Grant Thornton’s tax directory 2013 is an easy reference, pocket-sized overview of the South African tax system, incorporating announcements made in Minister Pravin Gordhan’s Budget speech on 27 February 2013.

Download: Grant Thornton tax directory 2013 (PDF)

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.

• Grant Thornton Budget 2013 tax data card
• Grant Thornton Budget 2012 tax data card – Budget for growth
• Grant Thornton Budget 2011 tax data card – Tax highlights
• Grant Thornton Budget 2010 tax data card – A new beginning
• Grant Thornton Budget 2009 tax data card – Budget for all seasons
• Grant Thornton Budget 2008 tax data card – How much are you in for

The Grant Thornton Budget tax data card is a handy pocket guide that contains all the salient features of Finance Minister Pravin Gordhan’s Budget speech including:

Tax schedules

• Customs and excise
• Residence Basis of Taxation
• Provisional Tax
• Deductions
• Allowances
• Dividends tax
• In the pipeline…
• Tax Administration Act penalties
• Capital gains tax
• Companies – tax rates
• Donations tax (Rate – 20%)
• Estate duty (Rate – 20%)
• Exchange control – individuals
• Fringe benefits tax
• Individuals and trusts – tax rates
• Interest rates
• Other taxes, duties and levies
• Schedule of values for travelling allowances
• Capital allowances
• Transfer duty
• Value added tax

The below calculator is merely an indication of your tax saving as a result of the 2012 Budget. Your actual tax saving will vary based on the deductions and exemptions you may qualify for. Data for graphs illustrating how your tax rands are spent by Government is based on information from the National Treasury Budget highlights 2013.

Calculator and graphs developed by Netspace.

Dividend withholding tax moves into the second phase
Following the Minister’s speech, dividend withholding tax (DWT) replaced the Secondary Tax on Companies (STC) regime. This new tax dispensation, effective from from 1 April 2013, has introduced a number of compliance requirements and it is expected that both SARS and taxpayers will experience teething problems as systems are implemented and developed to administer DWT. Find out what the current filing requirements are as SARS moves into the second phase of DWT implementation. [read more]

Proposals to encourage retirement savings through tax incentives
The second topic relates to the proposed changes to retirement fund contributions, which was recently the cause of confusion when certain commentators incorrectly suggested that the new legislation would be effective from 1 March 2013. The proposed changes are yet to be legislated and will only be effective from 1 March 2014, but will have a significant impact on both taxpayers and employers that will require advance planning. [read more]

Controlled foreign companies and the concept of effective management
Failing to do proper tax planning, many South African taxpayers that form companies in foreign jurisdictions to seize investment and expansion opportunities or benefit from no or low tax rates are faced with the shock of double taxation. Hawa Hoosen explains that taxpayers that own foreign companies need a clear understanding and awareness of the controlled foreign company (CFC) regime, to avoid possible double taxation. Hawa has recently joined the Grant Thornton Tax team as a consultant, based in Durban. [read more]

SARS takes further steps to strengthen their transfer pricing initiatives
Finally, in the transfer pricing feature, we look at SARS’ latest initiatives to strengthen its transfer pricing division’s capabilities through collaboration with fellow BRICS countries. [read more]

Budget 2013
Remember to bookmark www.budgetnews.co.za and follow @grantthorntonza on twitter for Grant Thornton’s downloadable 2013 tax data card, a user-friendly tax calculator, interest rate comparisons and our analysis of Minister Gordhan’s 2013 Budget Speech on 27 February 2013.

Dividend withholding tax moves into the second phase

By Bruce Russell, Tax consultant, Grant Thornton Cape Town

Due to delays encountered by various stakeholders in implementing and developing systems to administer dividend withholding tax (DWT), which was introduced on 1 April 2012, SARS is adopting a phased approach to enforce the new tax.

SARS’ phased approach
Initially, in order to facilitate the timely payment of DWT on dividends paid from 1 April 2012, a standardised return, DTR02 was made available which allowed the manual capturing of DWT due.

The second phase requires transaction data to be submitted through the submission of a Dividends Tax Transactions Information declaration, or DTR01. SARS has now informed companies that the DTR01 has to be completed in respect of all DTR02s previously submitted for dividends paid after 1 April 2012. The deadline for the submission of DTR01 forms for DWT previously declared is set for 1 March 2013.

