Mazars Budget 2017: 23 February 2017
Strategising for growth
BUDGET 2017/2018 SUMMARY OF MAJOR FEATURES
Companies and close corporations
The rate of normal tax remains unchanged at 28% in respect of years of assessment ending during the 12-month period to 31 March 2018. The dividend withholding tax (DWT) has been increased to 20% (effective 22 February 2017). The combined effective tax rate (normal tax and DWT) where all profits are distributed equates to 42.4% (previously 38.8%).
A new top personal income tax bracket of 45% for individuals earning above R1.5 million a year has been introduced. The minimum rate of tax remains unchanged at 18% where taxable income does not exceed R189 880 (previously R188 000).
TAX TABLE FOR THE YEAR OF ASSESSMENT – 2018
All natural persons and special trusts
TAXABLE INCOME TAX PAYABLE
R0 – R189 880 18% of taxable income
R189 881 – R296 540 R34 178 + 26% of taxable income above R189 880
R296 541 – R410 460 R61 910 + 31% of taxable income above R296 540
R410 461 – R555 600 R97 225 + 36% of taxable income above R410 460
R555 601 – R708 310 R149 475 + 39% of taxable income above R555 600
R708 311 – R1 500 000 R209 032 + 41% of taxable income above R708 310
R1 500 001 and above R533 625 + 45% of taxable income above R1 500 000
The primary rebate for all natural persons has been increased to R13 635 (previously R13 500).
The additional rebate for persons aged 65 years and older has been increased to R7 479 (previously R7 407). The tertiary rebate for persons 75 years and older has been increased to R2 493 (previously R2 466).
The tax-free portion of interest income remains at R23 800 for taxpayers under 65 years, and R34 500 for persons aged 65 years and older.
Liability for tax commences as follows
- Under 65 years: R75 750 (previously R75 000)
- 65 years and older: R117 300 (previously R116 150)
- 75 years and older: R131 150 (previously R129 850)
The rate of tax for the year of assessment ending 28 February 2018 has been increased to 45% (previously 41%) in line with the individual marginal income tax rate.
Medical scheme membership
From 1 March 2017 the monthly tax credits for medical scheme contributions will be increased to R303 (previously R286) for each of the first two beneficiaries and R204 (previously R192) for each additional beneficiary.
Capital Gains Tax
For individuals the inclusion rate for capital gains remains unchanged at 40%. In respect of companies and trusts the inclusion rate remains unchanged at 80%.
The exemption and rates for inbound foreign dividends will be adjusted in line with the new rate
of DWT. Most foreign dividends received from foreign companies are presently taxable at a
maximum effective rate of 15% (unless fully exempt from tax). The effective rate will increase to
20% effective for years of assessment commencing on or after 1 March 2017.
Withholding tax on immovable property
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.
New top personal income
tax bracket of 45% introduced
To provide relief for lower- and middle-income households, government proposes to raise
the duty-free threshold on purchases of property from R750 000 to R900 000, effective
1 March 2017.
Transfer duty is payable on acquisition of property by all persons
PROPERTY VALUE DUTY PAYABLE
R0 – R900 000 0% of property value
R900 001 – R1 250 000 3% of the value above R900 000
R1 250 001 – R1 750 000 R10 500 + 6% of the value above R1 250 000
R1 750 001 – R2 250 000 R40 500 + 8% of the value above R1 750 000
R2 250 001 – R10 000 000 R80 500 + 11% of the value above R2 250 000
R10 000 000 and above R933 000 + 13% of the value above R10 000 000
Government proposes to increase the general fuel levy by 30c/litre and the Road Accident Fund
(RAF) levy by 9c/litre with effect from 5 April 2017.
Tax on sugary beverages
Government proposes to implement a tax on sugary beverages, as soon as the necessary legislation is approved by Parliament and signed by the President. The tax will be administered through the Customs and Excise Act. The proposed tax rate will be 2.1c/gram for sugar content in excess of 4g/100ml.
A revised Carbon Tax Bill will be published for public consultation and tabled in Parliament by mid-2017. The latest developments include the following:
- 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
Excise duties on alcoholic beverages and tobacco products
The targeted excise tax burdens for wine, beer and spirits are 11%, 23% and 36% of the weighted average retail price, respectively. Since the implementation of the current excise regime in 2002, tax rates on most alcoholic beverages have consistently increased above inflation annually. The 2017 Budget continues this trend with proposed excise duty rate increases of between 6.1% and 9%. The targeted excise tax burden as a percentage of the retail selling price of the most popular brand within each tobacco product category is currently 40%. The consumption of cigars has moved towards more expensive brands, requiring a higher than inflationary increase to maintain the targeted tax burden. Government proposes to increase the excise duty rateby between 8% and 9.5%.
