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Budget 2017 – Brace Yourself For Tax Increases All Round

Against a challenging global and South African fiscal backdrop, the Minister of Finance articulated a balanced budget which maintains the country’s spending commitments whilst at the same time, supporting its long-term fiscal sustainability.

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Against a challenging global and South African fiscal backdrop, the Minister of Finance articulated a balanced budget which maintains the country’s spending commitments whilst at the same time, supporting its long-term fiscal sustainability.

For the first time since 2009/10, tax revenue growth has not matched economic growth – R28 billion additional taxes need to be raised and collectively, the tax proposals announced in Budget 2017 are aimed at achieving just that.   

Overall, the Budget contains a significant amount of tax proposals and underlying these proposals, are two of the fundamental principles of our tax system, namely:

  • Equity (namely, taxpayers with the same level of income should pay the same level of tax and our tax system should be progressive and ensure that those with higher incomes bear a higher proportion of the tax burden); and
  • Efficiency (namely, SA should collect all the taxes which are rightfully due to it and revenue should be raised in a manner that does not deter economic growth, investment and job creation).

Related: 7 Top Tax Tips For SMEs

The main tax proposals include the following:

Increases in taxes for individuals and trusts 

As expected, higher-income earners will pay higher taxes, come the new tax year. A new top personal income tax rate of 45% will apply to taxpayers with taxable income above R1.5million per tax year. Approximately, 100 000 taxpayers will be affected by the new bracket.

The tax rebates and the levels of all the taxable income brackets, will be increased by 1% from 1 March 2017. However, since the increase is below the expected level of inflation, this provides limited real relief to taxpayers. 

The combined effect of all these adjustments is that individuals at higher-income levels will be paying more tax. This is in line with the expectation that an equitable and progressive tax system should impose a similar tax burden on individuals at similar income levels (i.e. those with higher income, should pay higher taxes).

These increases of course also increase the effective capital gains tax rate.

Increase in dividends tax rate from 15% to 20%

Increasing the top marginal tax rate without concurrently increasing the dividend withholding tax rate would create tax arbitrage opportunity for some individuals (i.e. to earn their income in the form of dividends rather than salaries). It is for this reason, that it is proposed to increase the dividend withholding tax rate from 15% to 20%. 

Medical aid tax credit increase 

medical-aid-tax

The medical tax credit will be increased in line with inflation. It was however cautioned that this tax credit may possibly be reduced in future as part of the funding framework for National Health Insurance. 

Transfer duty

Transfer duty relief to be provided in the affordable housing market by increasing the threshold at which transfer duty becomes payable from R750 000 to R900 000. This proposal eliminates transfer duty on properties below R900 000.

Related: Ways To Save More Tax

Increase in annual allowance for tax free savings accounts from R30 000 to R33 000

These tax free savings accounts were introduced on 1 March 2015 with an initial annual allowance of R30 000 and it was planned that this annual allowance would increase with inflation. It is accordingly proposed that the annual allowance increases to R33 000 per annum. 

Increase in the general fuel levy and the Road Accident Fund levy 

Another increase which will hit the pockets of the man on the street directly is the proposed increases in the fuel levies. 

These increases will be two-fold, namely (1) an increase in the general fuel levy of 30 cents/litre and (2) an increase in the RAF levy of 9 cents/litre (this comes after a large increase in the fuel levy last during 2015/16).

Increase in excise duties for alcohol and tobacco, of between 6% and 10%. 

Sugar tax to be implemented

Sugar tax

Further consultations are currently taking place on the tax on sugary beverages. It is expected that the tax will be implemented later this year once details are finalised and the legislation is passed. 

Employees’ tax proposals 

Tax deduction for retirement fund contributions – applying the R350 000 cap for PAYE purposesThe much-anticipated changes to the retirement fund tax regime became effective on 1 March 2016. In particular, the new regime places a maximum limit on the tax deduction which taxpayers may claim in respect of contributions made by them to retirement funds (i.e. the deduction is limited to 27.5% of the higher of the individual’s remuneration; or taxable income, but capped at R350 000 per annum).  

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. 

  • Employees’ tax and reimbursement of travel expensesTo 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” and hence be subject to employees’ tax.
  • Increasing the fringe-benefit exemption for employer-provided bursariesCurrently, if an employee earns income (referred to as a “remuneration proxy”) of less than R400 000 per tax year and his/her employer provides a bursary to his/her relative, the value of the bursary, up to a limit, will not be taxable in the hands of the employee. It is proposed to increase this remuneration proxy figure for employees from R400 000 to R600 000 per annum, and to increase the monetary limits for such 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.
  • Limiting the tax exemption for foreign employment income earned by South African tax residents –  Currently, if a South African resident works in a foreign country for more than 183 days a year, foreign employment income earned is exempt from tax, provided certain conditions are met.  It has been noted that this exemption for foreign employment income appears to be excessively generous and that it may result in the SA resident not paying any tax on that foreign employment in South Africa or any other jurisdiction. Accordingly, it is proposed that this exemption be amended so that foreign employment income will only be exempt from tax if it is subject to tax in the foreign country.