However, from 1 January 2013, a DTR01 must be submitted to SARS for dividends paid on or after this date. Once the DTR01 is successfully filed, the DTR02 must be requested via eFiling and filed by the company or regulated intermediary paying the dividends.

DTR01 data requirements
Information regarding dividends received and dividends paid must be supplied and will allow SARS to track and match DWT data.
For dividends paid by the company the following must be provided for each beneficial shareholder to whom a dividend is paid:

• legal name
• identity number or registration number
• income tax number
• tax residency
• any criteria qualifying the beneficial owner for reduced DWT (including an exemption from DWT)

Similarly, in order for SARS to track dividends which are exempt from DWT, companies must declare all dividends received. The information required for each dividend received includes:

• The ISIN number of JSE listed shares on which the dividend is received
• The date that the dividend is declared, paid and received
• The STC credit utilised per share
• The dividend amount received per share

Supporting documentation required for preparation of DTR01
Signed declarations are required from the beneficial owner if dividends are paid to a beneficial owner who is:

• exempt from DWT (e.g. if the dividend is paid to a SA registered company)
• or is subject to DWT at a reduced rate (e.g. if the dividend is paid to a foreign shareholder who is entitled to a reduced rate of DWT in terms of a double tax agreement). If a reduced DWT rate applies, the signed declaration must state the reduced rate.

The beneficial owner is required to inform the dividend paying company when the beneficial owner’s DWT status is altered, or when it will no longer be a beneficial owner of future dividends paid.
SARS do not provide declaration forms to be completed by beneficial owners. The company paying the dividend is responsible to provide a declaration form. Contact your Grant Thornton office for assistance when preparing such a form.

Channels for filing DTR01 and DTR02 returns

• Companies paying dividends to 20 or fewer beneficial ownersmay file their DTR01 and DTR02 returns using SARS’ eFiling system or by capturing the data at a SARS branch office.
• Companies with more than 20 and fewer than 10 000 beneficial owners will need to file DTR01 and DTR02 returns via e@syFile.

Don’t delay preparing and submitting your DTR01 and DTR02 returns.
SARS have indicated that for DTR02 returns previously submitted, the accompanying DTR01 return is to be submitted by 1 March 2013. In order to allow for the timely payment of DWT payable on future dividends, DTR01 and DTR02 returns are to be submitted by the end of the month following the month during which the dividend was paid.

Administering this newly introduced tax will undoubtedly cause some teething problems and frustration. Some areas of concern include:

• The DTR01 return requires information to be included which may not have been collected from beneficial shareholders in the past. If not obtained in time, the issuing and filing of the DWT return (DTR02) for current dividends paid, may be delayed and result in late submission. Such a late submission will expose the dividend paying company to interest and penalty charges.
• The DTR01 return further requires data to completed in line with SARS’ formatting requirements and should therefore not be left to the last minute.

To avoid penalties, frustration and wasted time, start this process as soon as possible and if you have any questions, contact your Grant Thornton office for assistance.

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Proposals to encourage retirement savings through tax incentives

By Douglas Gaul, Tax manager, Grant Thornton Johannesburg

Finance Minister Pravin Gordhan revealed a proposal to change legislation governing retirement fund contributions in the 2012 Budget. Recently, this proposal was at the centre of confusion and concern amongst taxpayers, when certain commentators incorrectly suggested that the new legislation would be effective from 1 March 2013.

If legislated, the proposed changes will only become effective from 1 March 2014 and have a significant impact on employers and taxpayers alike.

The current position
There are currently three types of retirement saving vehicles available to South African taxpayers – pension, provident, and retirement annuity funds. Each of these has separate tax dispensations for the treatment of contributions to, and benefits received from the funds.

Provident funds

• Employer contributions are not considered fringe benefits and therefore not taxed in the hands of the employee.
• An employee’s contributions to a provident fund are not allowable as a deduction against taxable income. However, the contributions are carried forward and are deductible against the lumpsum received on retirement from the fund.

Pension funds

• Employer contributions are not considered fringe benefits and therefore not taxed in the hands of the employee.
• An employee can however claim a deduction for contributions to an approved pension fund, limited to a maximum of the greater of 7.5% of their retirement funding employment income*, or R 1 750.

* Retirement funding employment income is essentially an employee’s cash salary, excluding travel allowances and bonuses, as well as other non-employment income such as interest (net of the exemption), annuities, etc. Further, any portion of the employee’s salary that is not taken into account in calculating contributions made by him, or on his behalf, to a pension or provident fund is excluded.