Status of announced tax policies
In the 2014 Budget, government proposed an acid mine drainage tax. The 2012 Budget proposed a gambling tax. Neither proposal has been implemented. Their status is as follows:
- a discussion paper outlining the options to address acid mine drainage will be published for public comment and further consultation will take place by mid-2017
- the State Law Advisor has certified the draft National Gambling Tax Bill and the National
Gambling Tax Administration Bill. Both bills will be taken to Cabinet in 2017
Individuals, employment and savings
AMENDING EMPLOYMENT INCOME-TAX EXEMPTION IN RESPECT OF SOUTH AFRICAN RESIDENTS
Currently, if a South African resident works in a foreign country for more than 183 days in a 12-month period commencing or ending in a tax year, foreign employment income earned is exempt from tax, subject to certain conditions. 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.
REFINING MEASURES TO PREVENT TAX AVOIDANCE THROUGH THE USE OF TRUSTS
In 2016, an anti-avoidance measure aimed at curbing the tax-free transfer of wealth to trusts through the use of low-interest or interest-free loans was introduced in the Income Tax Act. This anti-avoidance measure 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%.
It has come to the attention of Treasury that some taxpayers have already attempted to circumvent the anti-avoidance measure by making low-interest or interest-free loans to companies owned by a trust. To counter abuse, it is proposed that the scope of this anti-avoidance measure 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.
Currently, once an individual elects to retire, the Income Tax Act does not cater for the transfer of lump sum benefits from one retirement fund to another. It is proposed that transfers of retirement interests be allowed from a retirement fund to a retirement annuity fund, subject to fund rules.
Removing time limit to join an employer umbrella fund
Existing employees who do not join a newly established employer umbrella fund have 12 months
within which to join the fund, after which they are unable to join. To encourage employees to contribute towards their retirement and remove practical difficulties, 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.
Increasing the fringe-benefit exemption for employer-provided bursaries
Currently, if an employee has an income of less than R400 000 and their employer provides a bursary to them or their relatives, the value of the bursary, up to a limit, will not be taxable in the hands of the employee. 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. The effective date of implementation will be 1 March 2017.
TAX IMPLICATIONS OF DEBT FORGONE
Alignment of the tax treatment of debt forgone for mining companies
It is proposed that the tax treatment of debt forgone for mining companies be aligned with the tax treatment applied to companies in other sectors.
Alignment of the tax treatment of debt forgone for dormant group companies or companies under business rescue It is proposed that the current relief in respect of debt that is cancelled, waived, forgiven or discharged in respect of loans between companies within the same 'group of companies' be extended to debt used to finance tax-deductible operating expenditure.
Debt settled for consideration other than cash
It is proposed that the conversion of debt into equity be allowed where debtors make compromises with their creditors. However, provision will be made to recoup capitalised interest on the debt in respect of which an interest deduction was previously claimed.
ADDRESSING THE ABUSE OF DISGUISED SALE OF SHARES USING SHARE BUYBACKS
In the 2016 Budget Review, tax avoidance schemes involving share buybacks were highlighted for review. Following the announcement in 2016, no specific countermeasures were introduced. It is therefore proposed that specific countermeasures be introduced to curb the use of share buyback schemes.
ADDRESSING THE ABUSE OF ARTIFICIAL REPAYMENT OF DEBT
Since the introduction of the current tax rules for debt forgiveness, it has come to government’s attention that creditors and debtors are entering into short-term shareholding structures that attempt to circumvent income tax resulting from a recoupment triggered by the debt forgiveness rules. It is proposed that measures be introduced to prevent these structures.
INTERACTION BETWEEN THE 'IN DUPLUM' RULE AND THE STATUTORY TAX LEGISLATION
The in duplum rule aims to protect debtors by limiting the amount of the total interest a creditor can charge. The effect of the rule is that interest on a debt ceases to accrue where the total amount of the interest equals the outstanding principal debt. Various anti-avoidance provisions in the Income Tax Act may be undermined should the in duplum rule apply. It is proposed that the tax rules dealing with low-interest or interest-free loans be amended to explicitly exclude the application of the in duplum rule to ensure their efficacy.
ADDRESSING CIRCUMVENTION OF DIVIDEND-STRIPPING RULES
The Income Tax Act has rules that target dividend stripping avoidance schemes. It is proposed that additional measures be introduced to curb circumvention of dividend-stripping rules.
