Overview Analysis of Tax Budget Proposals 2013/14 This year s tax proposals focus on supporting job creation and higher levels of savings. Social stability has been undermined by the high levels of unemployment and income inequality. Thus these tax proposals are made within the context of an economy under severe strain, in the face of declining growth of its major trading partners, and muted commodity prices. The proposals are meant to support the growth path indicated in the National Development Plan (NDP), published by the South African Presidency last year. The NDP maps out developmental objectives and a roadmap to 2030. The broad objective of the NDP is to place South Africa on a sustainable growth path at 5% per annum in order to double the size of the economy and thus address the social backlog and instability in the country. In light of the NDP, a review is to be undertaken in order to determine the appropriateness of the current fiscal policy in supporting economic growth. One of the particular aspects that are to be reviewed is the appropriateness of the elastic approach to mining and petroleum royalties based on commodity prices. This review will be sensitive to the competitiveness of South Africa as a mining investment destination. Job Creation A tax incentive targeted at the hiring of first- time work seekers is to be introduced. It will provide the highest tax incentive at the entry level wage, which presumably will be freely negotiated between the employer and the employee, tapering off to zero when the employee s earnings exceed the individual income tax threshold. This will be R67 111 for the new year. The incentive is subject to political, regulatory and labour market sensitivities. It is anticipated that SARS will be vigilant in its implementation in order to prevent abuse. A similar incentive is to be introduced for the employment of workers earning less than R60 per annum in the recently announced special economic zones. Savings Incentives Tax preferred savings and investment accounts will be permitted from April 2015. Accruals and withdrawals are to be tax free. These accounts will be independent of any retirement product or arrangement, such as a retirement annuity. They are aimed instead at all levels of individual income earners, and compete with conventional interest income products. They will also level the playing field between banks and contractual savings institutions in this market. As the interest exemptions will not be adjusted for inflation in the future, it is assumed that both preferred savings products and the interest exemption limit will co-exist, but with the latter having a declining significance. All figures in South African Rand. Spot Rate at budget date. GBP R13.46 Brazil Real R4.48 Indian Rupee R0.16 Chinese Yuan R1.42 Japenese Yen R 0.09 US Dollar R8.87 Euro R11.62 Job Creation Incentives SARS will want to ensure that the incentives that are to be paid on a graduated basis are appropriately claimed. Special Economic Zone Incentives: 15% corporate income tax (normal 28%); Accelerated depreciation for buildings. New Interest Exemption Limits: Under 65 years: R23 800 (R22 800) Over 65 years: R34 500 (R33 ) Tax Preferred Savings and Investment Products: Annual limit of contributions: R30 Overall lifetime limit: R500 Intended Page 1 of 5
The incentive is expected to benefit lower income earners more than, for example, the 18% of individuals, contributing 54% of revenue and enjoying only 22% of the individual tax relief this year. Retirement savings incentives aim at a streamlined approach to tax incentives. There is now neutrality between occupational (pension and provident funds) and non-occupational funds (retirement annuity funds). Neutrality is also achieved between funds that are permitted to pay an annuity (retirement annuity and pension funds) and those that do not (provident funds). Employer contributions that are excessive of the deduction limits permitted, and which constitute fringe benefits to employees, will rank to be included in the overall deduction limit. Provision is made for phasing in provident funds being required to pay annuities, with existing fund members retaining a vested right to their lump sum benefits. Personal Income Tax Another feature of this years budget is the absence of tax relief except for individual taxpayers. This is marginal at R7bn. The current tax year s revenue-take from individuals, both employed and engaged in profitable activities, is projected at R282.42bn. The relief is meant to benefit 82% of taxpayers, enjoying 78% of the benefit and expected to contribute 46% of the individual tax revenue for the budget year. Retirement Savings The overall