Retirement annuities

• Contributions by an employer to a retirement annuity are currently considered fringe benefits in the hands of employees.
• An employee may claim a deduction in respect of contributions to a retirement annuity fund limited to the greater of:
  • 15% of his non-retirement funding employment income*;
  • R 3 500 less his current contributions to his pension fund; and
  • R 1 750
• Any portion of the contribution that is not deductible is carried forward and will be available for deduction against future non-retirement funding employment income and/or the lumpsum payable on retirement from the fund.

In the case of contributions to a pension fund and/or retirement annuity fund, there is opportunity to make an additional “top-up payment” to such fund before the end of February to get the maximum tax benefit, if the rules of the fund allows for this.

If this is possible, it means that, at the maximum marginal tax rate, a taxpayer will get an additional tax deduction of 40% of the top-up contributions made, which means that the fiscus is effectively financing 40% of such contributions.

Proposed changes
A recent discussion document released by Treasury indicated that the current regime governing deductions of retirement fund contributions is considered unsatisfactory for the following reasons:

• The complexities and undue administrative burden involved in tracking the deductibility of contributions;
• A perceived unfair advantage gained by high income earners arising from the absence of a monetary cap on the tax deductions available to them.

The following changes were therefore proposed to simplify and balance thetreatment of retirement fund contributions:

It appears that all contributions by employers to the three types of retirement funds will be treated as a fringe benefit, taxed in the hands of employees, subject to, inter alia, the allowances below:

• Employees will be granted a deduction of employer and employee contributions to all types of retirement funds of up to 22.5% (or 27.5% for those aged 45 and above) of the higher of employment income or taxable income, with a maximum deduction of R250 000 p.a. (R300 000 p.a. for those aged 45 and above). It appears that employment income will essentially mean “cost to company” and will include employer’s contributions to any funds on behalf of employees.
• Non-deductible contributions in excess of the above thresholds will be exempt from income tax if, on retirement, they are taken as part of a lump sum or as annuity income.
• A rollover dispensation, that is similar to the current retirement annuity fund contributions dispensation, will be adopted to cater for flexibility in contributions for those with fluctuating income.

Below is an example of the potential effects on a taxpayer.

Note:
The deduction of R 93 750 is less than the maximum deduction allowable (22.5% of R 540 000 = R 121 500). However the deduction exceeds the fringe benefit and the excess of R 3 750 will be carried forward and will be available for deduction on retirement.

This new tax regime is yet to be legislated but theproposed implementation date is 1 March 2014.

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Controlled foreign companies and the concept of effective management

By Hawa Bibi Hoosen, Tax consultant, Grant Thornton Durban

South African taxpayers commonly form companies in foreign jurisdictions to seize investment and expansion opportunities. However, often the intention of the taxpayer is also to benefit from no or low tax rates in these foreign jurisdictions. These actions have resulted in an erosion of the South African tax base and the controlled foreign companies’ regime was introduced to prevent this and discourage taxpayers from shifting their income into such jurisdictions.

Taxpayers that own foreign companies need a clear understanding and awareness of the controlled foreign company regime as the foreign company in question, although incorporated in a country outside of South Africa, may still be subject to tax in South Africa.

The place of “effective management” of a company that is not a South African resident must be determined with absolute certainty where a company is considered to be a controlled foreign company. A ‘controlled foreign company” (CFC) is:

• a company that is incorporated and considered to be effectively managed outside of South Africa and
• 50% or more of the participation rights or voting rights of that company are held directly or indirectly by South African residents.

Effective management
It follows that, the place where a company is considered to be effectively managed is where it will be resident for tax purposes. Interpretation Note 6 (IN 6) issued by SARS during 2002, outlines and provides guidance to taxpayers on SARS’ view on the meaning of effective management and conducts a “three-stage inquiry” in practically determining this.

• Where the management functions of a company are carried out at a single location, that location will be the place where the company is effectively managed.
• Where the management functions are carried out at multiple locations for instance the use of videoconferencing or email, then the place of effective management is where the regular or day-to-day business operations and activities are run and where operational and commercial decisions are implemented.
• Where management functions and operations are carried out from various locations and in this instance the place of effective management is the place with the “strongest economic nexus”. It is cautioned that IN 6 serves only as a guideline and has no legal standing.

