Budget 2017: Tax Changes

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BUDGET 2017: TAX CHANGES

The 2017 budget lived up to the expectation created by the Finance Minister with the medium term budget policy statement late last year in which it was made clear that R28bn in additional tax revenue must be generated.

Tax increases were announced as follows:

  • Introduction of top marginal tax rate of 45% on personal taxable income above R1 500 000;
  • Increase in tax rate applicable to trusts (excluding special trusts) from 41% to 45%;
  • In consequence of increased top marginal rate for individuals, effective CGT rate for natural persons increased from 16.4% to 18% and in the case of trusts other than special trusts from 32.8% to 36%. The effective CGT rate applicable to companies remains the same at 22.4%;
  • Increase in dividends tax rate from 15% to 20%. Effective corporate tax rate is 42.4% from 1 March 2017. Foreign dividends that don’t qualify for exemption will also now have an effective tax rate of 20%; and
  • Withholding tax on non-residents disposing of immovable property is increased from 5% to 7.5% for foreign individuals, from 7.5% to 10% for foreign companies and from 10% to 15% for foreign trusts.

SARS’ tax pocket guide, which you can access here, contains a summary of the latest rates for the upcoming fiscal year.

Other tax changes proposed in the budget include:

  • Expanding the VAT base to include VAT on fuel. This is in addition to the fuel levy;
  • The section 10(1)(o)(ii) 183/60 day exemption for employment income to be amended to allow the exemption only where the employment income is taxed in the foreign country;
  • The definition of ‘resident’ to be amended for VAT purposes to address issues with VAT becoming a cost to certain non-resident companies effectively managed and controlled in South Africa;
  • The VAT zero rating associated with international travel is expected to be changed;
  • Currently VAT is imposed in South Africa upon the supply of certain electronic services and that cloud computing and services provided for by online applications also be subject to VAT;
  • Services supplied relating to securities or shares in a foreign incorporated company listed on the JSE should be subject to zero-rated VAT and accordingly changes to the VAT Act should occur to clarify the tax treatment of these services;
  • The section 7C amendment to prevent the use of low or non-interest bearing loans to trusts for the transfer of wealth is to include such loans as given to companies owed by a trust. Furthermore the provision will be extended to exclude trusts not used for estate planning and employee share trusts;
  • Income Tax Act to allow individuals to elect to retire, and the date on which the lump sum benefit accrued to the individual depended on the date on which the individual elected to retire and not on the normal retirement age. Currently, once the individual elects to retire, the Income Tax 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;
  • The eligibility threshold for employer provided bursaries and scholarships is to increase from R400 000 per annum to R600 000. The monetary limits are proposed to increase from R15 000 to R20 000 for NQF7 and below and from R40 000 to R60 000 for NQF 7 and above;
  • Paragraph 12A of the Eighth Schedule (applicable on reduction of debt) does not currently apply to mining companies. This disparity will be addressed;
  • The relief provided in paragraph 12A for dormant group companies or companies under business rescue should be extended to section 19;
  • The practice of settling debt by a means other than cash, such as the conversion of debt into equity, is to be allowed. Provision will be made to recoup capitalised interest where an interest deduction was previously claimed;
  • Specific countermeasures will be introduced to address share sales disguised as share buy backs;
  • Short term shareholding structures aimed at circumventing debt reduction provisions are to be addressed;
  • With a REIT’s assets not qualifying as allowance assets in a reorganisation transaction, the legislation will be amended to provide for reorganisation transactions involving REITs;
  • Currently the qualifying purpose exemptions for third-party backed shares are too narrow. Provisions are to be further refined to cover all qualifying purposes;
  • Refinements to the venture capital company regime, more specifically to investment returns and the qualifying company test;
  • Large multinational companies will be required to submit country by country transfer pricing policies to SARS from 31 November 2017;
  • Amendments to the Tax Administration Act to curtail inconsistencies arising out of the transitional rules for the calculation of interest on tax debts;
  • Only the portion of travel expenses reimbursed by the employer exceeding the fixed distance or rate as determined, is to be regarded as remuneration for the purposes of determining employee’s tax;
  • The annual cap of R350 000 on contributions to pension, provident and retirement annuity funds be spread over the tax year for determining monthly employee’s tax;
  • Clarification will be made that the chairperson of the Tax Board has the final decision as to whether or not an accountant or commercial member must form part of the constitution of the Tax Board; and
  • All decisions by SARS not subject to objection and appeal are to be subject to the remedies under section 9 of the Tax Administration Act.

