Budget 2017: Tax Changes

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-EXECS, PAYE AND VAT: SARS PROVIDES CLARITY

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.

RELOCATION ALLOWANCE – COMPLEX TAX LAW CHANGE

Relocation Allowance – Complex Tax Law Change

The very old and tested dispensation of paying an employee 1 month tax free relocation allowance on moving residency for employment, has been repealed by SARS. The new rule applies effective 01 March 2016 onwards and unfortunately the new rule comes with significant uncertainty in application.

Where an employer bears expenses associated with relocating an employee, the employer is providing the employee with a taxable benefit that is subject to tax. That is, unless reliance is placed on the exemption in section 10(1)(nB) of the Income Tax Act, No.58 of 1962 for qualifying expenditure.

The qualifying expenditure may broadly be broken down into three categories:

  • Travel expenses;
  • Cost of selling an employee’s previous home and cost of settling into the employee’s new home (“settling in costs”); and
  • Costs associated with certain temporary accommodation (“temporary accommodation cost”).

Travel expenses:

The travel expenditure that qualify for the exemption are those expenses incurred by the employer in transporting the employee, the members of his household and his or her household goods from his or her previous place of residence to the new place of residence. According to SARS’ guide for employer’s Typical examples of qualifying expenditure include:

Settling in cost:

Prior to 1 March 2016, SARS’ practice was to allow employers to pay an employee the equivalent of 1 month’s basic salary tax free to cover settling in costs. From 1 March 2016, this is no longer the case. Employees will now have to proof that the expenses were incurred to cover qualifying settling costs before reliance may be placed on the exemption. That begs the question – which costs qualify:

Expenses that qualify are those expenses directly related to the sale by the employee of is previous home and settling into new accommodation. There is no bright line test that may be applied to determine whether an expense qualifies or not. Each expense will have to be considered on its own facts. SARS, however, in their Guide for Employers in Respect of Employees Tax (2017), (“the SARS guide”), lists the following expenses as qualifying expenses:

  • Bond registration and legal fees;
  • Transfer duty;
  • Bond cancellation fees;
  • Agents commission;
  • Settling in fees;
  • replacement of curtains;
  • Vehicle registration fees;
  • School uniforms;
  • Water, electricity and telephone connections;
  • Internet connections;
  • Necessary housing refurbishments;
  • Affiliation registration costs; and/or
  • Levies.

In our view, the list of expenses above are not exhaustive.

Temporary accommodation cost:

These are costs incurred of hiring residential accommodation in an hotel or elsewhere for the employee or members of his household during the period ending 183 days after the employee’s transfer took effect or after he took up his appointment, as the case may be, if such residential accommodation was occupied temporarily pending the obtaining of permanent residential accommodation.