On 21 February 2018 we were presented with the Budget Speech by current Minister of Finance, Malusi Gigaba. It was widely accepted that drastic steps would be proposed in the Budget Speech in order to address the revenue shortfall of R48.2 billion, an amount that is slightly lower than the Medium Term Budget Policy Statement (MTBPS) of R50.8 billion. The primary tax measures that have been introduced are proposed to raise an additional R36 billion, this being achieved by a higher VAT rate and below-inflation adjustments to the personal income tax brackets.

The following points are a summary of the more significant tax measures included in the Budget Speech:

Increased VAT rate

With effect from 1 April 2018, the VAT rate is being increased to 15%. It is claimed that VAT is an efficient, certain source of revenue provided that its design is kept simple. Treasury has stated its view that the zero-rating of basic food items will mitigate the effect on poor households. In addition, Treasury claims that by increasing the rate by only 1%, it is estimated to have the least detrimental effects on economic growth and employment over the medium term.

Personal income tax brackets

The lower three tax brackets as well as the tax rebates will be adjusted by only a 3.1% increase. There will be no change in the top four brackets.

What this means in real terms is that all individuals will be liable for more personal income tax, with the lower level income earners still feeling the strain as the bracket adjustment is at a rate lower than inflation levels.

Increasing ad valorem excise duties

A simplistic measure of applying higher taxes to luxury goods is to increase the ad valorem excise duties. This could be applied to items such as cosmetics, electronics and golf balls. While the revenue collection from this amendment is not significant, it is aligned with the progressive structure of the tax system.

With effect from 1 April 2018, the maximum ad valorem excise duty for motor vehicles will be increased from 25% to 30%, and the classification of cell phones will be updated to include “smart phones”.

Increased rate of estate duty

Following from the recommendations of the Davis Tax Committee, as well as the progressive nature of the tax system, it is proposed to increase estate duty from 20% to 25%. However, this will only apply to estates of R30 million and greater. This will apply from 1 March 2018.

Increase in rate of donations tax

In order to limit the staggering of donations to avoid the new increased rate of estate duty, it is proposed that as from 1 March 2018, donations in excess of R30 million will be taxed at 25%. The current rate of donations tax is 20%.

Fuel taxes

The bad news for the cost of transport is that the fuel price is set to increase by 52 cents per litre. That will comprise of an increase of 22 cents per litre for the general fuel levy, and then an increase of 30 cents per litre for the Road Accident Fund levy.

Alcohol and tobacco excise duties

The traditional increases on duties for these products will come into effect. The proposed increase in duties on tobacco products is 8.5%, while alcohol duties will increase by between 6% and 10%.

Refining of anti-avoidance rules dealing with share buybacks and dividend stripping

The anti-avoidance rules related to share buybacks and dividend stripping were strengthened in the 2017 tax amendments. These rules would override the corporate restructure rules to prevent taxpayers from stripping dividends out of a target company before a reorganisation transaction. As these changes may affect legitimate transactions, it is proposed that the interaction between the anti-avoidance rules and the corporate restructure rules be reviewed.

Tax treatment of doubtful debts

In 2015, the Commissioner’s discretion on the section 11(j) doubtful debts allowance was removed with effect from a date to be announced. This was in anticipation of a move to a self-assessment income tax system. The intention was that the allowance would be claimed in terms of criteria to be defined in a public notice issued by the Commissioner. At present no criteria has been formulated for claiming the allowance, so it is proposed that the criteria for determining the allowance should be included in the Income Tax Act.

Interest paid to a non-resident beneficiary of a trust

It is currently unclear as to who should bear the withholding obligation after vesting of interest to a non-resident beneficiary of a trust. The rules dealing with trust income and beneficiaries do not deem the trust to have paid interest to beneficiaries if they are non-residents. As a result, a rule will be considered to address this shortfall.

Official rate of interest

At present, the official rate of interest is the repurchase rate plus 100 basis points (7.75%), and is commonly used to quantify the fringe benefit of low interest loans or the value of donations for low interest loans granted to trusts by a connected person. As it is uncommon to have interest rates lower than the prime rate, it is proposed that the official rate is increased to a level that is closer to the prime rate of interest.

Summary

Please note that the points addressed herein are limited to a summary of the more significant budget proposals from the 2018 Budget Speech. There are a number of other aspects covered that we would be welcome 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.

Please click on this link to access our latest electronic Budget guide.

Neil Hughes

Tax and Trust Director, Johannesburg

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