These and other proposed tax amendments will be discussed in more detail by Jerry Botha at the SAIT Budget and Tax Update and the SARA Annual Tax Update respectively. For more details, see the links below.

http://www.sara.co.za/Events/EventsCalendar.aspx

http://www.thesait.org.za/events/event_list.asp

NON-EXECUTIVE, NON-RESIDENT NON-EXECUTIVE DIRECTORS, PAYE AND VAT: SARS GENERAL RULING – INTERPRETATION

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The position for non-executive directors remain complex, despite the recent SARS General Rulings. The general rules confirmed in these Rulings are that non-executive director fees will, with effect 01 June 2017, not be subject to employees’ tax withholding and will be subject to VAT where the non-executive director is liable for VAT, either through voluntary or compulsory VAT registration. The following principles make the position on non-executive directors more complex –

  • The source of directors fees are considered to be where the head office of the business is located. Therefore, where the directorship is South Africa, the source is South Africa.  See for example ITC 77 (1927) 3 SATC 72; ITC106 (1927) 3 SATC 336; ITC235 (1932) 6 SATC 262; and ITC250 (1932) 7 SATC 46.
  • There is a specific Double Tax Agreement clause and which deals with directors’ fees. This clause is generally contained in Article 16 of the OECD model treaty and typical wording reads “Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.” This means that the DTA does not override the source country taxing right and also that the “independent personal services” clause, with certain exemptions, does not find application.
  • The non-executive director will have to register for VAT on a compulsory basis, where the VAT Act requirements are achieved. This effectively means that where the expected fees are above R1m for a fiscal year, the registration is compulsory provided there are some meetings held in SA in compliance with the definition of ‘enterprise’ in section 1 of the VAT Act. The VAT vendor must the invoice for services through the issuance of valid VAT invoices and there is normally a bi-monthly VAT compliance requirement, even where no VAT invoices was issued.
  • There is still employees’ tax withholding on non-resident non-executive directors. The reason is that they do not fall within the exemption in the Fourth Schedule to the Act. This makes also sense logically, as SARS would have difficulty collecting from someone in a foreign jurisdiction and the tax laws are by its very design aimed at protecting our tax base.
  • The non-executive director is allowed to claim expenses against the production of income, which can be done on personal tax assessment. There is necessarily then a refund of PAYE and to the extent which expenses are allowed. We recommend that a basic set of AFS are prepared and to support the tax filing. Also, a South African bank account may be opened and is very useful to receive the tax refund and a prerequisite for receiving a VAT refund.

Many companies with non-executive directors who are non-resident outsource their compliance and planning to provider for an end-to-end solution, including on income tax, VAT, administration and opening of their foreign bank accounts.

NON-EXECS, PAYE AND VAT: SARS PROVIDES CLARITY

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Historically, it was unclear whether amounts paid to a non-executive director were subject to the deduction of employees’ tax and whether the prohibition against certain deductions by salaried employees applied to them. This being as a result of a non-executive directors arguably not earning remuneration as defined in the 4th Schedule to the Income Tax Act. No. 58 of 1962 (“the Act”)

This uncertainty further extended into the application of proviso (iii) to the definition of an “enterprise” as contained in Section 1(1) of the VAT Act, 89 of 1991 (“the VAT Act”), as this proviso excludes from the ambit of VAT the activities of an employee but nevertheless applies to the activities of an independent contractor.

During the 2016 budget speech, it was announced that an investigation into these uncertainties will be launched and clarity provided.  This resulted in the issuance by SARS of two welcomed binding rulings. These are, Binding General Ruling 40 (“BGR40”) which deals with employees’ tax implications for a non-executive director and Binding General Ruling 41 (“BGR41”), which deals with the VAT implications.