Taxing CFCs in South Africa
CFCs are subject to section 9D of the South African Income Tax Act. The provisions of section 9D subject to specific exclusions prescribes that the net income of the CFC be included in the taxable income of the South African resident in proportion to the resident’s rights in that company. This is congruent with the basis that South African residents are taxed on their worldwide income and is aimed at taxing residents who invest their income-earning assets in foreign companies and earn passive or “diversionary” income as a result.
The net income of a CFC will be excluded from the taxable income of the South African resident in the following three instances:

• If the net income of the CFC is attributable to a “foreign business establishment”;
• Where the de minimus exemption applies; and
• Where the income of the CFC is taxed at a specific rate in a foreign jurisdiction.

It is apparent that the concept of effective management and the provisions envisaged in section 9D are riddled with complexities that taxpayers should understand and consider on a case by case basis to ensure compliance.
An IT10 return is required to be submitted to SARS for statutory disclosure purposes of the CFC and in terms of section 72A of the Income Tax Act. The annual financial statements of the CFC will be requested by SARS and must be retained for review. Taxpayers should note that with respect to the foreign business establishment exemption claimed by most taxpayers, SARS audits and reviews the exemptions claimed by most multinationals.

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SARS takes further steps to strengthen their transfer pricing initiatives

By Tarryn Spearman, Tax consultant, Grant Thornton Johannesburg

Only weeks after African Tax Administration Forum (ATAF) member countries and the OECD signed a memorandum of co-operation on transparency and exchange of information, SARS formally agreed to a further exchange of information forum with its fellow BRICS (Brazil, Russia, India and China) countries. This illustrates SARS’ proactive approach to improving the enforcement of transfer pricing regulations.

The BRICS countries have officially committed to sharing their experiences of best practice in the area of transfer pricing, capacity building and general anti-avoidance and a coordinated group has been established to discuss tax policy and administration. It is hoped that this will provide a greater scope for consensus building and exchange of ideas and experiences between developing countries on key aspects of international taxation.

To enhance the auditing ability of SARS officials working in the transfer pricing division, SARS formally indicated the intention to second a number of employees to other BRICS countries for training and will receive BRICS officials in return, so that each BRICS country is able to learn from the skills and experience of their respective fellow members.

In addition, SARS expressed particular interest in the Advanced Pricing Agreement (APA) regimes of the other BRICS countries and there is consensus to focus more effort on addressing the practices currently resulting in what is perceived to be a concerning erosion to the tax base. India has specifically committed to assisting South Africa in this regard and has pledged to share its resources and knowledge with SARS. In addition, China is also being assisted by India in their implementation of an efficient APA system.

In the past few years, India has emerged as a benchmark for many aspects of not only the BRICS nations, but many other countries’ tax systems. India’s transfer pricing legislation and court case precedent has been applied as a guideline for other countries in the process of drafting legislation in this regard. With the assistance of India, it is likely that the APA process will be introduced and developed more quickly and efficiently. This is good news for tax professionals and multinationals in South Africa and China alike.

What is interesting to note is that none of the BRICS countries are members of the OECD. Brazil, in particular, has legislated transfer pricing rules quite at odds with OECD accepted practice. This is perhaps because traditionally developed and developing countries have had different positions on issues relating to international tax policy, and it is widely recognised that the OECD guidelines are more applicable to developed nations and thus not always suitable to transactions occurring in less developed economies. Further, comparability concerns have often hindered the application of the OECD methodologies.

India, being the most notable transfer pricing influence on the BRICS countries, acknowledges the OECD principles in applying Indian fiscal law. However, during the past few years, Indian tax authorities have consistently been aggressive, often ignoring generally accepted international principles and therefore it is important that in accepting assistance from India, South Africa consider their position as an OECD observer country.

By establishing a forum to promote the sharing of resources, the BRICS countries may be able to provide working solutions for the problems being experienced by developing nations in applying the OECD methods. This will greatly assist many developing countries, including the other ATAF members, especially in the light of the ATAF exchange of information agreement committed to by SARS.

In addition to a more collective approach to transfer pricing being applied, easing the ability of developing countries to engage in more efficient trade, the commitment of the BRICS countries to work more closely will likely result in more aggressive transfer pricing regulations being introduced, meaning increased tax revenues and enhanced ability to achieve sustainable growth, much desired goals of most developing nations.

It is important, however, that the BRICS countries as well as the ATAF member countries carefully manage the balance between effective development of transfer pricing regulations and ensuring that these countries remain attractive investment locations.

