1
CONTENTS
PART 1 - BUDGET 2005
PAGE
2005 BUDGET - TAX PROPOSALS
/1
Highlights
/1
Direct tax proposals
/1
Personal income tax
/1
Tax tables 2004/05
/1
Tax tables 2005/06
/1
Rebates
/2
Tax threshold
/2
Tax saving per annum
/2
Interest and taxable dividend income exemption
/2
Medical scheme membership
/2
Motor vehicle allowances
/2
Curtailing subsistence allowances as a salary structuring
/3
Withholding tax on visiting entertainers and sportspeople
/3
Foreign assets and Donations Tax
/3
Transfer duty
/4
Transfer duty rates for individuals
/4
Corporate initiatives / 4Reduction in corporate tax rate
/4
Introduction of tonnage tax regime to stimulate the South African shipping industry
/4
Facilitating company restructurings
/4
Refining film incentives
/5
Government grants
/5
Financial transaction tax relief for the new issue of company shares
/5
Removal of financial transaction taxes on debit entries
/5
Business activities of public benefit organisations
/5
Tax stimulus in support of small businesses
/5
Graduated tax rate structure and accelerated depreciation
/5
Small retailers VAT package (VAT retail scheme)
/6
VAT return filing every four months
/6
Skills development levy
/6
Small public benefit organisations
/7
Tax measures to facilitate environmental sustainability
/7
Encouraging investments in renewable energy
/7
Anti-avoidance measures
/7
Overhaul of the general anti-avoidance rule (“GAAR”)
/7
Bribes, penalties and other illegal activities
/7
Indirect tax proposals
/7
Excise duties on tobacco products
/7
Excise duties on alcoholic beverages
/7
Excise duties on Sun Cream and digital cameras
/7
General fuel levy and Road accident fund levy
/8
Regional Services Council levies and Joint Services Board levies
/8
Compliance measures
/8
Single registration for all tax products per taxpayer / 8e-Filing to be extended to a number of new tax instruments
/8
Full view of account for taxpayers and tax practitioners
/9
Identifying undisclosed income
/9
Voluntary disclosure dispensation
/9
Miscellaneous amendments
/9
Individual home office expenses
/9
Providing certainty for deductible donations / 9Whole year learnership allowances for part-year learnerships / 9
Foreign tax credits and provisional tax payments
/9
Progress on implementation of tax reform initiatives
/10
Accelerated tax depreciation for urban development zones
/10
FIFA World Cup 2010 / 10Corporate tax rates
/10
Normal tax
/10
Secondary tax on companies (STC) / 10Other taxes, rates
/10
Estate duty
/10
Donations tax
/11
Capital gains tax – effective rates
/11
PART 2 - TAX UPDATE
These notes will cover amendments to the legislation promulgated during 2004 and early 2005. An attempt has been made to focus on the amendments most likely to be encountered in practice. We do not intend this to be an exhaustive reference work.
