Below are this year’s the income tax changes in a nutshell.

Tax tables
In terms of the tax tables, as usual and thankfully the Minister has increased the tax brackets to allow for inflation.

One of the possible Budget expectations was an increase of the marginal tax rate to above 40%, and this has not materialised. In stating that the rate has remained the same though, if one uses a CPI rate of 6%, even after the “inflationary” adjustment to the tax tables, unfortunately year-on-year tax payers will in fact be worse off, if you earn R120 000.00 or more per year.

Sin taxes
In terms of Sin taxes announced for 2013 – just like the sun rises in the morning – people will need to pay more for sins – the rates have gone up yet again.

Non-retirement savings
This year, the Minister announced that there is a proposal for contributions to tax preferred savings accounts with an annual contribution limit of R30 000 and lifetime limit of R500 000. Such investment payouts will be tax free but this is only from April 2015. This should provide an incentive to invest, although at the same time the interest-free exemptions will be increased from 1 March 2013 and then no further. Initially, at least this would seem beneficial but further details would be required to be ascertain any long term benefits. A simple interest deduction would probably have been easier to administer!

Retirement savings
Increased contributions to provident funds will be allowed from the current 20% (SARS practice) up to 27.5% of taxable income. However, this will be capped at R350 000 for equity reasons. If one is promoting retirement savings, it seems more appropriate for government to incentivise this with no cap but it is understandable to see where Treasury is coming from.

Employment tax incentives
To help youth enter the workforce, an incentive will be provided, but this benefit will fall away when the person reaches the personal income tax threshold level. It will be interesting to see whether this will have any benefit at all in terms of “big picture” tax income and employment in general.

Employer housing
Assistance announced by the Minister to low income earners in regard to acquiring houses from employers is welcomed.

Exempt income from off-shore
Currently employees working overseas are not taxed if they are off-shore for more than 183 days and 60 continuous days. It would seem that this will be looked at again especially if there is a South African employer involved. In view of numerous Double Tax Agreements which provide for the 183 day rule, such changes may create more complexities than achieving any real revenue for government.

Special economic zones
Similar to other foreign jurisdictions, the Minister is proposing to provide incentives for investment in certain special economic zones. In this regard the corporate tax rate will be 15%, an employment incentive for workers earning less than R60 000, plus an accelerated depreciation allowance for buildings. This is pleasing – at least in theory.

Donations
For the philanthropic tax payer, donations in excess of 10% of your taxable income to certain Public Benefit Organisations (PBO’s) will now be allowed as a deduction in a subsequent year (currently the deduction is limited to 10% of taxable income, and the excess is lost). For the few providing such donations this would only really assist if the donations are less than 10% in the following year.

Old age grants
This is currently based on a complex “means test”, but by 2016 this is proposed to be phased out, and all South Africa citizens will be eligible, although there will be other off-sets for the wealthy. This may then shift the tax complexity to the old age taxpayer which would be unfortunate wouldn’t it?

Trusts
These have been a long-time concern for SARS. Effectively discretionary trusts are being killed as they will be taxed at 40%, although they have allowed distributions as tax deductible expenses, to the extent that the trust has taxable income. The beneficiary will then receive income if there is a deduction; alternatively if there is no deduction for the trust, the amount will be received tax free.

Off-shore trusts
The Minister announced during his Budget Speech that distributions from off-shore foundations will be treated as ordinary revenue – ouch!

Share schemes
Last year we were promised reform to this complex legislation, but no changes have been made. Again changes are being promised – and we wait in hope.

Acquisition debt
Various deals over the years have caused this to be a large concern for SARS. The current rules should adequately deal with this. However the proposal is to take this one step further and only allow the deduction for up to five years. This may kill numerous acquisitions – sadly, like a shotgun, this will take out both the good and the bad.

Withholding Tax (WHT) on interest and royalties
Last year’s budget saw the announcement that this would come into effect on 1 January 2013 and then this was moved to 1 July 2013. Now, in terms of the Ministers 2013 speech the effective date has been pushed out again to 1 March 2014. In addition this will also apply to cross border service fees – strictly speaking this is probably already covered by current law, nevertheless people should be looking at the Double Taxation Agreement more closely to ensure the relevant relief.

NHI
Once again we await the funding proposal (to be released in 2013) of this leviathan.

No submission of tax returns
Currently if you earn employment taxable income of less than R120 000 you do not have to submit a tax return – this is to take a large leap forward to a taxable income of R250 000, which will be a welcome relief for many.

Review of various innovative financial instruments
This area will be researched in more detail by SARS. This is the constantly moving field of the planner versus the taxman – and the taxpayer whenever looking at such instruments should be aware that this is on SARS’ radar screen.

Leasehold improvements
Problems exist with tenants improving leasehold property. It’s proposed that the person using the asset as opposed to the person owning the asset be entitled to a tax deduction. But the main issue here is that someone should get the allowance, and if this proposal allows for this, it will be welcomed.

SARS, as an international policeman
Currently the taxpayer is entitled to a deduction when an expense has been incurred. This can create uneven tax treatment when one is dealing with foreign parties. It is proposed that the deduction will only be allowed when the expense has been paid. This type of amendment is welcomed from a tax consulting perspective as the law is simply being made more complex which means help is needed to understand difficult legislation and this inadvertent helps with advisory fees – not a great planning tool on the whole.

Treasury operations
Large groups usually have a company which act as a treasury company. It is proposed that listed companies can elect one such company to act as such and it will be treated as a non-resident company for Reserve Bank purposes. They can then use their foreign currency as a starting point for tax calculations. This is most welcomed as an incentive to keep such operations within SA. It would be preferred to see such dispensation to be allowed to all companies meeting certain requirements as opposed to only the listed entities. Unfortunately the impact of this proposal will be somewhat diluted as such treasury operations are often physically conducted from more tax-friendly jurisdictions – with which we currently cannot compete.

Controlled foreign companies
The Minister’s speech provides that certain anomalies have crept into controlled foreign company legislation over the years, and these will require clarification. Certain legislation in this regard does indeed provide what one can only assume are unintended consequences and we certainly hope that these will be rectified.

Winnings
To close, a gambling tax was proposed in 2011 and we are told this will be implemented in 2013. With any luck we can only hope this “lotto winning number” will be missed again.

