Other matters of interest
Tax treatment of certain infrastructure projects
To encourage infrastructure investment, Government will investigate the feasibility of a flow‐through tax treatment, similar to what is afforded to trusts and other investment vehicles, for certain clearly defined infrastructure projects under specified circumstances.
Interest limitation rules
Current law limits interest deductions when there is a relationship between a debtor and a creditor, and the corresponding interest income is not taxed fully. An unintended consequence of this rule may unfairly prejudice tax‐exempt investors, such as pension funds, when they lend to a related party. Government will consider this matter further, with the possibility of including amendments in the 2024 Taxation Laws Amendment Bill.
Combatting financial crimes and illicit activities
In February 2023, the International Financial Action Task Force (FATF) put South Africa on its “grey list” due to the deficiencies in technical compliance and effectiveness of the country’s system to combat money laundering and the financing of terrorism. These deficiencies were identified in the 2021 mutual evaluation report.
In response, Government developed a strategy to build a financial system that is less vulnerable to abuse and where abusers are effectively prosecuted. This involves both legislative and regulatory changes, as well as improvements in the implementation and application of these laws and regulations. In late 2022, Government enacted two key legislative amendments: the General Laws (Anti-Money Laundering and Combatting Terrorism Financing) Amendment Act (2022) and the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Act (2022).
At its October 2023 plenary, the FATF noted that South Africa is making progress and formally re-rated 15 of the 20 deficiencies as no longer deficient. Accordingly, South Africa needs to address five outstanding technical deficiencies in which the country is only partially compliant. Government intends to address these by the end of October 2024. Addressing all the remaining actions and demonstrating that improvements are sustainable by February 2025, to be removed from the “grey list”, will require a significant effort from all the relevant South African authorities.
Comment: The efforts to remove South Africa from the “grey list” are bound to lead to additional administrative and compliance burdens being placed on the wider financial services industry.
Financial inclusion
The National Treasury will develop a national strategy on financial inclusion in 2024 based on the policy paper, approved by Cabinet in 2023, entitled ‘An Inclusive Financial Sector for All’. The strategy’s goals will include deepening financial inclusion for individuals, improving access to financial services for small-, micro-, and medium‐sized enterprises, and enabling diversification, competition, and innovation in financial services.
In March 2023, the Corporation for Deposit Insurance was established to provide a framework to ensure depositors’ funds are protected in the event of a bank failure. The establishment of this institution is one of the key amendments contained in the Financial Sector Laws Amendment Act (2021). The remaining provisions, including the provisions to enable the Corporation for Deposit Insurance to begin collecting premiums and other financial contributions, will be effective from 1 April 2024.
Measures to boost long‐term investment
Government has proposed the relaxation and modernisation of certain exchange controls to promote long-term investment and foster business growth.
Gold and Foreign Exchange Contingency Reserve Account (GFECRA) reform
The GFECRA captures valuation gains on South Africa’s foreign exchange reserves, i.e., if the rand weakens against the US dollar and other reserve currencies, the account balance increases, and vice versa. The account balance has grown to over R500 billion over the years because the rand has depreciated significantly over time. GFECRA helps insulate the central bank’s profit-and-loss statement from currency swings, as valuation losses are charged to the National Treasury. However, National Treasury believes this account is now larger than any plausible losses on foreign exchange reserves from rand appreciation.
A proposed settlement agreement to be formalised between the National Treasury and the Reserve Bank will establish a new framework, the effect of which will be to reduce Government borrowing and improve the central bank’s equity position. These adjustments will take South Africa closer to peer norms. The agreement will allocate funds across three “buckets”. The first bucket, GFECRA, will retain sufficient funds to absorb exchange rate swings. The second bucket, a Reserve Bank contingency reserve, will ensure the central bank’s solvency. Once the first two obligations have been settled, the remaining funds in bucket three will be distributed to the National Treasury over time.
The net result is that the Reserve Bank is expected to distribute approximately R100 billion from the current GFECRA in 2024/2025 and R25 billion each over the next two years, reducing the country’s borrowing requirements.
Comment: While accessing a portion of the Gold and Foreign Exchange Contingency Reserve Account will reduce the Government’s borrowing needs, it is a temporary measure and does not resolve our country’s structural fiscal challenges.
Curbing the abuse of the employment tax incentive scheme
Changes were made to the Employment Tax Incentive Act (2013) in 2021 and 2023 to curb abuse of the employment tax incentive from aggressive tax schemes, which used training institutions to claim the incentive for students. It is proposed that punitive measures to support those amendments be refined in the legislation to address the abusive behaviour of certain taxpayers towards the incentive.
Tokenisation
Tokenisation is the representation of assets such as securities and payment instruments on distributed ledger technology, commonly known as blockchain. The Intergovernmental Fintech Working Group is considering the impact of tokenisation on domestic financial markets. By June 2024, a paper providing an overview of tokenisation will be published. By December 2024, a discussion paper will be published that outlines the policy and regulatory implications of tokenisation and blockchain‐based financial market infrastructure.