Budget 2016 South African budget speech summary | tax proposals

Budget 2016 finalOverview

The Honourable Minister of Finance read the 2016 South African budget speech on 24 February 2016. In this summary, we address only the revenue (i.e. tax) side of the budget proposals. As this budget speech has received an unusual amount of interest, we have set out the tax proposals in more detail than usual, although this summary is not intended to be comprehensive.

The economic growth outlook for 2016 has been revised down to 0.9%. Tax revenues are projected to be R11.6-billion down; corporate tax is estimated to be R13-billion down; value added tax (“VAT”) is to be R5.7-billion down and personal income tax R1.9-billion down. On the other hand, customs duties should increase by R4.3-billion.

The 2016 budget proposes to increase gross revenue collection by R18.1-billion in the 2016/2017 year and an additional R15-billion over and above baseline forecasts in each of the subsequent two years. These measures, along with spending plans and efficiency measures, are expected to narrow the budget deficit and stabilise public debt. Nett additional revenue amounting to an estimated R5-billion from all tax proposals will be generated after taking into account various tax increases and deducting the cost of fiscal drag relief and medical scheme tax credit increases.

highlights

  • personal tax, company tax, dividend tax, donations tax and estate duty rates remain unchanged
  • the VAT rate remains unchanged
  • the effective CGT rate has increased

Part I – areas to receive specific attention

  • unacceptable transfer pricing practices
  • treaty shopping
  • highly geared financing structures

The following steps have been taken:

  • Improving the quality of information to be provided to the South African Revenue Service (“SARS”) to enable it to identify aggressive or abusive tax planning.
  • Taking action on transfer pricing issues, including country reports and information sharing between tax authorities. SARS will have access to country-by-country information on all large multinationals operating in South Africa.
  • Enhancing rules on foreign companies controlled by a South African resident, enabling profits earned in another country to be taxed in South Africa if no meaningful economic activity took place in the other country.
  • Introducing rules to limit excessive interest deductions.

individual taxpayers

  • The primary rebate and bottom three income brackets will be adjusted to reduce the impact of inflation on lower and middle-income earners.
  • The maximum marginal rate of tax is to remain at 41%.
  • Monthly medical scheme contribution tax credits will be increased in line with inflation at a cost of an estimated R1.1-billion to the fiscus.
  • From 1 March 2016, changes in the tax treatment of contributions to retirement savings and withdrawals will come into effect. Further technical refinements to provide clarity have been proposed and the requirement for provident fund members to annuitise has been postponed to 1 March 2018.
  • Voluntary disclosure rules for non-compliant taxpayers will be relaxed for a period of six months from 1 October 2016 to allow non-compliant individuals and firms to disclose assets held and income earned offshore.
  • The inclusion rate for capital gains for individuals will be increased from 33.3% to 40%, raising the maximum effective CGT rate for individuals from 13.7% to 16.4%. The annual threshold will increase from R30  000 to R40 000.
  • These new rates will become effective for years of assessment beginning on or after 1 March 2016.
  • The VAT regulation relating to the determined value of company cars will be aligned with the provisions of the Seventh Schedule of the Income Tax Act of 1962 (“the Act”) to reduce the administrative burden.

companies

  • The fringe benefit tax exemption threshold for bursaries provided to employees and their relatives will be increased.
  • Investigation into the R&D tax incentives is under way and should be completed in April 2016, after which further proposals will be considered.
  • Government proposes that relief be provided for community-related expenditure agreed to in a community-endorsed social and labour plan for companies required to invest in terms of the Mining Charter.
  • Measures will be introduced, effective 24 February 2016, to eliminate mismatches arising from hybrid debt instruments where the issuer is not a South African resident taxpayer, to avoid double non-taxation.
  • The CGT inclusion rate will increase from 66.6% to 80%, increasing the maximum effective rate for companies from 18.6% to 22.4%.
  • These new rates will become effective for years of assessment beginning on or after 1 March 2016.

trusts

  • It is proposed that assets transferred through a loan to a trust are included in the estate of the founder at death.
  • Interest-free loans to trusts will be categorised as donations.
  • Further measures to limit income splitting and other tax benefits will also be considered.
  • The inclusion rate for capital gains will increase from 66.6% to 80%, resulting in an increase in effective rate from 27.3% to 32.8%.
  • These new rates will become effective for years of assessment beginning on or after 1 March 2016.

