Budget tax changes broken down

The Minister acknowledged that tax revenue had declined as a share of GDP, contributing to a widening budget deficit. Accordingly the 2010 tax proposals include initiatives to improve tax compliance and broaden the tax base. He signalled that in future higher tax revenue would be required to help narrow the fiscal deficit and suggested that taxes may have to be raised in future to meet our public spending commitments.

The budget emphasised that the preferred method of achieving higher tax revenues is through base broadening, closing loopholes and improving tax compliance. In addition to the closure of sophisticated tax loopholes the Minister announced a greater focus on tax compliance and the reduction of structuring opportunities and the perceived tax avoidance that follows from it.

Individuals

• The approach of the past ten years of adjusting income tax brackets to take account of the effects of inflation on income tax paid by individuals continued. The personal income tax relief for individuals amounts to R6,5 billion.
   

• Annual increases to tax free income were made as expected for individuals below and over 65 years.
   
• The same applied to the increase in monthly monetary caps for deductible medical scheme contributions for beneficiaries and their dependents. The proposed conversion of these deductions into non-refundable tax credits will be postponed to 1 March 2012, which means that the same deduction system that applied in 2010 tax year will apply for another tax year.
   
• The R30 000 tax exemption for retrenchment packages will be merged into the retirement lump sum tax exemption.
   
• The SITE system will be abolished as the personal income tax threshold for taxpayers younger than 65 years has increased to R60 000, which has largely eliminated the need for this system.
   
• The company car fringe benefit rate, which is currently 2.5% of the cost of the vehicle, will be increased which will make the tax cost of a company owned vehicle quite high. The increase is not surprising in light of the changes made to the PAYE withholding in respect of travel allowances and the removal of the deemed kilometres for purposes of calculating the allowance, from 1 March 2010.
   
• Government is concerned that employee deferred compensation and insurance schemes create immediate tax deductions for employers while providing tax deferred packages on behalf of employees upon retirement or on termination of employment. Steps will be taken to ensure that employer deductions match employees' gross income with regard to employer provided group life insurance schemes.
   
• It is proposed that employee insurance packages must be taxed fully as a fringe benefit on a monthly basis.
   
• The employer payment of professional body subscription fees currently does not give rise to taxable benefit as it is viewed as an employment cost. Sars acknowledges that there are other fees that could benefit the employer that are being paid on behalf of the employee and proposes that these fees will also not be subject to fringe benefit tax.
   
• A recent judgment provided that Sars can only collect the outstanding tax from employees where fringe benefit tax was incorrectly calculated. To enable Sars to effectively administer employees' tax in these situations, it is proposed that employees' tax legislation will be amended to allow Sars to raise an assessment on an employer. Further amendments will also be considered to ensure that the payment of this tax liability by the employer does not result in a further taxable fringe benefit for the employee.
   
• Regarding compliance issues, it seems that Sars will enhance its focus on large taxpayers and high net worth individuals over the next 3 years as an area for improved tax administration.
• Consideration may be given that certain amendments to the provisional tax payment legislation are made to ensure that taxpayers with little or no provisional tax to pay are exempted.
   
• The proposed CO2 Vehicle Emission tax will be implemented from 1 September 2010 as a specific tax. New passenger cars will be tax based on their certified CO2 emissions at specified rates.
   
• Changes to the controlled foreign company legislation are proposed to ensure that "protected cell" companies are included in the CFC legislation. It is proposed that each cell of this limited liability company will be treated as a deemed separate company for tax purposes. This could impact on individuals' offshore planning.
   
• Advance tax rulings will only be granted to compliant taxpayers, i.e. all tax returns must be submitted and all outstanding tax must be paid.

Corporate Tax

• The rate of corporate income tax and secondary tax on companies (STC) remain unchanged at 28% and 10% respectively.
   
• The proposed new dividend tax received surprisingly little attention. It appears that most of the pre-implementation issues have been resolved but smaller issues remain which require further changes to the dividend definitions, foreign dividends and secondary tax on companies (this latter aspect would presumably take earlier effect). Attention will also be given to the transition between the STC and dividend tax regimes and practical problems relating to in specie dividends. We anticipate that there will be a reasonable amount of further amendment to the current dividend tax rules prior to their introduction. There does not appear to be any particular date scheduled for the introduction of this new dividend tax regime.
   
• It comes as no surprise that the imminent company law reforms will require the alteration of the tax rules as a result. The co-ordination of the tax and company law rules will no doubt involve changes to many aspects of the Tax Act including the treatment of companies, dividends, reorganisations and the like.
   
• The Minister announced that investigations will be conducted to enhance South Africa's attractiveness as a springboard into Africa. Specifically, he is considering granting relief from exchange control and taxation for certain kinds of head quarter companies located in South Africa.
   
