The 2013 budget read by the Minister of Finance on 27th February 2013 contains relatively fewer tax proposals than prior years. However, some of the proposals are quite far reaching particularly relating to Trusts and Corporate gearing. In this brief analysis we highlight some of the key proposals for tax law changes.
There is no change proposed to the current rates of corporate tax or dividend tax.
Gearing continues to receive detailed attention and three measures are proposed to preclude debt eroding the tax base in certain circumstances namely:
re-characterisation of debt instruments as shares in certain circumstances, particularly where they do not have a realistic possibility of being repaid in 30 years, or if convertible into shares at the request of the issuer; excessive debt issued to connected persons if the creditor is exempt from tax on the interest; and acquisition debt used in corporate restructuring (currently regulated by a discretionary regime (section 23K)) it is proposed to replace this with a new regime where interest on “excessive debt” will be allowed to roll over for up to 5 years.
Certain tax incentives are proposed to be established in certain special economic zones including:
a 15% corporate tax rate; an employment incentive for workers earning less than R60,000 per annum; an accelerated depreciation allowance for buildings similar to the UDZ program.
Donations in excess of 10% of taxable income given to PBO’s in certain areas are to be allowed to be rolled over as allowable deductions in subsequent years. Attention will be given to the rules dealing with share cross issues. Recognition has been given to the fact that there are difficulties with the current anti-avoidance legislation.
Further attention will be given to the mark to market taxation regime which was introduced in 2012, but the implementation of which was deferred. Further refinements will include extending the covered persons and rules to prevent artificial losses from dividend transactions, amongst others.
The securities tax exemption for certain financial intermediaries is to be extended to maintain a level playing field.
The cost price of trading stock will in future automatically conform to the IFRS valuation without the need for SARS approval.
The criteria for eligibility for the research and development incentive are to be adjusted to eliminate alleged misuse.
Dividend cessions and manufactured dividends continue to receive attention. Under consideration is a single unified treatment both for dividend cessions and manufactured dividends and anti-avoidance rules to eliminate shifting of income from taxable to exempt parties.
Corporate restructuring will continue to receive attention both in relation to on-shore and off-shore reorganisations.
Individuals and employment
The following individual and employees’ tax points are of interest:
The top marginal rate for individual taxpayers has remained at 40%.
Fringe benefits tax relief is to be provided where low-cost employer provided housing is transferred to employees at below market value.
Medical tax credits will increase marginally and in line with annual adjustments.
Monetary thresholds for exempt bursaries given to employees’ relatives will be increased.
Individuals whose taxable income is from one employer and is below R250 000 a year are not required to submit income tax returns.
Tax-preferred savings and investment accounts will be implemented by April 2015. Returns and withdrawals from these accounts will be exempt from tax. The account will have an initial contribution limit of R30 000 and a lifetime limit of 500 000. These limits will allow for inflationary adjustments.
The deductibility of contributions to pension, retirement annuity and provident funds and employer contributions that constitute fringe benefits is set at 27.5% of the greater of remuneration or taxable income, subject to an annual cap of R350 000.
Contributions to provident funds will be tax deductible, with a view to harmonise the tax treatment of contributions to pension, retirement annuity and provident funds. Future contributions to provident funds will also be subject to the same annuitisation requirements as are applicable to pension and provident funds.
A youth employment tax inventive as well as a tax incentive for employees in special economic zones will be introduced.
Some further relief on donations to Public Benefit Organisations is proposed.
A special dispensation is proposed to address possible instances of double taxation in share schemes and the deductibility of employer contributions to fund these schemes will be examined.
All non-retirement fund disability and income protection policies – regardless of whether they compensate employees for the loss of future income or the loss of personal capital will be uniformly treated for tax purposes, i.e. contributions will not be deductible for tax purposes, but payouts will be exempt from tax.
Taxation of Trusts
Important measures are proposed dealing with the income tax and (in due course) estate duty treatment of trusts. These include the following:
Discretionary trusts will no longer act as flow through vehicles and instead will be taxed at a trust level (ie as an entity) with distributions acting as deductible payments to the extent of current taxable income. Tax free distributions to beneficiaries will be allowed except where they give rise to deductible payments (i.e. there appears to be a symmetry principle).
Trading trusts will also be taxable at the entity level with distributions being deductible to the extent of current taxable income. A trading trust according to the proposal will be one which either conducts a trade or one in which beneficial ownership is freely transferable by beneficiaries.
Distributions from “offshore foundations” will be treated as ordinary revenue.
Concern was expressed regarding the use of trusts to avoid estate duty (which is a long standing issue), but no further details were provided. The concern is surprising given indicators in previous years that estate duty was on the way out.
The real estate investment trust (REIT) tax regime is to be extended.
Currently a REIT is a listed company or trust that invests in immovable property, receives income from rental and distributes it to investors. A REIT may deduct such distributions if it resides in South Africa and if at least 75% of its gross income is rental income.
It is proposed to extend this regime to unlisted REITs once they are subject to similar regulation to listed REITs. This will be phased in initially to wholly owned entities of private and government pension funds and of long term insurers.
REIT tax relief will also be extended to other real estate entities if they become subject to property syndication regulation.
The current regime for tax depreciation of immovable property is to be extended to include property which is within the “possession and use” of the taxpayer (eg leasehold improvement) so that the ownership requirement will be eliminated.
