NATIONAL BUDGET 2017/2018 Summary On 22 February 2017 Finance Minister Pravin Gordhan delivered in parliament the eighth budget speech of the Zuma administration. The minister gave advance warning in his medium-term budget last year that the country would need to source revenue shortfalls through various tax increases. This has been borne out by the proposals. The minister noted that tough choices have to be made to achieve the development outcomes they seek. Economic growth is slow, unemployment is far too high and many businesses and families are under stress. The global environment is complex and uncertain. There are immense transformation challenges to overcome to face the inequalities and divisions of our society. All South Africans must share in a more prosperous future and there is a plan for a more inclusive, shared economy. Its implementation requires greater urgency and effective collaboration among all social stakeholders. This summary will concentrate mainly on the tax proposals of interest to financial planning clients. There were many miscellaneous tax proposals included in the budget review which will not be dealt with in this publication because they do not directly affect financial planning advice. Further communications will follow during the year on important aspects affecting financial planning when more detail is released. Against this backdrop the minister announced the following key features of the 2017 National Budget as follows.
Budget summary National Budget 2017 will be remembered for the following The budget deficit for 2017/18 will be 3.1% of GDP, in line with their fiscal consolidation commitment. Government debt will stabilise at about 48% of GDP over the next three years. Taxpayers will face a real increase in the effective personal income tax rate in 2017/18. A new top personal income tax rate of 45% for those with taxable incomes above R1.5 million. There is a four percentage point increase in the tax rate for trusts to 45%. This will affect about 100 000 taxpayers. An increase in the dividend withholding tax rate from 15% to 20% and on foreign dividends. The 2017 tax proposals are projected to raise a required R28 billion, and increase the tax burden from 26% of GDP in 2016/17 to 26.7% in 2017/18. The new top marginal income tax bracket for individuals combined with partial relief for bracket creep is expected to contribute R16.5 billion, with R6.8 billion coming from the increased dividend withholding tax rate. Limited bracket creep relief, increasing the tax-free threshold from R75 000 to R75 750. An increase of 30c/litre in the general fuel levy and 9c/litre in the road accident fund levy. Increases in the excise duties for alcohol and tobacco of between 6% and 10%. An increase in the threshold above which transfer duty is paid from R750 000 to R900 000. The annual allowance for tax-free savings accounts will be increased to R33 000. The medical tax credit will be increased in line with inflation this year and will be increased for the first two beneficiaries from R286 to R303 per month, and for the remaining beneficiaries from R192 to R204 per month. Future adjustments will be balanced with the funding requirements of national health insurance. The primary, secondary and tertiary rebates, and the levels of all the taxable income brackets, will be increased by 1% from 1 March 2017. Additional support for bursaries from 1 March 2017. A number of VAT amendments were introduced but will not be discussed here. Tax on sugary beverages will be introduced as soon as the necessary legislation is approved by parliament. No amendments were made to the Company Law, Estate Duty or Donations Tax rates. National Budget 2017/2018 Page 1
A. Personal Income tax 1. Personal tax tables for individuals and special trusts Old. 2016/2017 tax year Taxable income (R s) R0 - R188 000 Rates of tax 18% of each R1 R188 001 - R293 600 R33 840 + 26% of the amount above R188 000 R293 601 - R406 400 R61 296 + 31% of the amount above R293 600 R406 401 R550 100 R96 264 + 36% of the amount above R406 400 R550 101 - R701 300 R147 996 + 39% of the amount above R550 100 R701 301 and above R206 964 + 41% of the amount above R701 300 New. 2017/2018 tax year Taxable income (R s) R0 - R189 880 Rates of tax 18% of each R1 R189 881 - R296 540 R34 178 + 26% of the amount above R189 880 R296 541 - R410 460 R61 910 + 31% of the amount above R296 540 R410 461 - R555 600 R97 225 + 36% of the amount above R410 460 R555 601 - R708 311 R149 475 + 39% of the amount above R555 600 R708 311 - R1 500 000 R209 032 + 41% of the amount above R708 310 R1 500 001 and above R533 625 + 45% of the amount above R1 500 000 2. Rebates The table below reflects the proposed tax rebates for individuals. Tax rebates 2016/2017 tax year 2017/2018 tax year Primary rebate R 13 500 R 13 635 Secondary rebate (applicable to taxpayers age 65 and older) Tertiary rebate (applicable to taxpayers age 75 and older) R 7 407 R 7 469 R 2 466 R 2 493 National Budget 2017/2018 Page 2
