25 Feburay 2021
“Hope is being able to see that there is light despite all of the darkness. He observed that sometimes we forget that just beyond the clouds the sun is shining.” Minister Tito Mboweni was referring to Archbishop Emeritus, Desmond Tutu’s words in his opening statements.
He then spoke about “fiscal prudence” and went on to say, “Getting our fiscal house in order is the biggest contribution we can make to support our Economic Reconstruction and Recovery Plan”. These words sum up the themes in the remainder of the speech, aimed at closing the main budget primary deficit, stabilising government debt, addressing corruption, touching on structural reforms under Operation Vulindlela to address the electricity crisis, digital communications, water and freight transport issues, as well as economic transformation, job creation, land, tourism and small business development initiatives due to their potential high impact on economic growth.
While efforts to improve tax collection is underway, the tax base has shrunk due to job losses during the pandemic, and although tax collection is budgeted at R1.21 trillion during 2020/21, it is about R213 billion less than the 2020 Budget expectations and the largest tax shortfall on record.
More immediately, more than R10 billion will be allocated for vaccines over the next two years, with a contingency reserve from R5 to 12 billion for further purchases.
In closing, the Minister spoke about the challenging but achievable path to recovery, with this 2021 budget framework putting South Africa on course to achieve a primary surplus and stabilise government debt at 88.9% of GDP by 2025/26.
The main proposals related to the following:
The personal income tax brackets and rebates will increase by 5%, providing relief to households by ensuring that inflation does not automatically increase the individual tax burden. The top marginal rate remains at 45%.
Most of the relief benefits lower- and middle‐income households.
An inflationary adjustment will apply to the value of medical tax credits, which will increase from R319 to R332 for the first two members, and from R215 to R224 for all subsequent members.
The minimum value for paid‐up retirement annuities has not been adjusted since 2007/08. This value will increase from R7 000 to R15 000 from 1 March 2021.
When an individual ceases to be a South African tax resident, retirement funds are not always subject to withdrawal tax in terms of the Act. At issue is the tax treatment of retirement interest when an individual ceases to be a South African tax resident, but retains his/her investment in a South African retirement fund, and only withdraws from the retirement fund when he/she dies or retires from employment. Section 9(2)(i) of the Act deems such amounts to be from a South African source, thus remaining within South African tax jurisdiction despite the individual no longer being a South African tax resident.
The challenge arises when the individual ceases to be a South African tax resident before he/she retires and becomes a tax resident of another country. When that individual withdraws from the retirement fund, due to the application of the specific tax treaty between South Africa and the other country, the retirement fund interest will be subject to tax in the other country as the individual will, in terms of the tax treaty, be regarded as a tax resident in that other country.
The provisions of the specific tax treaty between South Africa and the new resident country will result in South Africa forfeiting its taxing rights. To address this anomaly, government proposes changing the legislation as set out below.
When the individual ceases to be a South African tax resident, the retirement fund interest will form part of the assets that are subject to retirement withdrawal tax. The individual will be deemed to have withdrawn from the fund on the day before he/she ceases to be a South African tax resident.
If the individual ceases to be a South African tax resident but leaves his/her investment in a South African retirement fund and only withdraws from the retirement fund when he/she dies or retires from employment, then the retirement withdrawal tax (including associated interest) payment will be deferred until payments are received from the retirement fund or as a result of retirement. When the individual eventually receives payments from the fund, the tax will be calculated based on the prevailing lump sum tables or in the form of an annuity. A tax credit will be provided for the deemed retirement withdrawal tax as calculated when the individual ceased to be a South African tax resident.
More detail in this regard is awaited in the Taxation Laws Amendment Bill for 2021 expected later this year.
From 1 March 2016, all employer contributions to a retirement fund on behalf of employees were considered taxable fringe benefits for the employees. If the contribution contains a defined benefit component, the fringe benefit is to be calculated in accordance with the Seventh Schedule of the Act and the employer must provide the employee with a contribution certificate.
An anomaly arises in instances where a retirement fund provides both a retirement benefit in relation to the defined contribution component and a self‐insured risk benefit. The current interpretation of the legislation would result in the classification of the total contribution to the fund as a defined benefit component because self‐insured risk benefits are not considered a defined contribution component. It is proposed that self‐insured risk benefits be classified as a defined contribution component to ensure that retirement funds that provide both defined contribution component retirement benefits and self-insured risk benefits can provide the fringe benefit value based on the actual contribution.
