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Budget 2020: The Outcome

27 February 2020

In this article we discuss some of the Budget proposals by the Minister of Finance as well as aspects of the National Treasury’s Budget Review for 2020.

The purpose of this article 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 more details.

Personal Income Tax

Provisional Tax Payers

You are reminded that a provisional taxpayer is any person who earns income by way of remuneration from an unregistered employer, or income that is not remuneration, or an allowance or advance payable by the person’s principal. An individual is not required to pay provisional tax if he or she does not carry on any business, and the individual’s taxable income:

Will not exceed the tax threshold for the tax year; or
From interest, dividends, foreign dividends, rental from the letting of fixed property, and remuneration from an unregistered employer will be R30 000 or less for the tax year.

Provisional tax returns showing an estimation of total taxable income for the year of assessment are required from provisional taxpayers.

Deceased estates are not provisional taxpayers.

Usual Personal Income Tax

The personal income tax brackets and the primary, secondary and tertiary rebates will be increased by 5.2% for 2020/21, which is above expected inflation of 4.4%. This adjustment provides R2 billion in tax relief. The change in the primary rebate increases the tax-free threshold from R79 000 to R83 100.

Retirement Fund Lump Sum Withdrawal Benefits

Remember that retirement fund lump sum withdrawal benefits consist of lump sums from a pension, pension preservation, provident, provident preservation or retirement annuity fund on withdrawal (including assignment in terms of a divorce order). The tax on lump sum withdrawal benefits remains unchanged from the 2019/2020 tax year.

Retirement Fund Lump Sum Benefits or Severance Benefits

Retirement fund lump sum benefits consist of lump sums from a pension, pension preservation, provident, provident preservation or retirement annuity fund on death, retirement or termination of employment due to attaining the age of 55 years, sickness, accident, injury, incapacity, redundancy or termination of the employer’s trade. As with the tax on withdrawal benefits from retirement funds, the tax on retirement lump sum benefits at the occurrence of any of the events named above remain unchanged from the 2019/2020 tax year.

Retirement Fund Reform

Government and the National Economic Development and Labour Council (Nedlac) have agreed to proceed with retirement reform related to the harmonisation of all retirement benefits, including provident funds.

Government will take steps to ensure the development of annuity products more suitable for the low income market. Further reforms will include improving oversight and governance of commercial umbrella funds, fund consolidation and auto-enrolment.

Medical Tax Credits

There will be an increase in the value of medical tax credits in 2020/21 from R310 to R319 per month for the first two beneficiaries, and from R209 to R215 per month for the remaining beneficiaries. This increases the value of the tax credit by 2.8%.

Furthermore:

In the case of an individual who is 65 years and older, or if an individual, his or her spouse or his or her child is a person with a disability, 33.3% of the sum of qualifying medical expenses paid and borne by the individual, and an amount by which medical scheme contributions paid by the individual exceed three times the medical scheme fees tax credits for the tax year; or
any other individual, 25% of an amount equal to the sum of the qualifying medical expenses paid and borne by the individual, and an amount by which medical scheme contributions paid by the individual exceed four times the medical scheme fees tax credits for the tax year, limited to the amount which exceeds 7.5% of taxable income (excluding retirement fund lump sums and severance benefits).

Tax-free Savings Accounts

The annual limit on contributions to tax-free savings accounts will be increased from R33 000 to R36 000 from 1 March 2020. The lifetime limit on tax-free savings accounts remains R500 000.

Transfer Duties

The brackets to calculate transfer duties on the sale of property, last adjusted in 2017, will be adjusted for inflation from 1 March 2020. No transfer duty will be liable on the purchase of property with a value below R1 million.

Dividends

The dividend received by individuals from South African companies are generally exempt from income tax, but dividends tax, at a rate of 20%, is withheld by the entities paying the dividends to the individuals. 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.

Interest Exemptions

Interest from a South African source, earned by any natural person under 65 years of age, up to R23 800 per annum, and persons 65 and older, up to R34 500 per annum, is still exempt from income tax. Interest earned by non-residents, who are physically absent from South Africa for at least 183 days during the 12 month period, before the interest accrues and the interest-bearing debt is not effectively connected to a fixed place of business in South Africa, is exempt from income tax.

Deductions

Retirement Fund Contributions

No changes have been proposed.

Amounts contributed to pension, provident and retirement annuity funds during a year of assessment are deductible by members of those funds. Amounts contributed by employers and taxed as fringe benefits are treated as contributions by the individual employees. The deduction is limited to 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). 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.

Estate Duty

No changes have been announced. The duty is levied on the dutiable value of an estate at a rate of 20% on the first R30 million, and at a rate of 25% above R30 million.

Donations

There are no changes to donations tax. Deductions in respect of donations to certain public benefit organisations are limited to 10% of taxable income (excluding retirement fund lump sums and severance benefits). The amount of donations exceeding 10% of the taxable income is treated as a donation to qualifying public benefit organisations in the following tax year.

Capital Gains Tax

No changes have been announced. Capital gains on the disposal of assets are included in taxable income.

