• The 2010 budget once again required a juggling act by the Minister of Finance with tax revenue sharply down on budget resulting in an increasing budget deficit. Not surprisingly the budget includes improved tax compliance initiatives and a broadened tax base while being mindful of a recovering economy and distressed consumers struggling to recover from recent high debt servicing costs and stubborn inflation levels.
• The 2009 budget proposals of interest include:
o Income tax relief for individual taxpayers amounting to R6.5 billion with further salary structuring tax avoidance limitation measures
o Increases in carbon emission taxes on new motor vehicles
o Increases in fuel taxes
o Increases in sin taxes
o A limited voluntary disclosure dispensation for defaulting taxpayers
Personal income tax rates and bracket adjustments
• Low income earners (taxable income up to R250 000) have benefitted most from the R6.5 billion personal tax relief with a share of 53.4%, while high income earners (taxable income above R500 000) will have a 20.4% share.
• The primary rebate has been increased to R10 260, increasing the income tax threshold by R2 800 to R57 000 for taxpayers below age 65.
• The secondary rebate has been increased to R5 675, increasing the income tax threshold for taxpayers age 65 and older from R84 200 to R88 528.
Interest and dividend income exemption
• The interest exemption for taxpayers below age 65 will be increased from R21 000 to R22 300 and for taxpayers age 65 and older from R30 000 to R32 000.
• The foreign interest and dividend income exemption will be increased from R3 500 to R3 700.
Discontinuation of SITE
• The SITE system has largely become redundant as the individual tax threshold for taxpayers below age 65 is close to the R60 000 SITE ceiling.
• It is proposed to repeal SITE effective from 1 March 2011.
Medical scheme contributions and medical expenses
• With effect from 1 March 2010 the monthly monetary caps for tax-free medical scheme contributions will be increased from R625 to R670 for each of the first two beneficiaries and from R380 to R410 per additional beneficiary.
• SARS' previous proposal to convert these deductions into non-refundable tax credits will be postponed to 1 March 2012.
Retrenchment - income tax exemption
• It is proposed to incorporate the R30 000 exemption for retrenchment packages into the retirement lump sum tax exemption.
Limiting salary-structuring opportunities
• In an attempt to make the tax system more equitable Government aims to limit structuring opportunities by increasing the company car fringe benefit taxable value as well as to match the timing of employer deduction and employee gross income inclusion in respect of deferred compensation and insurance schemes.
Increase in monetary thresholds
• The annual donations tax exemption has remained at R100 000.
• The estate duty exemption has remained at R3.5 million (spouses may combine their exemption to allow the surviving spouse the use of the unutilised portion).
• It is proposed that estate duty and capital gains payable on death be reviewed.
• The annual capital gains/loss exclusion has remained at R17 500.
• The exclusion on death has remained at R120 000.
• The primary residence exclusion has remained at R2 million in respect of properties with a gross value below R2 million. For properties valued above R2 million the R1.5 million capital gain/loss exclusion still applies.
In order to counter sophisticated tax avoidance schemes, resulting in a substantial loss to the fiscus, it is proposed that the following loopholes are closed:
• Amendments will be introduced to the Income Tax Act to clarify the tax treatment of unacceptable schemes associated with tax treaties and foreign tax credits. Examples of these schemes include:
o Schemes where funds are borrowed to acquire financial instruments that generate income, but are subject to a zero rate of tax by virtue of tax treaties; and
o Schemes which generate income, but are arguably not subject to South African ('SA') tax by virtue of the inappropriate use of foreign tax credits.
Interest cost allocation for finance operations
• Interest incurred in respect of the acquisition of assets which produce taxable income is deductible. Conversely, interest incurred in respect of assets acquired which produce exempt income, is not deductible.
• However, financial institutions are deducting interest expenditure beyond what should be allowed. It is therefore proposed to introduce measures to ensure that interest incurred is allocated proportionately amongst various financial assets based on a 'taxable income/gross receipts and accruals' formula.
'Protected cell' companies
• A foreign company is a controlled foreign company ('CFC') where more than 50% of the participation rights in that company are held by SA residents.