Developments over the last year
/12
The taxation laws amendment act 16 of 2004
/12
Prescribed interest rate (sec 1) / 12Scrapping allowance (sec 11(o)) / 13
Entertainment allowance (sec 11(u)) / 13
Farming equipment (sec 12B(2)(f)) / 13
Urban development zones (sec 13quat) / 14
Deduction in respect of UIF interest and penalties (sec 23(d)) / 14
Labour brokers (para 1 of 4th schedule) / 14
PAYE relief on income protection insurance premiums (para 2(4) of 4th schedule) / 15
Capital gains tax / 15
Valuation date of exempt person that becomes taxable (sec 10(1)(cA) and para 1) / 15
Capitalisation shares (para 78) / 15
The revenue laws amendment act 32 of 2004 and second revenue laws amendment act 34 of 2004 / 16
Section 7 deemed accrual / 16
Examples / 16
Share incentive schemes / 17
Gains made by directors or employees (sec 8A(1)(a)) / 17
Broad-based employee share plan (sec 8B) / 17
Old Law / 17
Reasons for change / 17
New law – General terms for tax-free treatment / 17
Equity shares for minimum consideration / 17
Widespread participation / 18
No dividend or voting restrictions / 18
Limitation on other restrictions / 18
Subsequent Sales / 18
Deductibility for the employer / 18
The new section 8B reads as follows / 19
Examples / 20
Requirements of the Companies Act, 1973 as they relate to section 8B(3)(a) / 20
Broad-Based Employee Share Plans, The Employer’s position
/ 21Broad-Based Employee Share Plans, Fringe Benefit Position
/ 22Broad-Based Employee Share Plans, Employees’ Tax
/ 22Broad-Based Employee Share Plans, Deduction of cost by employee
/ 23Vesting of equity instruments (sec 8C)
/ 24The law as it stood
/ 24Reasons for change
/ 24The amendments
/ 24General rule
/ 24Interaction with the Seventh Schedule
/ 24Basic system of taxation under section 8C
/ 25Vesting as the tax event
/ 25Restricted versus unrestricted instruments
/ 25Calculation of gain or loss upon vesting
/ 26Examples
/ 26Employees’ tax
/ 28Subsequent transfers
/ 28Restricted equity instrument swaps
/ 28Connected persons/non-arm’s length transfers
/ 29Transfers to connected persons or at non-arm’s Length
/ 29Subsequent transfers by connected person/non-arm’s length transferees
/ 30Collateral Capital Gains Tax changes
/ 30Elimination of duplicated gains
/ 30Expatriates
/ 31Donations Tax
/ 31Hybrid financial instruments
/ 32Reasons for change
/ 32Expand scope of the section: Section 8E(1): definition of “hybrid equity instrument”
/ 32Date of issue of share: Section 8E(1): definition of “date of issue”
/ 33Limitation of deduction of certain interest payments - Introduction of section 8F
/ 33General Rule
/ 33Limitation of deduction: Section 8F(2)
/ 34Types of Hybrid instruments covered by section 8F
/ 34Section 8F(1) defines a ‘hybrid debt instrument’ as an instrument where-
/ 34SectIon 64C(2)(h) - STC
/ 35Section 103(5)
/ 35Incurral and accrual of interest - amendments to section 24J
/ 35Exemption – JSE Securities Exchange and Bond Exchange (sec 10(1)(d))
/ 37Interest relief, investments held by Namibian, Swaziland and Lesotho investors (10(1)(h)
/ 38Foreign purchased annuities (sec 10A(11))
/ 39Research and development (sec 11B)
/ 39Deductions in respect of foreign dividends (sec 11C)
/ 40Public Private Partnerships (sec 11(g))
/ 40Part disposal rules revisited following 11(g) amendment
/ 41Urban development zones (sec 13quat)
/ 42Assets acquired in exchange for shares issued (sec 24B)
/ 42Shares for assets
/ 43Debt for assets
/ 43Shares issued for shares or debt
/ 43Debt issued for shares or debt
/ 44Assets acquired or disposed of for contingent or unquantified amounts (sec 24M)
/ 45“Open transaction” method
/ 46Transfers of non-depreciable assets
/ 46Taxation of the transferor (seller) — accrued unquantified amounts
/ 46Taxation of the transferee (purchaser) — accrued unquantified amounts
/ 47Transferor (seller) and transferee (purchaser) (unaccrued) contingent payments
/ 47Examples
/ 47Transfers of depreciable assets (sec 24M)
