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25 February 2016
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.
The maximum tax rate of 41% has not been increased, and there is general relief for all categories of tax payers (see Annexures 2, 3 and 4).
Monthly medical scheme contribution tax credits will be increased from R270 to R286 from 1 March 2016 for the first two beneficiaries and from R181 to R192 for additional beneficiaries.
According to the Budget Review “if the founder of a trust sells his or her assets to the trust, and grants the trust an interest-free loan as payment, donations tax is not triggered and the assets are not included in his or her estate at death. To limit taxpayers’ ability to transfer wealth without being taxed, government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder at death, and to categorise interest-free loans to trusts as donations. Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered.”
This explanation ignores the fact that any outstanding loan will be an asset in the estate of the founder of the trust at his death.
A voluntary disclosure programme gives non-compliant taxpayers the opportunity to correct their tax affairs. A new Organisation for Economic Co-operation Development (OECD) global standard for the automatic exchange of financial information between tax authorities comes into effect from 2017. The National Treasury, SARS and the Reserve Bank say they have received requests from taxpayers who still have undisclosed assets abroad to regularise their affairs. Accordingly, the government will relax voluntary disclosure rules for a period of 6 months, from 1 October 2016, to allow such non-compliant individuals and firms to disclose their offshore assets and income.
The inclusion rate for capital gains will increase for individuals from 33.3% to 40%, and for companies from 66.6% to 80%. This will raise the maximum effective capital gains tax rate for individuals from 13.7% to 16.4%, and for companies from 18.6% to 22.4%. The annual amount above which capital gains become taxable for individuals will increase from R30 000 to R40 000. The effective rate applicable to trusts will increase from 27.3% to 32.8%.
These new rates will become effective for years of assessment beginning on or after 1 March 2016.
Tax-free investments were introduced from 1 March 2015 to encourage individuals to save and were not intended to serve as a vehicle to avoid estate duty. Although the budget document reflects the view that the payment of policy benefits from a tax-free investment to a nominated beneficiary would circumvent estate duty, we do not consider it so. It is proposed that the legislation be amended to ensure that tax-free investments are estate dutiable.
Investors receiving dividends from tax-free investments are required to submit an exempt dividends tax return to SARS following the receipt of every dividend payment. It is proposed that an amendment be made to remove this requirement.
The implementation date to allow transfers of tax-free investments between service providers will be postponed from 1 March 2016 to 1 November 2016 to allow further time for service providers to finalise the administrative processes required for these transfers. Draft regulations outlining the transfer process will be published shortly.
There are exceptions to the rule that employers must ascertain from SARS the correct amount in employees’ tax to be withheld from lump-sum payments before payment is made. It is proposed that the provision for exceptions be removed.
From 1 March 2016, the tax treatment of contributions to retirement savings and how they are withdrawn at retirement comes into effect. These are:
Below are further technical refinements that will be made to the legislation to provide clarity. After further consultation, government proposes to postpone the requirement for
provident fund members to annuitise to 1 March 2018 (see in this regard the summary in Annexure 5 of the Revenue Laws Amendment Bill, 2016).
Before 1 March 2016, taxpayers were able to deduct retirement annuity contributions against their passive or non-trading income up to a certain limit. The current wording of section 11(k) of the Income Tax Act, which introduces the harmonised tax regime for retirement contributions from 1 March 2016, does not allow for contributions to any retirement fund to be set off against passive income. It is proposed that section 11(k) of the Act be amended to allow for retirement contributions to be deducted against passive income, subject to the available limits.
It is proposed that section 11(k) of the Income Tax Act be amended to allow for the rollover of excess contributions to retirement annuity funds and pension funds accumulated up to 29 February 2016.
To correct the ordering rule for calculating allowable deductions in the determination of taxable income, it is proposed that the allowable deduction under section 11(k) of the Income Tax Act be determined before the allowable deduction under section 18A (deduction of donations to certain organisations).
It is proposed that the requirement for a tax directive for tax-free transfers from pension funds to provident funds be removed because it is no longer applicable to these transfers. This does not make sense as these transfers will become taxable again (see Revenue Laws Amendment Bill, 2016 in Annexure 5).
Paragraph 12D of the Seventh Schedule of the Income Tax Act only makes provision for contributions actually made by the employer or employee to certain retirement funds, and excludes contributions made on behalf of the employer or employee (for example, by the retirement fund). It is proposed that paragraph 12D of the Seventh Schedule be amended to include all contributions made for the member’s benefit. Other technical amendments to paragraph 12D include clarifying that retirement fund income is the full amount used to determine the employer’s contribution, not only remuneration as defined in paragraph 1 of the Fourth Schedule. A potential issue of double counting for retirement funds with a hybrid structure (having both defined benefit and defined contribution elements) will be removed. It will also be made clear when actuaries can provide an updated contribution certificate.
Foreign pensions derived from past employment in foreign jurisdictions (i.e. from a foreign source) are exempted in terms of section 10(1)(gC) of the Income Tax Act. It is suggested that the treatment of contributions to foreign pension funds and the taxation of payments from foreign funds be reviewed in light of the tax policy for South African retirement funds.
The following transfer duty rates apply to transactions which are not subject to Value-Added Tax in 2016/2017.
This Bill aims to amend certain provisions of the Taxation Laws Amendment Act, 2015, Taxation Laws Amendment Act, 2014 and Taxation Laws Amendment Act, 2013 to provide for the postponement of certain provisions in respect of taxation of retirement benefits and to provide for a correction of the calculation of the amount of a deduction to be included in taxable income in respect of deductible contributions to defined benefit retirement funds.
Clause 1 provides for the postponement of the annuitisation requirement for provident funds for two years, until 1 March 2018. Contributions made by provident fund members to their funds before 1 March 2018 will not require annuitisation.
Clause 2 provides for a correction of the value of the fringe benefit in respect of employer contributions to defined benefit retirement funds that must be deemed to be the employee contribution. It makes provision for the deemed employee contribution to be equal to the value of the fringe benefit under paragraph 12D of the Seventh Schedule to the Income Tax Act, 1962 even if such value is greater than the actual contribution paid by the employer.
Clause 3: Subparagraph (b) of clause 3 provides for the postponement of the annuitisation requirement for provident funds for two years, until 1 March 2018. Subparagraph (c) of clause 3 deletes the provision that was available in the Taxation Laws Amendment Act, 2015, that required the Minister of Finance to consult with the relevant stakeholders and table a report in parliament by 30 June 2018, on the impact of the implementation of the annuitisation requirement for provident funds.
Clause 4 provides for the postponement of the inclusion of the compulsory annuity paid by a provident fund* or a provident preservation fund from the definition of the term ‘compulsory annuity” in section 10C of the Income Tax Act, until 1 March 2018.
* This is strange as Section 10C currently does not incorporate a provident fund.
Clause 5 provides for the postponement of a tax free transfer from pension fund to provident fund until 1 March 2018.