• Taxpayers have sought to bypass CFC legislation through the use of 'protected cell' companies. A statutory cell company effectively operates as a multiple limited liability entity, with each cell protected against the other.
• Investors typically have full control over the cell, but fail to satisfy the requisite CFC ownership requirements in the foreign entity overall.
• It is proposed to treat each cell as a deemed separate company with the ownership requirements measured separately.
Cross-border insurance payments
• Many cross-border insurance payments represent capital investments as opposed to risk-related insurance.
• The aim of these transactions is to generate an immediate deduction for offshore investments without a corresponding inclusion of income.
• While the CFC rules target captive insurers, many schemes involve controlled companies of a larger foreign-owned group in which SA operations are a mere subcomponent.
• It is proposed to deny the deduction in problematic cases.
Participation preference and guaranteed shares
• Currently, certain taxpayers repatriate funds offshore through deductible payments in the form of, for example, interest and reintroduce these funds back into SA, tax free, by utilising the foreign dividends participation exemption.
• The goal of the foreign dividends participation exemption is to encourage the voluntary repatriation of funds derived offshore.
• Therefore, in order to combat this scheme it is proposed to deny the exemption for preference share dividends, guaranteed dividends and any dividends derived directly or indirectly from SA.
Restricting the cross-border interest exemption
• SA Interest received by any foreign legal person is exempt from SA tax, unless the payment is made to a local branch of a foreign legal person.
• The purpose of this exemption is to attract foreign investment, but the broad wording of the exemption has resulted in the investment in SA debt by investors in tax havens, with little restriction.
• It is proposed that the exemption will be restricted to contain this leakage. However, none of the changes anticipated will affect foreign investment in SA bonds, unit trusts, bank deposits or the like.
• It is proposed to provide a uniform set of transfer pricing rules to deal with artificial pricing or the misallocation of prices within the various components of a single transaction. These rules will align the treatment of both onshore and offshore transactions.
• In order to enhance SA's appeal as an effective location from which to conduct business in Africa, exchange control relief for headquarter companies located in SA will be considered in order to ease the channelling of foreign sourced funds to other foreign locations which currently requires exchange control approval.
• Currently the tax treatment of certain financial instruments such as forward purchases, financial leasing and profit share acquisition is in certain instances detrimental to Islamic-compliant finance. The relevant tax legislation together with relevant double tax agreements affecting such transactions will be reviewed over the next two years.
• To encourage taxpayers to come forward and avoid the future imposition of interest, a voluntary disclosure programme will be instituted from 1 November 2010 to 31 October 2011.
• In terms of this disclosure programme taxpayers are provided with the opportunity to disclose their defaults and regularise their tax affairs. Individuals with unreported bank accounts overseas are also afforded the opportunity to fully disclose any untaxed revenue. The full amount of tax will remain due.
• A defaulting taxpayer will be granted relief under the programme, provided:
o Full disclosure is made;
o SARS was not aware of the default; and
o A penalty or additional tax would have been imposed had SARS discovered the default in the normal course of business.
• As a result of this program it is proposed that the discretion of SARS to waive interest charged on unpaid provisional tax (section 89quat interest) be scrapped.
• In the Budget the view was expressed that the general level of tax compliance deteriorated during the recession. As a result, SARS is refocusing its enforcement and audit capacity, and modernising its systems.
• The key areas for improved tax administration over the next three years are:
o Increased digitisation to enable self-service and voluntary compliance;
o Further modernisation of personal income tax, pay-as-you-earn, corporate income tax and VAT systems;
o Modernisation of customs systems;
o Improved call centres, office operations and payment processes;
o Increased system infrastructure to process administrative penalties;
o Enhanced focus on large taxpayers and high net worth individuals.
• Improved data analysis helps SARS to identify high-risk taxpayers for increased enforcement. This process will be enhanced by the improved collection of third-party data that allows for specific case identification.
• Depreciation allowances such as the accelerated urban development zones allowance are currently only available where the relevant improvement is effected by the landowner. The current legislation limits the application of the allowance where such developments take place in partnership with Government. This restriction will be reviewed to ensure private developers are not excluded from qualifying for the allowance.
