Insights
The South African Budget Speech 2020
As expected, Finance Minister Tito Mboweni’s 2020 Budget Speech dealt with a wide range of economic issues well-known to South Africans including low economic growth, tax revenue shortfall and electricity supply amongst many others. Positive announcements include a proposed R 261 billion reduction in Government spending.
To support growth, no major tax changes are proposed. Tax revenue is projected to grow by 4.9 percent in 2020/21.
Below is a summary of the tax proposals that will typically affect high net worth individuals, their structures and that of their businesses.
Personal tax (and donations tax)
- Personal tax brackets and tax rebates will be adjusted in favour of the taxpayer, slightly above inflation, by 5.2 percent. Medical tax credits only increase by 2.8 percent to help fund the rollout of the National Health Insurance.
- The inclusion rates of 40 percent for individuals and 80 percent for companies and trusts for capital gains tax (CGT) purposes remain unchanged and therefore also the effective CGT rates.
- The cap on the exemption of foreign remuneration income will increase to R1.25 million per year from 1 March 2020 (the first year in which a cap is applicable). This change is in consideration of the changes to exchange control as summarized below.
- Although CGT is payable when a company ceases to be a tax resident (due to deemed disposal of assets), tax residents that hold shares in the company could subsequently dispose of the shares and qualify for a participation exemption. A proposal is made for amendments to prevent this exemption.
- Section 7C of the Income Tax Act addresses the transfer of wealth by no or low interest loans to trusts or companies owned by trusts. These rules are circumvented by taxpayers subscribing for preference shares in companies owned by the trust connected to the individual. It is proposed that the rules preventing tax avoidance through the use of trusts be amended to address this practice.
Business tax
Even though there has been no increase in tax rates, Government may well raise more tax revenue through the reduction of tax deductions and incentives.
Curtailing corporate interest deductions
It is proposed that net interest expense deductions be restricted to 30 percent of earnings.
Limiting the use of assessed losses to reduce taxable income
The proposal is to restrict the offset of assessed losses carried forward to 80 percent of taxable income.
Other
The budget documentation deals with a myriad of other specific proposals or matters that will be investigated with a view of reforming. These include reviewing the sunset dates for various corporate tax incentives, the special economic zone tax incentive and the venture capital incentive. As is the case almost every year, refinements of the corporate reorganization rules and transfer pricing are proposed. In addition, the tax treatment of REITS and Collective Investment Schemes will also be reconsidered.
Exchange Control
The following have been highlighted in the Budget Review. However, the full effect will only be evident from the Regulations that will be issued by the Reserve Bank in the next few days.
Simplifying cross-border trade and financial flows
Over the next twelve months a new Capital Management System will be put in place which will increase transparency, reduce burdensome and unnecessary administrative approvals and promote certainty.
Individuals
- The concept of emigration for Reserve Bank purposes will be phased out.
- Restrictions applicable to emigrants such as emigrant blocked accounts, borrowings and being able to invest freely in South Africa have been repealed.
- The Reserve Bank controls will be replaced by a Verification process and Risk Management test on Residency and Source of Funds by SARS.
- The ordinarily resident and physical presence tests will continue to be used to determine tax residency.
- The concept of “loop” structures will also be reviewed, but only after amendments to the Income Tax Act (see below).
- The rules for emigrants withdrawing funds from retirement funds will be amended as these presently require proof of Reserve Bank emigration.
- A resident individual or company is currently not permitted to export a dual-listed share without Reserve Bank approval. As the approval requirement will be phased out as part of the exchange control changes, the export of a dual-listed share will be deemed a disposal subject to capital gains tax or normal tax.
- Under the new system, natural person emigrants and natural person residents will be treated identically.
Tax amendments linked to exchange control relaxation
- The so called anti -‘loop’ exchange control rule has been very restrictive over the years. Simply stated, South African residents cannot invest in a foreign entity, which then invests back into South Africa. It is indicated that the anti – ‘loop’ rules may be scrapped, but only after relevant income tax amendments were made to address the avoidance of tax on dividends and CGT via loop investments. Issues to be addressed include the potential to avoid tax on dividends in terms of the current ‘participation’ rules where a South African resident invests in a foreign company, which then invests back into a South African company, and the sale of shares in a foreign company that owns South African assets.
As always, if you have any queries or would like to discuss the Budget Speech in more detail, please contact your Relationship Manager, or our in-house tax specialists.
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