The honourable Minister of Finance, Nhlanhla Nene, read the 2015 budget to the National Assembly on 25 February 2015.
As widely expected, the slowdown in economic growth and tax collection necessitated an increase in tax rates. The key increases are the following:
- A 1% increase in the maximum marginal rate for individual taxpayers (other than those in the lowest tax bracket of 18%) and trusts. The maximum marginal rate for individuals and the flat rate for trusts is now 41%.
- Fuel levies will increase by a combined amount of 80.5c per litre.
- Excise duty on alcoholic beverages increases by between 4.8 and 8.5% and on tobacco products by between 5 and 7%.
- Transfer duty rates will be increased for properties in excess of R2.250 million to an amount of 11% (up from the current 8%).
The net estimated increase in tax revenues flowing from the various tax policy proposals is an amount of R8.3 billion.
The minister acknowledged that the opportunities for broadening the tax base had essentially been “exhausted”. A renewed focus on BEPS (Base Erosion and Profit Shifting) will be adopted to attempt to increase South Africa’s revenue take. Numerous proposals were put forward in this regard.
Apart from these proposals, the rates of VAT and corporate tax remain unchanged.
Below we highlight below some specific tax proposals that will be of interest to our corporate clients:
Tax on business
- Attention will be given to the taxation of the employee share schemes and, in particular, inter-relationships in the application of section 8C of the Income Tax Act. Although no detail is provided, these are not expected to be generous to employees.
- The corporate reorganisation rules will be revisited, including:
- Allowances in respect of transfer trading stock, relevant to township developers;
- Anti-avoidance measures in relation to asset-for-share transactions;
- Clarification of the rules in relation to cross-border intra-group transactions.
- Changes will be made to section 40C relating to the issue of shares.
- As mentioned under the VAT section below, changes will be made to the VAT Act to deal with unincorporated persons, such as joint ventures and partnerships in the context of corporate reorganisations.
- Section 9C of the Act (capital treatment of shares) will be reviewed to address the problem of return of capital and the meaning of the term “disposal”.
- The capital gains tax treatment of cancellation of contracts will be reviewed to eliminate an anomaly relating to base cost.
- In relation to third-party backed shares (typically secured preference shares), refinements will be introduced to clarify the requirements for a “qualifying purpose”.
- Sharia compliant financing will be extended further. It is proposed that Murabaha and Sukuk financing arrangements will be extended to listed entities (and not only public entities). Section 8A of the Securities Transfer Tax Act will be amended to cater for such transactions.
- Hedge funds, it is proposed, will be declared as collective investment schemes and will be subject to the same regulatory environment. Tax amendments will be considered to minimise inadvertent tax consequences arising from the restructuring of regulated hedge funds.
- Securities-lending arrangements will be reviewed in relation to the tax treatment of the transfer of beneficial ownership of collateral. Tax treatment will also be reviewed to account for corporate action during the term of such arrangement.
- The industrial policy project tax incentive will be extended from 31 December 2015 to 31 December 2017.
- The urban development zone (UDZ) incentive will be revisited to possibly allow for the demarcation of two or more UDZs per municipality.
- The research and development (R&D) tax incentive will be reviewed to deal with backlogs in the approval process to avoid prejudice to taxpayers. In addition, consideration will be given to third-party funding for R&D activities.
- Anomalies relating to the tax treatment of government grants will be addressed.
- The period for deduction for premiums paid for the right of use of transmission lines or cables to transmit electronic communications outside South Africa may be extended.
- Section 12C (accelerated depreciation) will be reviewed due to changes in the business models of some manufacturing activities.
- Film incentives in terms of section 12O of the Income Tax Act will be reviewed to remove anomalies.
- The tax treatment of special economic zones will be reviewed to deal with profit shifting between connected persons.
Capital Gains Tax (CGT)
- Although no change has been made to the rate of CGT, per se, the increase in the maximum marginal rates for individuals and the flat rate for trusts implies an increase in the effective CGT rate applicable to such taxpayers. Companies are unaffected.
- A draft carbon tax bill will be published in 2015 for public consultation. Legislation will be passed to implement the carbon tax in 2016. Companies that own or control facilities that emit greenhouse gases (such as carbon dioxide, methane, nitrous oxide and a few others) will be subject to the carbon tax. The carbon tax’s design will include a number of measures (such as the use of carbon offsets), which will reduce a company’s carbon tax liability.
