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).
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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
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 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.
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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
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 purposes – The 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 expenses – To 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 bursaries – Currently, 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.
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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.
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%.
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- 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
What Franchises Need To Lookout For From Budget Speech
Franchise business owners are waiting with bated breath for the outcome of the 2019 National Budget Speech to be delivered by Minister of Finance, Tito Mboweni, as they seek more opportunities to increase their contribution to GDP.
Morne Cronje, FNB Head of Franchising, says the Budget Speech is an important economic indicator that franchises can use to gain insight on the government’s plans on spending and economic growth for the year ahead.
He highlights potential National Budget Speech outcomes that could boost confidence of franchises:
Any form of relief that is likely to bring positive change, rebuild confidence and address some of the key challenges impacting consumers will be welcome by franchises.
Cronje says consumer spending contributes a significant portion to the profit margins of franchises especially in the food sector.
Rating agencies are keeping a close watch on South Africa’s performance and prospects for growth, which will impact our Sovereign ratings for the rest of the year.
Measures that the government puts in place to promote economic growth this year will be of interest to franchises.
Franchise owners will be looking to benefit from regulatory changes that aim to improve growth, operating environment and enhance participation in all facets of the formal economy.
Based on the Mid-Term Budget Review in October 2018, there’s likely to be no major shake up from a business tax perspective. The anticipated relief in tax will go a long way to boost the profit margins of franchisees.
Spending on infrastructure creates vast opportunities for franchise business owners, as well as job creation in the country. The government has signalled an intention to partner with the private sector to develop an infrastructure fund to increase investment in public infrastructure.
“Franchises that operate in South Africa should prioritise the National Budget Speech as key decisions announced by the minister have a direct impact on their growth,” concludes Cronje.
5 Businesses You Should Start in 2019
Here’s the lowdown on consumer and technology opportunities in 2019 and beyond.
Savvy entrepreneurs should keep a close watch on consumer and technology trends in 2019. This, according to Silvertree Internet Holdings Co-founder and MD, Manuel Koser. Having invested in and grown a number of highly successful South African brands (among them Faithful-to-Nature.co.za, UCOOK.co.za, Pricecheck.co.za, CompareGuru.co.za, Petheaven.co.za, Cybercellar.com, and CarZar.co.za). Silvertree’s management team sees several business opportunities set to grow exponentially over the coming decade.
Here’s the lowdown on consumer and technology opportunities in 2019 and beyond.
1. Indigenous and ethical: Personal and home care products
2019 Sees growing potential for personal care products – ‘Those with local and indigenous ingredients, ethical sourcing which is kind to nature and the body,’ Koser explains. ‘There is a lot of room to play in the African haircare market particularly, as it’s often overlooked by the major FMCG companies.’
The Silvertree MD also sees increasing room for innovative natural home cleaners as consumers become increasingly environmentally conscious. ‘Until now, it was all about the well-known cleaning products the major chemical manufacturers put on the shelves. Now, there’s increasing space for new, exciting entrants.’
2. New beverages
‘Locally-sourced ingredients and an earth-first mindset will also play an increasing role in the consumer beverage market. Add to this the fact that major soft drink manufacturers will struggle to produce drinks for increasingly health-conscious consumers. They’re often just not quick enough to adjust to changing consumer tastes – particularly the tastes of millennials. Think less about a standard fizzy drink, but rather one that’s kind to the body, with natural ingredients. Non-alcoholic: water plus, say, cucumber, or another indigenous ingredient. The market for this will grow.’
3. Ethical snacking
Plant-based, vegan, ancient grains, ethical, protein-rich snacks – these are just some of the trends Koser sees dominating in the snack segment in 2019 and beyond. It’s about unique, tasty, functional foods that cater to the modern, time-starved consumer, Koser explains.
4. Buy, sell and compare online
In the technology space, marketplaces, e-commerce sites and classifieds will all gain momentum in 2019 and beyond. This encompasses aggregators as well as more unusual online businesses, which are increasingly able to find and reach consumers interested in niche products and services.
‘Consider an online ice-cream business. Once, something like that would have been unthinkable,’ Koser explains. ‘But as consumers demand greater choice, room for niche products like this grows.’
Yet, dabble online and seamless execution and delivery become make-or-break factors. ‘Many South African consumers use services such as Google, Amazon, Uber and Spotify daily – world-class products that function on a global scale. You can call an Uber and wait for just two minutes before getting a ride,’ Koser explains. ‘It’s quick and totally seamless. Consumers have come to expect that level of service across the board. Aligned to this is the fact that the millennial wave is currently hitting Cape Town right now, and Joburg secondarily, meaning a number of opportunities are opening up. Go after products and services in the right space and consumers will follow.’