3. Tax thresholds The increased threshold below which individuals are not liable for personal income tax is set out in the table below. Tax thresholds 2016/2017 tax year 2017/2018 tax year Below age 65 R 75 000 R 75 750 Age 65 and over R 116 150 R 117 300 Age 75 and over R 129 850 R 131 150 4. The tables below illustrate the tax savings/increases for individuals (younger than age 65) Taxable income (R) 2016/2017 2017 / 2018 Tax reduction (R) Tax reduction (%) 400 000 500 000 750 000 1 000 000 1 500 000 80 780 116 460 213 431 315 931 520 931 80 347 115 824 212 490 314 990 519 990-432 - 635-941 -941-941 - 0.5% - 0.5% - 0.4% - 0.3% - 0.2% (Age 65-74) Taxable income (R) 2016/2017 2017/2018 Tax reduction (R) Tax reduction (%) 400 000 500 000 750 000 1 000 000 1 500 000 73 373 109 053 206 024 308 524 513 524 72 866 108 343 205 009 307 509 512 509-506 - 709-1015 - 1015-1015 - 0.7% - 0.7% - 0.5% - 0.3% - 0.2% National Budget 2017/2018 Page 3
(Age 75 and older) Taxable income (R) 2016/2017 2017/2018 Tax reduction (R) Tax reduction (%) 400 000 500 000 750 000 1 000 000 1 500 000 70 907 106 587 203 424 306 058 511 058 70 376 105 853 202 518 305 018 510 018-531 - 734-1039 - 1039-1039 - 0.7% - 0.7% - 0.5% - 0.3% - 0.2% Comment. The minister provided very little fiscal drag relief to individuals. If no adjustments were made to the personal income tax tables in 2017/18, this would amount to an estimated R14.6 billion in additional revenue. The bracket creep adjustment for 2017/18 amounts to R2.5 billion in relief, leaving R12.1 billion as additional revenue. B. Capital Gains Tax (CGT) Although there were no changes to the inclusion rate, the maximum effective rate for the following taxpayers due to the increase in the maximum marginal rate for taxpayers and the tax rate for trusts, is the following Individuals. The maximum effective capital gains tax rate for individuals will increase from 16.4% to 18%. Companies. This remains the same at an effective rate of 22.4%. Trusts. The effective rate applicable to trusts will increase from 32.8% to 36%. Special Trusts. The maximum effective rate applicable to special trusts will be raised from 16.4% to 18%. We have not yet ascertained how this will apply to life office funds. We will provide an update when this is known C. Interest exemption The interest rate exemptions will not be adjusted for inflation. Individuals will be encouraged to invest in the new tax-free savings accounts instead. In the circumstances the threshold at which tax is paid on interest income remains the same. Interest exemption for individuals 2017/18 Under age 65 R 23 800 Age 65 and over R 34 500 D. Tax-free savings accounts The annual contribution to a tax-free savings account is increased from R30 000 per year to R33 000 per year in line with inflation. There is no adjustment to the lifetime allowance of R500 000. National Budget 2017/2018 Page 4
E. Transfer duty To provide relief for lower and middle-income households, government proposes to raise the duty-free threshold on purchases of residential property from R750 000 to R900 000, effective 1 March 2017. Transfer duty table Property value (R) 2016/2017 Rates of tax Property value (R) 2017/18 R0 R750 000 0% of property value R0 R900 000 0% of property value R750 001 R1 250 000 3% of property value above R750 000 R 900 001 R1 250 000 3% of property value above R900 000 R1 250 001 R1 750 000 R15 000 + 6% on the property value above R1 250 000 R1 250 001 R1 750 000 R10 500 + 6% on the property value above R1 250 000 R1 750 001- R2 250 000 R45 000 + 8% on the property value above R1 750 000 R1 750 001- R2 250 000 R40 500 + 8% on the property value above R1 750 000 R2 250 001 and above R85 000 + 11% on the property value above R2 250 000 R2 250 001 R10 000 000 R80 500 + 11% on the property value above R2 250 000 R10 0001 and above R937 500 + 13% on the property value exceeding R10 000 000 R10 000 001 and above R 933 000 + 13% on the property value exceeding R10 000 000 National Budget 2017/2018 Page 5
F. Medical tax credits The table of monthly medical tax credits will increase marginally with effect from 1 March 2017 as follows Monthly medical tax credits for all taxpayers 2016/2017 2017/2018 Member R 286 R 303 First beneficiary R 286 R 303 Additional beneficiaries R 192 R 204 Family of four R 956 R 1 014 Family of four annual credit R 11 472 R 12 168 G. Dividend Withholding tax Government is increasing the dividend withholding tax rate to 20%, effective 22 February 2017. The exemption and rates for inbound foreign dividends will also be adjusted to 20% in line with the new rate, effective for years of assessment commencing on or after 1 March 2017. H. Individuals, employment and savings 1. Health reform. National health insurance fund to be established During 2017/18 government intends to establish a national health insurance fund. Its initial focus will be to expand access to a common set of maternal health services and make hearing aids and spectacles available through school health programmes. Government intends to finance it by exploring a small reduction in the tax credit on medical scheme contributions. During 2017/18, it is intended to publish the final national health insurance white paper. 2. Withholding tax on immovable property sales To align with the increased effective capital gains tax rate, government proposes to increase the withholding tax on immovable property sales by non-residents. Rates will be increased from 5% to 7.5% for individuals, 7.5% to 10% for companies and 10% to 15% for trusts. 3. Expanding the VAT base Government will look to expand the VAT base in 2018/19. It is proposed that the zerorating on fuel be removed. This will be subject to consultation leading up to the 2018 budget. National Budget 2017/2018 Page 6