Willem Oberholzer, Grant Thornton Pretoria Tax Partner
“Tax payers can breathe a sigh of relief because overall the status quo remains. Government seems to be consolidating. We’ve seen tax reforms for at least three years that were very big and this year is different.”

Willem Oberholzer, Grant Thornton Pretoria Tax Partner
“This year’s Budget Speech seemed to be very forward looking at future changes, in that deadlines announced are for changes to come in the future. Focus for this Budget Speech seemed to be on consolidating and collections – a more compliance-themed Budget for 2013. The effect of the proposed changes is that they will seek to collect 11% more from individuals compared to only 8.6% more from corporates.”

AJ Jansen van Nieuwenhuizen, Director and Head: Tax, Grant Thornton Johannesburg
“There are a lot of minor changes to pay attention to, but in general nothing major has been updated and the tax payer should be relieved.”

Willem Oberholzer, Grant Thornton Pretoria Tax Partner
“The Minister advised that discretionary trusts will no longer act as a flow-through vehicle and all income will be fully taxed at a trust level. We view this as a big concern for all beneficiaries of trusts and for estate planning in general. We would like to caution beneficiaries to take a close look at the cash flow implications as a result of this proposed change.”

Barry Visser, Associate Director: Tax, Grant Thornton Johannesburg
“We welcome the Minister’s announcement regarding the automation of tax clearance certificates because there are definite frustrations currently with obtaining these certificates.”

Neville Sweidan, Head: Forensic Services, Grant Thornton Johannesburg
“The Minister gave a long discourse on the government’s determination to fight corruption with particular reference to procurement. Particularly through the mechanism of the receiver of revenue SARS has started to target businesses that have supply contracts with the payment of taxes in respect of their receipts for such contracts. As a result a substantial tax had already been assessed. They were intending to broaden the process. However, this is closing the stable door after the horse has bolted because there is a lack of seriousness in the enforcement through the mechanisms that already exist such as the whistleblower act and the public protector. There appears to be up to now a lack of political will to utilise these mechanisms to their best advantage.”

e-Tolls, SANRAL and graduate Tax

Warren Martin, Director: Corporate Tax, Grant Thornton Pretoria
“E-tolls and graduate tax was not mentioned at all, which was very surprising after all that excitement and hype.”

Warren Martin, Director: Corporate Tax, Grant Thornton Pretoria
“The amount of R1.4bn which was allocated to SANRAL is certainly not enough to cover national projects, Western Cape expansions and e-Toll plans, to name a few. It appears to be for future expansion projects.”

VAT

Cliff Watson, Associate director: Indirect Tax, Grant Thornton Johannesburg
“The streamlining of VAT Registration processes is especially welcomed – it will facilitate VAT processing significantly.”

Cliff Watson, Associate director: Indirect Tax, Grant Thornton Johannesburg
“The Minister advised that foreign companies that provide e-Books, music and other digital goods and services are liable now to register for VAT in SA. While the consumer will pick up the increased cost, this VAT change will increase the national income quite significantly. In addition, it’s in line with the EU VAT legislation. However, it is going to be quite difficult for SARS to police this and track the VAT payments here because downloading digital goods is from a multitude of channels. It was previously mentioned that SARS would be allowed to go to actual download sites (e.g. Amazon) to request downloaded information and track it there – it is questionable if this will be legally possible.”

Cliff Watson, Associate director: Indirect Tax, Grant Thornton Johannesburg
“It is encouraging that SARS will be researching the VAT treatment of financial services and the apportionment of input taxes within the financial services sector, during 2013. This has been an ambiguous area for quite some time. There is a specific VAT ruling in the Banking Services sector and there was talk it would be withdrawn in April this year. We wonder if this research will form part of this. In addition the apportionment method of input taxes relating to non-financial sectors will be re-evaluated looking ahead. This is perhaps as a result of consistent pressure from tax payers and their advisors. This move is most certainly welcomed.”

NHI

AJ Jansen van Nieuwenhuizen, Director and Head: Tax, Grant Thornton Johannesburg
“The Minister’s mention that the proposed funding for the NHI will be published this year, i.e. during 2013, at least provides a deadline to advise as to how this Health Insurance will indeed be funded. We were hoping for more clarity, though, during this Budget and yet another delay is frustrating.”

International tax

Barry Visser, Associate Director: Tax, Grant Thornton Johannesburg says:
“While there are currently withholding taxes on royalties of 12%, it looks like cross-border service fees will be included in the withholding tax framework. This is a new inclusion – in a way it’s a bit of a surprise which we weren’t expecting. This is something which people will consider when international companies are looking to invest in SA. Normally the double tax agreements provide for relief but still this is another withholding tax which foreign companies will need to consider when investing.

“Although there is currently a withholding tax of 12% for royalties this would have increased to 15% on 1 July 2013. However, the Minister has delayed this increase until 1 March 2014. Effectively royalties carries on at 10% and withholding tax on interest as well as the new cross border service fees will also only come into effect on next year on 1 March 2014. This brings some relief but foreign companies should prepare themselves for the added cross-border service fees, which is onerous.”

Property sector

Lee-Anne Bac, Director: Grant Thornton advisory services
“The Minister’s mention in terms of housing was beneficial. The fact that there is pressure on banks to increase the levels of mortgage loans provided is a positive aspect and it is certainly welcomed in terms of expanding property ownership.”

Lee-Anne Bac, Director: Grant Thornton advisory services
“The Minister spoke specifically about creating simpler rules in terms of reducing the time and cost for investing and operating in Africa. Many SA property companies are looking to expand into Africa and this announcement is particularly positive for these organisations.

AJ Jansen van Nieuwenhuizen, Director and Head: Tax, Grant Thornton Johannesburg
“Real Estate Investment Trusts (REIT) tax benefits will be extended to unlisted REITs and this is certainly welcomed although it is not likely to come into effect in the near future.”

Public sector

Christelle Grohmann, Director: Grant Thornton Advisory Services
“The NDP’s plans are based on achieving a growth rate of 5% per year. Yet actual growth is less than half – according to the Minister (2.3%) over the next three years. Also the Minister mentions revenue shortfall. The question is why don’t we see more involvement of the private sector in infrastructure projects as we would assume that, with a decrease in revenue and a decrease in growth there will naturally be a revenue gap to fund the NDP. We are still concerned that we see very little activity called for from the Private Sector to take part and actually fund this gap that is obviously increasing and which is expected to increase even further. We note no new Public-Private-Partnerships in recent months – and this is one method of creating Private Sector involvement.”