collective deduction permitted is 27.5% of the greater of remuneration or taxable income tax. A cap of R350 per annum will be applied to prevent high level income earners from enjoying a greater proportional benefit. Excess contributions may be rolled over to succeeding years. At retirement, amounts not previously deducted are added to tax free lump sums Both company payrolls and individual arrangements will require review in light of this development. Table : Personal income tax rates and brackets adjustments, 2012/13-2013/14 2012/13 2013/14 Taxable income (R) Rate of tax Taxable income (R) Rates of tax R0 - R160 18% of R1 R0 - R165 600 18% of R1 R 160 001 - R 250 R 250 001 - R 346 R 346 001 - R 484 R 484 001 - R 617 R 617 001 and above R 28 800 + 25% of amount above R 160 R 51 300 + 30% of amount above R 250 R 80 100 + 35% of amount above R 346 R 128 400 + 38% of amount above R 484 R 178 940 + 40% of amount above R 617 R 165 601 - R 258 750 R 258 751 - R 358 110 R 358 111 - R 500 940 R 500 941 - R 638 R 638 601 and above R 29 808 + 25% of amount above R 165 R 53 096 + 30% of amount above R 258 750 R 82 904 + 35% of amount above R 358 110 R 132 894 + 38% of amount above R 500 940 R 185 205 + 40% of amount above R 638 600 Monthly Tax Credits for medical scheme contributions increase to R242 (R230) for the member and first beneficiary, and R162 (R154) for each additional beneficiary. Rebates Rebates Primary R 11 440 Primary R12 080 Secondary R 6 390 Secondary R6 750 Third R 2 130 Third R2 250 Tax threshold Tax threshold Below age 65 R63 556 Below age 65 R67 111 Age 65 and over R99 056 Age 65 and over R104 611 Age 75 and over R110 889 Age 75 and over R117 111 Page 2 of 5
Supporting Social Objectives Bursaries given to relatives of employees are seen as a socially uplifting activity by employers and the thresholds for fringe benefit exemptions are to be reviewed, and differentially for tertiary students and scholars. A major factor in the recent unrest on mines and farms has been the living conditions of workers. Employer housing schemes where houses are transferred to employees at less than market value had attracted fringe benefits tax, which will be relieved to promote settled conditions of employment. Donations to Public Benefit Organisations (PBOs) were permitted a deduction against taxable income to the extent of 10%. Amounts in excess of this were not permitted a deduction. These will be permitted to roll over to succeeding tax years to encourage large donations. PBO s may be subject to the small corporation turnover threshold and graduated tax rates in future. This is in recognition of many PBO s engaging in trading activities to sustain themselves, and the potential impact this could have on job creation. Businesses having a social impact are to be considered for tax support as part of the job creation imperative. The deduction of a donation of private land for conservation purposes was restricted to 10%. The excess may now be carried over and deducted in succeeding years. The means-test for the old age grant is to be abolished and the entitlement is to be universally applied, irrespective of income levels, by 2016. This will necessitate adjustments to the tertiary and secondary rebates. As National Health Insurance will be phased in over 14 years, a discussion paper addressing funding options is to be released later this year. A PBO funding other PBO s will be subject to distributions rules in future to accelerate expenditure on welfare. Conservation of Land: The lower of municipal or market value is to be the basis of the incentive Capital Gains may be offset against deductions over time. Certain conservation and maintenance expenses may be deducted. Trust Changes Tax Base Integrity Attacking Trusts: A raft of measures are to be introduced this year against the flow-through and flexibility aspects of trusts. Estate or succession planning is also cited as a reason for the intervention. The measures include: Not permitting discretionary and trading trusts to be used as flowthrough vehicles; and Amounts distributed by offshore foundations will be treated as revenue subject to tax in South Africa. Employment Share Schemes Proposed uniform tax treatment of schemes to ensure that both top hat arrangements and anomalies relating to low income earners are eliminated; and The tax treatment of employer s deductions are to be reviewed. Tax at trust level. Distributions deductible against current taxable income of trust. Beneficiary receives tax free distribution subject to an exception where a deductible payment is claimed. Page 3 of 5
