22 February 2017 brought about another Budget speech presentation by Minister Pravin Gordhan. In the build up to the latest Budget, it was clearly advertised that tax proposals were to be introduced to fund significant revenue collections intended to fund budget deficits. It was with keen anticipation that the Budget was closely watched to learn of Treasury’s proposals that are projected to raise R28 billion.

The following is a summary of some of the significant budget proposals:

Personal Income Tax

A new top marginal rate of tax of 45% is being introduced in respect of taxable incomes above R1.5 million.

There has only been a partial relief for bracket creep, meaning that the tax burden will be felt by all taxpayers.

These personal income tax proposals are expected to generate R16.5 billion in revenue collections.

Dividends Withholding Tax (“DWT”)

The next most significant Budget proposal related to an increase in the rate of DWT to 20%. This is intended to limit the ability of tax arbitrage after the increase in personal tax rates.

The proposal is expected to generate R6.8 billion in revenue collections.

The exemption and rate of tax for foreign taxable dividends will also be revised in line with the new DWT rates whereby the maximum rate of effective tax will be 20%. This will be effective as from 1 March 2017.

Trust tax rate

The rate of tax applicable to trusts (other than special trusts) has been proposed to be increased to 45%. This would result in the effective rate of Capital Gains Tax on the disposal of a capital asset in the hands of a trust increasing to 36%. By comparison, the maximum effective rate of tax on capital gains in the hands of a natural person will be increased to 18% as a result of the increased maximum marginal personal tax rate.

Tax Free Savings Accounts

This tax incentive was introduced on 1 March 2015 with an annual allowance of R30 000 for contributions to qualifying investments. In order to cater for inflationary adjustments, Government has proposed to increase the annual limit for contributions to R33 000.

Non-resident sellers of immovable property

In order to align with the increase in the effective capital gains tax rate from increased personal tax rates, the withholding tax to be applied to non-resident sellers of immovable property will be as follows:

Non-resident individual              -           7.5%

Non-resident corporate              -           10%

Non-resident trust                      -           15%

Expansion of the VAT base

In line with plans to address base erosion and profit shifting, foreign providers of electronic services to South African consumers were required to register for VAT since 1 June 2014. It is proposed that taxable services encompassed by these provisions will now include cloud computing and services provided using online applications. These changes will be published for public comment during 2017.

Transfer Duty

Relief is to be granted for lower and middle-income households by the proposal to raise the duty-free threshold to R900 000 with effect from 1 March 2017.

Tax on sugary beverages

Government is proposing to proceed with the tax on sugary beverages once the necessary legislation is approved by Parliament. The tax will be administered through the Customs and Excise Act. The proposed tax will be 2.1c/gram for sugar content in excess of 4g/100ml. A portion of the revenue will be used to support health-promotion interventions as part of a strategy to fight non-communicable diseases.

Amendment of the foreign employment income tax exemption for South African residents

At present, if a South African resident works in a foreign country for more than 183 days per year, foreign income earned may be exempt from income tax. The exemption has been considered to be excessively generous, therefore where a resident works in a foreign country and no tax is payable in that foreign country, the foreign income may benefit from double non-taxation. It has thus been proposed that this exemption be adjusted such that the foreign employment income will only be exempt from tax if it is subject to tax in the foreign country.

Refining tax measures to prevent tax avoidance through the use of trusts

In 2016, an anti-avoidance measure was introduced in section 7C of the Income Tax Act to curb the tax free transfer of wealth to a trust by means of an interest free or low interest loan. Treasury has identified that certain taxpayers have already attempted to circumvent the anti-avoidance measure by making interest free or low interest loans to companies owned by a trust. In order to counter this abuse, it is proposed that the scope of the anti-avoidance provisions will be extended to address these schemes. It is also proposed that the anti-avoidance rule should not apply to trusts that are not used for estate planning, such as employee share scheme trusts and certain trading trusts.

Increase in the fringe-benefit exemption for employer provided bursaries

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

Addressing the circumvention of anti-avoidance rules using share buybacks

It was highlighted in the 2016 Budget Review that tax avoidance schemes involving share buybacks were highlighted for review. Schemes involve a company buying back the shares from its current shareholders to avoid the tax consequences of share disposals whereby the seller receives the payment in the form of a dividend that may be exempt from normal tax and dividends tax, instead of a tax on the sale of the shares. It is proposed that specific countermeasures be introduced to curb the use of share buyback schemes.

Tax implications of controlled foreign companies and offshore foreign trusts

The 2015 Budget Review announced that measures would be introduced regarding the treatment of foreign companies held by interposed trusts. No specific countermeasures have yet been introduced in this regard, so it is proposed that specific countermeasures be introduced to curb abuse.

Employees’ tax and the reimbursement of travel expenses

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

Accrual of interest payable by SARS

Interest that is payable by SARS could accrue to a taxpayer over a number of tax years. In order to avoid complications in taxing that interest, or interest that is adjusted for previous tax years, it is proposed that interest payable by SARS should be deemed to accrue to the recipient on the date of payment thereof by SARS.

Summary

Please note that the aspects addressed herein are merely a summary of certain budget proposals from the 2017 Budget Speech. There are a number of other aspects covered that we would be happy to address if you so require. In addition, these matters addressed are not yet legislated, and may be subject to further changes, so should not be used as a substitute for detailed professional advice.

Download our 2017/18 Summary Tax Guide

Neil Hughes

Tax and Trust Director, Johannesburg