indirect taxes

  • The rate of transfer duty on property sales above R10-million will be increased from 11% to 13% for property acquired on or after 1 March 2016.
  • VAT
    • Goods containing gold will be restored to the definition of “second-hand goods”.
    • The interaction of VAT and PAYE in relation to non-executive directors’ fees will be revisited to provide clarity due to the current controversy in this regard.
    • The VAT treatment of grants allocated through SETAs and the National Skills Fund will be aligned.
    • The VAT treatment of loyalty programmes (including implications of redeeming loyalty points) and the provisions relating to vouchers will be reviewed.
    • The VAT implication of waivers and cancellations of debt will be analysed to deal with the possibility that such “supplies” could give rise to an output tax liability.
    • The time periods for claiming an input tax deduction will be limited in certain instances to the tax period in which the supply occurred and, in addition, the time limit for the payment of refunds will be clarified.
    • Further amendments will be introduced related to the VAT treatment of indirect exports, alignment of VAT and customs schedules, goods lost, destroyed or damaged, alternative documentary proof and removal of goods from a custom controlled area located in a special economic zone and the invoicing requirements of municipal entities that are registered on a payments basis.
  • customs and excise duty
    • A general anti-avoidance provision will be added to the Customs and Excise Act of 1964, in line with similar provisions in other indirect tax legislation.
  • tax admininstration and disputes
    • It is proposed that a longer period for the lodging of an objection and condonation will be considered, as opposed to the current 30-business day rule.
    • Consideration will be given to clarifying the under-statement penalty system in regard to GAAR matters.
    • The requirement of the VDP in relation to a person who is “aware” of a pending audit or investigation will be clarified.

international tax

  • The withholding tax on service fees will be withdrawn from the Income Tax Act and will be dealt with under the provisions of reportable arrangements in the Tax Administration Act of 2011 instead.
  • It is proposed that collective investment schemes will be excluded from applying section 9D to investments made in foreign companies.
  • It is proposed that the section 11(i) write-off for bad debts will be amended to include any exchange rate difference in respect of a debt that has been included in income and subsequently written-off as irrecoverable.
  • Where interest withholding tax has been paid on an amount that is subsequently written-off and irrecoverable, a mechanism will be introduced to allow for a refund.
  • The high tax exemption for CFCs will be revisited. The adjustment for foreign group losses in the calculation in the high tax exemption will be deleted.

Part II – specific tax amendments and proposals

business

  • employee share incentive schemes
    • The Act will be amended to avoid possible double taxation on the acquisition of a restricted equity instrument under both the definition of “gross income” and under section 8C.
    • Section 8C will be reviewed to address schemes where restricted shares held by employees are liquidated in return for an amount qualifying as a dividend.
    • Certain dividends in respect of restricted equity instruments are subject to income tax and these taxable dividends will be specifically included in the definition of “remuneration” for PAYE purposes.
  • other employment-related matters
    • The Commissioner will notify local employees of foreign employers to pay provisional tax in lieu of PAYE.
    • Exceptions to the rule that directives must be sought for all employment lump sums will be removed.
    • Certain once-off amounts that are excluded from the penalty for under paying provisional tax will be included in future.
    • The due date for submission of an estimate for the second provisional tax period will be fixed at the date of assessment of the relevant year.
  • sundry anti-avoidance and other provisions
    • Debt instruments that are subject to a subordination agreement will be specifically excluded from the ambit of section 8F (hybrid debt instruments).
    • It is proposed that section 42 of the Act will be amended to clarify the rules relating to section 42 rollover transactions involving a natural person and a company.
    • M&A transactions involving share subscription and repurchase arrangements are stated as being “in substance”, a share sale that should be subject to tax. These arrangements will be reviewed to determine if additional measures are required.
    • The tax treatment of securities lending arrangements will be reviewed, inter alia, in relation to the 12-month limitation and to take into account corporate actions during the term of the arrangement.
    • The rules relating to third-party backed shares will be reviewed to consider relaxing them in relation to such arrangements entered into before 2012.
    • Certain schemes including, for example, the formation of trust-holding mechanisms with preference shares as underlying assets are to be the subject of additional anti-avoidance measures.
    • Tax measures dealing with the transition of the hedge fund industry into a new regulated tax regime will be considered further, specifically in relation to asset-for-share and amalgamation transactions.
  • The incentive for venture capital funding for small businesses will be reviewed to eliminate unintended consequences.
  • The tax rate applicable to small business corporations in special economic zones will be clarified such that they are subject to corporate tax at either the applicable graduated rate or 15%, whichever is lower.
  • It is proposed that all government grants will be included in gross income and that the Eleventh Schedule of the Income Tax Act will be the sole mechanism for determining whether or not they are taxable.

property

  • The distribution rules in relation to real estate investment trusts (REITS) will be reviewed to exclude income recoupments (such as building allowances) previously claimed.
  • The interaction between REITS and section 9C will be amended to provide that section 9C(5) does not apply to shares in REITS.
  • The urban development zone (UDZ) tax incentive will be expanded to more municipalities to promote urban renewal.
  • Tax relief for land donated for land reform will be amended to cover other land reform initiatives such as those set out in the National Development Plan.

