Month: February 2021

Bracket creep is the phenomenon where a state collects increased revenue without making increases to the tax rate. Instead the state relies on inflation to bring more individual taxpayers into higher tax brackets, resulting in an increased revenue collection. While South African individual taxpayers have been spared an increase in tax rates in the recent past, this was based on the intention that bracket creep would provide the additional revenue required by the state.   The Minister has announced that the tax thresholds and seven tax brackets for individuals will be raised by 5%. The two tables below demonstrate the brackets for 2020/21 and 2021/22:

Controlled foreign companies (CFC) are companies where more than 50% of their participation rights or voting rights are held directly or indirectly by South African residents. The CFC regime is one of the measures put in place to tax South African residents that have majority held equity investments offshore. The provisions do this through (absent the qualification of an exemption), the imputation of the net income of the CFC (in essence, the taxable income of the CFC had it been South African resident) to the South African resident shareholders, in proportion to the interest held in the CFC. The Minister has proposed two amendments relating to CFCs as discussed below.

Following the amendments included in the recently published Taxation Laws Amendment Act 23 of 2020, which alter the rules regarding withdrawal of retirement benefits upon emigration from 1 March 2021, it was announced that other provisions dealing with retirement benefits may be amended. Specifically, the Budget identifies a potential anomaly arising in the context of a person ceasing to be a South African tax resident, but retaining her investment in a South African retirement fund and only withdrawing from the retirement fund when she passes away or retires from employment. When an individual ceases to be a South African tax resident, retirement funds are not always subject to withdrawal tax in terms of the Income Tax Act. Section 9(2)(i) of the Income Tax Act is important in this context, which section states the following regarding the source of a lump sum, pension or annuity payable by a retirement fund:

The corporate restructuring rules in sections 41 to 47 of the Income Tax Act are extremely useful for creating, restructuring and dismantling groups of companies. They allow for tax-neutral transfers of businesses and shares, amalgamations, unbundlings and liquidations. Each rule has specific clawback and ring-fencing provisions that can be triggered after the deal is concluded. Some of these clawback and ring-fencing periods last for 18 months, others for six years and the rest last forever. There are anomalies in the current rules, as some of these clawback and ring-fencing provisions result in double tax, while others are easily avoided by using the corporate rules in a certain sequence. The Minister has therefore proposed the following changes as discussed below.

Section 8F and 8FA of the Income Tax Act are anti-avoidance provisions which seek to re-characterise the taxation of interest on debt instruments issued by a company where either the debt instrument itself or the interest incurred on the debt instrument has certain equity-like features. The objective behind the section is to tax the return on the instrument in accordance with its substance (and according to what the Act deems its true nature) rather than its named form in order to avoid the deliberate manipulation of the nature of the instrument for purposes of seeking more beneficial tax implications. Stated simplistically interest on debt instruments that have equity features are required to be taxed as a return on equity (dividend) and not as interest.

In 2020, as part of National Treasurys endeavour to broaden the tax base, it was proposed that a restriction be imposed in respect of the extent to which an assessed loss carried forward by a company may be set-off against the taxable income of that company in the current year of assessment (YOA). Specifically, it was proposed that the offset of the carried forward assessed loss be restricted to 80% of the taxable income of the company for that YOA, with the effect that the company would be liable to pay tax on at least 20% of its taxable income, regardless of whether the assessed loss carried forward exceeds the taxable income. This proposal was intended to come into effect on 1 January 2021.

South Africas liquor industry has expressed grave concern after Finance Minister Tito Mboweni on day increased taxes on alcohol during his 2021 Budget Speech. Announcing an increase in sin taxes, Mboweni said that South Africans must expect to pay more for alcohol and cigarettes with immediate effect. Mboweni said that a 340ml can of beer or cider would cost an extra 14 cents, with a 750ml bottle of wine now costing an extra 26 cents, a 750ml bottle of sparkling wine will now be setting back customers an extra 86 cents, while a bottle of 750 ml spirits, including whisky, gin or vodka has increased by R5.50.

Many taxpayers will be thankful that Finance Minister Tito Mbowenis Budget Speech for the 2021/2 tax year offers real relief for people in most income tax brackets rather than the painful tax increases that many of us expected. Yet, his Budget Speech also sets the stage for what is likely to be a slow and difficult recovery from the pandemic over the next three years. According to the National Treasurys forecasts, the South African economy is expected to rebound by 3.3% this year, following a 7.2% contraction in 2020. As such, we have a long road ahead of us before GDP grows back to its pre-pandemic size. While the Ministers commitment to lowering barriers to entry, raising productivity and lowering the cost of doing business is laudable, his speech had few new ideas about how to do so.

Pensioners and civil society are up in arms over the below inflation increase in grants announced by Finance Minister Tito Mboweni during his Budget speech. The groups see it as an attack on the poor. Mboweni said social grants would be reduced by R5.8 billion in 2021/2022. He said it was expected that the number of social grant beneficiaries would reach 9 million people by 2022/2023. He said pensions and disability grants would increase from R1 860 to R1 890; child support will increase from R445 to R460; 3.4 percent increase, or R15. Julie Smith, a researcher at the Pietermaritzburg Economic Justice and Dignity group, said the small increase was violence against children, mothers and pensioners.

The property industry has been left somewhat disappointed by this afternoons Budget Speech which it had hoped would outline decisive plans to boost employment and stimulate economic growth. Both these issues hold powerful, although indirect, repercussions for the industry, and although some parts of the plans have been commended by property experts, others fall short.