Environmental fiscal reform
• It is proposed that with effect from 1 September 2010 the ad valorem CO2 emissions tax on new passenger motor vehicles announced in the 2009 budget be converted to a flat rate CO2 emissions tax applying to new passenger cars. The scope of the tax will eventually be extended to apply to commercial vehicles as well once CO2 standards are agreed upon.
o The emissions tax will represent a specific tax rather than an ad valorem tax and will be levied at R75 per g/km for each g/km above 120 g/km. The new tax will not replace the existing ad valorem luxury tax on new vehicles.
o The expansion of environmental levies and taxes will be researched further.
• The thin capitalisation rules will be extended to apply equally to foreigners with unincorporated SA branch operations as it would to interest on excessive debt owed by foreign owned SA companies.
• The tax legislation treating the conversion of one currency into another as a tax event will be reviewed to ensure such a tax event is not triggered where a country converts its entire currency into another.
• It is proposed that the use of the reporting currency as the starting point in determining taxable foreign exchange gains and losses be revised where multiple reporting currencies are used.
Value Added Tax ('VAT')
• The sale of residential property by developers is subject to VAT at the standard rate, while the leasing of residential accommodation represents an exempt supply. This results in VAT input credits being allowed for standard-rated sales of property, but disallowed for exempted rentals. Based on the current wording of the VAT Act the temporary leasing of residential units requires a full claw-back of the VAT input credits for leased units resulting in a disproportionate adjustment in relation to the exempt temporary rental income. Options will be investigated to determine an equitable value and rate of claw-back for developers.
• The zero rating of the supply of movable goods to foreign going ships will be extended to apply not only where the transport is commercial but also to foreign going ships temporarily stationed at local ports.
• The requirement to repay input VAT claimed on the supply of goods or services where payment for such supplies is not made within 12 months will be revisited where such supplies take place between group companies. The current legislation is regarded as being too restrictive on intra-group supplies on loan account.
• Under current legislation a vendor will become liable for VAT twice on deregistration where a deemed supply of an asset takes place and payment for such asset remains on loan account resulting in VAT input having to be repaid. This anomaly will now be removed.
• Corrective legislation may be introduced during 2011 to address certain anomalies resulting from the effective supply of exempt residential accommodation being regarded as commercial accommodation, subject to VAT.
• It is proposed that the pooling concept in terms of which certain activities conducted by multiple parties are being regarded as a single activity for VAT purposes be formalised and extended to more industries.
• The documentary proof requirements for claiming notional input VAT on the acquisition of second-hand goods will be expanded to include proof of payment.
• Vendors are currently required to declare VAT payable for imported services within a 30 day period on a specified form. This requirement will be amended to provide the option of declaring this VAT on the standard VAT 201 returns.
• While a tax invoice is not required to claim VAT input for a supply not exceeding R50 it is proposed that alternative documentary requirements, such as till slips, be put in place for such supplies.
• The legislation governing the mineral and petroleum resources royalties which become effective from 1 March 2010 will be reviewed to eliminate certain technical anomalies.
• SARS will only process returns and payments that are submitted electronically.
Customs and excise
• The introduction of reporting of information by third parties in order to verify information submitted to SARS is proposed.
• Amendments are proposed to allow more flexible alternative measures to secure user identification and access.
Customs and excise and fuel levies
• The changes to excise duties include:
o Cigarettes up R1.24 (16.1%) a pack of 20 cigarettes.
o Wine up 31 cents (8.3%) per bottle.
o A can of beer or cider up 6 cents (8.2%).
o Spirits up R6.90 (8.9%) per bottle.
• These increases are in line with Government's ongoing policy to maintain a total tax burden (excise duty plus VAT) of 23% on wine products, 33% on malt beer, 43% on spirits and 52% on tobacco products.
• The fuel levy and Road Accident Fund levy increased by 17.5 cents and 8 cents a litre, respectively. This means that 31.6% of the petrol price consists of taxes compared to 33.9% last year.
• The effectiveness of the collection of various forms of taxation levied on gambling both on provincial and national level will be reviewed.