5. Reinvent the wheel – and make it better
The final type of business entrepreneurs should keep an eye on is those that currently have low Net Promoter Scores. ‘This means that very few people like them, or the services they provide are of very poor quality,’ Koser explains. ‘Think of postal service providers or telecoms companies. With any monopolistic or oligopolistic structures, the service is often terrible because the heavyweights hold so much power. There’s a huge gap here.’
An allied approach for entrepreneurs is to assess opportunities for automation, or cutting out the middleman with technology. ‘Once, many markets – such as real estate were opaque, meaning you needed a middleman to help you transact. However, as the capabilities of technology have grown, markets have become far more transparent – making it easier for buyers to match with sellers safely. Today, a lot of this is easy to automate services – think about connecting a homeowner to a prospective renter through a digital solution where renters can be qualified, for example, in terms of their finances, personal information and criminal records. Quick and simple. And no middleman.’
The biggest opportunities here centre around where consumers spend the greatest amounts of time and money, Koser notes. ‘Housing and rent are always major costs. In terms of where consumers spend their time, on the other hand, much of it is, on a mobile phone, or PC.’
However, entrepreneurial success is never down to any one magic formula, Koser emphasises. Nor does Silvertree invest in prospective entrepreneurs solely on the basis of the product or service they offer. ‘It’s about passion, perseverance and tenacity as much as it is about the quality of the product.’
Silvertree Internet Holdings is an investment growth partner who aims to understand, grow and scale business, consumer and digital brands to unlock the brands’ exponential growth.
What To Watch For In Tito Mboweni’s First Budget Speech
By Rob Cooper, tax expert at Sage, and chairman of the Payroll Authors Group of South Africa.
Finance Minister, Tito Mboweni, delivers his first Budget Speech on 20 February at a difficult time for the South African economy. Even though President Cyril Ramaphosa has done much to restore business confidence in his first year in office, GDP growth remains weak, government finances are in relatively poor shape, and renewed load shedding is hurting business confidence.
Judging from his Medium-Term Budget Policy Statement in October last year, I expect Minister Mboweni — backed by the team in the National Treasury—to deliver a relatively cautious budget. Much of the focus will be on refinancing the state-owned enterprises and putting them back on to a sustainable footing.
We probably won’t see much in the way of radical thinking since the room for manoeuvre is so limited. Click each header below for an indepth video on the upcoming topics.
Renewal of the country’s public healthcare system with a mandatory health insurance fund and free healthcare at the point of need has been the ANC government’s policy for years, but progress has been slow to date. There isn’t much money in the country’s coffers to fund something as ambitious as NHI, yet the government will want to show that it is advancing the concept ahead of the elections.
With an NHI bill to be tabled in Parliament soon, we could learn more about how NHI will be funded in this year’s Budget Speech — it’s still not clear whether we will pay for it through payroll taxes, VAT increases or other fundraising measures. As an initial step, we could see medical aid tax credits reduced (or at least not adjusted for inflation) to free up some funding for the NHI.
The ETI Act came into effect on 1 January 2014; as a fan of this incentive, I was delighted that President Ramaphosa announced that it will be extended for 10 years another decade in his state of the nation address. However, I have also long argued that the scheme is not performing to its true potential because it is so complex for payroll managers to administer.
The introduction of the national minimum wage adds even more complexity— until and unless the ETI Act is amended, SARS is of the opinion that the National Minimum Wage will not qualify as a “wage regulating measure”. I hope the Budget Speech will announce steps to align the ETI with the national minimum wage and take other measures to simplify administration.
I don’t expect any major increases to corporate or personal income tax this year since the taxpayer doesn’t have much more to give. I think the top 45% rate will remain unchanged, while tax bracket creep relief (to compensate for inflation) will be limited to lower income earners. It seems unlikely that the Minister will increase VAT again this year, given last year’s increase.
That means the Minister is likely to look at ‘moral’ taxes (sin and sugar taxes) to raise more money; we can expect another steep increase in the fuel levy. Perhaps we’ll also hear about efforts to improve SARS’ revenue collection after several years of under-performance. The agency seems ripe for a turnaround strategy, with high-powered team looking for a permanent chief to take the reins at SARS.
Follow us on @SageGroupZA on 20 February 2019 for LIVE expert insights from the annual Budget Speech.
For more information about Sage’s annual tax seminars, please visit: https://get.sage.com/PRL_19Q1_C4L_ZA_EVCU_NPS_AnnualPayrollTaxSeminar2019
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