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By Sanlam Life: Law Service, 23 February 2017
Please note: The budget proposals are subject to ratification by Parliament. The final legislation is expected to be tabled later this year. We will then provide you with detailed information.
Government is implementing a new top personal income tax bracket of 45% for taxable incomes above R1.5 million per year. The primary, secondary and tertiary rebates, and the levels of all the taxable income brackets, will be increased by 1% from 1 March 2017 and the tax-free threshold will increase from R75 000 to R75 750. (See Annexures for tables.)
The rate of income tax on trusts is raised from 41% to 45% from 1 March 2017.
From 1 March 2017 the medical tax credit for monthly contributions to medical schemes is increased for the first two beneficiaries from R286 to R303 per month, and for the remaining beneficiaries from R192 to R204 per month.
The annual allowance for tax-free savings accounts has increased from R30 000 to R33 000.
The maximum effective rate for Capital Gains Tax for individuals and special trusts increases from 16.4% to 18% from 1 March 2017.
The duty-free threshold on purchases of residential property is raised from R750 000 to R900 000, effective 1 March 2017.
Estate duty remains at 20% on property of residents and South African property of non-residents. The abatement also remains unchanged at R3.5 million.
No changes have been made to the 2016 deductions allowed.
Amendments were made to the Income Tax Act in 2014 to allow individuals to elect1 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.
No changes have been made to the 2016 retirement tax table.
No changes have been made to the 2016 withdrawal tax table.
Currently, these benefits retain their tax-exempt status upon transfer to a private sector fund. Government proposes that this tax-exempt status be retained on subsequent transfers to funds.
Currently, existing employees who do not join a newly established employer umbrella fund have 12 months within which to join the fund, after which they are unable to join. It is proposed that the 12-month limit be removed and that employees be allowed to join without time restriction, subject to the rules of the fund.
It is currently not clear how the overall annual cap of R350 000 on contributions to pension, provident and retirement annuity funds should be applied when determining monthly employees’ tax. It is proposed that the amount of R350 000 be spread over the tax year, which is a more prudent approach.
Donations tax remains unchanged at 20%, with the first R100 000 being tax-free. Donations between spouses remain exempt.
Dividend income paid to shareholders is taxed at a rate of 15%. After accounting for company tax, which is paid before a distribution of dividends, the combined statutory tax rate on dividends is 38.8%, which is lower than the averages in Europe.
To reduce the difference between the combined statutory tax rate on dividends and the top marginal personal income tax rate, government is increasing the dividend withholding tax rate to 20%, effective 22 February 2017.
The exemption and rates for inbound foreign dividends will also be adjusted in line with the new rate, effective for years of assessment commencing on or after 1 March 2017.
To align with the increased effective capital gains tax rate, government proposes to increase the withholding tax on immovable property sales by non-residents. Rates will be increased from 5% to 7.5% for individuals, 7.5% to 10% for companies and 10% to 15% for trusts.
Currently, if a South African resident works in a foreign country for more than 183 days a year, foreign employment income earned is exempt from tax, subject to certain conditions. This exemption is for employees of private sector companies.
However, where no tax is payable by such resident in the foreign country, that foreign employment income will benefit from double non-taxation. Therefore, it is proposed that this exemption be adjusted so that foreign employment income will only be exempt from tax if it is subject to tax in the foreign country.
In 2016, an anti-avoidance measure aimed at curbing the tax-free transfer of wealth to trusts through the use of low-interest or interest-free loans were introduced in the Income Tax Act. This anti-avoidance measure deems any interest foregone in respect of low-interest or interest-free loans to a trust to be donations that are subject to donations tax at a rate of 20%.
However, according to government some taxpayers have already attempted to circumvent the anti-avoidance measure by making low-interest or interest-free loans to companies owned by a trust. It is proposed that the scope of this anti-avoidance measure be extended to cover these avoidance schemes, but excluding trusts that are not used for estate planning, for example, employee share scheme trusts and certain trading trusts.
The in duplum rule aims to protect debtors by limiting the amount of the total interest a creditor can charge. The effect of the rule is that interest on a debt ceases to accrue where the total amount of the interest equals the outstanding principal debt. Various anti-avoidance provisions in the Income Tax Act may be undermined should the in duplum rule apply.
Some taxpayers may be relying on this rule to distort the quantification of the tax benefit derived from low-interest or interest-free loans. These taxpayers aim to avoid income tax determined on the difference between the amount of interest actually incurred and the amount of interest that would have been incurred at the official rate.
It is proposed that the tax rules dealing with low-interest or interest-free loans be amended to explicitly exclude the application of the in duplum rule to ensure their efficacy.
Intermediaries are familiar with the so-called buy and sell agreement between shareholders, but sometimes a company enters into a share buyback (agreement) where there is no buy and sell agreement.
In the 2016 Budget Review, tax avoidance schemes involving share buybacks were highlighted for review. Such schemes involve a company buying back shares from its current shareholders to avoid the tax consequences of share disposals. The seller receives payment in the form of a dividend that may be exempt from normal tax and dividends tax, instead of paying tax on the sale of shares.
Following the announcement in 2016, no specific countermeasures were introduced. It is therefore proposed that specific countermeasures be introduced to curb the use of share buyback schemes.
Qualifying micro businesses (with turnover up to R1 million a year) and small business corporations (with turnover less than R20 million a year) are eligible for preferential corporate income tax rates. The former are taxed on turnover, while the latter are taxed on taxable income.
There are no transitional measures for micro businesses that grow sufficiently to migrate into the small business corporation tax regime. This can result in unforeseen tax liabilities and administrative penalties. Government proposes to reduce associated administrative penalties so that businesses can transition smoothly.
1‘elect’ refers to delaying to receive the retirement income/lump sum, not that the member can choose the age at which s/he retires