In terms of BGR40, SARS ruled that non-executive directors do not earn remuneration and therefore amounts paid to them are not subject to employees’ tax. In addition, BGR40 puts it beyond doubt that the prohibition against deductions as contained in section 23(m) of the Act does not apply to non-executive directors.

In terms of BGR41, SARS ruled that non-executive directors may be required to register for and charge VAT in respect of fees earned provided all requirements are satisfied.

While the rulings only apply from 1 June 2017, it is arguable that the rulings merely give effect to what has always been the position under South African tax law.

SA’s Tax Dilemma: Hiking VAT vs Wealth Taxes

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ALL eyes will be on government’s tax proposals in the upcoming national budget, to be tabled in Parliament on February 22.

The minister of finance already indicated in his mini budget that the fiscal authorities will be looking for additional tax revenue of R28bn in the 2017/18 fiscal year, plus a further R15bn in 2018/19, which will require more than routine tax increases. This is almost double the amount envisaged at the time of the tabling of the 2016 national budget, which indicated planned increases in tax revenue of R15bn in both 2017/18 and 2018/19, after an increase of R18bn in the current fiscal year. As unwelcome as these increases are at a time of general weakness in economic activity, they could have been substantially higher if National Treasury had not been as successful in maintaining the expenditure ceiling as has been the case.

Although increases in tax (in particular direct taxes) are generally regarded as anti-growth, one could argue that at this juncture they will contribute indirectly to higher economic growth by helping to maintain South Africa’s credit ratings and in that way prevent an increase in the cost of capital. The choice of taxes through which to raise the required additional revenue will nevertheless have to be exercised carefully to minimise any anti-growth bias.
The tax increases to be announced will in a sense be ad hoc in nature to address the current pressing problem of stabilising the government debt/GDP ratio. However, they will have to be contemplated within the context of the longer-term, fundamental tax reform envisaged at the time of the appointment of the Davis Tax Committee.

The pronouncements in this connection in the 2016 Budget Review should therefore be noted, viz. “Key considerations include the need to maintain the progressive nature of South Africa’s fiscal system and ensure that tax measures do not unduly prejudice economic growth or poor households.” Furthermore, “In future, the balance between taxes on income (direct taxes) and consumption (indirect taxes) will be an important consideration in ensuring a diversified, equitable and sustainable tax system. “The current mix suggests that there may be greater room to increase indirect taxes, such as VAT. Any proposals along these lines would need to be accompanied by measures to improve the pro-poor character of expenditure programmes so that the fiscal system remains progressive.” The comment about a possible increase in the VAT rate contrasts with the recent statement by Judge Davis that an increase in VAT would be inappropriate at this point in time, but then of course the judge does not make policy. It is therefore not surprising that the tax proposals in the 2016/17 budget relied mainly on increases in indirect taxes to raise additional revenue, but they could not avoid limiting the allowance for fiscal drag to less than what full compensation for inflation would have required (although shunning a further increase in marginal rates of personal income tax after the one percentage point increase in 2015).

So what does this tell us about the possible nature of tax increases in the 2017 national budget? Judging by the principles set out in the 2016 Budget Review as quoted above the emphasis should once again be on indirect taxes, viz. increasing rates for a variety of taxes (e.g. excise taxes and the fuel levy) by more than inflation, but also looking at broadening the indirect tax base by the introduction of new taxes such as the proposed sugar tax. The problem is that the amount of additional revenue (R28bn) required at this point in time is probably too large to raise the lion’s share of it from indirect taxes without increasing the VAT rate. The comments from the National Treasury quoted above indicate that they have accepted the eventual inevitability of a higher VAT rate, but one must acknowledge that there will always be political push-back against this because of the alleged regressive nature of an increase in the VAT rate (ignoring the World Bank’s finding that the way South Africa’s VAT regime is structured results in it actually being progressive).