Maximum effective rate of tax:

Individuals and special trusts: 18%
Companies: 22.4%
Other trusts: 36%

Events that trigger a disposal include a sale, donation, exchange, loss, death and emigration.

The following are some of the specific exclusions:

R2 million gain or loss on the disposal of a primary residence
Most personal use assets
Retirement benefits
Payments in respect of original long-term insurance policies
Annual exclusion of R40 000 capital gain, or capital loss is granted to individuals and special trusts
Small business exclusion of capital gains of R1.8 million for individuals (at least 55 years of age), when a small business with a market value not exceeding R10 million is disposed of
Instead of the annual exclusion, the exclusion granted to individuals is R300 000 for the year of death.

Anti-avoidance Rules for Trusts

In 2016, anti-avoidance measures were introduced 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, these rules were strengthened to prevent the transfer of growth assets through low interest or interest-free loans made to companies owned by trusts.

Certain taxpayers are undermining the adjusted rules by subscribing for preference shares in companies owned by trusts that are connected to the individuals. To curb this new form of abuse, it is proposed that the rules preventing tax avoidance through the use of trusts be amended.

Reimbursing Employees for Business Travel

If an employee spends a night away from home for business purposes, an employer may reimburse the employee for meals and incidental costs. This reimbursement is not taxed, provided the amount does not exceed the amount published by the Commissioner of the South African Revenue Service (SARS) in the notice. This table has been adjusted and is referred to in the SARS Pocket Guide.

Where the recipient is obliged to spend at least one night away from his or her usual place of residence on business, and the accommodation to which that allowance or advance relates is in the Republic of South Africa, and the allowance or advance is granted to pay for:

Meals and incidental costs, an amount of R452 per day is deemed to have been expended
Incidental costs only, an amount of R139 for each day, which falls within the period, is deemed to have been expended.

Where the accommodation to which that allowance or advance relates is outside the Republic of South Africa, a specific amount per country is deemed to have been expended. Details of these amounts are published on the SARS website, under Legal Counsel / Secondary Legislation / Income Tax Notices.

If an employee is away from the office on a day trip, advances or reimbursements are not taxed if the employee can prove that they incurred these expenses on the instruction of the employer in the furtherance of the employer’s trade. An anomaly arises when an employee purchases meals and incurs incidental costs during a day trip for work, but the employer has not explicitly instructed the employee to do so.

To address this anomaly, it is proposed that the legislation be amended to exclude reimbursement expenses incurred by an employee for meals and incidental costs during a business day trip, provided the employer’s policy allows for such reimbursement.

Foreign Remuneration Exemption

Government will increase the cap on the exemption of foreign remuneration earned by South African tax residents to R1.25 million per year from 1 March 2020. Some advisers have recommended emigration, as recognised by the Reserve Bank, as a way to break tax residency.

However, this is only one factor considered by SARS. Government wants to encourage all South Africans working abroad to maintain their ties to the country. Consequently, this concept of emigration will be phased out by 1 March 2021.

The intention is to allow individuals who work abroad more flexibility, provided funds are legitimately sourced and the individual is in good standing with the South African Revenue Service. Individuals who transfer more than R10 million offshore will be subjected to a more stringent verification process. Such transfers will also trigger a risk management test that will include certification of tax status and the source of funds, and assurance that the individual complies with anti-money laundering and countering terror financing requirements prescribed in the Financial Intelligence Centre Act (2001).

Under the new system, natural person emigrants and natural person residents will be treated identically. Additional restrictions on emigrants – such as the restrictions on emigrants being allowed to invest, and the requirement to only operate blocked accounts, have bank accounts and borrow in South Africa – have been repealed. The concept of emigration as recognised by the Reserve Bank, will be phased out to be replaced by a verification process based on the requirements above. Tax residency for individuals will continue to be determined by the ordinarily resident and physically present tests as set out in the Income Tax Act (1962).

Under existing international standards, South Africa participates in the automatic sharing of information between tax authorities on individuals’ financial accounts and investments. These cooperative practices will remain in place to ensure that South African tax residents who have offshore income and investments pay the appropriate level of tax.

Consequently, this concept of emigration will be phased out by 1 March 2021.

Unclaimed Benefits

Retirement funds and the Guardian’s Fund are sometimes unable to trace beneficiaries, resulting in the money remaining unclaimed. The money is invested in government bonds and other instruments. These investments are being considered in the mobilisation of funding for infrastructure. Government will introduce legislation later this year to centralise such funds and establish a central registry of all members of retirement funds.

Third-party Cell Captive Insurance

In December 2019, the Financial Sector Conduct Authority (‘FSCA’) published a position paper to address concerns about third-party cell captive insurance, in which insurance is provided through cells, rather than directly to a client. Improving its regulation and supervision will protect consumers by ensuring that a financial adviser can no longer earn commission and share in the profits of the cell captive arrangement.

Deposit Insurance for Financial Institutions

Following consultation, the Minister of Finance has submitted final legislation to introduce a comprehensive deposit insurance scheme that protects depositors when banks fail. This safety net will also support the growth of smaller banks. In addition, systemically significant payment systems, as defined in the National Payment System Act (1998), will be considered. The Corporation for Deposit Insurance, which will be located at the Reserve Bank, is being created to manage and administer the deposit insurance fund.

