Author: Linda Ensor (BDlive). A higher tax burden for all except low- to middle-income earners, a higher fuel levy and a lower rate of growth in government expenditure this year have allowed Treasury to fill the holes left in its budget by lower revenue collection. The measures announced by Finance Minister Pravin Gordhan in the R1.5-trillion budget he tabled in Parliament on Tuesday are just the start of what is anticipated to be a tough three years ahead as the government battles to ward off a credit ratings downgrade, address falling revenue and reignite economic growth.
Category: Budget 2016/17
Budget 2016 – A budget of prods and tweaks in the right direction
Finance minister Pravin Gordhan adopted a tenor at the start of his budget speech which, at last, matches SA’s parlous economic position. Gone is the attitude of faux bullishness, underpinned by some measured caution, that were the hallmarks of previous budget speeches, many presented by himself, and his predecessor Nhlanhla Nene. In its place was a more humble, more real, and more appealing presentation. It was, in many ways, the state of the nation speech that President Jacob Zuma should have given earlier this month. “We are conscious of the difficulties we face. Our resilience as a nation, black and white, can propel us to a better future if we make the right choices,” he said.
Budget 2016 – The re-characterisation of proceeds in the case of a share buyback
It was announced as part of the Budget proposals that National Treasury may recharacterise the proceeds that are received by a shareholder that is a company in circumstances where it disposes of its shares through means of a share buyback as opposed to selling the shares outright to a third party. This conundrum is currently arising on a daily basis where a shareholder in a company has two ways in which to dispose of the shareholding in the company, being:
Budget 2016 – The anomaly that dividends are not exempt when declared by a reit
The introduction of tax legislation pertaining to Real Estate Investment Trusts (REITs) has resulted in significant development of this industry over the last few years. Apart from the fact that a REIT is not subject to capital gains tax in respect of properties that it disposed of, an additional consequence is that dividends declared by a REIT to South African shareholders are not exempt, but are in fact part of taxable income. The distribution is also deductible in the hands of the REIT on the basis that a flow-through principle is essentially adopted with reference to rentals and similar income that are received by the REIT.
Budget 2016 – Adjustments to personal income tax
Following an increase in individual tax rates in the 2015 Budget and in light of the current economic circumstances which include lower estimated tax revenues, it was highly anticipated that the Minister would announce an increase in personal income tax rates in the 2016 Budget. Expectations varied between an increase in the maximum marginal rate of tax of 1% to 4%, bringing the maximum marginal rate of tax within the 42% to 45% range. It is thus with great surprise that the 2016 Budget introduces adjustments to the bottom three personal income tax brackets which effectively relieves the impact of inflation on lower- and middle-income earners. No amendments to the marginal tax rates were proposed.
Budget 2016 – Venture Capital Companies
Section 12J of the Income Tax Act was introduced in 2008 to stimulate much-needed equity funding for small businesses. It provides for the formation of an investment holding, described as a Venture Capital Company (VCC). Investors subscribe for shares in the VCC and claim an income tax deduction for the subscription price incurred. The VCC must then deploy most of these subscription proceeds within three years by subscribing for shares in investee companies.
Budget 2016 – Adjustment for foreign group losses to be removed from the CFC high-tax exemption calculation
The controlled foreign company (CFC) provisions contained in s9D of the Income Tax Act were amended with effect from 1 January 2008 (applicable to foreign tax years of CFCs ending during years of assessment ending on or after that date). Provided that the ‘net income’ of a CFC be deemed nil if the total amount of tax payable to all spheres of government of any country other than South Africa by the CFC on its net income amounts to at least 75% of the amount of normal tax that would be payable in respect of any taxable income of the CFC had it been a resident for the relevant foreign tax year.
Budget 2016 – Withdrawal of withholding tax on service fees
The withholding tax on service fees provided for in s51A-s51H of the Income Tax Act was expected to commence on 1 January 2017. In this regard, it was envisaged that the local recipient of services would generally have to withhold 15% of the fee payable to the non-resident service provider, (subject to the application of a relevant international tax treaty).
Budget 2016 – Narrowing the definition of a hybrid debt instrument
The definition of a hybrid debt instrument will be amended to exclude instruments subject to subordination arrangements. The proposed amendment aims to exclude interest-bearing arrangements from the definition of hybrid debt instruments as contained in s8F of the Act, if these instruments become subject to a subordinary agreement.
Budget 2016 – Share incentive schemes
Section 8C of the Income Tax Act acts as an anti-avoidance mechanism that prevents employees from treating what is essentially fully taxable salary or bonus income at reduced tax rates through the use of restricted shares and other incentive schemes. Essentially, s8C delays taxation in respect of the receipt or accrual until such time that the employee becomes entitled to the full value of the share or rights under the relevant scheme. Dividends received or accrued on the underlying shares are also generally not exempt under s10(1)(k) of the Income Tax Act unless the shares are equity shares as defined.