Christelle Grohmann, Director: Grant Thornton Advisory Services
“It is encouraging to see renewed activity in respect of the Special Economic Zones and the specific tax incentive which was mentioned by the Minister is certainly encouraging. However, profits need to be earned before tax incentives can come into play and there are concerns that many of these industrial parks are developing far too slowly due to service delivery issues at local government level and problems in electricity capacity.”

Terry Ramabulana, Director: Group leader, Public sector advisory, Grant Thornton Johannesburg
“In terms of the National Development Plan, the real focus from the Minister was on growth and development. These are issues which we have raised long time ago. Our question is that we haven’t seen enough change in the Government’s stance on this matter. In terms of the Presidential Infrastructure Co-ordinating Commission and its purpose, again we see this as a unit that would drive growth and development as well, especially from an infrastructure point of view. Going back to the NDP – what are the real differences here? Having said all this – there doesn’t seem to be a focused way of moving from equitable share to a point where revenue is distributed to where it is really needed – i.e. provincial and local government. In this instance, equitable share is ‘as per formula’ and not ‘as per real need’.”

Terry Ramabulana, Director: Group leader, Public sector advisory, Grant Thornton Johannesburg
“In terms of the allocation to the Provinces – R23.9 billion is available to provincial education departments for infrastructure over the next three years. The Minister has not mentioned how these funds will be managed and as in the past, we fear that there is no real mechanism is in place to ensure this money is spent for the purpose for which it was intended.”

Terry Ramabulana, Director: Group leader, Public sector advisory, Grant Thornton Johannesburg
“R4.3 billion has been allocated to a new grant to be administered by the Department of Water Affairs, providing water treatment, distribution, demand management and support for rural municipalities. The question here is what would the role be of the current utilities services which are entrusted with managing water services under the Municipalities? There is no indication as to how revenue collected by agents to the municipalities would be monitored. For instance taking into account ring-fencing revenue to monitor and track revenue collection and growth.”

Tweets

Hylton Cameron, Associate Director: Tax, Grant Thornton Johannesburg

Hylton Cameron, Associate Director: Tax – A budget of consolidation for 2013 #Budget2013 #SABudgetgt.co.za/publications/b…

— Grant Thornton (@GrantThorntonZA) February 28, 2013

AJ Jansen van Nieuwenhuizen, Director and Head: Tax, Grant Thornton Johannesburg

Video: Overall impact of the #Budget2013 on the taxpayer: youtu.be/XRi1pSt3rcM

— Grant Thornton (@GrantThorntonZA) February 28, 2013

Terry Ramabulana, Director: Group leader, Public sector advisory, Grant Thornton Johannesburg

Video: Keeping an eye on how #budget2013 provincial allocations will be spent : youtu.be/6kUOter0CI8

— Grant Thornton (@GrantThorntonZA) February 28, 2013

Gillian Saunders, Head: Advisory services, Grant Thornton Johannesburg

Video: @gillbat highlights the impact of #Budget2013 on the tourism industry: youtu.be/x18gZ-uxnC8

— Grant Thornton (@GrantThorntonZA) February 28, 2013

Cliff Watson, Associate director: Indirect Tax, Grant Thornton Johannesburg

Video @cliffordewatson – VAT registration for foreign co’s providing digital goods & services in SA #Budget2013 youtu.be/PoVAFMc3dQg

— Grant Thornton (@GrantThorntonZA) February 28, 2013

Christelle Grohmann, Director: Grant Thornton Advisory Services

Video: @christellegrohm discusses tax incentives for special economic zones from the #Budget2013: youtu.be/mxpbD3HEMxU

— Grant Thornton (@GrantThorntonZA) February 28, 2013

Lee-Anne Bac, Director: Grant Thornton advisory services

Video: @leeannebac talks about the impact of the #budget2013 on the property sector youtu.be/5KGRpsy6ylk

— Grant Thornton (@GrantThorntonZA) February 28, 2013

David Campbell, CEO: Grant Thornton Johannesburg

1,1% of SA tax payers contribute 24% of personal tax to government.Astonishing stat re SA tax base from GT expert “AJ” @grantthorntonza

— David Campbell (@campbers1) February 27, 2013

Claire Du Bourg, Associate Director: Corporate Finance, Grant Thornton Johannesburg

@grantthorntonza #2013budget event is well attended. Thanks to our JV partners JSE and UBS

— Claire Du Bourg (@Cdubourg) February 27, 2013

Lee-Anne Bac, Director: Grant Thornton advisory services

.@leeannebac proposed simplification of rules to reduce time & cost for imvesting in Africa positive for SA co’s expanding beyond borders

— Grant Thornton (@GrantThorntonZA) February 27, 2013

Barry Visser, Associate Director: Tax, Grant Thornton Johannesburg

Video #Budget2013 Impact on cross-border service fees: youtu.be/tZRtxyVB9Sk

— Grant Thornton (@GrantThorntonZA) February 27, 2013

We’ll be keeping an eye on upcoming provincial budgets for better insight into how today’s provincial allocations will be spent #Budget2013

— Grant Thornton (@GrantThorntonZA) February 27, 2013

Steven Kilfoil, Director: Corporate Finance, Grant Thornton Johannesburg

Video: Impact on the mining industry @skilfoilgt1 youtu.be/O-6imBqhSzE #Budget2013

— Grant Thornton (@GrantThorntonZA) February 27, 2013

Christelle Grohmann, Director: Grant Thornton Advisory Services

We’re encouraged by renewed activity in IDZs, but they’re developing too slowly due to infrastructure constrants bit.ly/GTBudget2013

— Grant Thornton (@GrantThorntonZA) February 27, 2013

Our tax teams hard at work analysing the budget so you don’t have to. Visit bit.ly/GTBudget2013 #Budget2013 twitter.com/GrantThorntonZ…

— Grant Thornton (@GrantThorntonZA) February 27, 2013

Willem Oberholzer, Grant Thornton Pretoria Tax Partner

Tax payers can breathe a sigh of relief because overall the status quo remains. Visit bit.ly/GTBudget2013 for more info #budget2013

— Grant Thornton (@GrantThorntonZA) February 27, 2013

AJ Jansen van Nieuwenhuizen, Director and Head: Tax, Grant Thornton Johannesburg

Lots of minor changes to pay attention to, but in general nothing major has been updated & the tax payer largely unaffected #Budget2013

