This year’s Budget for 2013/14 highlights overall that there are no real changes to get us really excited and the Treasury seems to be buttoning down on the pertinent and outstanding issues. Below are this year’s income tax changes in a nutshell.
In terms of the tax tables, the minister has increased the tax brackets to allow for inflation. One of the possible expectations was an increase of the marginal tax rate to above 40 percent, and this has not materialised. However, if one uses a consumer price index rate of 6 percent, even after the “inflationary” adjustment to the tax tables, unfortunately year on year, taxpayers will be worse off, if you earn R120 000 or more annually.
Just as the sun rises in the morning, people will need to pay more for sins – the rates have gone up yet again.
The minister announced a proposal for contributions to tax preferred savings accounts with an annual contribution limit of R30 000 and a lifetime limit of R500 000: such investment payouts will be tax-free, but this is only from April 2015.
This should provide an incentive to invest, but the interest-free exemptions will be raised from Friday and no further. Initially this seems beneficial, but further details are required to ascertain long-term benefits.
Increased contributions to provident funds will be allowed from the current 20 percent (Sars practice) up to 27.5 percent of taxable income.
However, this will be capped at R350 000 for equity reasons. When promoting retirement savings, it seems more appropriate for the government to incentivise this with no cap but it is understandable to see where the Treasury is coming from.
Employment tax incentives
To help the youth enter the workforce, an incentive will be provided, but this benefit will fall away when the person reaches the personal income tax threshold level. It will be interesting to see whether this will have any benefit in terms of “big picture” tax income and employment in general.
Assistance announced by the minister to low-income earners with regard to acquiring houses from employers is welcomed.
Exempt offshore income
Currently employees working overseas are not taxed if they are offshore for more than 183 days and 60 continuous days. It would seem that this will be looked at again, especially if there is a South African employer involved. In view of numerous Double Tax Agreements, such changes may create more complexities rather than achieving any real revenue for government.
Special economic zones
Similar to other foreign jurisdictions, the minister is proposing incentives for investment in certain special economic zones. The corporate tax rate will be 15 percent, an employment incentive for workers earning less than R60 000, plus an accelerated depreciation allowance for buildings. This is pleasing – at least in theory.
Those in excess of 10 percent of taxable income to certain Public Benefit Organisations (PBO’s) will be allowed as a deduction in a subsequent year (currently the deduction is limited to 10 percent of taxable income, and the excess is lost). For the few providing such donations, this would only really assist if the donations are less than 10 percent in the following year.
This is based on a complex “means test”, but by 2016 this is proposed to be phased out, and all citizens will be eligible, although there will be other off-sets for the wealthy. This may then shift the tax complexity to the old-age taxpayer, which would be unfortunate.
These have been a long-time concern for Sars. Effectively discretionary trusts are being killed as they will be taxed at 40 percent, although they have allowed distributions as tax deductible expenses to the extent that the trust has taxable income. The beneficiary will then receive income if there is a deduction; alternatively if there is no deduction for the trust, the amount will be received tax free.
Distributions from offshore foundations will be treated as ordinary revenue – ouch!
Last year we were promised reform, but no changes have been made.
Various deals over the years have caused this to be a large concern for Sars. The current rules should adequately deal with this. However, the proposal is to take this one step further and only allow the deduction for up to five years. This may kill numerous acquisitions.
Withholding interest and royalties tax
Last year’s Budget saw the announcement that this would come into effect on January 1 and then this was moved to July 1. Now in terms of the Budget 2013/14, the effective date has been pushed out again to March 1, 2014.
In addition, this will also apply to cross border service fees – strictly speaking this is probably already covered by current law, nevertheless people should be looking at the Double Taxation Agreement more closely to ensure relief.
Once again we await the relevant funding proposal.
No submission of tax returns
Currently if you earn employment taxable income of less than R120 000, you do not have to submit a tax return – this is to take a large leap forward to a taxable income of R250 000.
Review of various innovative financial instruments
This area will be researched in more detail by Sars. It is the planner versus the taxman – and the taxpayer, whenever looking at such instruments, should be aware that this is on Sars’ radar screen.
Problems exist with tenants improving leasehold property. It’s proposed that the person using the asset, as opposed to the person owning the asset, be entitled to a tax deduction. But the main issue here is that someone should get the allowance.
Sars as an international policeman
Currently the taxpayer is entitled to a deduction when an expense has been incurred. This can create uneven tax treatment when one is dealing with foreign parties. It is proposed that the deduction will only be allowed when the expense has been paid. This type of amendment is welcomed from a tax consulting perspective as the law is simply being made more complex, which means help is needed to understand difficult legislation and this inadvertently helps with advisory fees.
Large groups usually have a company that acts as a treasury. It is proposed that listed companies can elect one such company to act as such and it will be treated as a non-resident company for Reserve Bank purposes. They can then use their foreign currency as a starting point for tax calculations.
This is most welcome as an incentive to keep such operations within the country. Unfortunately the impact of this proposal will be somewhat diluted as such operations are often physically conducted from more tax-friendly jurisdictions.
Controlled foreign firms
Certain anomalies have crept into controlled foreign company legislation over the years, and these will require clarification. Certain legislation in this regard does indeed provide what one can only assume are unintended consequences and we certainly hope that these will be rectified.
To close, a gambling tax was proposed in 2011 and we are told this will be implemented this year. With any luck we can only hope this “lotto winning number” will be missed again.
Hylton Cameron, associate director: tax, Grant Thornton Johannesburg.