Related: Tax Basics For Business Owners

Corporate tax changes

Combatting base erosion and profit-shifting 

Over the last few years, many governments have co-operated and collaborated to deal with tax transparency and information sharing to combat significant financial leakages in the economy through the erosion of the tax base, profit-shifting and illicit money flows. 

The Minister again highlighted the fact multinational corporations continue to use inconsistencies in global tax rules to avoid tax liabilities and that to combat this, South Africa will be signing a multilateral instrument this year which will assist in the updating of treaties and will reduce the scope for aggressive tax avoidance activities. 

The automatic exchange of information between tax authorities will also come into operation this year.

Carbon tax 

The proposed carbon tax and its date of implementation will be considered further in Parliament this year.

Curbing tax avoidance through the use of trusts 

Currently, an anti-avoidance measure exists which is aimed at curbing the tax-free transfer of wealth to trusts through the use of low-interest or interest-free loans. Where such low-interest or interest-free loans are made, the anti-avoidance measure deems the “foregone” interest on the loan to be a donation that is subject to donations tax at a rate of 20%. 

However, it was noted that this anti-avoidance measure is being circumvented by certain taxpayers who are now making these low-interest or interest-free loans to companies owned by a trust. To counter this abuse, it is 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 rules should not apply to trusts that are not used for estate planning, for example, employee share scheme trusts and certain trading trusts.

It is also proposed that the tax rate for trusts (other than special trusts) be increased to 45%.

Related: Entrepreneurs And Tax: 101

Tax incentives 

  • The learnership tax incentive which supports training and skills development will be extended until 2022.
  • The employment tax incentive will be extended until 2019 to allow for further assessment of the impact of this incentive. It was noted that during the period 1 January 2014 to 31 January 2017, more than 50 000 firms utilised the employment tax incentive, however, it has had a limited positive impact on the employment of youth employment (whilst no notable negative impacts were identified).
  • The tax incentive for qualifying industrial policy projects comes to an end this year and it is noted that government will review the programme before taking a decision on its future.
  • A tax review of the diesel refund scheme, specifically to ensure that all taxpayers who should benefit from the scheme, benefit on a more equitable basis. It was also proposed that the diesel refund scheme be delinked from the VAT system and the creation of a standalone diesel refund administration. A discussion paper outlining the options for a simplified administration system was published for public comment on 15 February 2017. The legislative amendments to give effect to the separation of the diesel refund system will be developed following public consultations.

Other tax proposals

Special Voluntary Disclosure Programme It was noted that this programme has commenced and that SARS had already received disclosures of R3.8 billion in foreign assets, which would yield revenue of approximately R600 million. The programme will be available until August 2017. 

Graduate tax  Government will continue to work on a sustainable method for funding higher education, taking into account budget constraints. It was noted that several groups have suggested that this be funded through the introduction of a graduate tax – to be levied directly on all university graduates. The idea offers several potential advantages, however, is unlikely to raise the levels of revenue required to fund universities.

Transfers from a retirement fund to a retirement annuity fund – Currently, once an individual elects to retire, the tax legislation does not cater for the tax efficient 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 the fund rules.

Withholding tax on immovable property sales – To align with the increased effective capital gains tax rate, it is proposed that the withholding tax on the disposal of immovable property by non-residents be increased from 5% to 7.5% for individuals, 7.5% to 10% for companies and 10% to 15% for trusts. 

Tax relief for small businesses 

Qualifying micro businesses with turnover up to R1 million a year and small business corporations (SBC) with turnover of less than R20 million a year are eligible for preferential corporate income tax rates. Micro business pay tax on their turnover and SBC are taxed on their taxable income at preferential rates.

There are however no transitional measures for “micro business” to migrate into the “SBC” tax regime which can result in unforeseen tax liabilities and administrative penalties. It is not proposed to reduce associated administrative penalties so that businesses can transition smoothly. 

Whilst SARS has achieved steady successes in broadening the tax base and bringing small businesses into the tax net, the progress bringing small businesses operating in the informal sector into the South African tax net, has been slow. 