• He further announced relaxing aspects of the tax system which act as a barrier to certain forms of Islamic compliant finance.
   
• Enhanced allowances are being considered in regard to improvements on leased land. This will allow private developers who improve the land of a third party (including the Government) to access depreciation allowances, including the urban development zone allowances in future.
   
• On the whole, the number and extent of tax proposals affecting companies seems quite limited compared to previous years. However there appears to be a concerted focus on what is perceived to be sophisticated tax planning and measures will be proposed to combat the perceived avoidance. A list of "schemes that have been identified for closure" include the following:
   
  • Schemes involving debt/equity arbitrage (which for example entail the borrowing of funds to acquire financial instruments to generate income but which are subject to a zero rate of tax by virtue of tax treaties) or the "inappropriate use of foreign tax credits".
     
  • Measures are to be introduced to limit the interest expenditure incurred by financial institutions based on a formula which will allocated proportionately among various financial assets. This is to ensure that interest is not deductible in relation to the acquisition of non revenue producing assets.
     
  • The cells of a "protected cell company" are proposed to be treated as a separate deemed company in each instance with the ownership requirements measured separately in order to test them against the controlled foreign company ownership requirements.
     
  • Cross border insurance payments will be denied as a deduction in "problematic cases" where the aim of the transaction is to generate a tax deduction for offshore investments without taxation on the other side.
     
  • The participation exemption for certain foreign dividends is to be denied in the case of certain dividends which are derived directly or indirectly from South Africa. This is intended to combat a scheme where funds are taken offshore in a deductible manner and brought back onshore again through tax free dividends.
     
  • The current wide exemption from taxation on interest paid to foreigners is to be restricted to contain the leakage where investors in tax havens invest in South African debt instruments. According to the Minister none of the changes anticipated will affect foreign investment in South African bonds, unit trusts, bank deposits or the like.
     
  • In line with previous statements made by Commissioner Oupa Magashula, it is clear from the tax proposals that the focus of Sars on transfer pricing as a major part of its strategy to increase collections will continue in 2010;
     
  • A specific example mentioned in the summary of additional tax proposal 2010/11 is the proposal to provide a uniform set of transfer pricing rules to deal with artificial pricing or the misallocation of prices within the various components of a single transaction. It will be interesting to see whether this new set of transfer pricing rules will be incorporated into the transfer pricing legislation or whether it will be introduced via amendments to Practice Note 7;
     
  • Another issue specifically mentioned is the extension of the thin capitalisation rules, which currently on apply to subsidiaries of foreign companies but not to foreign companies operating through a branch in South Africa, to South African branches of foreign companies, which is a highly contentious issue, which is widely discussed in the international tax community.
     

Further proposals which will impact on businesses include the following:

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  • Revisions to the current legislation affecting the treatment of employee share schemes. The changes are intended to deal with the date of vesting from an anti-avoidance perspective; and welcome attention to potential double taxation concerns in regard to shares held by share scheme trusts, and potential avoidance through swaps of "restricted" share. Unnamed other "technical issues" will be dealt with as well.
     
  • The Corporate "rollover" provisions of the Act will be amended further to deal with issues including the following:
     
    • Transfer of plantations;
       
    • Relaxation of the conditions for share relief in the case of listed shares;
       
    • Change in the elective position regarding the transfer of trading stock between group companies;
       
    • Improved rollover provisions for the transfer of bad debts which will allow the acquiror to write off a bad debt which occurs after the reorganisation
       
  • It is proposed that the current income tax rules for the valuation of trading stock should exclude financial instruments in general (and not only shares as is currently the case) and this is due to the recognition that financial reporting distinguishes financial instruments from other inventory or trading stock.
     
  • Attention will be given to the current system for taxing short term insurers which may involve tax changes during the current and ensuing tax years.
     
  • Relief is provided for the unusual circumstances where a country changes its entire unit of currency. No particular country is referred to in this regard.
     
  • Foreign currency reporting rules are to be clarified.

Indirect Taxes

• No changes are proposed to securities transfer tax.
   
• The transfer duty thresholds and rates remain unchanged.
   
• The General Fuel Levy on petrol and diesel will increase from 7 April 2010 by 17.5 cents per litre. The Road Accident Fund Levy will be increased by 8 cents per litre, also with effect from 7 April 2010.
   
• The VAT rate remains unchanged at 14%
   
• Other proposed VAT amendments that are under consideration include:
   
  • the relaxation of the one year payback period in respect of unpaid purchases on intra-group loan accounts;
     
  • eliminating double charges of VAT upon the deregistration for VAT;
     
  • a review of the VAT treatment of residential and commercial accommodation;
     
  • the extension of VAT pooling arrangements to industries other than farming or commercial rentals

Customs Issues

• It is proposed that third party information reporting will be introduced for Customs. This will be to enable Sars to verify information submitted to it.
   