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We all knew that paying more tax was inevitable, but a few additional surprises also made it into this year’s National Budget Speech. Here are some of the highlights.

Personal Income tax – The Minister has made allowances for the usual bracket creep. If you earn R250k p.a. or less your tax liability will decrease by 5% (approximately) and it will decrease by 72% if you earn R65 000 or less. On the other hand, if individuals earn more than R250k p.a. your tax liability will decrease by approximately 3%. If you fall into this latter category, on the basis that the CPI is 6%, you are in fact paying more tax than last year (owing possibly to partial bracket creep?).

Dividend Withholding Tax – A rather big surprise for most is that the dividend withholding tax rate will increase from the proposed 10% to 15% (from 1 April 2012), which is a surprising 50% increase. The reasons provided are that higher income individuals tend to receive a larger portion of their income from dividends and therefore they should “suffer” more tax. Further Secondary Tax on Companies (STC) credits (to be used against the dividend WHT) will be only allowed for three years (previously five years).
With suitable foresight and wise use of Double Tax Agreements the foreign investor should be able to ignore this increase.

Increase in Capital Gains Tax – Without getting into the detail, the current effective CGT rate for individuals is 10% and for companies it is 14%. This rate will increase to 13.3% for individuals and 18.6% for companies from 1 March 2012. This clearly means that if you are going to sell any asset we would recommend you need to sell quickly!
Certain measures have been applied to assist the middle income earner in regard to such increase, with possibly the main benefit being the increase in the exemption on the disposal of one’s primary residence from R1.5m to R2m.

Medical Deductions – While the system is a bit more complicated, the Minister has increased the rebates (which were to be effective from 1 March 2012) by a small percentage. However for families in the middle to upper income groups these groups will probably still pay more tax in terms of the new system.

Perhaps to assist such families we are informed that from 1 March 2014 additional medical deductions will be converted to tax credits. But what such additional deductions will be in two years time one can only guess (and cough up in the interim).

National Health Insurance – Again no specific mention of the funding of this leviathan over and above current budget allocations to public health, is provided. However we are informed that additional funding will be required, and the possible suspects are: increase in VAT rate, a payroll tax on employers, or a surcharge on taxable income for individuals, or a combination. A discussion paper will be provided at the end of April 2012.

Improved Household Savings -This was mentioned in last year’s budget, with this year’s budget providing slightly more detail. The end result seems to be some sort of tax free investment of R30k p.a. with a cap at R500k per lifetime – but this proposal is only for 2014.

Retirement Reforms – Brief outlines were provided to incentivise individuals to save for their retirement. While they are welcomed again such benefits will only be from 1 March 2014.

Debt – In order to ensure the taxpayer only deducts interest it is proposed that certain instruments will be regarded as shares as opposed to debt. This would obviously mean that the taxpayer would not be allowed an interest deduction. For those embarking on the use of more complex instruments – you have now been warned.

In addition the Minister has warned that a general ceiling may be applied to interest deductibility in terms of income before interest and depreciation. In the current economic climate a taxpayer could well hit any ceiling simply due to the world environment and not due to complex tax structuring.

Interest on share acquisitions – It is proposed that if one borrows to acquire shares, then the interest may be allowed as a deduction, provided that at least 70% of the target company is acquired. Again limitations will be applied, but this is certainly a great step forward.

Withholding tax (WHT) on interest to foreigners – From 2013 a WHT of 15% will apply to interest paid to foreigners. The rate was previously going to be 10%. The rate for royalties will increase from 12% to 15%. South Africa has a lot of Double Taxation Agreements which significantly reduce these rates.

Gambling tax – Last year it was proposed that winnings will be taxed. It is now proposed that a 1% levy be raised on a “uniform provincial gambling tax base”.

Share Schemes – Last year we were promised some reform on what can be a fairly complex set of rules. While there were no changes we have now been informed that this will be done over the next two years, although we are informed that such schemes are legitimate.

Fringe Benefits - In certain cases, the taxpayer is taxed on a deemed amount. Where possible it has been proposed that actual amounts be used (this is far better for everyone concerned).

Taxation of branches – Currently the tax rate for a branch is 33% – and this will be reduced to 28%. In light of this reform and the increase in dividends WHT, one is likely to see more branches.

Alignment with Company Law – The new Companies Act provided various changes which are ahead of the Tax Act. It is proposed that over the next two years this will be dealt with in terms of the Tax Act or possibly the Companies Act. In the interim, while legally certain transactions can be undertaken the tax results are – to say the least – rather uncertain.

