Budget Speech summery

“Income Tax Relief for Individuals

Budget 2011 proposes tax relief for R 8.1 Billion, mainly for middle to lower income taxpayers through adjustments of personal income tax brackets. In addition to the primary and secondary rebates, a third rebate of R 2 000 per annum has been proposed for taxpayers 75 years and older.

Conversion of medical deduction to medical tax credit

Monthly deductions for contributions to medical schemes and for qualifying out-of-pocket medical expenses will be converted into tax credit effective 1 march 2012. This is to ensure that the tax relief remains consistent across different tax rates. The manner in which these credits will operate will be released in a discussion document.

Businesses and Trusts

Dividends tax

The new dividends tax set to replace the existing secondary tax on companies will come into effect on 1 April 2012. The introduction of dividends tax should correct the impression that a tax on dividends is another tax on businesses: legally and economically, it will be a tax on dividends and non-resident shareholders.

Two issues remain unresolved regarding the new dividends tax – the proposed taxation of inbound foreign dividends and the taxation of foreign-owned South African branches. Foreign-owned South African branches are currently subject to tax at a 33 percent rate instead of the standard 28 percent rate. It is proposed that the 33 percent rate be repealed when the new dividends tax comes into effect.

Closure of Dividend Schemes    

Revenue is of the opinion that certain dividend schemes undermine the tax base as a consequence of dividend sessions, receipt of dividends from shares in which the taxpayer has no meaningful economic risk and the use of preference shares that generate allegedly tax-free dividends while the dividends are indirectly generated from interest-yielding debt. Revenue will effectively close these schemes by treating the dividends at issue as ordinary revenue.

Revised tax rules for capital distributions and for pre-2001 capital gains assets 

Currently dividend distributions are subject to secondary tax on companies and capital distributions are subject to capital gains tax. The international practice is to reduce the distributing share base cost by the capital distributions, with gains only taking effect once the base cost is exceeded. This has, however, not been practical in South Africa as the pre-2001 capital gains tax rules prevent taxpayers from knowing the base cost of pre-2001 assets until disposal. A simplified system for determining the base cost of pre-2001 assets is being considered and this should align the South African capital gains tax rules with international practice.

Youth employment subsidy

In order to support job creation, a tax credit system over the next three years will be introduced when youth are employed.

New environmental tax and levy on electricity

From 2012, Revenue will introduce a new carbon tax. The detail of how the tax work is still to be finalised. In addition, the government levy on electricity generation from non-renewable energy sources will increase to 2.5c/Wh from 1 April 2011.

Cross-border withholding tax on interest

The new proposed withholding tax on cross-border interest payable at 10% will become effective from January 2013.

Currency transaction indirectly connected to certain foreign hedges

Currently, only certain exemptions and deferrals are available on foreign currency transaction used for business. It is proposed to further expand on the exemptions to allow for the exemption of foreign gains/losses on all linked instruments, i.e. where foreign bank loans are utilised to fund foreign inter-group loans.

Tax payments by individuals with more than one source of income

Pensioners receiving income from more than one retirement fund/insurer may be contacted by SARS in order to request that the pension/annuity be subjected to a higher rate of tax. This is to ensure that pensioners whose income is split across different sources (and consequently taxed individually at lower rates) do not have a tax liability on assessment.

Employer-provided long-term insurance plans

Revenue concedes that the changes to employer-provided insurance plan such as key-man, income protection policies and unapproved group life remains ambiguous. It is the intention of Revenue to rationalise the concerns that the industry has raised.

Lump sums from provident funds

Retirement lump sum amounts from provident funds will be subject to the same one-third limit applicable to pension funds and retirement annuities. This implies that two-thirds of the retirement value must be used to purchase compulsory annuities. The fact that no deductions were historically allowed for employee contributions to provident funds does not seem to have been considered. As two-thirds of the retirement benefit must now be taken as an annuity which is subjected fully to tax at marginal rates, provident fund members will effectively be denied the tax relief for non-deductible contributions that would have been obtained when taking the full benefit out as a lump sum.

As with the change to the deductibility of retirement fund contributions, the impact of this change on provident fund members also requires evaluation and further engagement with Revenue.

Miscellaneous changes

Gambling:

All gambling winnings above R25 000 will be subject to a final 15% withholding tax. This includes winnings from the National Lottery.

Securities Transfer Tax:

Brokers (members of a stock exchange) are exempt from securities transfer tax. It is proposed that the exemption be revised to clarify that it applies solely to players engaged as market makers.

Tax policy research projects:

Revenue has commenced with tax policy research projects which include investigations into the taxation of financial derivatives, long-term insurers and the effectiveness of estate duty.”