— Grant Thornton (@GrantThorntonZA) February 27, 2013

.@skilfoilgt1 discussing impact of #budget2013 on the mining industry with @richsimmondsza twitter.com/GrantThorntonZ…

— Grant Thornton (@GrantThorntonZA) February 27, 2013

Willem Oberholzer, Grant Thornton Pretoria Tax Partner

Discretionary trust will no longer act as a flow-through vehicle, all income to be fully taxed. Very bad for all beneficiaries #Budget2013

— Grant Thornton (@GrantThorntonZA) February 27, 2013

Steven Kilfoil, Director: Corporate Finance, Grant Thornton Johannesburg

@grantthorntonza #budget2013 Surprised the Minister never used the last budget before election year to make Real changes. Bland budget

— Steven Kilfoil (@skilfoilgt1) February 27, 2013

AJ Jansen van Nieuwenhuizen, Director and Head: Tax, Grant Thornton Johannesburg

Real Estate Investment Trusts tax benefits will be extended to unlisted REITs in the future and this is welcomed #Budget2013

— Grant Thornton (@GrantThorntonZA) February 27, 2013

Warren Martin, Director: Corporate Tax, Grant Thornton Pretoria

e-tolls and graduate tax was not mentioned at all – after all that excitement and hype. #Budget2013

— Grant Thornton (@GrantThorntonZA) February 27, 2013

Steven Kilfoil, Director: Corporate Finance, Grant Thornton Johannesburg

@grantthorntonza Reason says e-tolling should have been mentioned in the budget… Instinct says Pravin felt it safer to avoid it!!!

— Steven Kilfoil (@skilfoilgt1) February 27, 2013

Barry Visser, Associate Director: Tax, Grant Thornton Johannesburg

We welcome the Minister’s announcement to automate tax clearance certificates because there are definite frustrations currently. #SABudget

— Grant Thornton (@GrantThorntonZA) February 27, 2013

AJ Jansen van Nieuwenhuizen, Director and Head: Tax, Grant Thornton Johannesburg

We’re pleased SARS has given a deadline as to how NHI will be funded but we did hope for more clarity. The delay is frustrating. #Budget2013

— Grant Thornton (@GrantThorntonZA) February 27, 2013

Neville Sweidan, Head: Forensic Services, Grant Thornton Johannesburg
“The Minister gave a long discourse on the government’s determination to fight corruption with particular reference to procurement. Particularly through the mechanism of the receiver of revenue SARS has started to target businesses that have supply contracts with the payment of taxes in respect of their receipts for such contracts. As a result a substantial tax had already been assessed. They were intending to broaden the process. However, this is closing the stable door after the horse has bolted because there is a lack of seriousness in the enforcement through the mechanisms that already exist such as the whistleblower act and the public protector. There appears to be up to now a lack of political will to utilise these mechanisms to their best advantage.”

Reason says: Your taxes are due.
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Visit our mobile-friendly Budget 2013 website for:

• 2013 Grant Thornton Budget tax data card
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• Finance Minister Pravin Gordhan’s Budget speech

Although speculation abounds as to what surprises Finance Minister Pravin Gordhan may spring on the economy in his annual National Budget Speech taking place on 27 February 2013, the real focus for tax payers this year should be on compliance with the new Tax Administration Act (TAA) that came into effect on 1 October 2012, because penalties for non-compliance are onerous to say the least.

“Corporate tax levels are expected to be unchanged this year, dividend tax amendments are already well underway following last year’s announcements and we may see slight bracket creep in some of the changes from this year’s Budget Speech, but overall we’re not expecting any huge surprises,” says Willem Oberholzer, tax partner at Grant Thornton Pretoria. “However, SA’s ‘golden goose’ will be expected to take on more of an administrative tax burden when new legislation forces individuals to be extra vigilant and responsible in order to avoid new burdensome penalties for non-compliance.”

The ‘golden goose’ refers to the small minority of taxpayers (roughly 2.2%) who earn more than R1 million annually, and who contribute in excess of R71 Billion (over 25%) of personal tax income to sustain the rest of the country and keep the wheels of the state turning.

With the introduction of TAA, effective 1 October 2012, mandatory penalties will now be levied on individuals who may be knowingly declaring below expected revenues or perhaps mistakenly claiming for invalid expenses.

Oberholzer warns that these penalties will vary from between 5% and 200% depending on a number of important factors.

“The TAA states that if there are any penalties and interests accruing for an individual as a result of late filing, non-submission, or incorrect claiming, a compulsory penalty has been declared,” adds Oberholzer.

He advises that voluntary disclosure by tax payers will be given amnesty at this stage, but if the admission of guilt is accompanied by a written audit letter, evaders could expect to pay anything between 5% and 75% of their taxable income as a penalty, depending on the degree of avoidance in question. Worst case scenarios will see penalties of up to 200% of an individual’s taxable income being imposed on serious offenders who choose not to declare appropriately and who are deemed to be negligible on all accounts.

“What’s important is for the flock of golden geese to ensure that due care is taken in a preventative effort to reduce the penalty risk exposure,” continues Oberholzer. “When the tax burden on this group of individuals is already so onerous, extra care should be taken to ensure that no additional funds are lost due to carelessness.”

In order to avoid penalties on under declaration of income when completing provisional tax returns, Oberholzer recommends that individuals keep an up to date record of income and expenses incurred, at all times – not just at year end.

“Regular discussions with your tax advisors will also help to ensure that personal accounting records are accurate and well maintained at all times,” says Oberholzer. “Overall it’s about taking greater care to complete your income tax returns so that any variances, omitted information or errors which are identified can be declared voluntarily to SARS, thereby ensuring that penalties of any kind are reduced to the absolute minimum.

“The above could go a long way to ensure that our flock of golden geese can in fact still afford their well-deserved breaks to the coastal regions of our fine country, as opposed to seeing the SARS getting hold the goose’s last remaining savings due to errors which could have been avoided, on our income tax returns,” Oberholzer concludes.

“Too many companies are falling foul of SARS’s current approach of issuing letters of intent in which either the company’s eligibility to claim the rebate is contested, the amounts claimed disputed, or the documentary veracity of their application rejected” says Cliff Watson, Associate Director of Tax, Grant Thornton Johannesburg.