Financial Instruments – These instruments always move faster than the legislation can cope with, and it is proposed that various changes will occur over the next few years. In essence it would seem that the proposals would align accounting and tax. Practically this should assist all taxpayers concerned.

Sale of Provisions – This issue was briefly legislated last year and then withdrawn. Interpretive guidance and minor amendments are expected later this year. Again one can only hope this occurs sooner than later, as the numbers involved are usually of a material nature to all parties.

Capital loans to subsidiaries -It is proposed that certain loans to subsidiaries be regarded as capital and hence there will be no transfer pricing adjustments. Such change is pleasing.

Tax Research Projects – An interesting research project announces is one providing a rebate for a child/dependent. Possibly a reason to have more children?

Last by not least, beer and smokes will cost more, and if you intend to buy that boat or plane you will pay an extra 7% – 10% more for life’s little luxuries.

“Trusts continue to be hammered in respect of Capital Gains Tax which does not bode well for wealth creation.” David Nathan, senior partner Grant Thornton Johannesburg

“We were disappointed that dividend tax has effectively been increased by 50% (from 10% to 15%). STC used to be payable by companies at 10% of the dividend whereas now the shareholder pays and the rate will be 15%.” David Nathan, senior partner Grant Thornton Johannesburg

“The Minister said we should turn our country into a true gateway for investment and development into Africa. However we’re disappointed that he has done nothing to abolish or even to mitigate the wasteful and unnecessary bureaucratic system of exchange controls.” Leonard Brehm, national chairman, Grant Thornton South Africa

“The Minister said the government is committed to an environment that will encourage business investment. Why then did he put the CGT rate up by one third and the dividend tax rate by 50%? This simply punishes investors.” Leonard Brehm, national chairman, Grant Thornton SA.

“We’re disappointed that nothing further has been mentioned about the abolition of Estate Duty which was alluded to several years ago. Estate Duty coupled with a higher Capital Gains Tax is detrimental to many people who have managed to accumulate wealth in their lifetime. ” David Nathan, senior partner, Grant Thornton Johannesburg.

On the increase to the dividend tax
“Certain listed companies have announced a delay in declaring their dividends pending the introduction of the new dividend tax system, but they now need to make other provisions. Following the changes in the dividend tax rules announced today, it will provide companies with an incentive to declare dividends before 1 April.” Neville Sweidan, partner, Grant Thornton Johannesburg

SMME support
“Regarding small, micro and medium sized enterprises, it is encouraging that there is some tax relief given to small, micro and medium enterprises. The reduction in the administrative burden is also welcomed.” Cliff Watson, executive tax manager, Grant Thornton Johannesburg

Gauteng tolls
“The special appropriation of R5,8 billion towards the debt related to the project, is encouraging. The idea of the halving and capping of these fees is welcomed. However, it should be taken into account that a person with an e-Tag would need to travel approximately 1833 km per month, or 46 km per day one way on the toll road to reach the cap of R550 per month. In addition to this, individuals would spend an average of R51,24 per month following the increases in the fuel levy and Road Accident Fund.” Cliff Watson, exeutive tax manager, Grant Thornton Johannesburg

Indirect taxes
“The special economic zones are welcomed – it could create a possible reduction in headline corporate tax rate for businesses within the selected zones.” Wian de Bruyn, associate director, Grant Thornton Johannesburg

NHI
“It is worrying that the taxpayer is still in the dark as to how NHI is going to be funded.” Barry Visser, senior tax manager, Grant Thornton Johannesburg

Road Accident Fund
“In light of capping of Road Accident Fund benefits, the increase in the Road Accident Fund levy is difficult to understand, unless there are more serious problems in the RAF that have been publicised.” Neville Sweidan, partner, Grant Thornton Johannesburg

Customs
“It is encouraging that there will be a continued focus by customs on import consignments to review the value of imported goods.” Wian de Bruyn, associate director, Grant Thornton Johannesburg

Carbon tax
“It seems likely that the government will be moving in the direction of a draft policy paper some time this year.” Wian de Bruyn, associate director, Grant Thornton Johannesburg

VAT
“The VAT exemption for bargaining councils and political parties’ income is encouraging, as the move is to be in line with other similar exemptions. There are proposals to alleviate double vat charge on certain supplies or importation of goods.” Cliff Watson, executive tax manager, Grant Thornton Johannesburg

Capital Gains Tax
“While the relief is encouraging regarding the exclusions for primary homes, the CGT inclusion rates have increased and individuals will pay 3,3% more while companies’ contribution will increase by 4,6%.” Barry Visser, senior tax manager, Grant Thornton Johannesburg

On infrastructure, support and development
“We agree with the Minister where he emphasises that business should invest in our future – he alluded to 43 planned public infrastructure projects of which transportation and logistics, social infrastructure and energy were the main focus areas. Yet he provided no clarity or role for the Private Sector or on PPPs in general.” Christelle Grohmann, director advisory services, Grant Thornton Johannesburg.