4. Amending foreign employment income-tax exemption in respect of South African residents If a resident works in a foreign country for more than 183 days with no tax payable in the foreign country, that foreign employment income will benefit from double non-taxation. It is proposed that this exemption be adjusted so that foreign employment income will only be exempt from tax if it is subject to tax in the foreign country. 5. Increasing the fringe-benefit exemption for employer-provided bursaries Government proposes to increase the income eligibility threshold for employees from R400 000 to R600 000, and the monetary limits for bursaries from R15 000 to R20 000 for education below NQF level 7, and from R40 000 to R60 000 for qualifications at NQF level 7 and above I. Retirement Reform Proposals 1. Annuitisation for Provident Fund members The postponement of the annuitisation of retirement benefits for provident funds to 1 March 2018 to allow for further consultation with NEDLAC will continue, with the aim of reaching consensus on the need to annuitise at retirement. Should no agreement on annuitisation be reached, government will review the continuation of the tax deduction for funds that do not annuitise part of their retirement savings, to ensure the tax system is equitable across all retirement funds. National Treasury will engage with the industry to provide appropriate annuity products that take better account of the needs of low- and middle-income members of retirement funds. 2. Preservation of benefits after reaching normal retirement dates Prior to 2015, an employee was forced to retire from an occupational fund on reaching retirement age. In 2014, amendments were made to the Income Tax Act to allow individuals to defer their retirement date until a future date when they are entitled to elect to retire. Following this amendment, submissions were made to National Treasury for members to be allowed to transfer to a preservation fund at retirement age so that they had multiple options on retirement from employment and they were not forced to defer their retirement in the employer fund. Currently, the Income Tax Act does not cater for the transfer of lump sum benefits from one retirement fund to another when reaching retirement. The budget proposals contain an intention to allow the transfer of retirement interests to a retirement annuity fund, subject to fund rules. There is no mention of a preservation fund. 3. Tax-exempt status of pre-march 1998 build-up in public-sector funds Currently, the Income Tax Act makes provision for the tax-free transfer of pre-arch 1998 lump sum benefits from a public-sector fund to a private sector fund. We have previously noted in a Lighthouse circular that the law only applies to a first transfer and a subsequent transfer causes the tax-free nature of the pre 98 portion to be lost. The IRF and ASISA has been asking for a legislative change for many years and we are pleased to see that it is proposed that subsequent transfers of these lump sum benefits to another private sector pension fund will be tax-free. National Budget 2017/2018 Page 7
4. Removing the time limit to join an employer umbrella fund When a new occupational retirement fund is introduced in an employer entity, existing employees have 12 months within which to join the fund, after which they are unable to join. It is proposed that the 12-month limit be removed and that employees be allowed to join without time restriction, subject to the rules of the fund. It is not certain whether this only applies to umbrella funds or to stand alone funds too. 5. Application of the cap on deductible retirement fund contributions It is currently not clear how the overall annual cap of R350 000 on contributions to pension, provident and retirement annuity funds should be applied when determining monthly employees tax. It is proposed that the amount of R350 000 be spread over the tax year, which is a more prudent approach. 6. Default regulations The second revised draft of the default regulations was released for public comment in December 2016. The aim of the default strategies (investment, preservation and annuities) is to ensure that the retirement savings of members are better protected through lower charges and provide better value for money. While concerns on the blanket ban of performance fees and guaranteed products have been addressed, these may be reviewed in the final regulations published later this year. Further steps to lower charges will follow. 7. Pension Funds Act amendment In 2017, amendments to the Pension Funds Act will be considered to introduce the concept of an umbrella fund, and to clarify the extent, purpose and interpretation of the powers of the Registrar of Retirement Funds to deal with funds that do not have properly constituted boards. 