South Africa: Tax proposals for 2011/2012
The National Treasury released the Draft Taxation Laws Amendment Bill and the Draft Taxation Laws Second Amendment Bill 2010 for public comment in May 2010. The bills contain proposed amendments to the various tax acts for 2011/2012 tax year. This alert seeks to inform clients of these proposals to enable them to submit comments directly to the National Treasury or via the Ernst & Young South Africa office. The proposed amendments summarized below relate to personal tax including company car schemes, withdrawal from pension funds, interest threshold exemptions and voluntary disclosure of income schemes.
Company car scheme
From 1 March 2010, the deemed kilometer method for deducting expenses associated with the car allowance has been repealed. Taxpayers will now have to maintain a logbook in order to justify their business travel at year end. It is proposed that such logbook obligation be expanded to company provided vehicles (being vehicles supplied to employees by the company). In terms of the new proposals, the fringe benefit inclusion rate for company cars will be increased from 2.5 percent to 4 percent per month (only 3.2 per cent will be included in respect of Pay-As-You-Earn withholding). VAT and maintenance plans will be included in the cost of the car for the purposes of calculating the fringe benefit. The starting point for the calculation will also assume that all operating expenses are incurred by the employer. Employees will then be able to reduce their fringe benefit on assessment based on actual business kilometers. Deductions for the private element of actual expenditure on license fees, insurance premiums and maintenance with private fuel costs will be based on a deemed rate per kilometer. Existing payroll systems will require amendments to cater for these changes.
Pension withdrawal limits
Following changes in 2008 and 2009, pension withdrawals are now subject to a tax-preferred calculation that includes a lifetime tax free amount of ZAR300,000 (USD38,000 approx) as well as a favorable marginal rate structure. The new proposals allow terminated workers receiving a lump sum to receive the same tax treatment regardless of whether it is obtained from an employer or by the withdrawal of funds from pre-existing retirement funds. Both sums will be subject to the special rates table for lump sum withdrawals on retirement. Employer-provided lump sum termination payouts as a result of age, sickness, accident, injuries or mental incapacity will now form a part of the tax-preferred calculation. These changes become effective on 1 March 2011.
Interest threshold exemption
The interest exemption in terms of Section 10(1)(i)(xv) of the Income Tax Act, which provides relief to domestic individuals will be widened as follows : Individuals below 65 years will have the threshold raised to ZAR22,300 (USD 2,800approx) (previously ZAR21,000); and Individuals of 65 years and above will have the threshold raised to ZAR32,000 (USD4,000 approx) (previously ZAR30,000). A second exemption for domestic resident individuals receiving or accruing foreign interest and dividends will be raised to ZAR3,700 (USD470 approx) (previously ZAR3,500). SARS and National Treasury are of the opinion that the domestic threshold exemption has been abused through the use of family loans or loans between other connected persons.
The interest exemption will now only be applicable to savings that flow intothe general economy and all other forms of interest will be taxable at marginal rates. Therefore, threshold exemption will be limited to the following: Interest bearing products listed on the JSE (such as corporate bonds of widely held companies) Interest paid by any one of the three spheres of government Interest paid by any bank that is regulated in terms of the Banks Act, Mutual Banks Act, Co-operatives Act and Dedicated Banks Bill Interest paid by a friendly society registered under the Friendly Societies Act Interest paid by a medical scheme registered under the Medical Schemes Act Collective investment (money market) schemes and Interest from dealer or brokerage accounts The foreign interest and dividend exemption will remain the same. The effective date is the commencement of years of assessment ending on or after 1 January 2010.
Voluntary disclosure program
The South African Revenues Services (SARS) has decided to run a Voluntary Disclosure Program from 1 November 2010 to 31 October 2011. Taxpayers may come forward during this period to disclose any unpaid taxes and rectify their tax affairs. If disclosure is made before they are aware of a SARS audit or investigation, then the full amount of tax will remain payable however, additional tax, penalties (other than administrative penalties) and interest relating to the default will be waived for qualifying taxpayers. SARS will also not pursue criminal prosecutions in respect of the default. In circumstances where taxpayers have become aware of an audit or investigation, disclosure may still be made. However, only 50 per cent of the interest relating to the default will be waived. The voluntary disclosure program will be supported by a simultaneous exchange control program that will be brought into effect separately. More details on the program will be forthcoming from SARS and SARB in the coming weeks.
Abolition of standard income tax on employees (SITE)
With advances in technology, the SITE system (which was a final tax withholding on low earners meaning no tax return filing was needed) is no longer necessary. Efiling allows for taxpayers earning up to ZAR120,000 (USD15,240 approx) per annum with a single employer and no additional income or deductions to not file an income tax return. The discontinuation of SITE may potentially result in an increased tax liability for some low-income taxpayers with more than one source of income. SITE will be phased out over a three year period in order to limit any potential hardship to these taxpayers.
Employer-provided professional fees and indemnity insurance
Certain professions require persons practicing within that profession to belong to a regulated institution. Some professions further require their members to obtain indemnity insurance. Employers sometimes bear these costs as a benefit to their employees, especially when these fees are an absolute or practical prerequisite for engaging in the profession. It is proposed that the exemption for professional dues be adjusted to more closely reflect commercial reality. Under the exemption as revised, professional dues paid by an employer on behalf of an employee will remain non-taxable subject to two criteria. First, the duties of employment must involve the practice of the profession to which the fee relates. Second, the registration, certification or licensing operates as a prerequisite for that person to practice within the relevant profession.
Ernst & Young will be making written submissions to SARS and National Treasury on the draft bills. The draft bills are published for public comment before formal introduction in Parliament. The Standing Committee on Finance convenes informal hearings and considers public comments received. The Bills are then revised by the National Treasury to take account of the public comments and presented to the Committee in a response document before the revised bill is formally introduced by the Minister of Finance. Clients are advised not to act on these proposals until the parliamentary process has been finalized. Clients may view the draft bills on the National Treasury website at www.treasury.gov.za.
Source: Ernst and Young