“To further invest in the EDZs (economic development zones) in order to use them as a mechanism for infrastructure growth would require more specific detail,. It makes it hard to entice big investors into these zones without detailed information specifically relating to the ROIs and overall worth.” Christelle Grohmann, director advisory services, Grant Thornton Johannesburg.

On Tourism
“We are very disappointed with the lack of mention of budget allocations for the Tourism sector other than a brief mention with no data on SANParks. This is disappointing given expenditure and investments in 2010 – it indicates a serious lack of continuity.” Lee-Ann Bac, director advisory services, Grant Thornton Johannesburg.

“The detailed budget estimates show an encouraging increase from R52 million to R70 million – however, this is less than $10-million and paltry compared to our biggest tourism competitor (Australia) that has an annual budget of $170 million.” Lee-Ann Bac, director advisory services, Grant Thornton Johannesburg.

On housing
“It is encouraging that Treasury is putting a focus on housing with tax-break options for developers. In addition, the recognition that housing finance institutions and low income earners require additional financial and other support is laudable. We would hope that the mortgage support facility comes to fruition.” Lee-Ann Bac, director advisory services, Grant Thornton Johannesburg.

On impacting M&A transactions
“An increase in capital gains tax for individuals and trusts could result in a slight decline in transactions in the short term, as sellers’ after-tax receipts will be lower than expected. This combined with possible targeting of leveraged transactions, (continuing the theme from last year’s disastrous suspension of Section 45), could scupper a number of M&A transactions, particularly in the Private Equity and BEE space.” Steven Kilfoil, director corporate finance, Grant Thornton Johannesburg.

On general tax admin
“From an administration perspective, I am delighted to see that SARS will establish a dedicated ombudsman for tax matters. The ombudsman will hopefully provide taxpayers with a low cost mechanism to address administrative difficulties which cannot be resolved by SARS,” David Honeyball, partner, Grant Thornton Port Elizabeth

On personal tax – individual tax
“There is some tax relief for individual taxpayers in the form of the deduction for contributions to retirement funds. This is considered as an incentive to encourage South Africans to save for their retirement, but given the current economic situation of many families, one wonders whether there is any real possibility of the average South African achieving any substantial benefit from this in the short term. Individual taxpayer deductions will be set at 22,5% for individuals below the age of 45 and 27,5% for taxpayers over 45 years of age.” David Honeyball, partner, Grant Thornton Port Elizabeth

On corporate tax
“It is pleasing to see some relief for small business corporations as SARS shows continued support for these entities by providing tax relief to them. The tax free threshold of these entities increases to R63 556 from R59 750.” David Honeyball, partner, Grant Thornton Port Elizabeth

On dividend tax
“The move from the application of STC at a rate of 10% to a withholding tax applied at a shareholder level at a rate of 15%, has opened up a wide gap between the potential post tax yield which can be earned on equity investments by exempt institutions compared to individuals and non-exempt companies. Exempt institutions will now be able to pay more for an investment to realise the same net return while private investors will need to pay less”. David Paropoulos, director corporate finance, Grant Thornton Johannesburg

This is one of the most critical priorities for a Budget that seeks to be sustainable, says AJ Jansen van Nieuwenhuizen, Head of Tax at Grant Thornton Johannesburg.

“While we are all too familiar with the golden goose being squeezed for all he is worth, we must also not lose sight of the future. To have any hope for the prosperity of future generations of goslings, current planning must be done in a responsible and sustainable manner,” says Jansen van Nieuwenhuizen.

The ‘golden goose’ refers to the small minority of taxpayers who contribute the majority of personal tax income to sustain the rest of the country.

In his 2011 Budget Speech, Finance Minister Pravin Gordhan alerted the country of the importance of ensuring that spending today is conducted responsibly so that our children do not need to pay for our current lack of discipline. Jansen van Nieuwenhuizen believes it is now the time to see the fruits of these words.