A tax incentive is under consideration for construction of new housing stock for sale below R300,000.00 per dwelling.
These will fall under collective investment scheme legislation and be regulated accordingly. They will be taxed similarly to other collective investments schemes and unit holders will be required to treat their earnings as ordinary revenue when realised. A similar regime is being considered for interest income funds.
International/cross border tax and Excon
It is proposed that the cross border withholding regime on interest and royalties be extended to cross border service fees (subject to treaty relief). All three sets of withholding regimes namely interest, royalties (which are currently subject to withholding) and service fees will become effective from 1 March 2014.
The deduction of expenditure based on an accrual will be deferred until actual payment, in the case of a cross border payment between connected persons.
Anomalies continue to receive consideration including:
Complexities associated with the calculation of the acceptably taxed exemption.
The threshold for the participation exemption.
Transfer pricing requirements in management activities for the benefit of foreign branches.
Headquarter company relief to be refined to make it more effective and easier to understand.
Listed South African multi-nationals will be allowed to treat a single local subsidiary as a non-resident company for exchange control purposes so that treasury operations can remain within South Africa rather than offshore. In addition these entities may use their foreign functional currency rather than rand as the starting point for tax calculation.
In relation to controlled foreign company activities the imputation system will be clarified further. Issues mentioned include:
Active offshore research and development activities.
International shipping activities.
Commodity hedges associated with active operations.
Intra-controlled foreign company insurance premiums.
The exemption from tax on a foreign source of income if subject to foreign tax will be removed in relation to initial copyright authors.
Currency taxation rules are to be simplified in favour of a “more practical approach”. A longer term shift is being considered towards an IFRS based approach.
A carbon tax of R120 per ton of CO2 will be imposed from 1 January 2015 increasing by 10% per annum.
The tax for passenger vehicles will increase to R90 for every gram/km emissions in excess of 120 gCO2/km and for double cab vehicles to R125 for every gram/km in excess of 175 gCO2/km, effective from 1 April 2013.
The certified emission reductions tax incentive is extend to 31 December 2020.
No changes are proposed to transfer duty.
The general fuel levy on petrol & diesel will increase by 22.5c/l from 3 April 2012 and the Road Accident Fund levy will increase by 8c/l.
The general fuel levy already includes a new multiproduct pipeline levy (7.5c/l) that will be phased out on 2 April 2013. The net increase in the general fuel levy on 3 April 2013 will therefore be only 15c/l and not the full 22.5c/l. The demandside levy on 95 octane petrol sold inland will be increased later this year.
Biofuels production incentive
The cost of the incentive will be 3.5c/l to 4c/l of petrol or diesel, recovered through a levy included in the monthly price determination.
Plastic bag and incandescent light bulb levies
The plastic bag levy increases from 4c to 6c per bag from 1 April 2013 and the levy on incandescent light bulbs from R3 to R4 from 1 April 2013.
The VAT rate remains unchanged at 14%.
The following VAT legislation amendments are proposed:
All foreign businesses supplying e-books, music and other digital goods or services in South Africa will be required to register for VAT in South Africa.
Other proposed VAT amendments that are under consideration include:
The VAT treatment of the surrender of goods under the National Credit Act will be brought in line with that of the repossession of goods under an instalment credit agreement.
The special time of supply rules between connected persons where the input and output tax is accounted for in the same tax period will be reviewed.
Where tax invoices are issued in foreign currency, it is proposed that the supplier uses the rate of conversion agreed between the parties, or if no rate was agreed, the spot rate on the date of the supply.
A potential mismatch between the output tax and input tax treatment on conversion of a share block scheme to sectional title will be removed.
A home owners association will be treated the same for VAT as a sectional title body corporate.
VAT relief will be provided for goods destroyed, damaged or abandoned on the same basis as that provided under the Customs Act for these goods when they are entered for home consumption; and The VAT treatment of all pooling arrangements will be reviewed. A national gambling tax at the rate of 1% of gross gambling revenue will be implemented by the close of 2013 (in addition to provincial rates). The following research projects will also be undertaken:
a review of the VAT treatment of financial services and VAT apportionment within the financial sector; and a re-evaluation of the application of the default turnover based method of apportionment for the non-financial sector.
An exemption will be introduced for mining de-watering associations which restore water levels adversely impacted by mining in a manner similar to a mining rehabilitation fund. This is under consideration.
Excise duties on tobacco and alcohol
The excise duties on tobacco products, wine, clear beer and spirits are determined in accordance with a targeted total tax burden (excise duties plus VAT) of 52, 23, 35, and 48 per cent respectively. The excise duties on tobacco products will increase by between 5.8 and 10 per cent, and on alcoholic beverages by between 5.7 and 10 per cent.
Excise duties of fruit fermented beverages
The structure of tariff heading 22.06 has been amended to align the excise duty provisions for fruit fermented beverages with the requirements of the Liquor Products Act (1989). As a result, only products that are predominantly fruit fermented will be distinctly classified in this beverage category.
Fermented products that are not mainly derived from fruit will be included in the band for beverages that uses the highest excise rate that will be increased to the highest spirits rate in Budget 2014 to allow manufacturers time to comply.
Ad valorem excise duties
Video recorders with eight or more input channels and a value for duty purposes exceeding R13 000, will be exempted from ad valorem excise duties with effect from 1 April 2013.