CHANGES TO THE DEFINITION OF CONTRIBUTED TAX CAPITAL
The definition of 'contributed tax capital' was introduced in the Income Tax Act in 2008, when the Companies Act came into effect. It is proposed that amendments be made to the Income Tax Act to prevent the abuse of the definition of 'contributed tax capital'.
CORPORATE REORGANISATION RULES
Tax implication on the assumption of contingent debt
It is proposed that the assumption of future contingent liabilities be considered as an acceptable consideration under the corporate reorganisation rules. Interplay between real estate investments trusts (REITs) and corporate reorganisation rules It is proposed that the legislation be amended to make provision for corporate reorganisation rules to apply to transactions involving REITs. Despite the fact that the corporate tax rate remains unchanged the combined effective rate increased from 38.8% to 42.2% due to the increase in dividends tax
AMENDMENTS TO THIRD-PARTY BACKED SHARES PROVISIONS
Currently, all dividends arising directly or indirectly from transactions and arrangements involving preference shares guaranteed by third parties are deemed ordinary revenue, subject to 'qualifying purpose' exemptions, to which the anti-avoidance rules do not apply. The qualifying purpose exemptions are too narrow, and may impede legitimate transactions. It is proposed that the current exemption on third-party backed shares with regard to asset-backed securities be further refined to cover all qualifying purposes.
PARTIAL OWNERSHIP OF LAND DONATED UNDER LAND-REFORM INITIATIVES
It is proposed that the current exemption from donations tax and capital gains tax on land-reform initiatives, as outlined in Chapter 6 of the National Development Plan, be extended to allow partial ownership of land under appropriate circumstances.
REFINEMENT OF THE VENTURE CAPITAL COMPANY REGIME
Government has been gradually making changes to the venture capital company regime to encourage investment in small and medium-sized enterprises. It is proposed that further changes be made to the regime to remove impediments to investment, such as rules relating to investment returns and the qualifying company test.
CLARIFYING THE SCOPE OF RELIEF FOR INTERNATIONAL DONOR FUNDING ORGANISATIONS
South Africa is a recipient of official development assistance from international donor funding organisations. Currently, the Income Tax Act provides special tax relief for these organisations. However, the tax treatment of these donor organisations is not aligned. It is therefore proposed that changes be made in the Income Tax Act to align the tax treatment of international donor funding organisations.
TAX TREATMENT OF FOREIGN MEMBER FUNDS
The South African government will be establishing foreign member funds to enable local and foreign fund managers to establish and manage funds targeted for investments into the rest of Africa and the world. To make foreign member funds attractive, they will benefit from a special tax dispensation. Foreign investors investing in the funds for onward investment into the rest of Africa or elsewhere will be exempt from withholding tax on interest. However, fees earned by local asset managers and collective investment scheme managers for investment management services will be subject to tax in South Africa.
TAX IMPLICATIONS OF ACQUISITION OF FOREIGN INTELLECTUAL PROPERTY BY SOUTH AFRICAN MULTINATIONALS
The Income Tax Act does not allow deductions for payments made to a foreign person in respect of the use or right to use tainted intellectual property. As these anti-avoidance measures may affect legitimate commercial transactions and discourage the use of South African-based group infrastructure to further develop offshore intellectual property, relaxation of the policy will be considered without losing sight of the initial policy intent, which is to prevent tax base erosion. Government proposes that companies and individuals no longer need the Reserve Bank’s approval for standard intellectual property transactions. It is also proposed that the 'loop structure' restriction for all intellectual property transactions be lifted, provided they are at arms-length and at a fair market price. Loop structure restrictions prohibit residents from holding any South African asset indirectly through a non-resident entity.
TAX IMPLICATIONS OF CONTROLLED FOREIGN COMPANIES AND OFFSHORE FOREIGN TRUSTS
In 2015, the Budget Review announced that measures would be introduced on the treatment of foreign companies held by interposed trusts. However, no specific countermeasures were introduced in this regard. It is therefore proposed that specific countermeasures be introduced to curb abuses.
Value-Added Tax (VAT)
EXPANDING THE VAT BASE
Government will look to expand the VAT base in 2018/19. It is proposed that the zero-rating on fuel be removed. This will be subject to consultation leading up to the 2018 Budget. To mitigate the effect on transport costs, government will consider combining this with either a freeze or a decrease in the fuel levy.
To address base erosion and profit shifting, businesses providing foreign electronic services to South African consumers have been required to register for VAT since 1 June 2014. In line with the 2015 Budget announcement, the regulations are being updated to broaden the scope of electronic services that are subject to VAT and to remove some uncertainties and practical difficulties. Taxable services will now include cloud computing and services provided using online applications. The proposed changes will be published for public comment during 2017.