Companies are generally threatened with penalties of up to 200% being levied on understated VAT amounts, forfeiture of an amount equal to the value of the litres overstated, or suspension from the scheme. “Yet considering judgements issued in relevant South African case law these settlements are often not in line with the correct application of legislation” says Watson.

In a nutshell, Schedule 6 of the Customs and Excise Act, No 91 of 1964 (Customs Act) allows VAT registered companies, operating in specific industry categories, to claim a diesel rebate on eligible diesel purchases. Since the legislation is quite specific regarding which companies and what activities using diesel qualify for the rebate, “companies should ensure that they meet the criteria for qualification before they apply for a diesel rebate” says Watson.

Qualifying companies and activities, for example, include:

• On-land mining
• Forestry
• Farming
• Fishing
• Coastwise shipping
• Offshore mining
• National Sea Rescue Institute
• Rail freight
• Electricity generation

Importantly, certain activities relating to these industries, for example diesel used in the rehabilitation of mines – either during operations or when operations have ceased – do not classify as eligible diesel purchases. Another example of non-eligible purchases is diesel used by a farmer in activities to change the nature of farm produce, such as the processing of grapes into wine or the drying of fruit.

Once certain that the activities for which the rebate is being requested definitely qualify for rebate, certain documentary requirements apply to how the consumption and cost of the diesel should be recorded – and then applied to SARS for rebate.

While this seems all straight forward enough, problems arise when companies making claims under the diesel rebate scheme are accused of wrongdoing – with penalties of up to seven times more than the original rebate amounts claimed by SARS in compensation.

For example, all claims need to be supported by ‘books, account or documents’ recording vehicle details, vehicle use, and dates, times and quantities of diesel used. Just because all these details are not included in a single log book does not mean a company is in breach. All companies will have records of their vehicles, their diesel consumption, the cost of this consumption, and a host of other records that can prove where the vehicles were and what they were used for. If all these different documents and records can be assembled to meet the requirements of the legislation then the company is not in breach and can confidently dispute the claims of the audit.

Instead, “too often companies elect to prematurely settle with SARS, even when their claim was both legitimate and correct – simply because they haven’t understood how to interpret the legislation and assemble the required documentation” says Watson.

The trick is simply to identify, seek, find and correctly assemble all the information required.

Watson agrees that all companies should work within the spirit of the law to meet their tax obligations accurately and honestly in the interests of the country. When, however, it comes to disputes with SARS, especially in the arena of the current diesel rebate system, “companies that stand their ground and apply the letter of the law often find that many of SARS audit claims are incorrect or groundless and, with a little extra effort and evidence, they can more than satisfy SARS’s rebate qualification requirements” concludes Watson.

Striking the right notes on growth and projecting an incremental improvement in South Africa’s budget deficit while identifying efficiency gains and savings as likely sources of additional revenue, “the minister, nonetheless, reserved the right to change tack should the economic situation deteriorate further” added Jansen van Nieuwenhuizen.

Certainly, if efficiency gains and savings are to account for additional revenue other references to the South African public sector in the Medium Term Budget Policy Statement may prove instructive.

On this front the minister’s mention of “aligning municipal spending plans to predetermined objectives while promoting transparent systems of governance over expenditure is most welcome and, if implemented, will assist the administration’s clean audit objectives” says Terry Ramabulana, Public Sector Specialist, Grant Thornton. Other mentions that should drive public sector efficiency gains and savings include:

• A greater requirement for treasury to outsource training to local government on IT governance and financial management.
• Long overdue cash flow management efforts alongside stringent project management discipline at all levels of government. Certainly, “for earmarked infrastructure development projects to succeed in providing the efficiency, skills and employment dividends that government projects, a greater deal of financial management, facilitated by adequate monitoring systems, are a prerequisite” adds Ramabulana.
• Welcome creative tax measures, including a real time tax clearance certificate system will streamline the process, reduce the incidence of tender fraud and, importantly, allow for the verification of tender revenue in recipients tax returns.

Notable for Jansen van Nieuwenhuizen was the minister’s failure to specifically mention funding options for the NHI, even though previous Medium Term speeches included the proposal. Although there was mention of health infrastructure spend, the annual increase in health spending over the next three years is put at around 7.5%. This is unlikely to cover NHI aspirations in the medium term. As such, more definitive insight into NHI funding mechanisms is crucial. While mention was made of various NHI documents which are to be released in November this year and January 2013, “one can only hope that clarity will be provided in the budget speech in February next year” said Jansen van Nieuwenhuizen, adding that “funding the NHI through VAT or an employer levy or a payroll tax or a combination of the three is a bit vague for my liking.”

While the minister committed more effort and resources to upgrade infrastructure at both local and provincial level, “we hope that the managers entrusted to spend the allocated budgets apply business intelligence tools and methodologies to make informed decisions. This is important as lack of capacity, especially in local government, has frustrated much of South Africa’s infrastructure spend in the past” cautions Ramabulana.

Since the minister forecasts that the bulk of infrastructure funding is to come from parastatal balance sheets this, in effect, means that users will likely pay for the recovery of these costs over time, “similar to Eskom’s 16% tariff increases and toll road funding which add to the pool of stealth taxes we already suffer ” says Jansen van Nieuwenhuizen.

The commitment to plan procurement and planning is also most welcome from a public sector perspective, “but needs to result in actual delivery if the infrastructure spend is to create skills and drive growth and job creation” says Ramabulana.

Though the minister expected the budget deficit to narrow from 4.8 percent to 3.1 percent of GDP in 2015/16, this is based on annualised increases in tax revenue collections of about 10% up to 2013/2014. “If the level of economic activity required to support these levels of collections are not achieved, both spending reductions and tax increases may need to be considered” said Jansen van Nieuwenhuizen.

The Medium Term Budget Policy Statement repeatedly refers to DISCIPLINE, the importance of QUALITY of spending, and the reduction of WASTE – to be achieved by linking future cash flows to actual project delivery. “As much as Finance Minister Gordhan is committed to lead by example, the challenge will be for his fellow ministers follow his lead ” says Jansen van Nieuwenhuizen.

So, while as ever the devil may lie in the detail, “on the whole the minister has proved his mettle and met a difficult challenge head on, sending a message of fiscal discipline and policy consistency at a time critical to the reputation and future prosperity of South Africa” concluded Ramabulana.

