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By Sanlam Employee Benefits, 26 February 2014
The numbers, importantly, rely on continued expenditure restraint, with real non-interest spending increasing at just 1.9% per year over the medium term. Expenditure declines relative to GDP over the period – failing which the debt ratio is likely to continue rising. Also, we need a sustained firm business cycle upswing to support revenue (else we are likely to get higher taxes).
The purpose of this document is to provide intermediaries with information applicable to their work.
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 detail information.
To compensate for the effects of inflation, the personal income tax brackets and rebates will be adjusted, providing individuals with personal income tax relief (see Annexures 1, 4, 5 and 6).
Monthly medical scheme contribution tax credits will be increased from R242 to R257 per month for the first two beneficiaries, and from R162 to R172 per month for each additional beneficiary, with effect from 1 March 2014.
Tax-preferred savings accounts announced in the 2012 Budget Review will proceed. These accounts will have an initial annual contribution limit of R30 000, to be increased regularly in line with inflation, and a lifetime contribution limit of R500 000. The account will allow investments in bank deposits, collective investment schemes, exchange-traded funds and retail savings bonds. Eligible service providers will include banks, asset managers, life insurers and brokerages.
The taxable income brackets for the retirement fund lump sum tables are increased by about 10% (see Annexures 2 and 3).
Government intends to move progressively towards a mandatory system of retirement for all employed workers. Agreement has been reached with the Association of Savings and Investment of South Africa on a way forward to reduce the level of charges for retirement savings products. Draft regulatory reforms will be published shortly.
South African residents working abroad and foreign residents working in South Africa regularly contribute to local and foreign pension funds. With overall retirement reform now in effect, cross-border pension issues need to be reconsidered. Given the complexity of the issues involved, it is proposed that the review take place over two years, with extensive consultation.
Long-term insurers issue both risk and investment policies. Currently, all activities of long-term insurers are taxed in one of four funds – the individual policyholder fund, the company policyholder fund, the untaxed policyholder fund and the corporate fund. Where profits are taxed in one of the two taxable policyholder funds, the insurer is taxed as a trustee of the policyholders and policy benefits are “tax free” in the hands of the policyholder.
Government proposes that profits from the risk business of an insurer be taxed in the corporate fund similar to the manner in which short-term insurers are taxed. This will ensure that the corporate fund, rather than one of the policyholder funds, will be taxed on the risk policy business and profits. Details of this proposal are not yet available. Government will also review the fairness of the taxation of the individual policyholder fund, where a 30 per cent tax rate is applied, irrespective of the income level of policyholders.
Miscellaneous tax amendments proposed for the upcoming tax legislative cycle are set out below.
The tax treatment of life and disability premiums and policy proceeds was aligned in 2013, with effect from 1 March 2015. The premiums will not be deductible and the policy proceeds will be tax free. However, the wording prohibiting the deduction of the premium for tax purposes does not cover all circumstances, which may allow providers to argue that certain structured products fall outside the ambit of the legislation.
It is proposed that the wording be clarified so that premiums paid on all personal insurance policies not be allowed as a deduction against income, and that the policy proceeds from such policies are tax free.
“Keyperson” refers to a person who is key to the success of a business. In 2011, the tax regime for keyperson policies was changed to allow the taxpayer to elect a deduction for the premium on incurral and taxable policy proceeds or to accept the default non-deductible premium with tax-free policy proceeds. Most employers opted to accept the default option.
One of the requirements for an employer policy on a keyperson to qualify for the election is that the employer must be insured against any loss due to the death, disablement or severe illness of an employee or director. The policy will therefore not qualify if it protects the employer against, not a business loss, but a contingent liability such as the repayment of a loan should the employee or director die before the loan is repaid. A deduction relating to the security cession of that policy contradicts the policy intent.
It is proposed that the wording in section 11(w)(ii) of the Income Tax Act relating to the policy cession be deleted. This will confirm that an insurance policy will not qualify if it is not intended to insure the employer against a loss suffered as a result of the death, disablement or severe illness of an employee or director.
Some long-term insurers reinsure policyholder liabilities with non-resident reinsurers. Policyholders of the South African long-term insurer often elect the underlying offshore investments to which the growth on their policies will be linked. Returns earned on the investments held by the reinsurer and paid as reinsurance benefits are not taxed in South Africa because reinsurance premiums and claims are wholly disregarded in determining the tax liability. Government proposes that net returns from foreign reinsurance be included in the tax calculation of the insurer.
The Minister of Finance appointed the Tax Review Committee in July 2013. The committee, headed by Judge Dennis Davis, has a broad brief to investigate aspects of the tax system and make recommendations for possible reforms. The committee’s first interim report, which examines how the tax system affects small and medium-sized enterprises (SMEs), will be published for public comment soon. However, the following recommendations by the committee have been accepted by government:
The turnover tax regime is targeted at businesses with an annual turnover of up to R1 million. This regime will be retained, but requirements will be simplified, and thresholds and tax rates adjusted. Turnover up to R335 000 will not be taxed (a zero tax rate) and the maximum tax rate will be reduced from the current 6% to 5%.
It will no longer be required for businesses to opt in to the regime for three years and to have annual, rather than biannual, tax returns.
The lower tax rates for small business corporations are not effective, do little to support the objective of small business growth and do not address tax compliance costs. The current regime provides tax relief to only 50 000 businesses and (in some instances) to professions not originally intended as beneficiaries. The reduced tax rate regime will be replaced by an annual refundable tax compliance rebate (subject to certain conditions).
Although government has accepted this as a recommendation from the Tax Review Committee it is subject to public consultation.
The Tax Review Committee is investigating the role of wealth taxes in the tax system, including the position of estate duty and its relationship with capital gains tax.
Use of a company car by an employee is a taxable fringe benefit based on the market value of the vehicle. However, car manufacturers that import vehicles calculate the fringe benefit at cost. To align the treatment of company car fringe benefits for all employees (whether or not they work for a vehicle manufacturer), government proposes that actual retail market value be used in all cases. This reform will be phased in over four years. Adjustments are also proposed to treat employees who bear the costs relating to fuel and the upkeep (maintenance, insurance and licence) of their company car in a more equitable manner.
The following are some of the items on the National Treasury’s research agenda over the next two fiscal years, with some research having already started: