Insights
The South African Budget Speech 2019
As expected, Finance Minister Tito Mboweni’s maiden Budget Speech focused on stimulating economic growth and did not introduce significant tax changes.
In the context of economic weakness, the suggested Budget tax proposals are designed to minimise the negative impact on growth and over the medium term, tax policy adjustments will be made as needed to strengthen fiscal consolidation. No increases in tax rates for any category were announced for the current South African Budget and instead, collections will increase by not adjusting for inflation.
Below is a summary of the tax proposals and other comments that will typically affect high net worth individuals and their structures, as well as limited commentary on the important tax rates that have not been changed.
Personal income tax and capital gains tax
The personal income tax rates have not changed and the personal income tax brackets have also remained unchanged. The primary, secondary and tertiary rebates will increase slightly. The medical tax credits have not been adjusted and taxpayers will face a real increase in the effective personal income tax as very limited relief has been provided for bracket creep in the form of the increased rebates. It was expected that the inclusion rate for capital gains may increase. No changes were however announced.
Unchanged tax rates
No changes were made to the corporate income tax rate of 28%, the dividends withholding tax rate of 20% and the VAT rate of 15%. No changes were also made to the estate duty and donations tax rates.
Tax administration
Focus is being placed on improving tax administration and consequently, tax collection. Among various actions being taken is the appointment of a new SARS Commissioner and the re-establishment of the Large Business Unit. The process is expected to be completed by April 2019. Judge Dennis Davis will assess the tax gap, which is the difference between revenue collected and what ought to be collected.
Refining the foreign employment income tax exemption for South African residents
From 1 March 2020, South African tax residents employed outside of South Africa will be subject to taxation in South Africa on any foreign employment income that exceeds R1 million. To prevent the monthly withholding of income tax both in South Africa and abroad, it is proposed that South African employers may reduce the PAYE they are obligated to deduct by the amount of foreign taxes withheld.
Combatting base erosion and profit shifting
Steps have been taken to close loopholes exploited by multinationals to artificially shift profits and avoid paying taxes. Government is reviewing its measures to curb excessive debt financing taking into account the important balance between attracting investment and protecting the corporate tax base.
Addressing abusive arrangements aimed at avoiding the anti-dividend stripping provisions
In 2017 the rules governing share buy-backs and dividend stripping were changed to prevent taxpayers avoiding tax payable on share disposals by companies. These rules (which were adjusted in 2018) are still undermined by the target company distributing a substantial dividend to its current company shareholders and subsequently issuing shares to a third party. As a result, the value of the current shareholder’s shareholding in the target company is diluted and the shares are not immediately disposed. It is proposed that the rules be amended with effect from 20 February 2019 to curtail any abuse.
Retirement reforms
Once a member of a retirement fund retires and receives an annuity, any contributions to the retirement fund that did not qualify for an income tax deduction are tax exempt. This exemption does not currently apply to provident or provident preservation funds, but it is proposed to extend the exemption to provident and provident preservation funds. The exemption would apply for any contributions made after 1 March 2016.
Study on the tax treatment of amounts received by portfolios of collective investment schemes
In 2018, amendments were proposed to tax the profits of some collective investment schemes as revenue instead of capital. After review of the public comments, it was decided that more time is needed to work with industry and it is now proposed that this study will be done in the 2019 legislative cycle.
Reviewing Controlled Foreign Company (CFC) rules
The rules for CFCs aim to prevent South African taxpayers from shifting income that should be taxed in South Africa to an offshore jurisdiction with a favourable taxation regime. Government argues that these rules are inadequate for multi-layered transactions and has identified schemes where CFCs (which are part of a group) are interposed in the supply chain between South African connected parties and independent non-resident customers or suppliers. It is proposed that additional measures be introduced to prevent this circumvention.
Refining the VAT corporate reorganisation rules
The VAT Act provides relief for companies in the same group by treating the supplier and the recipient of goods or services as the same person during corporate reorganisation transactions. If these transactions take place in terms of sections 42 or 45 of the Income Tax Act, VAT relief is only permitted if the transfer relates to a going concern. However, transfers of fixed property may not always involve a going concern and it is proposed that the VAT Act be amended to clarify treatment in these instances.
Model mandatory disclosure rules and non-compliance penalties
It has emerged that offshore structures/arrangements are designed in an attempt to circumvent reporting under the OECD’s Common Reporting Standard (CRS). It is proposed that the OECD’s model mandatory disclosure rules be implemented in South Africa to identify and counter such structures/ arrangements, and that penalties (similar to those for non-compliance with the reportable arrangement legislation) be imposed.
Venture Capital Companies
In addition to changes made in 2018, the regime will be reviewed further to prevent abuse by taxpayers.
Gambling tax
The 2012 Budget proposed a gambling tax in the form of a 1% levy to fund rehabilitation and awareness-raising programmes to mitigate the negative effects of excessive gambling. Government intends to publish draft legislation for public comment during 2019.
Fuel levy and carbon tax
The general fuel levy (by 15c per litre) and the RAF levy (by 5c per litre) will increase from 3 April 2019 and from 5 June 2019 a carbon tax of 9c per litre for petrol and 10c per litre for diesel will become effective.
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Whilst every effort is made to ensure that the information provided is accurate and up to date, some of the information may be rendered inaccurate in the future due to any changes.
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