In light of the large‐scale migration to working at home over the past year, the National Treasury will review current travel and home office allowances to investigate their efficacy, equity in application, simplicity of use, certainty for taxpayers and compatibility with environmental objectives. In recognition of the potential effect on salary structuring, this will be a multiyear project, starting with consultations during 2021/22.
The Income Tax Act (1962) permits an employer to grant a long‐service award (in the form of an asset or a non‐cash benefit) to an employee as a no value fringe benefit provided that the value of this award does not exceed R5 000.
Currently, employers recognise long service through awards in a variety of forms that could be considered non‐cash benefits in terms of the Act. Therefore, it is proposed that the current provisions of the Act be reviewed to consider other awards within the same limit granted to employees as long‐service awards.
When a person dies, the Estate Duty Act (1955) provides for the assets of the person to be transferred to the estate of the deceased before the assets are distributed to their heirs. The Act also provides for the executors to administer this estate, which includes preparing and submitting the liquidation and distribution account to the Master of the High Court Office, and submitting the relevant tax returns – including payment of the estate duty – to SARS.
Legally, the liquidation and distribution account must remain open for inspection in the Master of the High Court Office for 21 business days. Once the liquidation and distribution account is finalised, the personal right of the heirs to claim delivery of the assets is triggered.
At present, there is timing uncertainty around when the heirs are regarded as having acquired an asset from the estate of the deceased. To clarify the time of disposal of this personal right, government proposes that the legislation be changed so that the disposal by the estate occurs on the date when the liquidation and distribution account becomes final.
Anti‐avoidance measures were introduced in 2016 to curb the transfer of growth assets to trusts using low‐interest or interest‐free loans, which was done to avoid estate duty on the asset’s subsequent growth in value. In 2017 and in 2020, further changes were made to the tax legislation to counter new attempts to undermine these rules. Some taxpayers may continue to undermine the current rules by transferring loans – which finance high‐value assets – between trusts, where the founder of one trust is related to one or more beneficiaries of the other trust. To curb this abuse, it is proposed that further changes be made to these anti‐avoidance rules.
The Income Tax Act specifies certain amounts to be included in “gross income”, which is defined in section 1, and certain disposals that are regarded as donations in terms of section 56. Some taxpayers have devised schemes to undermine both the abovementioned provisions. These schemes entail a service provider (for example, an employee or independent contractor) ceding the right to receive or use an asset to be received from the person to whom the services are rendered or are to be rendered.
The right is generally ceded to a family trust for no consideration. In these instances, the service provider will be able to circumvent the gross income provisions as the asset would have been ceded to the trust before a value can be attached to it. In addition, the service provider will not be liable for donations tax, as it appears as though they are disposing of a worthless asset and are therefore not liable for donations tax until the services have been rendered and the employer transfers the asset to the cessionary. Moreover, the service provider will not be entitled to the asset and therefore cannot be regarded as having disposed of it.
In order to address these kinds of schemes, it is proposed that changes be made to the abovementioned tax provisions.
The information required by law in the receipts issued for tax‐deductible donations is limited and entities issuing the receipts are not required to provide third‐party data on the donations to SARS on a systematic basis.
SARS has detected that receipts are being issued by entities that are not approved to do so.
To ensure that only valid donations are claimed and to enhance SARS’ ability to pre-populate individuals’ returns, it is proposed that the information required in the receipts be extended and third party reporting be extended in future to cover the receipts issued.
The Act contains provisions in part IV A and part IV B for withholding tax on royalties and interest respectively. According to the rules dealing with withholding tax on interest, no withholding tax on interest applies if the foreign person submits a declaration that he/she is – in terms of an agreement for the avoidance of double taxation – exempt from the tax. A similar declaration does not exist for withholding tax on royalties. To address the anomaly, it is proposed that the tax legislation be amended.
Taxpayers may approach SARS to obtain advance rulings on proposed transactions, which are binding on SARS, to enhance taxpayer certainty. In line with its strategic objectives, SARS has invited public comment on the advance tax ruling process for binding rulings to assess whether it can be improved. Legislative amendments may be required to give effect to improvements identified during the consultation process.