• In a step forward, Treasury has indicated that the secrecy provisions of the various agencies under the Finance Ministry will be revised to relax the secrecy provisions somewhat to allow for some exchange of information within the bounds of the law.
   
• More flexible measures will be introduced to secure user identification and access for electronic communication with Sars.

Excise Duty Rates

• The following rates of excise duty have been amended with effect from 17 February 2010:
   
  • Malt beer - increased by 6 cents to 85 cents per 340ml can
     
  • Unfortified wine - increased to R2.14 per litre
     
  • Fortified wine - increased to R4.03 per litre
     
  • Spirits - increased to R27.27 per 750ml
     
  • Cigarettes - increased by R1.24 to R8.94 per packet of 20
     
• A flat rate carbon emissions tax is to be introduced on new passenger vehicles. This will be with effect from 01 September 2010.

Exchange Control

A number of circulars have been issued by the South African Reserve Bank which explains in further detail the exchange control reforms announced in the Budget.

• As of 1 March 2010 South African banks will be able to acquire direct and indirect foreign exposure up to 25% of their total liabilities (excluding equity), covering all foreign exposure but excluding FDI. The initial limit of 40% has been adjusted downwards in light of recent international developments.
   
• Research is underway to finalise the definition of "foreign asset" that captures the underlying risks. For now, the definition of foreign asset for companies - which is based on place of incorporation and / or primary listing - remain in place.
   
• National Treasury will shortly release a framework document for the reform of policy on inward and outward investment and regulation of foreign exposure for foreign investors.
   
• Appropriately mandated private equity funds meeting certain criteria will be able to obtain upfront approval from the Reserve Bank for investments in Africa for up to one year.
   
• Technical amendments - covering a range of matters including investment incentives in Africa - to Regulation 28 of the Pension Funds Act which limits the amount and extent to which private pension funds may invest in certain asset categories will be released for public comment.

Estate Planning

The Minister announced that taxes upon death will be reviewed. It was acknowledged that the coincidence of estate duty and capital gains tax at the time of death could be regarded as double taxation. In addition he stated that estate duty raises limited revenue and is cumbersome to administer whilst wealthy individuals were able to avoid it through the use of trusts and other means.

Tax Administration

• A voluntary disclosure program is proposed to be instituted from 1 November 2010 to 31 October 2011 which will allow taxpayers to come forward disclose information they have not reported during previous dealings with Sars, without penalties and with reduced interest charges. It will also give individuals with unreported bank accounts overseas an opportunity to fully disclose such untaxed revenue. However, the full amount of tax will remain due. A defaulting taxpayer must comply with the following requirements before he can be granted relief:
   
  • Complete disclosure is made to Sars
     
  • Sars was not aware of the default
     
  • A penalty or additional tax would have been imposed had Sars discovered the default in the normal course of business.
     
• An important implication of this program is that government proposes to remove the discretion of Sars to waive interest charged on unpaid provisional tax. This programme therefore seems to allow for the waiver of penalties and a reduced interest charge and not the tax liability. Consideration will also be given to give exchange control relief.
   
• Sars will also be refocusing its enforcement and audit capacity, and modernising its systems to combat what they have identified as a deteriorating level of tax compliance during the recession.

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responses to this article

Retirement fund question a member of a retirement fund died. Fifteen months later his extramarital child appproaches the fund in order to be considered for a portion of teh death benefit, only to be advised that the fund has already paid all benefits to his two children from his . .more marriage. the child was then told that the situation is governed by legislation and that she may have some recourse. please advise regarding her fathers pension fund death benefit and possible recourse she may have. refer to relevant legislation where necessary. . .less by fierdous on February 17 2010, 20:52 Find this comment inappropriate? Report it

help? It is the responsibility of the trustees to ensure that they identify all dependent on the deceased. approach the fund with your information. If you get no joy then approach the pension funds ombudsman. by trustee on February 17 2010, 21:39 Find this comment inappropriate? Report it

Medical Do not agree with medical dedcuction comment regarding same as 2010. The changes was already implemenetd from 1 March 2010, in the amendment bill signed into law in September 2009 by Tax Guy on February 18 2010, 09:49 Find this comment inappropriate? Report it

voluntary tax disclosure program What if you want to come clean now already, even though this program only starts 1 Nov 2010? Surely SARS will accomodate you now already? by want_to_comply on February 18 2010, 16:35 Find this comment inappropriate? Report it

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