8. Unclaimed Benefits National Treasury will engage with the Financial Services Board to find a sustainable policy solution to the challenge of unclaimed benefits. 9. Automatic enrolment in retirement funds South Africa has a well developed occupational pension system, but there is limited coverage and a large number of funds. Government is considering automatic enrolment as a key and urgent initiative to ensure more workers save for their retirement. This initiative would encourage or require employers to automatically enrol their workers into a retirement fund, which could be sponsored by the employer or sourced from a third party. J. Tax Treatment of Trusts 1. Refining measures to prevent tax avoidance through the use of trusts In 2016, an anti-avoidance measure was introduced which deems any interest foregone in respect of low-interest or interest-free loans to a trust to be donations that are subject to donations tax at a rate of 20%. However, some taxpayers have already attempted to circumvent this by making low-interest or interest-free loans to companies owned by a trust. The scope of this anti-avoidance measure will be extended to cover these avoidance schemes. In addition, it is proposed that the anti-avoidance rule should not apply to trusts that are not used for estate planning, for example, employee share scheme trusts and certain trading trusts. National Budget 2017/2018 Page 8
2. Tax rate of trusts It has been increased to 45% for trusts excluding special trusts. The maximum marginal rate for special trusts is 45% which is reached at R1 500 000 taxable income. K. Social Security The Social Security grants are increased as follows 2016/2017 2017/2018 Disability and Old Age Grants Over 75 R 1 505 R 1 525 R 1 600 R 1 620 Foster care R 890 R 920 Child support Grant R 350 R 380 L. Indirect taxes Fuel levies Tobacco excise duties 9 cents per litre increase in the RAF levy, effective 5 April 2017 Government proposes to increase the excise duty rate by between 8% and 9.5%. Pack of 20 cigarettes will cost R1.06 more while cigarette tobacco prices will rise by R1.19 per 50 grams and pipe tobacco by 40 cents per 50 grams. Alcoholic beverages Beer 11 cents more per 340ml can, unfortified wine 30 cents more per litre, fortified wine 35 cents more per litre, Champagne 93 cents more per litre, spirits R4.43 more per bottle. Carbon Tax Sugar sweetened beverages VAT on fuel During the first phase of the tax (until 2020), there will be no impact on the price of electricity. A revised regulation for the carbon offset allowance, enabling firms to reduce their carbon tax liability, will be published by mid-2017. By the end of this year, government expects to provide clarity on the alignment of the carbon tax and carbon budget after 2020. The proposed tax rate will be 2.1c/gram for sugar content in excess of 4g/100ml. Of the proposed rate, 50% will apply to concentrated beverages. Zero VAT rating on fuel might be removed in 2018/19 after consultation. National Budget 2017/2018 Page 9
Conclusion The most notable changes in this year s budget from a financial planning angle was the increase in the maximum marginal rate of tax, which affects individual investors by causing interest and REIT taxable dividends to be taxed at a higher marginal rate of tax, for individuals with taxable income exceeding R1 500 000 per year. This has a knock on effect of increasing the effective rate at which capital gains are taxed. Notably, dividend withholding tax which is increased from 15% to 20% will also have an effect on client s investment returns. This is extended to foreign dividends too. Trusts continue to become less attractive for tax purposes with a tax rate of 45% on income and 36% on capital gains. Higher tax rates should encourage every client to have a tax-free savings account with the new annual amount of R33 000. Often the tax proposals in the budget are bald statements which are not fully understood immediately. We often have to await the legislation and industry discussion to understand the full impact of the budget proposals. For example, we do not yet know whether the tax rate in the individual policyholder fund of life offices will be changed. We expect to be able to provide you with fuller information on that and the other issues as the year proceeds. We hope that this budget brings opportunities and an improvement to the lives of all South Africans. Disclaimer. Please note that while care has been taken to ensure that the information provided in this publication is correct, it represents an overview of the topic under discussion and as such does not constitute advice. While Alexander Forbes has taken reasonable effort to ensure that the information contained herein is true and correct it will not be held liable in respect of any loss arising from any advice provided arising out of the contents of this circular. We suggest that you contact your Legal department before taking any decisions based on the information herein. National Budget 2017/2018 Page 10