- Companies that are not subject to the carbon tax do not escape the effect of the carbon tax, as they may pay higher prices to their (carbon tax liable) suppliers. These companies may make use of the energy efficiency tax deduction, which will be increased from 45c/kWh to 95c/kWh and which will be extended to cogeneration projects. This tax deduction is calculated with reference to the amount of energy saved. It is not calculated with reference to the cost of the equipment that would have been purchased to achieve the energy savings. Certain certification requirements must be met in order to qualify for the deduction.
- Investments in renewable energy to generate electricity are incentivised through accelerated depreciation deductions, subject to a number of requirements, exceptions and limitations that will be reconsidered during the next legislative cycle. For example, the current capacity limit of 30 megawatts for hydropower generation may be increased. In addition, an accelerated depreciation deduction for solar photovoltaic renewable energy will be considered.
- REITS (Real Estate Investment Trusts)
- The provisions of section 25BB, relating to REITS, will be refined to remove anomalies.
- It is proposed that unlisted property-owning companies should qualify for the same tax treatment as listed REITS, if they become regulated. A regulatory framework for such companies will be developed by government.
- As mentioned, the transfer duty rate will be increased to a maximum of 11%. However, the new rates will eliminate transfer duty on all property acquired below R750 000 and decrease the effective liability on properties up to an amount of R2.3 million.
- The withholding tax levied in terms of section 35A on the disposal of immovable property by non-residents will be revisited to clarify the timing of the withholding.
- The definition of “immovable property” in paragraph 2(2) of schedule 8 (CGT) of the Income Tax Act will be aligned with the definition in the OECD model tax treaty, specifically relating to the right to work mineral deposits.
- The definition of “fixed property” in the VAT Act will be amended to include a right or interest in the use of immovable property supplied by co-operatives or other entities entering into arrangements similar to those of a shareblock company.
- The definitions of “date of acquisition” and “property” in the Transfer Duty Act will be reviewed.
- Securities transfer tax
- No changes are proposed to securities transfer tax.
- Transfer duty
- The exemption threshold for transfer duty is increased to properties with a value up to R750 000 from 1 March 2015. The transfer duty rate for properties with a value above R2,25 million is increased to 11% from 8% from 1 March 2015.
- Fuel taxes
- The general fuel levy on petrol and diesel will increase by 30.5c/l from 1 April 2015 and the Road Accident Fund levy will increase by 50c/l.
- Diesel refunds for land mining will be reduced to 20% and to 50% for electricity generation by Eskom from 1 April 2016.
- Diesel refunds are to be delinked from the VAT system from 1 April 2016.
- The VAT rate remains unchanged at 14%.
- The following VAT legislation amendments are proposed:
- The SABC is to account for VAT on the payments basis on TV licences and on its operations;
- The VAT regulations regarding the supply of electronic services by non-residents are to be clarified and expanded to include the supply of software and “other electronic services”;
- The VAT registration and threshold requirements of a commercial accommodation establishment are to be reviewed to limit potential abuse;
- The definition of “fixed property” is to be amended to include a right or interest in the use of immovable property supplied by cooperatives;
- The VAT relief for corporate re-organisations will be expanded to apply to joint ventures and partnerships as well;
- The time of supply between connected persons where the value cannot immediately be determined is to be reviewed;
- The zero rate is to be applied to services supplied by a vendor to a South African VAT registered client of a non-resident, where the services are rendered to the non-resident as part of a supply of services by the non-resident to his or her South African client;
- The application of the zero rate for vocational training for the employees of a non-resident will be expanded to situations where the training is provided by a subcontractor;
- The scope application of the zero rate in respect of services rendered regarding the National Housing programme will be clarified.
Individuals and employees
- Government proposes a one percentage point increase in marginal personal income tax rates, except for the lowest bracket, which will remain at 18%. This also requires a one percentage point increase in the taxation of trusts.
- To provide relief for inflation-related earnings, all income tax brackets and rebates will be increased by 4.2%.
- There will be normal adjustments to tax rebates and medical scheme contribution tax credits.
- Medical tax credits related to medical scheme contributions will be taken into account for both PAYE and provisional tax purposes for individuals over the age of 65.
- A one-year relief measure is proposed in respect of Unemployment Insurance Fund contributions. The proposal is that the contribution threshold should be reduced from the current R14 872 to R1 000 a month for the 2015/16 year.
- Significant attention will be given to erosion of the tax base arising from BEPS’ activities. Reference was made to the ongoing work of the Davis Tax Committee in this regard.
- The interaction between the Controlled Foreign Companies (CFC) rules and Transfer Pricing rules will be altered. It is proposed that profit diversionary rules applicable to the sale of goods by a CFC to a connected resident will be reinstated.
- Consideration will be given to allowing CFCs held by interposed trusts to be subject to tax in South Africa.