individuals, employment and savings

  • The allowable deduction for employer contributions to defined pension funds will be aligned with the full value of the employer contribution fringe benefit value, according to paragraph 12D of the Seventh Schedule, with effect 1 March 2016.
  • Section 11(k) of the Income Tax Act will be amended to allow retirement contributions to be deducted against passive income, subject to the available limits. In addition, section 11(k) will be amended to allow for the rollover of excess contributions to retirement annuity funds and pension funds accumulated up to 29 February 2016. The ordering rule for calculating allowable deductions in the determination of taxable income will be corrected, such that the 11(k) deduction is determined prior to the allowable deduction under section 18A. The requirement for a tax directive to effect tax-free transfers from pension funds to provident funds will be removed.
  • Various changes will be made to paragraph 12D of the Seventh Schedule, dealing with the value of contributions made by an employer or employee to certain retirement funds and related issues.
  • In relation to divorce settlement orders, it is proposed that the withdrawal of retirement benefits arising from such settlements will be proportionally attributed as a reduction against the vested right (i.e. the contributions made before 1 March 2016) and the non-vested right portions of the retirement fund savings.
  • From 1 March 2016, provident fund members above the age of 55 will be able to continue contributing to that provident fund without being required to purchase an annuity upon retirement. It is proposed that a forced transfer through the closure of a retirement fund will not affect the member’s ability to make further contributions that may then be taken as a lump sum. Further technical corrections will be made in relation to the vested rights provisions.
  • Consideration is to be given to the exemption of foreign pensions derived from past employment in a foreign jurisdiction, taking into account the tax policy for South African retirement funds.
  • The rules relating to raising an assessment for recalculating a fringe benefit will be revised such that the wording of paragraph 3(2) of the Seventh Schedule will be aligned with paragraph 5(2) of the Fourth Schedule to the Income Tax Act.
  • The definition of “private travel” in section 8 and the Seventh Schedule of the Act will be aligned.

estate duty

  • The transfer of the proceeds of a tax-free investment to a named beneficiary will be included in the estate duty calculation in relation to endowment policies.
  • Although the Minister made reference to measures to strengthen estate duty and donations tax, no further details are provided in the budget review other than those mentioned above.

exchange control

  • An opportunity for voluntary disclosure relief has been proposed for a period of six months, running from 1 October 2016, to allow previously undisclosed assets held and income earned offshore to be regularised.
  • Companies in banking and insurance groups will be allowed to apply for “HoldCo” status, subject to the Governor of the Reserve Bank’s approval, after consulting the bank supervision and financial surveillance departments.
  • For a period of 12 months, institutions affected by the depreciation of the Rand will not be required to rebalance their portfolios, but no further offshore investments will be allowed until the institution is within the prescribed offshore investment limit.

green taxes and incentives

  • Accelerated depreciation allowances will be introduced to facilitate an additional investment in Capex by South African oil refineries to comply with new fuel specifications.
  • Government will consider enhancing existing deductions to include indirect infrastructure costs connected with investment in renewable energy, such as the construction of fences and roads.
  • The fuel levy will increase by 30 cents per litre, effective 6 April 2016.
  • A tyre levy will be implemented at a rate of R2.30 per kg of tyre, effective 1 October 2016.
  • The levy on incandescent light bulbs will be increased from R4 to R6 per globe, effective 1 April 2016.
  • The levy on plastic bags will be increased from 6 cents to 8 cents per bag, effective 1 April 2016.
  • Motor vehicle emissions tax will be increased from 1 April 2016 for passenger vehicles, from R90 to R100 for every gram of emissions per kilometre over 120g, and for double cabs, from R125 to R140 for every gram of emissions per kilometre in excess of 175g.
  • Carbon tax has been designed to ensure that its overall impact will be revenue neutral up to 2020. The draft Carbon Tax Bill was published in November 2015 and 90 comments have been received to date. The draft Bill will be revised taking into account comments and further consultation.
  • A “sin tax” will be introduced from 1 April 2017 in relation to sugar-sweetened beverages.
  • Excise duties on alcoholic beverages will be increased by an amount of 6.7% to 8.5%; however, a 10% lower excise duty will be applied to pot stilled and vintage brandy. The difference between excise duty on natural and sparkling wine will be maintained by pegging the sparkling wine excise rate at 3.2 times that of natural unfortified wine.
  • A review of tobacco product taxation will begin in 2016/2017, which will consider taxing both existing traditional and non-traditional products such as e-cigarettes.

securities transfer tax

  • No changes are proposed to securities transfer tax.

Source:

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