The Conduct of Financial Institutions Bill

In 2018, the Conduct of Financial Institutions Bill (‘COFI’) was published for public consultation. Public workshops were held during 2019. Over 800 pages of comments were received, including feedback on governance requirements, retirement funds, payment services, financial markets and wholesale banking. A revised draft of the bill will be published for public comment and tabled in Parliament in 2020.

Retail Distribution Review (‘RDR’)

The FSCA published an update of its RDR in December 2019. The update reflects progress in the implementation of principles in respect of the fair treatment of consumers when financial products are marketed and advertised, requirements for product sales and ongoing support to the consumer, and ends the practice of “sign-on” bonuses paid to intermediaries or representatives.

Financial Markets Legislation

In view of rapidly evolving financial markets, a need was identified for South Africa to update its legislative and regulatory framework. A review of the Financial Markets Act (2012) highlighted gaps in the current framework and the proposed changes to address such gaps. The National Treasury (‘NT’) has consulted with market participants, the Prudential Authority (‘PA’) and FSCA. A consultation paper will be published and legislation will be drafted for public comment and tabled in Parliament by 2021.

The framework for regulating over-the-counter derivative markets has been finalised, in line with South Africa’s commitment to the Group of Twenty (‘G20’). The final joint standard on margin requirements will take effect on 1 October 2020.

Levies Bill

The Financial Sector Levies Bill, to be submitted to Parliament during 2020, will propose the collection of levies from the financial services industry to ensure that the PA, the FSCA and Ombuds are sufficiently resourced to carry out their duties and functions.

Transformation and Financial Inclusion

The Financial Sector Transformation Council has established eight subcommittees to review the targets in the Financial Sector Code to strengthen transformation of the financial sector. To date, the committees have developed targets for management control, skills development, socio-economic development, consumer education and retirement funds.

A paper to establish a policy framework for financial inclusion in South Africa will be published for public comment in 2020.

Innovation Hub

The Intergovernmental Fintech Working Group is introducing an online fintech portal with an innovation hub, which will clarify the applicability of financial services regulation and support the testing of new products and services.

Anti-avoidance for Taxation of Foreign Dividends

The participation exemption rules for foreign dividends do not contain a similar limitation for general foreign dividends exemption rules (in the Income Tax Act). This limitation denies tax exemption for foreign dividends if there is a deductible expense or reduction that is determined directly or indirectly with reference to a dividend.

For example, where a resident owns 20 percent of the shares in an unlisted foreign company, no tax is imposed on the foreign dividends, even though these dividends arose from amounts that previously qualified for a tax deduction. To address this concern, it is proposed that changes be made to the legislation.

Withdrawing Retirement Funds upon Emigration

Individuals are currently able to withdraw funds from their pension preservation fund, provident preservation fund and retirement annuity fund upon emigrating for exchange control purposes through the Reserve Bank. As a result of the exchange control announcements in Annexure E, the concept of emigration as recognised by the Reserve Bank will be phased out. It is proposed that the trigger for individuals to withdraw these funds be reviewed. Any resulting amendments will come into effect on 1 March 2021.

Measures to Enhance Tax Administration

Pay-as-you-earn

The legal framework and administration of pay-as-you-earn (PAYE) will be reviewed with a view to implementing a more modern, automated process for employers that is easy to understand, access and maintain. The reform is intended to promote accurate and timely withholding from employees and payments to SARS.

Tax Administration

It is expected to reduce the administrative burden for employers, payroll administrators and SARS. In addition, employees will be able to monitor their tax obligations during the course of the year, and the annual return process for employers will be simplified. Over time, this reform is likely to mean that most individual salaried taxpayers will not have to file personal tax returns.

Tax Policy Reviews and Research

The National Treasury will undertake or complete the following projects during 2020/21:

Examining the regulation and tax treatment of unlisted real estate investment trusts, in line with the announcements in the 2013 and 2019 Budget Review
Reviewing the tax treatment of amounts received by portfolios of collective investment schemes in line with the announcement in the 2019 Budget Review.

Tax Administration

Public benefit organisations approved to receive tax-deductible donations must submit audit certificates.

If a public benefit organisation fails to comply with specific requirements for receiving tax-deductible donations, SARS may regard these donations as taxable income for the organisation. If the failure is not addressed within a reasonable period, the receipts issued by the organisation will no longer be valid for claiming tax deductions.

The sanctions do not apply to the requirement that an organisation conducting mixed activities, some of which qualify for the issue of receipts and some of which do not, obtain an audit certificate for the use of the funds for which receipts have been issued. It is proposed that this be corrected.

Deductions for Retirement Fund Contributions

Paragraphs 5(1)(a) and 6(1)(a) of the second schedule to the Income Tax Act (1962) make provision for a deduction of retirement fund contributions that did not qualify for a deduction in terms of section 11F of the act. These paragraphs refer to “own contributions”, which inadvertently prevents employer retirement fund contributions on behalf of employees (made on or after 1 March 2016) from qualifying for a deduction under either paragraph. It is proposed that the legislation be amended to remove this anomaly.