Budget 2014 – Income Tax and VAT highlights of the 2014 Budget

rp_Budget-2014-News1-150x1501-150x1501-150x1501-150x15011.jpgThe 2014 Budget produced few surprises. There were no changes to the corporate or personal income tax rates, capital gains tax inclusion rates or the VAT rate. The robustness of revenue collections, almost in line with the 2013 forecast, probably played a part in enabling the Minister to keep rates steady.

The most significant changes are:

    • The introduction of tax-preferred savings accounts. The initial contribution limits are very low, at R30 000 per annum, with a lifetime contribution limit of R500 000. This was announced at last year’s budget.
    • Significant downward adjustments in the retirement fund lump sum tax tables.
    • Public Benefit Organisations that are what the Minister referred to as ‘philanthropic foundations’, by which he appears to mean those that provide funds to other public benefit organisations, will see a relaxation in the requirement that they distribute at least 75% of the funds received by way of donations for which they have issued tax deduction receipts, within 12 months of the end of the year of assessment.
    • Simplification is proposed in respect of the turnover tax regime. In addition, turnover up to R335 000 should not be taxed at all, and the maximum tax rate is to be reduced from 6% to 5%. Other suggestions are doing away with the compulsory three year lock in period and requiring annual, rather than biannual, returns. In the meantime, taxpayer-friendly changes were made to the bands within the small business graduated tax tables.
    • Small business corporations in terms of section 12E of the Act may see a replacement of the reduced tax rate regime with an annual refundable tax compliance rebate, subject to public consultation.
    • Foundations that promote small enterprise development through grants may be granted public benefit organisation status or otherwise benefit from a more dedicated tax provision.
    • Government grants received by small and medium- sized enterprises may be made tax exempt. However, mention was made of the need to prevent abuse and avoid inconsistency within the tax system.
    • It is sought to popularise the venture capital company regime, which has received limited uptake, by either:
      • Making deductions permanent if investments are held for a certain period;
      • Allowing transferability of tax benefits upon disposal of holdings;
      • Increasing the total asset limit for qualifying investee companies from R20 million to R50 million, and from R300 million to R500 million in the case of junior mining companies; or
      • Waiving capital gains tax on disposal of assets and expanding the permitted business forms.
    • Tax relief measures for companies undergoing business rescue, in respect of debt reduction provisions, will be considered.
    • Profits from the risk business of an insurer will be taxed in the corporate fund rather than in the policyholder funds – this was announced at last year’s budget.
    • The method of valuation of the fringe benefit that arises where an employer provides the employee with residential accommodation is to be reviewed.
    • We are pleased to see that it has been proposed that the imposition of a secondary adjustment in the case of transfer pricing transgressions is to be transformed into a dividend or return of capital, depending on the facts or circumstances, rather than a deemed loan. There have been many concerns about the method in which deemed loans could be extinguished and it could be argued that such a loan would exist indefinitely. The proposed amendment will result in more certainty and, interestingly enough, takes us back to a similar position to that which applied under STC in which a transfer pricing adjustment gave rise to a deemed dividend.
    • A review of cross-border retirement saving with extensive consultation and spanning 2 years is to be conducted. From the wording it would appear to refer to South Africans working abroad and foreign residents working in South Africa.
    • Taxpayer-friendly amendments are to be made to the ‘third party-backed share’ provisions of the Act (section 8EA). The circumstances in which the provision will not apply will be expanded to include:
      • The refinancing of third-party backed shares originally used to fund equity acquisitions in operating companies;
      • The inclusion of exploration companies in the definition of ‘operating companies’; and
      • Limited pledges in respect of third party backed shares.
    • Section 23N, which will replace the directive system (section 23K) relating to the deduction of debt utilised in reorganisation or acquisition transactions, will be amended so as to take the taxpayer’s taxable income into account in the year preceding that in which the transaction occurred. It will also be amended to take assessed losses from previous years into account i.e. so as not to further lower the limitation on the quantum of the interest that may be deducted.
    • If an individual resident’s controlled foreign company receives a taxable foreign dividend, under current law the foreign dividend is taxed at an effective rate of 21% in the hands of the individual. This rate will be changed to reflect the fact that the taxpayer is an individual and not a company.