/ 51Taxation of the transferor (seller) — accrued unquantified amounts
/ 51Taxation of the transferee (purchaser) — accrued unquantified amounts
/ 51Transferor and transferee — accrued contingent amounts
/ 51Example
/ 52Transfers of trading stock assets (sec 23F)
/ 53Taxation of the transferor — accrued unquantified amounts
/ 53Taxation of the transferee — accrued unquantified amounts
/ 53Transferor and transferee (unaccrued) contingent payments
/ 53Example
/ 54Deferral mechanism for disposal or acquisition of equity shares (sec24N)
/ 54Taxation of the seller
/ 55Taxation of the purchaser
/ 55Income of trusts and beneficiaries of trusts (sec 25B)
/ 56Withholding tax on sale of immovable property by non-residents (sec35A)
/ 56Intra-Group transactions: Degrouping (sec45)
/ 59Unbundling transactions: Valuation date value of previously held shares (sec46)
/ 61Intra-Group donations (sec56(1))
/ 62STC (sec64B)
/ 62Notification of change of address (sec67)
/ 64Registration of tax practitioners (sec67A)
/ 64Advanced tax rulings (sec 76B to S)
/ 65Value Added Tax
/ 75Vat Treatment of grants paid by Public Authorities and Local Authorities
/ 75Commercial accommodation (sec 1 and sec 8(2B))
/ 76Game viewing vehicles and Hearses (sec 1 etc)
/ 76Tax invoices (sec 20)
/ 77Farmers (sec 25)
/ 77Cancellation of registration (sec 58(i))
/ 771
PART 1 - BUDGET 2005
2005 BUDGET TAX PROPOSALS
HIGHLIGHTS
- Company tax rate reduced to 29%
- Tax and compliance concessions for Small business
- No change to VAT, STC, CGT, Donations tax or Estate Duty rates
- Significant increase in tax threshold for those aged 65 and over
- Changes to travel allowance and company cars
TIPS FOR TREVOR
The minister shared some of the more wishful and entertaining tips put forward by the public.
- “We cannot live without entertainment and if you always increase the price of beer and brandy then the culture of entertainment will die, which will be unfair for human nature”.
- “Labola is a social responsibility put upon one’s shoulder unwillingly so it should be tax-deductible”
The notes that follow draw extensively from the guide published by SARS titled 2005/6 Budget Tax Proposals.
DIRECT TAX PROPOSALS
PERSONAL INCOME TAX
Personal income tax relief of R6.8 billion has been proposed. The distribution of the tax relief is as follows:
Threshold of R60,00012.0%
R60,000 to R150,00032.3%
R150,000 to R250,00022.4%
R250,000 and above33.5%
Tax tables 2004/05
Taxable income /Rate of tax
0 / - / 74,000 / 18%74,001 / - / 115,000 / 13,320 / + / 25%
115,001 / - / 155,000 / 23,570 / + / 30%
155,001 / - / 195,000 / 35,570 / + / 35%
195,001 / - / 270,000 / 49,570 / + / 38%
270,001 / - / 78,070 / + / 40%
Tax tables 2005/06
Taxable income /Rate of tax
0 / - / 80,000 / 18%74,001 / - / 130,000 / 14,400 / + / 25%
115,001 / - / 180,000 / 26,900 / + / 30%
155,001 / - / 230,000 / 41,900 / + / 35%
195,001 / - / 300,000 / 59,400 / + / 38%
300,001 / - / 86,000 / + / 40%
Rebates2004/052005/06
PrimaryR5,800R6,300
SecondaryR3,200R4,500
Tax threshold
Below age 65R32,222R35,000
Age 65 and overR50,000R60,000
Tax saving per annumAge below 65Age above 65
Taxable income Tax reductionTax reduction
R35,000 – R70,000R500R900 – R1,800
R75,000R570R1,870
R80,000 – R100,000R920R2,220
R120,000R1,170R2,470
R150,000R1,670R2,970
R200,000R3,070R4,370
R250,000R3,970R5,270
R500,000 and overR4,570R5,870
Interest and taxable dividend income exemption
2004/052005/06
Natural persons below age 65R11,000R15,000
Age 65 and overR16,000R22,000
Of the above, the amount that can be
applied to foreign interest and dividendsR1,000R2,000
The proposed relief for taxpayers over 65 represents a significant alleviation of the tax burden on retired persons that, in turn, enhances the return on savings for retirement and is a further fiscal encouragement to save.
A retired couple with income only from interest-bearing investments, approximately R2 million can be invested tax-free in 2005/06.