More discipline from Government
“Taxpayers need to hear and see a strong commitment to fiscal discipline at all levels within government, from municipalities to national government. As taxpayers, we can no longer tolerate an ongoing increase in the tax burden whilst the spending side of the economy is a fiasco of fraud, corruption and financial mismanagement.

“As a country we should not be tolerating situations like Limpopo and the Gauteng Toll project – the cost of this is ultimately borne by taxpayers whilst those responsible move on with no real repercussions,” says Jansen van Nieuwenhuizen.

This topic is especially important in light of two prominent credit ratings agencies, Moody’s and Fitch, recently having downgraded their outlook for some of the government’s debt, citing worries about fiscal discipline and the inability of government to address persistent structural problems. They have furthermore warned that the actual debt rating could be downgraded if there are no commitments to more spending discipline. If the latter happens, it will be difficult for the country to borrow money at competitive rates.

Decrease the dependence on the few faithful geese
Jansen van Nieuwenhuizen believes more can be done to lower the fiscus’ dependency on the few faithful taxpayers and he does not support an increase in their already heavy burden.

“Although there has been speculation about an increase in marginal tax rates, South Africa’s golden goose cannot afford this. Efforts to bring tax evaders into the tax net should rather be stepped up,” he adds. “It is estimated by SARS that about 9,000 high net worth individuals owe the fiscus about R50 billion in unpaid taxes.”

In the same vein, he urges the government to do more to target the informal sector. “Measures to bring the informal sector into the tax system would be welcomed. While many of these individuals may be earning below the tax threshold, certain informal participants are very wealthy people.”

While many may think it an easy way to increase revenue tenfold, Jansen van Nieuwenhuizen does not believe the VAT rate should be tampered with. “We would not support an increase in the VAT rate – this will impact on all South Africans, especially those that cannot afford it. Tax revenue generation should rather focus on select dishonest and delinquent groups for more money.”

One way to remove a lot of stress from the fiscus is by seriously addressing the payment of social grants – a call that has been made by numerous people over several years. “We do not question the needs of the poor, but South Africa cannot sustain further significant increases in the grant system. No matter how you dissect it, when the number of grant beneficiaries outweighs the number of individual taxpayers, you have an unhealthy situation which cannot be sustained.”

More clarity for businesses
South Africa’s economy gets a lot of fuel from its healthy businesses and while businesses are more than happy to contribute their fair share, this does not mean they should be squeezed even further, especially given the troublesome global economic waters.

“There is widespread concern about the South African Local Government Association’s (SALGA) proposed introduction of a new business tax that is intended to be a replacement of the RSC Levy system that was abolished, and which will provide further funding for municipalities,” he says.

The best thing for businesses in this environment is more certainty. “As the Minister of Finance will ultimately need to support these proposals from SALGA, business needs to know what his position is. Business cannot operate in an uncertain fiscal environment, especially when they have no control over elements of their cost structure.

“A business tax will either reduce margins or be passed on to the consumer – in the current economic cycle, neither can afford this. The focus should rather shift to the poor fiscal management of municipalities rather than seeking ways to further fund a culture of misappropriation and corruption.”

To this end, Jansen van Nieuwenhuizen suggests other ways of thinking about taxation regarding companies. “We would welcome steps towards the introduction of a ‘group taxation’ regime, whereby companies within the same group set off their various tax positions and pay tax on the net result.”

National Health Insurance
This initiative has been mentioned for the first time a few years ago, but still there is not yet a lot of concrete information necessary for planning to take place on all sides. Jansen van Nieuwenhuizen believes this is another critical element of this year’s Budget Speech.

“Further clarity needs to be provided on the funding of the proposed NHI scheme, what this is likely to cost taxpayers and over what period. Whilst the beneficiaries of an NHI scheme – certain players in the health industry and the people that will use the NHI benefits – know that their fortunes will improve, the most critical stakeholder, the taxpayer, is still in the dark.”

Overall, this budget is going to be another that requires Minister Gordhan to strike that fine balance between responsible spending, reduction of the deficit and breeding a fertile ground for growth. “South Africa is not unique in this challenge, especially given the state that a number of governments around the world find themselves in currently. However, we have been able to do it in the past and can certainly find an appropriate balance again.

“The search for growth is the key factor this time around if we are to ensure a prosperous and burgeoning future for the golden goose and its goslings,” he concludes.