Johannesburg - Finance Minister Pravin Gordhan said in his Budget speech on Wednesday that tax
revenue growth was likely to lag the recovery and that the government's preferred method of achieving higher revenues was through "base broadening,
closing loopholes and improving tax compliance".
However, because of the state of the economy and the financial stress
of households, Gordhan did not increase tax rates this year, instead he
focused on closing existing loopholes.
"Apart from introducing a new carbon emissions tax, no new taxes were
introduced," says Absa Group Head of Tax, Etienne Louw.
Louw.
Moderate tax relief for households, in total R6.5bn, has been provided to cater for the effect of inflation, mainly for
taxpayers in lower-income brackets.
For example, an individual under the age
of 65 earning R65 000 of taxable income will pay 25.9% less tax in the new
fiscal year, compared to the February 2009 year; while an individual under
the age of 65 earning R300 000 of taxable income, will pay only 3.5% less
tax in the new fiscal year.
The bracket relief to cater for inflation in
respect of individuals earning more than approximately R100 000 a year, will
be less than the inflation rate.
"Such taxpayers would accordingly be worst
off in the new fiscal year," says Louw.
Taxpayers receiving travelling allowances are however likely to pay more
tax in the new fiscal year, as the log book requirement becomes effective in
March 2010.
This, together with the implementation of a flat rate emissions
tax on 1 September 2010, a 10 cent per litre tax increase on fuel, a 7.5
cent per litre contribution towards a pipeline, and an 8 cents a litre
increase in the road accident fund levy, will result in a rather significant
increase in the effective tax cost attributable to travelling and passenger
cars.
More fuel efficient cars will however be subject to a lower effective
tax charge. Louw said there would need to be further research done into how
the new carbon emissions tax will impact on the price of new cars.
One of the most significant proposed loophole changes, was to the
taxation of certain preference share investment structures.
This is, for
example, where interest is paid to investors offshore, with a corresponding
tax deduction. This amount is then brought back into the country in the form
of a dividend, which is then exempt from tax. Louw says National Treasury
has been investigating these structures for some time.
"Once the new legislation is implemented, the affected preference share
investments would be redeemed and investors will have to invest elsewhere,
possibly in interest-bearing investments," he says.
It is considered that billions of rand may currently be invested in
such investments.
Other loopholes
Another change will be to the way "protected cell " companies are
taxed. Some taxpayers make use of offshore "protected cell" companies on the
basis that the controlled foreign company ("CFC") legislation, in terms of
which the South African shareholder of an offshore company can be taxed on
the profits of the offshore company, is considered not to apply
to "protected cells".
It is proposed to treat each cell as a deemed separate
company with the ownership requirements measured separately.
"Going
forward, the profits of these protected cell companies could become taxable
in the Republic," says Louw.
Cross border insurance payments will also be affected by the loophole
changes. National Treasury considers many cross-border insurance payments as
capital investments as opposed to risk-related insurance. While the
Controlled Foreign Company ("CFC") rules already target captive insurers,
schemes involving controlled companies of a larger foreign-owned group in
which South African operations are a mere subcomponent, would be affected by
the proposed changes.
The Income Tax Act will further be amended to clarify the tax treatment
of unacceptable schemes associated with tax treaties and foreign tax
credits.
The current exemption in respect of local interest payments to foreign
legal persons will be restricted to contain leakage. None of the changes
anticipated should affect foreign investment in South African bonds, unit
trusts, bank deposits or the like.
The Minister also proposed to provide a uniform set of transfer pricing
rules to deal with artificial pricing or the misallocation of prices within
the various components of a single transaction.
Islamic 'leakage'
Louw said it was positive that Gordhan had announced that Islamic-compliant funding would be accommodated from a tax perspective.
"Because investors in Shariah-complaint funding cannot receive interest,
these products are structured in a way that may cause tax leakage. For
instance, investors can't utilise the exemption on interest earned and may
be liable for VAT in some cases.
"The changes should remove some current tax
leakages attributable to Islamic-compliant finance," says Louw. "It's
encouraging that government sees Islamic banking as a positive growth
opportunity for South Africa and intends to change the taxation of these
products to make them more attractive," says Louw.
Gordhan also said government would continue to simplify the tax system
and reduce red tape as well as enhance the country's attractiveness as a
viable and effective location from which businesses could extend their
African and other worldwide operations.
"There is no detail as yet on how this will be achieved, but the
announcement is another positive move," says Louw.
Other welcome announcements by the Minister included the increase in
monthly monetary caps for deductible medical scheme contributions, and an
increase in the annual tax-free interest income from R21 000 to R22 300 for
individuals below 65 years, and from R30 000 to R32 000 for individuals 65
years and over, said Louw.
No date for new legislation on the withholding tax on dividends was
announced and it's likely that this will only be introduced next year or in
2012.
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I-Net Bridge