offense, unless he/she can prove (a) reasonable possibility (b) ignorant of falsity of statement (c) ignorance was not due to negligence. SARS official may lay complaint with SAPS or NPA regarding these offences.
Professional reporting (continued) When may SARS report a professional If an intentional or negligent act resulting in a taxpayer avoiding or unduly postponing performing an obligation contained in a tax Act. 68
Questions