A RECAP OF BUDGET HIGHLIGHTS 2013/2014

Personal Income Tax Rates

  • The minimum tax threshold increased from R63 556 to R67 111 for persons under the age of 65. For persons aged from 65 to 74 the tax threshold increased from R99 056 to R104 611 and for persons aged 75 and older the tax threshold increased from R110 889 to R117 111.
  • The primary rebate increased from R11 440 to R12 080. The secondary rebate for individuals aged 65 and older increased from R6 390 to R6 750.
  • The third rebate for individuals aged 75 and older increased from R2 130 to R2 250.
  • The maximum marginal tax rate at 40% is applicable to taxable income above R638 601 (previously R617 000).

Interest and Dividend Income Exemption

  • The domestic interest exemption increased from R22 800 to R23 800 for taxpayers aged under 65 and from R33 000 to R34 500 for taxpayers aged 65 and over.

The most significant tax proposals

Income Tax: Individuals

    1. Changes to the tax treatment of contributions to retirement funds As foreshadowed in the 2012 budget speech, changes in the income tax treatment of contributions to retirement funds were enacted. These will take effect from 1 March 2015. The new regime will work as follows. Contributions to retirement funds by employers will become taxable as fringe benefits in the hands of the employees. This treatment will apply regardless of the nature of the retirement fund. These contributions will be deemed to have been made by the employee and the employee will be allowed a deduction of up to 27.5% of the greater of his remuneration and his taxable income (excluding retirement annuity or lump sum income) in respect of the sum of his own contributions and those of the employer that were deemed to have been made by him. An overall deduction ceiling of R350 000 per annum will apply. Excess contributions will be rolled forward. Also, future contributions to provident funds will be subject to the same annuitisation treatment as contributions to pension funds (i.e. that a maximum of one third may be taken as a lump sum). Existing vested benefits as at the date of implementation will however be protected.
    2. Tax-preferred savings vehicles

It was announced in the 2012 budget speech that tax preferred savings vehicles would be introduced in order to encourage savings. In the 2013 speech it was announced that these vehicles would be in place by April 2015. The proposal was that contributions to such vehicles will not be tax deductible but all growth in the vehicle will be free of income tax (including capital gains tax). Withdrawals will be free of tax. An annual contribution limit of R30 000 was proposed, along with a maximum investment contribution of R500 000. These amounts would be reviewed annually in line with inflation. Detailed legislation in this regard is yet to be promulgated.

    1. Registration as a taxpayer

Taxpayers with taxable incomes not exceeding R250 000 consisting solely of remuneration derived from a single employer will no longer be required to submit an annual income tax return

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    1. Disability and income protection policies

Income continuation policy contributions will no longer be deductible but will be exempt on payout: this treatment will apply to all non-retirement fund disability and income protection policy contributions and payouts.

    1. Favourable adjustments to the bursary exemption

It was announced that this limit on remuneration would be increased from R100 000 to R200 000 – this was in fact increased to R250 000. In addition, the exempt bursary ceiling for bursaries to relatives of the employee has been raised from R10 000 to R30 000 in the case of relatives attending a higher education institution (NQF 5 and above).

    1. Carry forward of excess s18A donations

The carry forward of such excess donations is to be allowed.

    1. Relief for the transfer of a residence from an employer to low earning employees It was announced that relief would be granted in respect of the above transfers. At present such transfers attract fringe benefits tax based on the market value of the residence at the date of transfer less any consideration paid by the employee.

Business

    1. Small business incentives

Favourable adjustments were announced in respect of small business corporations (section 12E). The current ceiling of R14 million of gross income per annum has been raised to R20 million. In addition, the graduated tax table applicable to small business was made significantly more favourable.