The maximum tax-free income of a couple who take full advantage of the interest exemptions rises from R132,000 to R164,000.
Medical scheme membership
The current tax treatment of medical scheme arrangements allows an employer to pay two-thirds of the member’s contribution as a tax-free fringe benefit. This has the effect that the fiscal benefit, expressed as the tax-induced reduction in the price of medical scheme membership, rises from nil for individuals below the tax threshold to 26,7% for those taxed at the maximum marginal rate of 40%.
With a view to encouraging broader medical scheme coverage, extending the tax benefit to self-employed individuals and achieving a more equitable tax treatment, it is proposed that the two-thirds tax-free provision should be replaced by a monthly monetary cap that takes into account the number of beneficiaries covered by medical scheme membership. This in effect provides complete tax relief for more affordable medical aid packages for low and middle-income families, while restricting benefits for more expensive packages.
The capping of medical aid contributions will have the further advantage of removing the tax induced reduction in the marginal price of more expensive medical scheme options, which interferes with market discipline on medical scheme prices and costs. A discussion document will be released this year on the proposed reform. For administrative reasons, it will take effect on 1 March 2006.
Motor vehicle allowances
The deduction of deemed business expenses against a motor allowance has increased substantially over the years and has become a commonly used means of reducing tax liability, irrespective of actual business travel cost. The current formula creates a bias in the structuring of salary packages, particularly for higher income earners, encourages the purchase of higher value vehicles and unfairly influences household travel choices.
As from 1 March 2005, the deemed method for calculating fixed business travel cost will be adjusted by introducing a residual value element and by capping the car value at R360,000. The revision of the tables will recognise that five-year old vehicles commonly have a 30% residual value. The deemed private kilometres will be increased from 14,000 to 16,000, and to 18,000 in 2006. Simultaneously, the deemed maintenance and fuel costs are to be adjusted to reflect the latest applicable average running cost rates for motor vehicles, and will be annually reviewed in future.
In line with these adjustments, the monthly taxable value of a company car is to be increased from the current 1,8% to 2,5% effective from 1 March 2006. The taxable value of a second company car remains at 4% per month.
For VAT purposes, the value for the deemed supply of the right of use of a motor vehicle is determined by applying a percentage to the determined value of the vehicle. In light of the proposed changes to the motor vehicle fringe benefit system, the percentages and amounts prescribed by the Minister for VAT purposes will also be adjusted, and will be published in the Government Gazette.
Curtailing subsistence allowances as a salary structuring
Many employers compensate their employees for work-related travel, including advances to cover travel subsistence. Currently, an exclusion from taxable income is available on a per diem basis, which obviates the need to maintain receipts for travel expenses incurred. Unfortunately, some employees and employers are relying on this mechanism in order to artificially reduce and postpone employees’ tax obligations. Government will accordingly seek to eliminate this form of salary structuring by requiring a more direct and immediate link between a tax-free subsistence advance and anticipated travel. Tax-free advances for travel without fixed dates or for travel long after the advance is paid will no longer be condoned. The foreign travel per diem limits will also be revised in order to align these with prevailing foreign country costs.
Withholding tax on visiting entertainers and sportspeople
Like all visiting foreign workers, visiting entertainers and sportspeople are responsible for paying South African tax on their South African source income. However, tax compliance is poor. Problems in enforcement mainly stem from the short-term nature of the local events and the substantial quantum of the tax liability. It is therefore proposed, in line with international practice, to introduce a final withholding tax regime on the gross payments to visiting entertainers and sportspeople. These will be set at 5% for visiting residents of African countries and 15% for residents of other countries. The lower rate for African residents recognises the special nature of South Africa’s relationship with other African countries.
Foreign assets and Donations Tax
Certain foreign located assets are to be included under the Donations Tax net.