Although the planned first phase of National Health Insurance (NHI) in 2013 is meant to be funded from the existing Health budget, it becomes clear that “the current Medium Term Budget Policy Statement is going to have to address the issue of additional revenue for the 2013 tax year and beyond” says AJ Jansen van Nieuwenhuizen, Director and Head of Tax at Grant Thornton in Johannesburg.

As such, the trillion Rand question surrounding the Medium Term Budget Policy Statement is who will pay?

Will corporates be asked to contribute more?
This is unlikely given government’s drive to woo foreign investors in the wake of its handling of the mining crisis and two successive ratings downgrades. Moreover, South African corporate tax rates are already higher than the OECD average of 25% and BRIC average of about 23%. Add to this a cumbersome legislative environment, with very little infrastructural or ease-of-business dividend in return for South Africa’s high corporate taxes, and the country starts looking outright business unfriendly. As such, AJ Jansen van Nieuwenhuizen sees “no room for any corporate tax increases.”

Can personal tax be increased?
This is also unlikely as South Africans, already amongst the highest paying taxpayers in the world, are close to being overburdened. It should be kept in mind that individuals are the major contributors to the tax pool – in the 2011/2012 year personal income tax amounted to R250 billion, which is more than a third of all taxes collected. These individual taxpayers also, to a large extent, indirectly bear the cost of the other types of taxes like VAT, dividend withholding taxes, corporate taxes, customs and excise taxes. The level of tax burden on individual taxpayers, especially in higher income brackets, is significantly increased when one considers stealth “taxes” which taxpayers have to pay because the government cannot provide the basic services required – these include private medical aid, security, schooling and retirement funding. An increase in the level of personal tax may therefore raise the level of resistance and will do little to grow the tax base. Eskom requesting 16% annual increases in electricity tariffs for the next 5 years will also not help!

Could government improve tax collection?
In other words, are there a lot more companies and individuals out there who could be paying but are avoiding tax? The truth is that the majority of corporates are already good tax payers. Collecting taxes more successfully from the very small pool of corporates who are not entirely honest in their tax returns will not deliver the windfall that some in government expect. Widening the pool of individual taxes payers on the other hand is also unlikely to increase revenues sufficiently. South African’s top earners are already in the net. SARS has also very successfully increased the number of registered individual taxpayers in South Africa to 13.7 million in the 2011/2012 tax year. Despite this large increase in the number of registered individuals, approximately 1,4 million people – only 10% of registered taxpayers – were responsible for payment of 85% of all individual income tax in 2011. This demonstrates that increasing the pool of individual tax payers to include even lower income South Africans is unlikely to deliver the revenue that government requires.

Instead, “the elephant in the room in any consideration of expanding revenue has got to be VAT” says Van Nieuwenhuizen.

Yet VAT in South Africa, currently at 14%, is relatively low taking into consideration the average standard EU VAT rate is approximately 21% and the global average of approximately 16.5%. This average takes into consideration developed and developing countries. However, as one of the BRICS countries, our VAT rate is also lower than the average VAT rate of the other BRICS countries at around 18% (not taking into consideration the various state differences in those countries). This leaves some room for a few percentage points increase to be in line with the global and BRICS average VAT rates. It is broadly accepted that an increase in the VAT rate will have a disproportionately negative impact on lower income earners and the poor. One method to reduce the impact on the poor is to expand the basket of zero rated VAT items. As such, taking into account the current social, economic and political climate in South Africa, “we could also see more basic foodstuffs, medication, education materials, energy, transport or other basic necessities zero rated from VAT” speculates Nieuwenhuizen. This type of relief could be funded through the introduction of a higher VAT rate on luxury items.

Given ongoing revenue losses combined with a range of new demands on the fiscus, “it would be surprising if the Medium Term Budget Policy Statement did not deal with what additional funding sources will be considered. Although logic points towards a VAT rate review, South African political and trade union agendas do not follow logic, especially so close to an election year” concludes Van Nieuwenhuizen.

The adoption of the REIT structure, which is recognised in most of the key property markets internationally, is set to revive the nation’s current systems which are dated and often tedious through the introduction of a scheme that has been tried and tested internationally.

The REITs will simultaneously bring about much needed tax and regulatory changes that local property structures could certainly benefit from in the long term.

The National Treasury’s proposal to introduce this listed property investment regime is aimed at aligning the South African listed property sector with its international counterparts, which will also create a more attractive investment structure to enhance international interest.

“The main reason for the overhaul is because existing local structures, property loan stocks (PLS) and property unit trusts (PUT) are unevenly regulated and subject to different tax treatments, prompting the need for a shared set of regulations,” says AJ Jansen van Nieuwenhuizen, head of tax at Grant Thornton Johannesburg.

The Tax Amendment Bill proposing REITs – which was tabled in early July – will unify the approach to local property investment schemes and provide greater certainty for international investors.

“The proposed tax framework reflects that global best practice for REITs has been carefully considered and National Treasury and SARS should be commended for taking international considerations into account,” he says.

“Some of these lessons were clearly learnt from the UK REIT regime, which at first levied a conversion charge of 2% of the value of the property portfolio of REITs wanting to convert and limited the REITs’ listing to the main exchange.”

In an effort to be more competitive with other REIT markets like Australia and the USA, the UK dropped the conversion charge, has expanded listings to the AIM exchange and has temporarily relaxed the gearing limits.

South Africa’s draft proposals do not contain any of these onerous provisions and we have therefore benefitted from the lessons that other countries have learnt in the last few years. Jansen van Nieuwenhuizen says that the new framework is a welcome change that will modernise the rules governing South Africa’s property investment regime and attract foreign investment.

PUT and PLS structures that comply with the proposed REIT requirements will benefit from certain tax dispensations, specifically, an exemption from capital gains tax (CGT).

“These tax features are certainly strong benefits of the proposed structure,” adds Jansen van Nieuwenhuizen.

He also points out that a company wishing to register as a REIT must be listed or intend to list on the Johannesburg Securities Exchange (JSE), and comply with all listing regulations.

At present, there are no listing requirements for PUTs, but they are regulated closely by the Financial Services Board (FSB).

“The introduction of REITs will expand the investment options available to those PUT structures that elect to register,” he says. Despite the increased flexibility, tradability and tax relief offered by REITs, he says that PUTs and other property investment entities will have to consider the increased administrative and regulatory burden of listing before making a decision.

