2017 South African budget speech summary | tax proposals

• a new maximum marginal income tax rate of 45% for those with taxable income over R1.5-million per annum (an increase from the current maximum rate of 41%).

• an increase in the dividend withholding tax rate from 15% to 20% (effective 22 February 2017). The exemption and rates for foreign dividends will also be adjusted in line with the new rate, effective for years of assessment commencing on or after 1 March 2017.

• an increase of 30 cents per litre in the general fuel levy and nine cents per litre in the Road Accident Fund levy.

• increases in excise duties for alcohol and tobacco of between 6% and 10%.

• no change to the value-added tax (VAT) rate of 14%.

• the transfer duty-free threshold for residential properties will be increased from the current R750 000 to R900 000.

• no increase in the corporate tax rate of 28% (which is considered to be higher than the Organisation for Economic Co-operation and Development average of 25%).

• the income tax rate applicable to income retained by trusts will increase from 41% to 45%.

• withholding tax on immovable property sales by non-residents will be increased from 5% to 7.5% for individuals, 7.5% to 10% for companies and 10% to 15% for trusts.

• Following the introduction of section 7C to the Income Tax Act, 1962 (low or no interest loans to trusts), it is proposed that the anti-avoidance rule will be extended to cover low or interest-free loans to companies owned by a trust (as opposed to the trust directly). However, this anti-avoidance rule should only apply to trusts used for estate planning and not, for example, to employee share scheme trusts and certain trading trusts (the existing section 7C does contain a number of carve-outs).

• Government remains committed to implementing tax on sugary beverages. This follows the publication of the draft policy paper and consultation with industry and other interested parties on the tax, following which the design of the tax has been revised.

• A revised Carbon Tax Bill will be released for public consultation and tabled in Parliament by mid-2017.

Securities transfer tax

o No changes are proposed to securities transfer tax.

Transfer duty

o As mentioned above, the threshold for transfer duty-free purchases of residential properties is increased from R750 000 to R900 000 effective from 1 March 2017.

Fuel levies

o As mentioned above, the general fuel levy on petrol and diesel will increase by 30 cents per litre and the Road Accident Fund levy increases by nine cents per litre from 5 April 2017.

VAT

o The VAT rate remains unchanged at 14%.

o The following VAT legislation amendments are proposed:

the removal of zero-rating of fuel.

the VAT regulations that subject certain electronic services supplied by foreign suppliers to VAT are to be expanded to include cloud computing and services provided using online applications.

the VAT treatment in respect of the time and value of the supply of leasehold improvements on leasehold property is to be clarified.

transitional VAT measures are to be introduced for the disestablishment and merger of municipalities.

the definition of resident of the republic regarding foreign companies effectively managed in South Africa is to be amended.

the effective date of abolishing the zero-rating of goods and services in relation to the national housing programme is to be postponed for another two years.

the application of the zero-rating of international travel insurance is to be clarified.

The VAT treatment of services supplied in connection with movable property situated outside South Africa is to be clarified.

The use of share subscription and repurchase schemes in mergers and acquisitions transactions will be the subject of specific anti-avoidance rules.

Certain bargaining councils have been non-tax compliant and, in order to regularise them, a certain level of relief will be considered, where after full compliance will be expected in future.

The foreign employment income tax exemption for South African residents is to be restricted. It is proposed that the exemption will be applicable only to the extent that the foreign employment income is actually subject to tax in the foreign country.

The rules relating to employee share schemes will be reviewed to address the interaction of section 8C and the Eighth Schedule of the Income Tax Act following last years changes that targeted dividend stripping to avoid section 8C tax.

Additional relief for the tax implications of forgiveness of debt will be introduced:

• to align the tax treatment of debt forgone for mining companies with the tax treatment applied to companies in other sectors.
• to provide an expansion of the relief for dormant companies or companies under business rescue within a group of companies.
• to allow conversion of debt into equity (without adverse effects), while unpaid interest so capitalised will be recouped.
• to make short-term shareholding structures seeking to avoid the recoupment triggered by the debt forgiveness rules the subject of anti-avoidance rules.
• to amend the tax rules dealing with low-interest or interest-free loans to explicitly exclude the application of the in duplum rule.

The current dividend stripping rules will be expanded to include circumstances where loans for the purchase of shares are raised from a non-connected person, such as a bank.

Amendments will be made in relation to the definition of contributed tax capital to avoid companies with foreign parents avoiding the payment of dividend tax through contributed tax capital funding and subsequent capital distributions.

The assumption of future contingent liabilities will be considered as an acceptable consideration under the corporate reorganisation rules. This is in line with the approach of the recently released Interpretation Note 94, which deals with, inter alia, the position of the seller who is released from such future contingent liabilities.

The corporate reorganisation rules will be amended to provide for corporate reorganisations involving real estate investment trusts (REITs).

The current treatment of the provision of collateral and securities lending arrangements will be expanded to include listed government bonds.

The definition of qualifying purpose for the purposes of third-party backed shares will be expanded to cover all qualifying purposes (such that the dividends thereon will not be recharacterised as revenue).

Tax treatment of banks and financial institutions:

o Following the replacement of International Accounting Standard 39 with International Financial Reporting Standard (IFRS) 9, it is proposed that the tax treatment of the financial assets and liabilities of banks and other financial institutions under section 24JB of the Income Tax Act be aligned with IFRS 9, except for the treatment of impairments.

o The South African Revenue Service directive on the treatment of doubtful debts for banks will be reviewed and incorporated into the Income Tax Act. Moreover, it is proposed that section 24JB will exclude impairment adjustments in terms of IFRS 9.

o It is proposed that section 8F (which deals with hybrid debt instruments) will override the provisions of section 24JB.

o It is proposed that measures will be introduced that prohibit mismatches on the tax treatment of reduced or waived loans between a financial institution and another company that is part of the same group as that institution.

When a person retires from a retirement fund, the retirement fund lump sum benefit accrues to that person at the date of retirement. There are certain deductions available against the retirement fund lump sum benefit under the Second Schedule of the Income Tax Act to determine the taxable amount of the lump sum benefit, but there is no deduction for amounts that are transferred to another retirement fund when the person has retired from a fund. The proposal is to allow a (presumably tax-free) transfer to a retirement annuity fund when a person retires from a retirement fund.

A number of measures are proposed in the international tax arena, including the following:

Specific measures to deal with the treatment of foreign companies held by interposed trusts (presumably to strengthen the current controlled foreign companies rules).

Anti-avoidance measures precluding deductions for payment made to a foreign person in respect of tainted intellectual property, will be relaxed.

The qualifying criteria for domestic treasury management companies in relation to tax residence will be reviewed, as they are currently overly restrictive.

Foreign member funds established by the South African government in regard to investment into the rest of Africa and the world will receive a special tax dispensation. Foreign investors investing via the funds will be exempt from withholding tax on interest. However, fees earned by local asset managers and computer and information systems managers for investment management services will remain subject to tax.