Taxpayers may approach SARS to regularise their tax affairs to avoid criminal prosecution, understatement penalties and certain administrative non‐compliance penalties. The voluntary disclosure provisions will be reviewed in 2021 to ensure that they align with SARS’ strategic objectives and the policy objectives of the programme.
The 2020 Budget Review stated that government intends to restructure the corporate income tax system in a revenue‐neutral manner. This requires broadening the tax base through limiting assessed losses and interest expense deductions to ensure the proposals are affordable.
Since February 2020, many businesses have either closed down or are in financial distress as a result of pandemic‐related restrictions on economic activity. Government has therefore postponed the introduction of these two measures until 2022.
The tax table for withdrawal benefits from retirement funds remains unchanged.
The tax table for retirement benefits from retirement funds remains unchanged.
These remain the same at 27.5% of the greater of the amount of remuneration for PAYE purposes or taxable income (both excluding retirement fund lump sums and severance benefits). As before, the deduction is further limited to the lower of R350 000 or 27.5% of taxable income before the inclusion of a taxable capital gain.
A member of a retirement fund may receive an annuity on retirement. Where the member is allowed to take, or commute, a lump sum equal to a maximum of one‐third of the retirement interest on retirement, the annuity is to be provided with the balance of the member’s retirement interest following commutation. The retirement fund can provide the annuity by paying it directly to the member, or purchasing it from a South African registered insurer in the name of the fund (a fund-owned annuity) or purchasing it in the name of the retiring member (a member-owned annuity). If a member opts to receive an annuity, the full value of their retirement interest following commutation must be used to provide either of the abovementioned annuities.
Therefore, a member is prohibited from using their retirement interest to acquire various annuities. Government proposes that retiring members be allowed to buy a member-owned and fund-owned annuity, or multiple annuities from more than one product provider.
The Income Tax Act stipulates that any transfer by a member of a pension, provident or retirement annuity fund (who has opted to retire early) into a similar fund would be considered a taxable transfer.
The policy in this regard is not intended to tax transfers from a less to a more restrictive fund, or between similar funds. Government proposes allowing tax‐free transfers into more or similarly restrictive funds by members who have already opted to retire to address this anomaly. This is to be welcomed as currently only transfers to a retirement annuity fund and preservation fund are allowed and not to a pension or provident fund.
Provisional taxpayers are required to make provisional tax payments within 6 months after the commencement of a year of assessment and then again by the end of the year of assessment. Currently, no provision is made for instances where a taxpayer has a short year of assessment, whether by reason of death, ceasing to be a tax resident, a company being incorporated during a year or a change of a company’s financial year. It is proposed that a first provisional tax payment and return not be required when the duration of a year of assessment does not exceed 6 months.
The exemption on interest earned remains unchanged and interest from a South African source, earned by any natural person under 65 years of age, up to R23 800 per year, and persons 65 and older, up to R34 500 per year, is exempt from income tax. This has remained the same since the introduction of tax-free savings accounts during 2014.
Dividends received by individuals from South African companies are generally exempt from income tax, but dividends tax is withheld by the entities paying the dividends to the individuals at a rate of 20%. Dividends received by South African resident individuals from REITs (listed and regulated property owning companies) are subject to income tax, and non-residents in receipt of those dividends are only subject to dividends tax.
Most foreign dividends received by individuals from foreign companies (shareholding of less than 10% in the foreign company) are taxable at a maximum effective rate of 20%. No deductions are allowed for expenditure to produce foreign dividends.
The tax deduction in respect of donations to certain Public Benefit Organisations remain the same.
The provisions in respect of Capital Gains Tax remain unchanged.
The budget proposals in this article, by the Minister of Finance, are subject to ratification by Parliament. The information herein incorporates commentary from the Budget Speech but the legislation finally enacted may differ. All information herein is believed to be correct at the time of publication, 25 February 2021. While we have taken utmost care in compiling this article, we accept no responsibility for any inaccuracies, errors or omissions.
This article is not intended to give advice, consequently the contents hereof should not be used as a basis for action without seeking your own professional advice. Tax rate changes proposed in the Budget Speech only becomes effective once legislation is enacted by Parliament. No part of this work may be altered or reproduced without the consent of Law Services.