Oddly enough, the regressiveness of increases in other indirect taxes does not get a mention.
A key question is how the expenditure side can be made even more pro-poor as envisaged in order to make an increase in the VAT rate politically more palatable. For this reason any compensating adjustment will have to be visible and its effect demonstrable. One possibility would be an ad hoc increase in social grants coinciding with an increased VAT rate becoming effective, but then one should guard against diluting the revenue gain from an increased VAT rate too much. For example, a one percentage point increase in the VAT rate will result in approximately R22bn in additional tax revenue in the first year. If all social grants were simultaneously increased by 1% (which would amount to overcompensating for the higher VAT rate) it would cause a revenue loss of approximately R1.5bn, resulting in a net increase in tax revenue of approximately R20.5bn. This would be enough to almost close the tax gap, while the remainder could be raised from routine adjustments to other indirect taxes and tweaking the allowance for the effect of fiscal drag.

Without an increase in the VAT rate, increases in income and wealth-related taxes (capital gains tax is to my mind closer in character to a wealth tax than an income tax), including adjustments to marginal rates of personal income tax, will be unavoidable. (An increase in corporate taxes, although politically popular, would be extremely unwise given the imperative of raising South Africa’s growth rate.) If this route is chosen, income taxes should only be raised in so far as they fit into government’s longer-term strategic view of the future tax system. By now government should already have a sense of how it will respond to the work of the Davis Tax Committee, and any tax changes at this stage should not be contradictory to the anticipated response. Tax reform should be aimed at broadening the tax base in order to enhance the possibilities for lower tax rates, rather than politically expedient tax increases aimed at plucking the goose to get the maximum amount of feathers with the least amount of hissing (with due acknowledgement to Jean-Baptiste Colbert).

In view of South Africa’s highly unequal distribution of income and wealth a markedly progressive tax system is not only inevitable but also justifiable as a matter of principle. However, one should bear in mind that directing government expenditure towards pro-poor items is an even more powerful tool for redistribution. As a rule many South Africans are inclined to uncritically revert to “the rich must pay” (to put it in populist terms) whenever the issue of financing public expenditure is raised. The cumulative extent of all redistributionary measures are rarely considered and although the disincentive effect of any single measure may not be that great, together it may well add up to having a significant influence, e.g. on the international mobility of high-skilled labour. Given the amount of extra tax revenue required, an increase of at least 2 percentage points in marginal tax rates would be a reasonable expectation if the bulk of the required additional revenue was to come from increased personal income tax.

The final answer will depend on how much allowance is made for fiscal drag, if any, and whether the lowest marginal rate (18%) will again escape from being increased as in 2015.

 

Source: m.news24.com

SA RETIREMENT LUMP SUMS: FULLY TAXABLE DESPITE OFFSHORE SERVICES

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SA RETIREMENT LUMP SUMS: FULLY TAXABLE DESPITE OFFSHORE SERVICES

Promulgation of the 2016 Taxation Laws Amendment Bill on 8 January 2017 brings about an impending change to the way in which South African pension, pension preservation fund, provident funds, provident preservation funds and retirement annuity fund (“hereinafter collectively referred to as a “retirement fund”) lump sums are taxed in South Africa for South African tax residents. The brunt of impending the change will be borne by South African tax residents who render employment services outside South Africa while still saving for retirement in a South African retirement fund.

Currently, the Income Tax Act, No. 58 of 1962 (“the Act”) allows an exemption for South African tax residents from tax on lump sum payments from a South African retirement fund to the extent that the services giving rise to the payment were rendered outside South Africa. With effect from 1 March 2017, this will no longer be the case.

According to the explanatory memorandum issued by SARS addressing, amongst others, the reason for changing the status quo is to avoid the disparity which ostensibly arises where South African residents get the benefit of an income tax deduction for contributions towards the retirement fund whilst enjoying an exemption (or partial exemption) on pay-out.

Accordingly, with effect from 1 March 2017, lump sums received by South African tax residents from South African retirement funds will be fully taxable, irrespective of the location where services giving rise to the benefit were rendered. Benefits paid from retirement assets transferred from a foreign fund to a South African retirement fund will however remain exempt from tax as per the status quo.

It is important to note that the change referred to here only effects South African tax residents. Non-residents will still be required to identify the source of the lump sum in accordance with the provisions of section 9 of the Act to assess any South African tax liability.

