On 24 February 2016 we had the welcome sight of Pravin Gordhan back on centre stage to deliver the 2016 Annual Budget Speech. What was keenly anticipated from this speech was an indication of Government’s plans on how to achieve greater revenue collections to fund the budget deficit.

The following is a summary of some of highlights from this latest budget speech:

Capital Gains Tax

The proposal was tabled to increase the level of inclusion rates at which taxable capital gains are included into the taxable income of a taxpayer. This can be seen as a form of tax on wealthy taxpayers in the position to be realising profits on the disposal of capital assets.

The inclusion rate for individuals has been increased from 33,3% to 40%. This results in the effective rate of tax on taxable capital gains rising from a maximum of 13,65% to 16,4%.

For companies and trusts, the inclusion rate has been raised from 66,6% to 80%, with the effective rate of tax on taxable capital gains for companies moving from 18,65% to 22,4%, and for trusts it rises from 27,31% to 32,8%.

The nominal relief on capital gains was to increase the annual exclusion for individuals from R30 000 to R40 000.

Trusts and interest free loans

Government is still of the view that certain taxpayers make use of trusts to avoid paying estate duty and donations tax. In order to limit a taxpayer’s ability to transfer wealth without being taxed, it has been proposed that assets transferred through a loan to a trust are included in the estate of the founder at death, as well as to categorise interest free loans to a trust as donations.

It was also noted that further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will be considered.

These comments do not unfortunately provide great clarity on exactly how the measures may be applied, and further clarity may only be obtained as the legislation is released for public comment. It is therefore uncertain at this time what form of impact this may have on existing trust structures.

Transfer Duty

A new tier has been added to the transfer duty rates that apply to the sale of a property that is not subject to VAT. The new tier will impose a duty of 13% of the property value that is in excess of R10 000 000. The previous top bracket imposed a transfer duty rate of 11%.

Retirement savings

The new rules regarding the levels of deductions for contributions to pension, provident and retirement annuity funds will go ahead as planned from 1 March 2016. However, after further consultation, government has proposed to postpone the requirement for provident fund members to annuitise fund payouts to 1 March 2018.

Voluntary disclosure

There is already an ongoing voluntary disclosure programme in place by SARS that enables taxpayers to declare and regularise cases of non-disclosure. However, with the new OECD global standard for the automatic exchange of information that will come into effect in 2017, there is limited time for taxpayers wishing to declare previously undisclosed assets held outside of South Africa. The National Treasury, SARS and the Reserve Bank have received requests from parties wishing to regularise those affairs.

Government has therefore proposed to relax voluntary disclosure rules for a period of six months from 1 October 2016 to allow non-compliant taxpayers to disclose assets held and income earned offshore. It is however unclear at this time what the full extent of the relaxation may be, and how the disclosures will be handled.

Levies and taxes

The proposal was tabled to increase the general fuel levy by 30 cents per litre with effect from 6 April 2016. This levy is contended to be used to raise general revenue, fund compensation for road accidents, and to help address pollution and congestion.

A tyre levy was proposed in 2015 with the intention of reducing waste while encouraging reuse, recycling and recovery, and discouraging disposal into landfills. This levy will become effective from 1 October 2016 at the rate of R2.30 per kg of tyre.

Government has proposed to introduce a new tax on sugar-sweetened beverages as from 1 April 2017. This is intended to reduce excessive sugar intake as a result of obesity stemming from overconsumption of sugar, leading to a greater risk of heart disease, diabetes and cancer.

Avoidance schemes in respect of share disposals

A scheme that has been identified as being used to avoid the tax consequences of share disposals is the scenario where a company repurchases the shares from a seller and then issues new shares to the buyer. The seller may therefore receive proceeds in the form of dividends that may be exempt from normal tax and dividends tax, and the amount paid by the buyer may qualify as contributed tax capital.

The argument is that such a transaction is in substance a share sale that should be subject to tax. These arrangements will be reviewed to assess whether additional countermeasures are required.

Withdrawal of Withholding Tax on Service fees

The new withholding tax on service fees from a South African source paid to a non resident was set to be introduced from 1 January 2017. It however had unforeseen issues, including uncertainty on the application of domestic law and taxing rights under tax treaties. In order to resolve these issues, it is proposed that these withholding tax provisions be withdrawn from the Income Tax Act and dealt with under the provisions of reportable arrangements in the Tax Administration Act.

Extension of objection and condonation periods

The current period within which a taxpayer is required to lodge a dispute under the Tax Administration Act is 30 business days from the date of assessment. That has been found in many instances to be an insufficient time period, especially in the case of complex matters, resulting in a large number of applications for condonation. It is proposed that a longer time period be considered within which these objections should be lodged.

Summary

Please note that the aspects addressed herein are merely a summary of certain budget proposals from the 2016 Budget Speech. There are a number of other aspects addressed that we would be welcome to address if you so require. In addition, these matters addressed are not yet finalised, and may be subject to further changes so should not be used as a substitute for detailed professional advice.

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Neil Hughes

Tax and Trust Director, Johannesburg