- The special foreign tax credits for services imposed on South African residents by foreign countries will be withdrawn.
- Provisions relating to the CGT effects of a South African resident company issuing shares for the acquisition of shares in a foreign company will potentially be relaxed.
- The definition of “interest” for the purpose of the withholding tax on interest will be defined.
- The provisions of section 50B(1) with section 9(2)(b) of the Income Tax Act will be aligned to provide for the exemption for interest to a non-resident for debt owed by another non-resident, unless the latter was present in South Africa for a period exceeding 183 days, or the debt is effectively connected to a PE in South Africa.
- Withholding Tax on Services will be reviewed to clarify definitions and remove any anomalies.
- Amendments will be proposed to improve transfer pricing documentation and reporting, and changing the rules for the digital economy in line with the latest guidance issued in the OECD reports.
- Rules and conditions continue to be modernised to attract investment and enable South African companies to expand internationally, particularly into Africa.
- The following threshold changes will take effect from 1 April 2015:
- Authorised dealers may process corporate investment up to R1 billion per year, from R500 million previously, as well as the carrying forward of any unused allowance.
- South African residents’ foreign capital allowance will increase from R4 million to R10 million per calendar year or upon emigration, or R20 million per family unit.
- The subcategories under the individual single discretionary allowance are removed and the annual R1 million allowances may be used for any legal purpose abroad.
- The dispensation for credit card usage, currently limited to individuals, will be extended to corporates.
- The exchange control manual is being simplified and this process will be completed in 2015.
Retirement funds, deceased estates and related items
- The interaction of section 25 of the Income Tax Act and paragraph 40 of Schedule 8 (CGT) will be reviewed relating to the tax treatment of income and capital gains for deceased estates.
- The mismatch in treatment between South Africans who immigrate and non-residents who temporarily work in South Africa with regards to withdrawal from retirement funds will be reviewed and aligned.
- The changes affecting various funds from 1 March 2016 will be revisited to correct an omission in 2013 excluding some retirement funds from the benefit of higher deductions without being subject to the uniform and annuitisation rules.
- The deferral of drawing on retirement income from a retirement fund will be capped by the introduction of a maximum age by which withdrawals must be made.
- A loophole that allows individuals to avoid estate duty by transferring their assets into an RA fund before their death will be addressed by including an amount equal to the non-deductible contributions to retirement funds in the value of the dutiable estate on death.
- A new valuation method for policyholder liability of long-term insurers is to be introduced based on International Financial Reporting Standards (IFRS), in order to accommodate the introduction of the SAM supervisory regime for long- and short- term insurers in 2016.
Excise duties on alcoholic beverages and tobacco products
- Since 2002, tax rates on alcoholic beverages have consistently increased above inflation. This trend continues with the amendments for 2015/16, with excise duty rate increases of between 4.8 and 8.5%.
- The excise duties on tobacco products increased between 5 and 7%.
- An additional excise duty category is proposed for grain-based fermented beverages. The rate for these beverages will initially be linked to the excise duty for beer, and may be reviewed to ensure a level playing field with fruit-fermented beverages.
- Other reforms under consideration include providing excise duty relief to wine-based spirits (for example, brandy). The rationale is that brandy is at a cost disadvantage compared to other forms of alcoholic spirits, because it takes four to five litres of wine to produce one litre of brandy.
- Sparkling wine accounts for a very small proportion of alcoholic beverage sales and the nature of this market results in large price discrepancies. This may require a review of the way the excise duty on sparkling wine is calculated.
- Government proposes a change in the way the targeted tax burden on alcoholic beverages and tobacco products is expressed. VAT will be removed from the calculation and, as a result, the excise tax burden for wine, beer and spirits will henceforth be 11, 23 and 36%, excluding VAT and rounded to the nearest whole number. For tobacco products the rate will be 40%.
Ad valorem excise duties
- It is proposed that the excise duty on digital cinema projectors above R250 000 per unit be abolished on 1 April 2015. This monetary limit will ensure that the relief is limited to commercial use in the movie industry only.
- Government proposes a tyre levy, with effect from the last quarter of 2015, to be implemented through the Customs and Excise Act and collected by SARS.
- Revenues from the levy will be deposited into the National Revenue Fund, and an on-budget allocation will be made available through the budget of the Department of Environmental Affairs for the recycling of waste tyres and other waste streams.
Appeal and dispute resolution procedures for customs and excise
- Uniform appeal and dispute resolution procedures for taxes administered by SARS are proposed by aligning the procedures under the Customs Control Act (2014), the Customs Duty Act (2013) and the Customs and Excise Act (1964) with dispute resolution procedures under the Tax Administration Act (2011).