VAT Highlights

  • An amendment is proposed to prevent second hand goods consisting of precious metals from obtaining a notional input tax deduction.
  • The elimination of the four-monthly category of VAT vendor is proposed. Vendors registered under this category will be brought into the bi-monthly VAT system.
  • The current provisions in the VAT legislation impose interest on late payments of VAT for every month or part month that the VAT is outstanding. In other words the interest charged is the same irrespective of when, during the subsequent VAT period, the VAT is paid. The proposed amendment seeks to align the interest charging provisions in the VAT Act with those in the Tax Administration Act and as such interest will only be charged for the period between the period when the VAT became due and when payment is made. In so doing it will ensure that the basis on which interest is charged is fair.
  • It is understood that over the next two fiscal years, National Treasury’s research agenda will include reviews of the following VAT areas:
    • The zero rating provisions for housing subsidies with a view to eliminating anomalies encountered in practice. The standard rating of these grants is currently being considered together with an increase in the value of the grant.
    • The current treatment of educational services and public transport.
  • The current zero rating of petrol and diesel sales will be reviewed.
  • The legislation and the supplementary interpretation note dealing with the zero rating of a going concern are not aligned. Whereas the current VAT legislation prescribes that both the seller and the purchaser must be registered VAT vendors at the time of concluding the agreement in order for the zero rate to apply to the sale of the going concern, the interpretation note merely requires that the parties agree that the buyer will be a registered vendor at the effective date. The proposed amendment seeks to align the current legislation with the provisions of the interpretation note and to clarify the uncertainty surrounding whether the buyer needs to be a registered VAT vendor prior to concluding the agreement.
  • The VAT legislation and accompanying interpretation notes prescribe the obtaining and retention of certain customs documentation. Due to the customs modernization programme, paper-based documentation is no longer freely available. The proposed amendment seeks to align the VAT documentary requirements with the electronic customs modernization programme.
  • At present the VAT legislation only prescribes times limits in respect of tax invoices issued by VAT vendors. The 21 day time limit will be extend to agents acting on behalf of a VAT vendors. However legislation does not set any time limits for the issuing of debit and credit notes. The proposed amendments will make provision for this.
  • The current VAT legislation together with Interpretation note 49 requires that the vendor is in possession of proof that the VAT levied on the importation of goods has been paid over to SARS prior to it being claimed by the vendor. The requirement is vague and the vendor is often unsure as to what documentation is required by SARS to substantiate the proof of payment. The proposed amendment will provide clarity on the documentation required to substantiate the proof of payment to SARS.
  • The current VAT legislation allows for a supplier of goods and services who concludes an agreement prior to being registered as a VAT vendor and which subsequently is registered for VAT purposes to recover any VAT due arising from the agreement from the recipient. Suppliers who fail to register as VAT vendors will be excluded from relying on this provision and the legislation will be amended accordingly.
  • Bargaining councils receive a separate fee for administrative services provided over and above the normal fee for goods and services provided to their members. Currently only the supply for goods and services arising from membership contributions are exempt from VAT. This exemption will be extended include the administration services provided.
  • The concession granted to the agricultural sector to provide cash flow relief will be revisited. In order to curtail transactions entered into for the purpose of claiming fraudulent input tax deductions, the supply of goods which are used or consumed for agricultural, pastoral or farming purposes which supply is currently zero rated will be reviewed. It may possibly be replaced with the standard rate.
  • The issuing of money or legal tender (paper currency) by the reserve bank is not subject to VAT. However the printing of money is standard rated. In order to ensure that VAT does not become a cost in the issuing of money, the definition of money in the VAT Act will be reviewed with a view to zero-rating of the supply of a legal tender or money.
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