REIT-registered companies will have to satisfy four additional requirements.

The levels for each requirement are yet to be finalised, but as it currently stands companies must have a minimum gross holding of direct or indirect property assets of R300 million.

A REIT must distribute at least 70% of its profits annually and its gearing is limited to 60% of net asset value.

A PLS, South Africa’s more dominant vehicle for property structures is a share-linked debenture structure that is indivisibly tradable on the JSE and taxed at a normal rate of 28% with an effective CGT rate of 18.6%.

Under the PLS structure, most profit is paid out to investors as interest, which is tax deductible in the PLS and taxable income in the hands of the investor, meaning that the PLS vehicle attracts low levels of income tax.

“Yet in substance, the revenue authorities have always contended that the distribution is more akin to profit than interest and this contradicts general tax principles,” he adds.

The new framework will improve the tax treatment for PLSs, seen to be problematic and a major factor behind the proposal to introduce REITs in South Africa.

Companies looking to register as REITs in South Africa must ensure that they adhere to all of the requirements to avoid profits being taxed. Similarly, each merger or acquisition must be closely examined to ensure that the target does not compromise the company’s REIT status.

“The introduction of REITs in South Africa will improve liquidity, making the local market more attractive to international investors,” he concludes.

Mike Teuchert, tax partner at Grant Thornton Cape Town cautions, though, that in order to qualify for relief, full and complete disclosure will need to be made to SARS on a voluntary basis. “This will give rise to a potential penalty or additional tax which will not result in a refund.”

During this year’s Budget Speech by the Finance Minister in February this year, Mr Gordhan announced that there would be voluntary exchange control and tax disclosure programmes.

Exchange control disclosure programme
The Reserve Bank recently issued draft regulation 24 for comment by the public, which deals with the granting of relief for exchange control contraventions as well as details about the current voluntary disclosure programme.

“As such, the Exchange Control Programme regulations have not yet been finalised,” says Teuchert.

As it currently stands, the regulations state that Exchange Control infringements prior to 28 February 2010 need to be regularised on or before 31 October 2011.

Individuals would need to declare – disclosing all relevant details – any foreign loans raised by residents with possible recourse to South Africa, receipt of foreign inheritances before 17 March 1998, foreign income earnings by SA residents prior to 1 July 1997 and any foreign assets of immigrants to South Africa which are held abroad.

Declarations by organisations would apply to all approved foreign investments where there may be non-compliance to any of the conditions of approval; foreign loans raised which have recourse to South Africa and any unauthorised foreign investments.

“No levies will be payable in respect of the specific contraventions mentioned here,” says Teuchert. “However the so-called ‘loop-structures’ and donations that have been made by SA residents to foreign discretionary trusts will require a full application for disclosure, and the payment of a 10% levy from offshore assets.”

In addition, for loop structures the transfer of the asset will need to be made to a South African resident within six months from the date of submission of the application. For donations to foreign discretionary trusts, the founding documentation of the trust (i.e. the trust deed and any amendments) must accompany the application and the asset will be deemed to be that of the donor from inception.

“Should insufficient funds be available abroad to pay the levy,” adds Teuchert, “The levy can be paid out of local funds, but this will then be increased to 12%.”

Teuchert also warns that the payment of the levy may in itself trigger a tax event as this payment would invariably accompany a disposal of the foreign asset or a portion thereof. “This would especially be the case where foreign funds are being held in offshore bank accounts.”

Tax disclosure programme
In terms of the tax disclosure programme, The National Treasury has released the enabling legislation for contraventions and this is currently awaiting Parliament approval. “This legislation has already been through the preliminary parliamentary committee approval processes and it is not expected that there will be any changes to it at this stage,” says Teuchert.

The voluntary disclosure programme is open to all taxpayers and it applies to the admission of submitting any inaccurate or incomplete information to SARS. It also includes failure to submit information which may have caused the incorrect amount of tax being paid or inaccurate refunds being received.

“This includes all contraventions that occurred prior to 17 February 2010 relating to income tax, PAYE, CGT, VAT, Customs & excise, transfer duty, stamp duty / securities transfer tax, SDL and UIF,” says Teuchert.

Teuchert says that SARS will grant successful applicants protection from criminal or civil prosecution and 100% relief for any penalty and additional tax in respect of returns submitted before 17 February 2010 which were incorrect or inaccurate. “SARS will also grant 100% relief of interest where no audit has commenced, and where an audit has commenced only 50% of the interest where SARS directs that a taxpayer applies for relief.”

Applications will not be allowed for either the Exchange Control or Tax Disclosure programmes if an investigation has commenced or there is a pending audit underway.

The legislation for both amnesties require that successful applicants enter into a written agreement that includes all the material facts pertaining to the contravention, the amount of tax and where applicable, interest payable, payment arrangements, future treatment and undertakings by the parties.

Islamic finance is derived from the Sharia’h and it essentially involves profit and risk sharing and forbids the paying or receiving of interest or investment in certain industries.

The proposed new section of the Act brings three types of Islamic financing transactions into the tax net – the investment account agreement called Mudarabah, the financing transaction known as Murabaha and joint ownership financing which is termed Diminishing Musharaka, all removing interest from the equation.

“Interest is considered economically harmful by Sharia’h law as the extension of credit increases money supply, which stimulates demand for goods and services but does not always result in real, tangible economic activity,” says Tasneem Gangat, a tax consultant at Grant Thornton Johannesburg. “It believes interest-bearing transactions result in economic ills including issues such as high inflation and unemployment.”

The proposed new section 24 JA takes into account three types of Islamic financing and will be aligned to Sharia’h law. For investment account agreements, or Mudarabah, tax will be payable on any profits derived by the client as these will be deemed as interest, thus making them taxable at the hand of the client.

Any Murahaba financing transactions between a client and the financier will see “marked up” amounts within the agreement as the taxable amount payable in favour of the bank for tax purposes. For joint ownership financing – known as Diminishing Musharaka – the client purchases the bank’s “portion” of ownership in the asset over time and the amount paid monthly to the bank includes both the premium payable and taxable amount owed to the bank.

South Africa joins Australia, Hong Kong, the United Kingdom and a growing number of other non- Muslim countries developing their Islamic finance sector by changing regulations to attract investors who can only put their money in Sharia’h compliant assets. The changes will be effective from a date to be announced by the Minister of Finance.