CLARIFYING THE VAT TREATMENT ON LEASEHOLD IMPROVEMENTS
The VAT Act does not currently provide guidelines in respect of the VAT treatment of leasehold improvements effected by the lessee to the leasehold property during the period of a lease agreement. It is proposed that amendments be made to the VAT Act to clarify the VAT treatment in respect of the time and value of supply of leasehold improvements on leasehold property.
AMENDING THE DEFINITION OF 'RESIDENT OF THE REPUBLIC' FOR VAT PURPOSES
The VAT Act contains a definition of 'resident of the Republic' for VAT on cross-border supplies based on the definition of 'resident' in the Income Tax Act. However, if a foreign company is effectively managed from South Africa, it will be regarded as a resident of South Africa. This implies that goods or services supplied by a South African company to the foreign company will be subject to VAT and no zero-rating provisions are applicable. If the foreign company is not required to register as a VAT vendor, but bears South African VAT because it is a resident, the VAT that is borne will become a business cost, as that company cannot deduct that VAT as input tax. The definition of 'resident of the Republic' in the VAT Act will be amended to provide for such situations.
POSTPONING THE 2015 AMENDMENT DEALING WITH THE VAT TREATMENT OF THE NATIONAL HOUSING PROGRAMME
In 2015, amendments were made to the VAT Act to abolish the zero rating of the supply of goods and services for government’s national housing programme, with effect from 1 April 2017. However, both the National Treasury and municipalities are not ready to make the VAT amendments. It is proposed that the effective date for this amendment be postponed for two years.
CLARIFYING THE ZERO RATING OF INTERNATIONAL TRAVEL INSURANCE
It is proposed that the zero-rating provision pertaining to international travel be clarified, including, for example, while the traveller is still in the country of departure, while the traveller is still being transported to or from the original point of departure in South Africa, and while the traveller is not actually travelling, but is in a hotel room.
CLARIFYING THE VAT TREATMENT OF SERVICES SUPPLIED IN CONNECTION WITH PARTICULAR MOVABLE PROPERTY SITUATED IN AN EXPORT COUNTRY
The term 'movable property' is not defined in the VAT Act. In terms of the Companies Act, movable property includes securities or shares. Securities or shares in a foreign incorporated company that is listed on the JSE could be interpreted to mean movable property that is situated in an export country. The VAT Act makes provision for the zero rating of services (fees charged) that are supplied directly in connection with movable property that is situated in an export country at the time the services are rendered. This implies that services supplied relating to securities or shares in a foreign incorporated company listed on the JSE should be subject to zero-rated VAT. It is proposed that changes be made to the VAT Act to clarify the tax treatment of these services.
Customs and excise
DISCLOSURE OF TRADE STATISTICS
It is proposed that the current legal authorisation for the sharing of trade statistics with organs of state be reviewed for its appropriateness and possibly amended.
MARKING, TRACKING AND TRACING OF TOBACCO PRODUCTS
Amendments will be considered for the provisions in the Tax Administration Laws Amendment Act for the marking, tracking and tracing of locally manufactured and imported tobacco products to account for further implementation requirements.
REVIEW OF THE DIESEL REFUND ADMINISTRATION SYSTEM
The 2015 Budget announced a comprehensive review of the administration of the diesel refund, which requires the delinking of the diesel refund from the VAT system and the creation of a standalone diesel refund administration. A discussion paper outlining the options for a simplified administration system was published for public comment on 15 February 2017. The legislative amendments to give effect to the separation of the diesel refund system will be developed following public consultations.
EMPLOYEES’ TAX AND REIMBURSEMENT OF TRAVEL EXPENSES
Where the distance travelled for business purpose does not exceed 12 000 kilometres per tax year, no tax is payable on an allowance paid by an employer to an employee up to the rate of 355 cents per kilometre. To facilitate and simplify the calculation and administration of employees’ tax, it is proposed that only the portion of the travel expenses reimbursed by an employer that exceeds the rate or distance fixed by the Minister of Finance by notice in the Gazette in terms of the current law should be regarded as remuneration for purposes of determining employees’ tax.
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.
REGISTERED AUDITOR – A FIRM OF CHARTERED ACCOUNTANTS(SA)
AUDIT • TAX • ADVISORY
www.mazars.co.za • 0861 mazars
Mazars is an international, integrated and independent organisation, specialising in audit, accountancy, advisory and tax services. Mazars operates throughout the 79 countries that make up its partnership, drawing on the expertise of 18 000 women and men led by 950 partners. We assist clients of all sizes, from SMEs to mid-caps and global players as well as start-ups and public organisations, at every stage of their development. In South Africa, Mazars employs over 1000 staff in 12 offices nationally.