    1. Special Economic Zones

A number of incentives were announced for enterprises operating within special economic zones. These were to be implemented following consultation with the Minister of Trade and Industry. These include a 15% rate of corporate tax, an incentive in the form of an income tax deduction for employing persons that are paid less than R60 000 per annum and an accelerated building allowance regime. Special provisions giving effect to these proposals have been inserted into the Income Tax Act to take effect from the date that the Special Economic Zones Act comes into operation. These provisions however do not include an income tax deduction for employing persons that are paid less than R60 000 per annum.

    1. Changes in the tax treatment of trusts

The current flow-through principle that applies to the treatment of income and capital distributed by discretionary trusts was to be scrapped. The details of the proposal were sketchy at best, but it appeared as if the trust would be subject to income tax on its income with a deduction of the amount distributed to beneficiaries, limited to the trust’s taxable income. Such deductible distributions would be taxable as income in the hands of the beneficiaries. It was also announced that the use of trusts to avoid Estate Duty would be reviewed. Distributions from offshore foundations would be treated as ordinary revenue. It was not clear exactly what is envisaged by a ‘foundation’. It would appear that these proposals are in abeyance pending the release of reports of the Davis Tax Committee.

    1. Limitation of interest deductions

Interest deductions were to either be limited or re-characterised as dividend income in a number of scenarios. These proposals have largely been promulgated, although some of the provisions have yet to take effect.

    1. Deferral of expenditure incurred by certain connected persons in an international context Mention was made of the deferral of deductions until payment in circumstances where the counterparty lacks immediate (or deferred) corresponding income. Unfortunately scant detail was provided, save that the situation of a South African subsidiary of a foreign parent company was referred to. The introduction of this principle would be disastrous in certain situations. For example if a SA resident company incurs expenditure on a foreign loan and on-lends to another foreign company. Although it would be fully taxed on accrual of the interest on the loan receivable, it would not be able to deduct the interest on the loan payable until payment. This proposal has not been enacted.
    2. Withholding taxes

The implementation date for the withholding tax on interest and the withholding tax on royalties would be pushed out to 1 March 2014. In addition, a further withholding tax was announced – in respect of cross-border services. This would also be implemented with effect from 1 March 2014. The implementation date of the withholding tax on royalties and on interest is to be further pushed out to 1 January 2015, with the implementation date of the withholding tax on cross-border services to be 1 January 2016.

    1. Tax incentive for first time job seekers

It was announced that a tax incentive would be introduced to encourage businesses to employ young South Africans. However, not much detail was provided in this regard. This has been enacted in the form of the Employment Tax Incentive Act whereby employers of qualifying employees obtain a credit against its employees’ tax liabilities.

    1. Mining taxation

The tax regime applicable to mines would be reviewed as part of the overall review of the tax system, which was announced in the Speech.

    1. VAT
      • All foreign businesses that provide digital goods or services within South Africa would be obliged to register for VAT.
      • Currently, the VAT Act does not allow for the issuance of a valid tax invoice in any currency other than rands. This was to be amended.
    2. Carbon Tax

A carbon tax will be introduced from 1 January 2015 at the rate of R120 per ton of CO2 equivalent, increasing annually at the rate of 10% during the first phase of implementation (from 2015 to 2020).

    1. Tax Administration
      • An automated tax clearance certificate system was to be introduced later in 2013, to enable the real-time tracking of the status of the person who tendered for government work. This has yet to be implemented.
      • A single tax registration number was to be implemented in respect of all tax types. This has yet to be implemented.
      • A simplified income tax return form would be implemented for use by small businesses. This has yet to be implemented.
      • VAT registration was to be streamlined. However, relatively minor amendments to the registration requirements were enacted.
    2. Fuel levy and excise duties

These were increased: the general fuel levy by a net amount of 15c per litre. However, in order to fund the building of 8 biofuel plants, an additional 3.5 to 4c per litre was also recovered. Excise duties on tobacco products was increased between 5.8% and 10% and excise duties on alcoholic beverages by between 5.7% and 10%.

    1. Exchange Control

Each South African listed company is now permitted to establish one subsidiary to hold African and offshore operations, which is not subject to foreign exchange restrictions.

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