Sharia’h law states that the emphasis on economic activity must ensure that money changes hands (from provider to user), accompanied by an increase in trade, manufacture, service provision and, as a result, employment.

The basis of Islamic finance is equity through profit and loss sharing schemes and rental income, usually mutually developed through agreements between the bank and client. The Islamic financier will assume the risk of the purpose of the funds he is investing and share in pre-agreed ratios in profit or loss which result from the transactions.

“The principles of investment management such as sector diversification, low risk versus high risk, income versus capital growth etc, will still apply to an Islamic investor, but the manner in which these objectives are achieved, as well as the investments utilised, will differ from conventional finance,” says Gangat.

Islamic financing is available to the general public and not exclusively made to people of the Muslim faith. Even though Islamic finance is still a young concept, it is a way forward as entrepreneurs realise the scope of the potential market for Islamic products.

“Judging by this success of ethnical funds worldwide, the need to bolster GDP in SA and the intense focus on business ethics, Islamic finance is likely to become a permanent feature of SA economic landscape,” concludes Gangat.

Further information on Islamic finance transactions
Mudarabah

• An investment account where anticipated profits are divided proportionately in terms of an agreement that is concluded between the bank and the client, essentially a partnership. The client bears the risk in relation to the funds deposited and shares in the profits made by the underlying assets of the deposit.
• This form of relationship is also the most common mechanism that banks and collective investment schemes use to access retail investors.
• From a tax perspective any profits so derived by the client shall be deemed to be interest and taxable in the hand of the client.

Murabaha

• A financing transaction where the bank will purchase an asset (say machinery) from a third party and thereafter sell the asset to the client at a pre-agreed price. The mark up by the bank is determined with reference to the time value of money. The client will settle the “purchase consideration” to the bank by way of regular instalments that will not vary over the lifetime of the arrangement. The bank retains the right to re-possess the asset if the client defaults on payment.
• For example an individual identifies a printing machine from an equipment dealer and approaches the Bank for financing. The Bank agrees to purchase the equipment for R 9000 in its own name and to on-sell the equipment to individual at R 17 000 (including a profit margin), the amount of which is payable by individual in one lump sum at the end of a 24 month period.
• The individual is deemed to have directly acquired the printing machine directly from the dealer at a cost of R 9 000 and the Bank is deemed not to have acquired or disposed of the printing machine. The marked up amount of R 8 000 constitutes a “premium payable” by the client and constitutes a taxable amount in favour of the bank for tax purposes.

Diminishing Musharaka

• A form of financing whereby the bank and client will acquire joint ownership of an asset on the basis that the client will purchase the bank’s “interest” in the asset over a period until such time as the client becomes the sole owner of the asset, similar to a financial lease.
• For example a client identifies a residential property worth R 1 million and approaches the Bank for financing. The Bank agrees to purchase property jointly with the individual from the seller on condition that individual pays 20% (R 200 000) of the purchase price and the Bank pays 80% (R800 000); the individual will purchase 10% of the Bank’s proportionate interest in the property each year over a period of 8 years for R 100 000 per year, and the individual pays an annual rental of R 96 000 for the right of occupation in the Bank’s proportionate interest in the residential property.
• For income tax purposes, the individual is also deemed to have acquired the property directly from the seller at a cost of R 1 million. The R 800 000 constitutes the issue price of the instrument. The Bank is deemed not to have acquired or disposed of the property. The annual rental of R 96 000 constitutes the premium payable by the client and a taxable amount in favour of the Bank.

“The implications of submitting the more multifaceted tax items incorrectly can be detrimental to taxpayers, with inflated amounts inaccurately being paid to SARS,” says Neville Sweidan, a tax partner at Grant Thornton Johannesburg.

The 2010 tax filing season officially opened on 1 July 2010. The deadline for electronic submissions on e-filing is 26 November 2010 as opposed to the postal submissions deadline which is 30 September 2010. The deadline for people or trusts which are classified as provisional tax payers is extended to 31 January 2011.

“Company tax returns differ significantly, however, from those applicable to individuals with the submission deadline only 12 months after the company’s financial year end,” adds Sweidan. He warns that details relating to foreign income, capital gains or losses, local farming, non-taxable considerations or local business, trade and professional income can become complicated issues to submit correctly online.

In terms of income earned outside of South Africa’s borders, often a withholding tax has been deducted by the foreign institution. “In certain circumstances, the withholding tax is deductable from SA taxes payable – which could result in a significant saving for the taxpayer,” says Sweidan.

Capital gains and losses is also a complex section of the tax legislation and it’s important to have all the necessary information at hand in order to claim the appropriate base cost or exclusions. “Skilled tax advisers can assist particularly with complicated capital gains issues and final submissions to SARS,” he adds.

Another tax complication can arise when individual taxpayers experience a sudden increase or decrease in net assets, which is reflected in statements of assets and liabilities arising from non-taxable receipts or losses. “It is very important to explain the reasons for the increase or loss to SARS appropriately,” warns Sweidan. “Failure to do so can result in exasperating queries and delays in receiving correct assesments.”

SARS is very strict on deadlines as well as whether an individual’s personal particulars on record are accurate. Sweidan warns that penalties for inaccurate personal details or late submissions can range from R250 to R16,000 a month, depending on the category of the taxpayer which is determined by the individual’s taxable income.

“Using SARS e-filing to submit your company and personal tax returns on time and accurately is certainly a whole lot more efficient, but it may require some careful preparation and research beforehand, to confirm all data is correct, thus limiting the need for amendments later on,” concludes Sweidan.

Ernest Mazansky, Tax Partner of Grant Thornton and head of its International Business Centre, explains that there are four key conditions for the new capital gains tax exemptions.

“First, the disposing company must hold an interest of at least 20% in the other company and the shares must have been held for at least one year. The disposing company also has to be trading (or part of a trading group) and the company being disposed of must be a trading company or the holding company of a trading group,” he says.

Mazansky says the tax free disposals of qualifying subsidiaries will be a major advantage for a UK holding company. Relatively low tax rates (a maximum of 30%) and a generous credit system for foreign taxes will also be huge benefits.

“Other changes to the UK tax system that will be of interest to international businesses are the proposals to implement tax relief for expenditure on intangible assets and a new research and development tax credit system at 150% of qualifying expenditure,” Mazansky adds.