In South Africa and globally, it is extremely difficult to broaden the tax base in the informal sector and a large part of this sector continues to slip through the noose of tax authorities – even as governments continue to grapple with the complex problem of how to avoid this. 

The proposed changes to the small business tax regime, could be a first step to bringing a greater percentage of the informal sector into the tax net. 

In conclusion, it was noted that the efficiency of SARS is one of South Africa’s institutional strengths and that this tax administration body plays a critical role in ensuring that expected levels of revenue are collected to fund the country’s spending programmes.  

Accordingly, it was noted that SARS will continue to develop the skills and capacity needed to enforce legislation and will also continue to enhance its relationships with taxpayers as this is key to our fiscal health. In this regard, the Davis Tax Committee would be called on for advice on how best to ensure that SARS remains a robust and effective tax collection agency.

Featured image credit: humanaction.co.za

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3 Stealthy Tax Hikes Payroll Managers And Employees Need To Take Note Of

By Rob Cooper, tax expert at Sage, and chairman of the Payroll Authors Group of South Africa

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“Dammed if you do and dammed if you don’t.” 

The adage summarises the difficult decisions government and the Finance Minister faced when balancing the country’s books, rescuing state-owned enterprises, and reviving the growth of our economy. Given the economic pressure that most taxpayers are facing, government ideally needed to achieve all of that without direct increases to personal income tax in the most recent Budget Speech.

Personal income tax has comprised at least a third of South Africa’s total tax revenue in recent tax years, despite growing unemployment. The 2019 Budget, presented in February, forecasts that personal income tax will account for nearly 39% of tax collected during the upcoming (2019/20) tax year. Given that we are in an election year and that the tax base is fragile, it’s not surprising that the Finance Minister and the National Treasury avoided direct increases to the statutory tax tables used to calculate PAYE for employees in the budget.

Nonetheless, government has made inflation work in its favour to impose some tax increases by stealth. Here are three ways government is raising more revenue without direct tax increases:

1. Bracket creep

The statutory tax tables used by payrolls and employers have not been changed for 2019/20, nor have the brackets been adjusted for inflation. This effectively amounts to an indirect tax increase that will yield a revenue saving of approximately R12.8 billion for government’s coffers.

It is not unusual for government to use ‘bracket creep’ to effectively raise more revenue. But unlike previous tax years, even low- and middle-income earners are not getting much relief. Rebates and the tax threshold are being increased by small amounts to allow some relief, but many people this year will feel the pain as inflationary salary increases push them into a higher tax bracket.

2. Medical aid credit not adjusted for inflation 

As proposed in the 2018 Budget, the Finance Minister did not apply an inflationary increase to the Medical Tax Credit, which allowed him to raise an extra R1 billion in revenue for the year. Surprisingly, these funds will be allocated to general tax revenue rather than ring-fenced for healthcare. In previous tax years, revenue generated from below-inflation increases on medical scheme credits was used to fund National Health Insurance (NHI) pilot projects.

There is still no clarity on how the NHI is going to be funded except for a general statement that the funding model is a problem for the National Treasury to solve, and that the principles of cross-subsidisation will apply. One wonders if any real progress will be made soon, given the fiscal constraints government faces.

3. Business travel deduction left untouched

The Budget leaves the per-kilometre cost rates used to determine tax deductions for business travel untouched. By not increasing travel rates to account for inflation, government effectively increases income tax collection at the cost of the taxpayer. This will be a blow for people who need to claim from their employers for business travel in their personal vehicles. This change has slipped through largely unnoticed and the budget does not provide numbers for the expected increase in tax revenue.

Closing words

Amid political turmoil and uncertainty, the Finance Minister presented a balanced budget for 2019/20 that offers hope for the future along with some tough love. With government taking steps to accelerate economic growth and improve revenue collection, we should hopefully see a steady improvement in government finances, which will translate into less pressure on the taxpayer in future years.

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Entrepreneur Today

SMEs: Staying On The Right Side Of The Taxman

Remaining SARS compliant can be a constant challenge for small- to medium-enterprises (SMEs), especially when they are trying to focus on growing their businesses and streamlining their operations.

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EasyBiz Managing Director, Gary Epstein, says submitting taxes can be a seamless process that does not have to take up more time than is necessary. “If business owners understand what is required of them and they put a few processes into place to deal with their tax submissions properly, their lives will be so much easier.”

What are the top three considerations for SMEs when submitting tax returns?

“Firstly,” says Epstein, “SARS returns must be accurate and submitted in terms of the relevant Act. Secondly, returns should be submitted and paid on time to avoid unnecessary penalties and interest, and thirdly, business owners must follow up on queries issued by SARS. “Do not ignore these queries, act on them as soon as possible”.