• The current tax exemption of gambling winnings will be reviewed in addition to measures to curb money laundering, unlicensed online gambling and other abuses.
• Post-retirement annuity payments which are converted into a lump sum should be afforded the same tax treatment as retirement lump sum benefits. This should similarly apply to secondary successions of retirement savings.
• The definition of preservation funds should be extended to cover situations where employers terminate membership to umbrella funds and transfer the funds to a preservation fund, to ensure that such transfers are permissible.
• The payout of funds from a member's retirement benefit to third parties should be treated similarly to other lump sum benefits in the member's hands.
• Fringe benefit relief should be extended to not only cover the payment by an employer of an employee's professional subscription fees (membership of which is a condition of employment) but also any fee which will ultimately benefit the employer.
• Technical issues in respect of employee restricted share schemes must be reviewed in order to be brought in line with the intended anti-avoidance policy.
Special relief measures
• The window of opportunity provided for the amalgamation of professional and amateur sporting bodies to effectively allow the deduction of operational expenditure incurred in respect of the development of amateur arms, will be extended to 31 December 2012. Other anomalies in this regard will be given further consideration.
• The tax effects of the dissolution or winding up of tax exempt entities such as chambers of commerce, trade unions and fidelity funds will be brought in line with those of public benefit organisations ('PBOs') and clubs. This will ensure that the recoupments triggered on such events in respect of PBO's and clubs will be mirrored by these entities.
• It is proposed that the cut-off date for tax deductible donations made to The Peace Parks Foundation be removed to ensure such donations will be tax deductible in future. The initial cut-off date was set at 31 March 2010.
• Proposed income tax amendments applicable to business include, inter alia:
o It is proposed that ownership in liquidating/deregistering companies no longer be grounds for preventing micro and small business relief.
o Plantations do not qualify for the rollover relief applicable to qualifying company reorganisations. These reorganisation rules will be corrected to eliminate this anomaly.
o Share-for-share reorganisations qualify for roll-over relief if certain conditions are satisfied. Some of the conditions require the acquiring company to know certain tax information about the target shareholders, such as whether the target shareholder holds the target shares as a capital asset or as trading stock. This level of knowledge is impractical in a listed context given the volume of shareholders and the small share interests typically involved. It is proposed that conditions of this nature be waived in the case of listed share-for-share relief, to the extent this waiver does not create opportunities for tax avoidance.
o Currently, rollover relief applies automatically in respect of qualifying intra-group transactions unless the parties involved actively elect out. However, taxpayers regularly engaged in the intra-group transfer of trading stock prefer to fall outside the relief due to tracing problems. It is proposed that different methodology be provided for this class of intra-group transfer to simplify compliance.
o It is proposed that the reorganisation rules be modified so that bad-debt deductions can be claimed when creditors acquire debts in terms of the reorganisation rules and the debtor defaults after such an acquisition.
o Trading stock, other than shares, must be reflected at the lesser of cost or net realisable value. It is proposed that the exclusion for shares be extended to all financial instruments.
o It is proposed that the current system for taxing short-term insurers may potentially be amended within the current and subsequent tax budget cycle.
o Ongoing refinements of the proposed dividends tax including changes to the current and proposed dividend definition (such as adding a new definition for foreign dividends and remedying certain defects within the current definition applying to the secondary tax on companies), transitional issues between the current and proposed regimes, practical problems relating to in specie dividends and further refinements to the proposed withholding system.
o It is proposed that the three year window period, allowing residential property entities to liquidate without triggering additional taxes, be extended.
o Pending company law implementation may require associated tax amendments during 2010.
o Further technical refinements to the micro-business presumptive turnover tax are proposed.
• Proposed income tax amendments applicable to personal and employment tax include, inter alia:
o The amendment to the definition of provisional taxpayer to eliminate persons who are exempt from the payment of provisional tax from such definition and the requirement to register as such. This exemption could be extended to provisional taxpayers with minimal or no provisional tax to pay, such as dormant companies.
o SARS' advance tax rulings should only be issued to taxpayers whose tax affairs are up to date.
o SARS may raise an assessment on an employer on the under deduction of employees' tax where fringe benefits have been under-valued.