Newsletter 6

Budget 2017

Budget 2017

Budget 2017

Budget 2017

Introduction

The Minister of Finance (“MOF”), Pravin Gordhan delivered his widely anticipated Budget Speech on 22 February 2017.

On the back of the Davis Tax Committee’s (“DTC”) recommendations on Estate Duty and Trust reforms during 2016, it was expected that at least some of the proposals will find its way into the tax proposals.

Some of these were:

  • Donations between spouses, except to fund living expenses, should no longer be exempt from donations tax;
  • The estate duty abatement should no longer be transportable but increased from R3.5mil to R15mil;
  • Vesting and discretionary trusts should be taxed differently;

However, despite facing some “tough choices to achieve the development outcomes Government seeks, the 2017 Budget to a large extent was a bit of a non-event to, truth be told.

The usual increases like customs and excise were there, the increase in the fuel levy but we have not seen any of the DTC recommendations announced.

However, there are two proposals in particular that stand out for us.

These are:

  • The proposed anti-avoidance provisions introduced by S7C of the Income Tax Act, No 58 of 1962 (as amended) (“the Act”); and
  • The proposed amendment to S10(o)(ii) of the Act that in certain circumstances exempt foreign employment income from taxation in South Africa.

Tax Proposals

We list below some of the more prominent tax proposals.

Personal:

  • A new top personal income tax bracket of 45% for taxable incomes above R1.5 million;
  • An increase in the dividend withholding tax rate to 20% from the current 15%;
  • Interest exemption is increased to R23 800 per annum for persons under the age of 60, and persons 65 and older, up to R34 500 per annum, is exempt from taxation;
  • Medical Tax credit increases from R286 to R303 for the first two beneficiaries and from R192 to R204 per month;
  • Tax-free savings accounts proposed to increase from an annual allowance of R30 000 to R33 000;

Capital Gains Tax and Donations Tax

  • It is proposed to increase the withholding tax on immovable property sales by non-residents. Rates will be increased from:
    • 5% to 7.5% for individuals,
    • 7.5% to 10% for companies, and
    • 10% to 15% for trusts.
  • Dispositions between spouses and South African group companies and donations to certain public benefit organisations to remain exempt from donations tax.

Trusts

  • Trusts to be taxed at 45% instead of the current 41%.

SECTION 7C 

Some taxpayers have already attempted to circumvent the anti-avoidance measure by making low-interest or interest-free loans to companies owned by a trust. To counter abuse, it has been proposed that the scope of this anti-avoidance measure be extended to cover these avoidance schemes.

In addition, it is proposed that the anti-avoidance rule should not apply to trusts that are not used for estate planning, for example, employee share scheme trusts and certain trading trusts.

It is not certain from which date the proposal will be effective.

Interest on no or low and interest free loans

Interaction between the “in duplum” rule and the statutory tax legislation: The in duplum rule aims to protect debtors by limiting the amount of the total interest a creditor can charge. The effect of the rule is that interest on a debt ceases to accrue where the total amount of the interest equals the outstanding principal debt. Various anti-avoidance provisions in the Act may be undermined should the in duplum rule apply. Some taxpayers may be relying on this rule to distort the quantification of the tax benefit derived from low-interest or interest-free loans.

These taxpayers aim to avoid income tax determined on the difference between the amount of interest actually incurred and the amount of interest that would have been incurred at the official rate. It is proposed that the tax rules dealing with low-interest or interest-free loans be amended to explicitly exclude the application of the in duplum rule to ensure their efficiency.

VAT

Government will look to expand the VAT base in 2018/19.

It is proposed that the zero-rating on fuel be removed. To mitigate the effect on transport costs, government will consider combining this with either a freeze or a decrease in the fuel levy.

Transfer Duty

The duty-free threshold on purchases of residential property is to increase from R750 000 to R900 000, effective 1 March 2017.

Retirement Funds

The Act does not cater for the transfer of lump sum benefits from one retirement fund to another. It is proposed that transfers of retirement  interests be allowed from a retirement fund to a retirement annuity fund, subject to fund rules.

Employees’ tax

Employees’ tax and reimbursement of travel expenses

To facilitate and simplify the calculation and administration of employees’ tax, it is proposed that only the portion of the travel expenses reimbursed by an employer that exceeds the rate or distance fixed by the Minister of Finance by notice in the Gazette in terms of the current law should be regarded as remuneration or purposes of determining employees’ tax.

Application of the cap on deductible retirement fund contributions

It is currently not clear how the overall annual cap of R350 000 on contributions to pension, provident and retirement annuity funds should be applied when determining monthly employees’ tax. It is proposed that the amount of R350 000 be spread over the tax year, which is a more prudent approach.

Employer bursaries

It is proposed to increase the income eligibility threshold for employees from R400 000 to R600 000, and the monetary limits for bursaries from R15 000 to R20 000 for education below NQF level 7, and from R40 000 to R60 000 for qualifications at NQF level 7 and above.

Foreign Employment Income Exemption

Currently, if a South African resident works in a foreign country for more than 183 days a year (of which 61 days must be consecutive), foreign employment income earned is exempt from tax, subject to certain conditions. This exemption is for employees of private-sector companies. In terms of the residence-based system of taxation, South African residents are taxed on their worldwide income.

However, this exemption on foreign employment income appears excessively generous. If a resident works in a foreign country for more than 183 days with no tax payable in the foreign country, that foreign employment income will benefit from double non-taxation. It is proposed that this exemption be adjusted so that foreign employment income will only be exempt from tax if it is subject to tax in the foreign country.

Please feel free to contact our offices with any queries you may have as to how the 2017 Budget will impact or is likely to impact on you.

Yours faithfully

Stellentrust Trustees and Trust Compliance (Pty) Ltd