Disability Income Protection Policies There is a lack of distinction between indemnifying for loss of income as opposed to loss of a limb (personal capital) in many insurance policies. All individually held disability policies will no longer enjoy a tax deduction against the premium paid. In future the contributions paid will not be deductible and the benefits will be exempted from tax. Business Taxes debt restrictions The objective of these measures is to close artificial and excessive debt arrangements in order to increase revenue. The measures include: Artificial debt, where the prospect of repayment within 30 years is not possible or debt is converted to equity at the insistence of the issuer. Banks and insurers will not be affected. Connected persons using excessive debt will be subject to limits on interest deductions and the excess will be permitted to be deducted over five years. Acquisition debt against future earnings is to be limited to the extent of the deduction permitted and excess debt may be deducted over five years. Long term insurers The four funds approach to taxation is being modified. Risk business will be taxed in the corporate and no longer the policy-holder fund. The deduction of expenses against risk business will now be made against a deeper tax base than was the case previously. Reserving for this risk business is to be permitted on a basis similar to short-term insurance reserving. Real Estate Investment Trusts (REITS) The tax regime applicable to listed REITS is to be extended to unlisted REITS, once they are appropriately regulated. When property syndication legislation is passed to protect investors, the same tax relief is expected to be extended to them. Hedge Funds Are expected to fall under collective investment scheme legislation and the tax proposal is that investors will be taxed on the realisation of their participation. Interest income funds are expected to be treated in the same way. Withholding Tax uniformity Subject to Double Tax Treaty relief, the approach to withholding tax on interest and royalties is to be applied to cross-border services, from 1 March 2014. Indirect Taxes The following indirect tax proposals were tabled: A carbon tax is to be introduced from 2015 and in tandem the electricity levy is to be phased out; The energy-efficiency savings incentive will receive some of the carbon taxes to fund the incentive. Vehicle emissions of CO2 tax is to be increased from 1 April; On the back of the extension of the Kyoto Protocol, the exemption from tax on income from primary certified emissions reductions, has been extended to 2020; Plastic bag and incandescent light bulb levies have been increased; Page 4 of 5
Fuel levies have been increased and a further levy amount dedicated to the subsidisation of the biofuels industry during its incubatiuon is proposed; and As is customary, sin taxes on tobacco and alcohol have increased. Foreign businesses supplying e-books, music and other digital goods or services will be obliged to to register as VAT vendors in South Africa. Tax Administration Tax administration measures are to be introduced and aimed at: Broadening and protecting the tax base from eroding. South Africa is cooperation with the OECD and BRICS countries in addressing mechanism that involve profit shifting; Registering micro businesses including those operated by foreigners in collaboration with the Department of Home Affairs; Relieving from penalties were there are bona fide errors. Combating the illicit economy and to identify undervalued imported goods; Updating to an automated tax clearance system in order to prevent non-complaint taxpayers from transacting with the state and Creating a single registration across tax types. A summary of additional specific amendments being worked on by the National Treasury for the 2013 legislative season is obtainable by contacting any of the personal listed below Editor: Ahmed Jooma WTS South Africa ahmed@wts-southafrica.com www.wts-alliance.com T: +27 (0) 11 447-5167 F: +27 (0) 866-317-163 Staff Contributions: Production - Ashraf Jooma ashraf@wts-southafrica.com Analysis - Farmidah Khan farmidah@wts-southafrica.com Office Location 95 Oxford Road Saxonwold Johannesburg This issue of Budget Review newsletter is published by WTS-South Africa. The information is intended to provide general guidance with respect to the subject matter. This general guidance should not be relied on as a basis for undertaking any transaction or business decision, but rather the advice of a qualified tax consultant should be obtained based on a taxpayer s individual circumstances. Although our articles are carefully reviewed, we accept no responsibility in the event of any inaccuracy or omission. For further information please refer to the authors Page 5 of 5