What are the major SARS submission deadlines for SMEs?

Epstein points out that small business owners need to adhere to various tax deadlines, each with their own particular dates for submission. “It is important that business owners diarise the dates (and set advance reminders for themselves) and/or enlist the services of an accountant or financial adviser to help them keep abreast of requirements.”

Value-added tax (VAT)

VAT payments need to be submitted in the VAT period allocated to the business, according to various categories and ending on the last day of a calendar month. This may mean making payments once a month, once every two months, once every six months or annually, depending on the category.

Provisional taxes

Provisional tax should be submitted at the end of August (first provisional) and at the end of February (second provisional) – for February year-end companies.

Employee taxes

In addition to submitting an annual reconciliation (EMP501) for the period 1 March to end of February for Pay-As-You-Earn (PAYE), Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF), employee tax, in the form of an EMP201 return, needs to be submitted by the seventh of every month.

When can SMEs get extensions and is it worth it?

Epstein says SMEs can apply for various extensions, but these are subject to the Income Tax Act and Tax Administration Act.

“It is best for SMEs to consult their tax professionals to get advice regarding extensions for their businesses.”

What is SARS not flexible about?

SARS is not flexible when it comes to late returns and late payments.

“I cannot stress enough how important it is for SME owners to ensure their tax returns are submitted on time. In this way, they will avoid the inconvenience and expense of additional fines and interest,” notes Epstein.

What skills do SMEs need in their organisations to be able to submit to SARS efficiently?

Business owners often don’t have the time or expertise to deal with tax submissions throughout the year. If the business cannot afford to employ a full-time accountant or financial services expert, it would do well to outsource its tax requirements to a registered tax practitioner.

“I would recommend that even if they are not submitting the tax returns themselves, business owners should have a broad understanding of the tax regulations and what is expected of them. There is a lot of helpful information on the various Acts and tax requirements on SARS’ website,” says Epstein.

How does the right software help SMEs remain SARS compliant?

SME’s (and their accountants’) jobs can be made easier by using reliable accounting software to calculate accurate VAT reports. These reports are only as accurate as the data entered into them, which means care needs to be taken when inputting data into the accounting programme. Epstein says a good accounting software package must be reliable, easy to use and functional.

“SMEs need to check that the software has thorough reporting capabilities and can interface with other software solutions. Of course, it is also important to find out whether the software is locally supported by the vendor or not.”

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Entrepreneur Today

4 Dangers Of Business Under-insurance

A common short-term insurance peril that many SMEs face when submitting a claim following an insured event is the risk of being underinsured.

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Malesela Maupa, Head of Products and Insurer Relationships at FNB Insurance Brokers says, many small business owners mistakenly believe that by merely having a short-term insurance policy in place they are adequately protected against unforeseen events.

“This is technically correct provided that the business is covered for the full replacement value of the items insured. However, in circumstances where the sum insured does not cover the full replacement value or material loss of the item insured, the business is underinsured,” explains Maupa, as he unpacks the dangers of business underinsurance:

1. Financial loss

The most common risk is financial loss on the part of the business. If the business is underinsured or the indemnity period understated, the short-term insurance policy will only pay out the sum insured for the stated indemnity period as stated in the schedule, with the business owner having to provide for the shortfall. This often leads to cash flow challenges, impacting profit margins or rendering it difficult for the business to recover following the financial loss.

2. Reputational damage

Should an underinsured business not have sufficient funds to replace a key business activity or critical component following a loss, this may impact its ability to fulfil its contractual obligations, leading to a loss of business or market share, and irreparable reputational damage in the worst-case scenario.

3. Legal action

A small business also faces the risk of customers or clients taking legal action against it, should it fail to deliver on goods and services following a loss or be unable to honour its financial commitments that they committed to prior to the loss.

4. Survival of the business

A catastrophic event such as fire, which could result in the loss of stock or company equipment and documentation, could threaten the survival of a small business that is not yet fully established, if the business assets are not adequately insured.

Working with an experienced short-term insurance broker or insurer is essential when taking up short-term insurance to ensure that business contents are covered for their full replacement value.

Furthermore, depending on the nature of the business or item insured, the policy should be reviewed on a regular basis to avoid underinsurance as the value of items often change overtime due to fluctuations in economic activity. Where it’s necessary, evaluation certificates need to be kept up to date.

“Lastly, SMEs should ensure that the sum insured does not exceed the replacement value, which would lead to over insurance. Should a business submit a claim following a loss, the insurer would only pay out the replacement value, regardless of the higher sum insured,” concludes Maupa.

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