President Jacob Zuma Signs Bills Into Law

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The following Bills were promulgated and signed on 11 January 2017 by President Jacob Zuma:

  • The Taxation Laws Amendment Act;
  • The Tax Administration Laws Amendment Act, 2016;
  • The Rates and Monetary Amounts and Amendment of Revenue Laws (Administration) Act, 2016; and
  • The Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2016.

Several changes have been made to various sections which are now applicable.

Tax Increases Next Year?

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With the introduction of Dividends Withholding Tax during the 2013 fiscal year, corporate taxpayers (effectively) saw an increase in the effective tax rate from 34.55% to 38.8% while the Royalty withholding tax was increased from 12% to 15% in the 2015 fiscal year. In the 2016 fiscal year, individual taxpayers bore part of the brunt of meeting fiscal demands when the maximum marginal rate for individuals were increased by one percentage point from 40% to 41%. In addition, 2016 saw an increase in the maximum transfer duty marginal rate from 8% to 11%. The 2017 fiscal year, in turn, has also seen its fair share of tax increases with an increase in amongst others, the effective capital gain tax rate from 13.3% to 16.4% for natural persons and special trusts, 18.6% to 22.4% for corporates and 26.6% to 32.8% for trusts.

Will we see more increases in the 2018 fiscal year? Early signs indicate a resounding, yes:

  • The 2016 Tax Administration Laws Amendment Bill proposes amendments to various tax acts that gives the Minister of Finance the power to change tax rates by announcement in the annual Budget Speech. While the power to be bestowed on the Minister remains subject to Parliamentary intervention, it seems as if Government is reading itself for quick and effective increases in tax rates.
  • The Minister made it clear in his recent medium term budget policy statement that Government needs to raise an additional R28bn in tax revenue to meet fiscal targets over the medium term.

If an increase in tax is inevitable, the next and more prominent question on everybody’s lips is –  who is going to pick up the bill? Corporates, individuals, trusts, the South African public in general?

The Minister has made it clear on several occasions that we will only know for sure next year. While there are many ways to collect more taxes, we are left to speculate:

  • The VAT rate has been the elephant in the room for many years. However, an increase in the VAT rate during the 2018 fiscal year is highly unlikely due to the political sensitivity of a VAT rate increase –  perhaps even more so than in the recent past given the current political landscape.
  • The corporate tax rate, currently at 28%, is relatively low when compared to other jurisdictions. However, potential adverse consequences on investment would probably prevent an increase of this rate next year.
  • Perhaps most likely is yet a further increase in the maximum marginal tax rate for high earning individual taxpayers. We will also not be surprised by an increase in Skills Development Levy to assist with the funding demands for higher education.

Either way, chances are very good that taxpayers will be forking out more next year. We will have to wait for the 2017 Budget to see exactly how much more.

 

 

 

eFiling Profile Hacking

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VISIT YOUR NEAREST SARS BRANCH TO VERIFY CHANGES TO YOUR PERSONAL

Some taxpayers recently received messages from SARS about the changing of their personal details. If you received this message (and to ensure that the resultant changes are not fraudulent) you are kindly requested to visit your nearest SARS branch as soon as possible with the following supporting documents:

  • Valid original or temporary Identification Document (Green ID book / new ID card / Original Passport/ Driver’s Licence) and a certified copy thereof;
  • Original stamped bank statement not more than three months old that confirms the account holder’s legal name, bank name, account number, account type and branch code, where applicable, or where a new bank account was opened in the past 30 days and a bank statement cannot be produced, an original letter from the bank not older than one month on the bank letterhead with the original bank stamp reflecting the date the bank account was opened;
  • Copy/original proof of residential address or completed CRA01 in the case of proof of residential address that is in the name of a third party; and
  • Power of Attorney in the case where a registered tax practitioner/representative visit the branch to request the stopper to be lifted on behalf of the taxpayer.

For enquiries, please call the SARS Contact Centre on 0800 00 7277.

SARS Interpretation Note 92

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SARS has released their Interpretation Note 92 (documentary proof prescribed by the Commissioner).

For access to the entire note, please click here