TRANSFER DUTY
Transfer duty rates for individuals
2004/052005/06
Property valueRate of taxProperty valueRate of tax
0 -R150,000 0%0 -R190,000 0%
150,001 -R320,000 5%190,001 -R330,000 5%
R320,001 and aboveR8,500 + 8%R330,001 and aboveR7,000 + 8%
In all other cases the rate remains 10%
The proposed new duty rate will reduce the tax burden on a property transaction of R320,000 by R2,000. The new rates will apply from 1 March 2005.
CORPORATE INITIATIVES
Reduction in corporate tax rate
Internationally, a clear trend is emerging towards reduced taxation, or increased tax exemption levels, for business income. Corporate tax rate reductions have been implemented in many countries, motivated by the imperative of competing for scarce foreign direct investment, minimising incentives for tax avoidance and reducing distortions due to the imposition of high taxes. International practice is also informed by increasing evidence that a lower corporate rate together with a robust tax structure is fiscally more sustainable than the erosion of effective rates through a proliferation of special tax allowances.
Globally, a general disillusionment in respect of tax incentives has set in, as governments seldom have a clear quantitative and qualitative understanding of their effectiveness or revenue impact. A moderate statutory rate structure, with a graduated lower rate regime for incorporated small businesses, from the perspectives of transparency, administrative simplicity and economic efficiency is the preferred policy route.
It is accordingly proposed that in respect of years of assessment ending on or after 1 April 2005, the South African corporate income tax rate will be reduced from 30% to 29%.
The reduction in the general corporate tax rate necessitates corresponding changes to other rates linked to that rate:
- The tax rate for South African branches or agencies of a foreign company will be reduced from 35% to 34%.
- The rates for company policyholder funds and corporate funds of long-term insurers will be reduced from 30% to 29%.
- In the case of gold mining companies not exempt from the STC, the new formula for gold mining income will be Y = 35-175/x (formerly, Y=37-185/x); and in the case of gold mining companies opting to be exempt from the STC, the new formula will be Y = 45-225/x (formerly, Y = 46-230/x), with the rate for non-mining income reduced from 38% to 37%.
- The tax rate for an employment company will be reduced from 35% to 34%
Introduction of tonnage tax regime to stimulate the South African shipping industry
South Africa primarily depends on maritime trade, with over 90% of exports and imports conducted via international shipping routes. Unfortunately, foreign vessels almost solely provide this service, as only one vessel remains on the South African Ships Register (down from 50 vessels in the 1970’s). One of the reasons for the decline has been the rapidly changing international tax environment, which has rendered the South African system very unfavourable for ship owners.
The introduction of a tonnage tax regime which, taxes shipping companies at fixed rates according to the size of their ships, and not according to the company’s business income results, will lower the effective tax rate paid by such companies, making the South African tax environment for shipping more competitive. Tonnage tax regimes have been successfully implemented in other countries such as Belgium, India, Ireland, the UK and the Netherlands with almost immediate positive outcomes in terms of related business activities.
It is proposed that to draft legislation in 2005 with a view to introducing the regime in the following year.
Facilitating company restructurings
A few years ago, Government revised the tax treatment of company restructurings in support of more efficiently realigned business structures. However, the regime is proving to be overly restrictive in practice. Of special concern are the various percentage requirements, such as ‘the 75%’ shareholder threshold for intra-group tax-free transfers. It is proposed to reduce this threshold to 70% as it accommodates other government regulations and guidelines. In addition, the 75% look-through test for determining passive financial instrument company status may be too high in the case of domestic and foreign restructurings involving multi-tier company structures. The ‘more than 25% threshold’ for tax-free formations is also unduly hindering company formations when multiple parties seek to form a company. Both thresholds will accordingly be reduced. Other lesser anomalies hindering restructurings and avoidance loopholes will be addressed as time permits.
Refining film incentives
Growing interest in the South African film industry is a welcome development. However, some film schemes involve complex and disguised arrangements that involve little or no commercial risk and may even carry no connection to the South African film industry. As a result, the tax incentives for films must be refined to achieve their intended goal. Alternative forms of targeted tax relief will be considered, such as exempting government film grants, to encourage this promising industry.