South Africa Unveils 2010/2011 Budget
South Africa’s Minister of Finance delivered his Budget Speech on 17 February 2009. In this article, the key measures impacting individuals will be highlighted.
Personal Income Tax
The following table shows the new tax rates, which will apply to natural persons for the 2010/2011 tax year.
[ZAR 1 = USD 0.131 / ZAR 1 = EUR 0.0961 / ZAR 1 = GBP 0.0844]
• Primary: ZAR 10,260 (was ZAR 9,756)
• Secondary: ZAR 5,675 (was ZAR 5,400).
Tax Threshold (2010/2011)
• Below age 65, ZAR 57,000 (was ZAR 54,200)
• Age 65 and over, ZAR 88,528 (was ZAR 84,200).
Interest and Dividend Exemption
With effect from 1 March 2010, the interest exemption will be raised from ZAR 21,000 to ZAR 22,300, for taxpayers under the age of 65 and from ZAR 30,000 to ZAR 32,000, for taxpayers aged 65 and over. The portion of the exemption which may be applied against foreign interest and foreign dividends has been increased from ZAR 3,500 to ZAR 3,700. Interest earned by nonresidents who are absent from South Africa for 183 days or more and who are not carrying on business in South Africa remains exempt from tax.
Medical Scheme Contributions and Medical Expenses
Effective 1 March 2010, the capped tax-free amount which may be deducted in respect of employee medical scheme contributions will be increased from ZAR 625 to ZAR 670, for each of the first two beneficiaries and from ZAR 380 to ZAR 410, for each additional beneficiary.
Contributions exceeding the capped tax-free amount and any other medical expenses may be claimed as a deduction to the extent that this exceeds 7.5 percent of taxable income.
Company Car Fringe Benefits
The private use of a company vehicle is currently deemed to be 2.5 percent per month of the determined value of the vehicle. It is proposed that this deemed monthly taxable value be increased in order to limit potential abuse.
Although announced in last year’s Budget speech, it was confirmed in this Budget speech and will become effective from 1 March 2010, that 80 percent of travel allowances will be subject to Employees’ Tax.
Employee Deferred Compensation and Insurance Schemes
Concerns have been raised in relation to the taxation around certain insurance schemes, for example “key man” policies, deferred compensation, and group life policies. These schemes have become methods of creating up-front tax deductions for employers and providing a mechanism for deferral of tax in the hands of employees. It is proposed that measures will be taken to ascertain that employer deductions match employee gross income from a timing perspective and that the contributions are subject to monthly employees’ tax withholding.
The ZAR 30,000 exemption applicable to retrenchment packages has not been revised for many years. It is proposed that retrenchment and retirement lump sums be treated in the same way in future. In other words, the tax tables applicable to retirement lump-sum benefits will apply to retrenchment benefits as well.
Conversion of Annuities to Lump Sums
Lump-sum payments made by a retirement fund upon the death or retirement of a member are taxed in accordance with a special rates table, which includes a ZAR 300,000 exemption. If an annuity is converted into a lump-sum post retirement, it is proposed that this conversion also be taxed in accordance with the special rates table.
Retirement Death Benefits
In certain circumstances, upon death, an annuity may be converted to a lump sum in favor of another party. It is proposed that the special rates table (including the ZAR 300,000 exemption) be extended to cover these circumstances.
Where multiple employers make use of an umbrella fund and one employer terminates its membership and transfers the savings to a preservation fund, the amount transferred should not be taxed in the hands of the employee. The current definition of a preservation fund could potentially give rise to adverse tax implications for the employee and it is, therefore, proposed that the ambit of the definition of a preservation fund be extended to allow for such transfers.
Payments from Retirement Funds
In certain circumstances, the Pension Funds Act allows fund administrators to use member’s retirement benefits to make payments to third parties. Where the member borrows money from his or her retirement fund, it is proposed that the amounts withdrawn for this purpose be subject to taxation in accordance with the special rates tables.
Currently, no taxable benefit arises where an employer pays professional subscriptions fees (e.g., SAICA) on behalf of its employees if certain conditions are met. It is proposed that, where other professional fees are paid which largely benefit the employer, the fringe benefit relief be extended to cover these payments. Although it is unclear what type of professional fees will be covered, it is envisaged that this could potentially encompass tax practitioner fees.
In terms of current legislation, employees are subject to income tax on share gains when the restrictions are lifted or when the employee disposes of those shares. There are potential double taxation issues surrounding the use of employee share trusts and undesired implications with regard to share swaps. It is the intention that these problems and other technical issues will be resolved with the introduction and further refinement of the anti-avoidance legislation.
Winnings in the hands of gamblers are currently not subject to income tax. It is proposed that this practice be reviewed and measures be considered to limit opportunities for money laundering, unlicensed online gambling, and other abuses.
Payment of Tax and Administrative Issues
Standard Income Tax on Employees (“SITE”)
SITE is to be abolished from 1 March 2011 (2012 tax year). Administrative relief measures will be considered for low-income taxpayers with multiple sources of income.
Exemption from Provisional Tax Registration
Currently, the definition of provisional taxpayers includes those who are exempt from the payment of provisional tax (for example, where the taxable income of the person will not exceed the tax threshold or the taxable income is derived from interest, dividends, and rental income from the letting of fixed property not exceeding ZAR 20,000). It is proposed that the definition of a provisional taxpayer be amended to exclude provisional taxpayers who are exempt from the payment of provisional tax. The purpose of this proposal is to eliminate unnecessary provisional tax registrations.
Advanced Tax Rulings
SARS currently issues binding advance tax rulings to taxpayers. It is proposed that the advanced tax ruling system only be made available to compliant taxpayers. A condition will therefore be introduced to ascertain that the tax affairs of an applicant are in order before an application for a ruling may be submitted.
Recovery of Employees’ Tax from Employers
In a recent judgement it was held that an incorrect determination by an employer of employees’ tax on taxable benefits can only be remedied on assessment of the employee. It is proposed that SARS be allowed to raise an assessment on an employer where the value of the taxable benefit has not been taken into account (or it has been undervalued) resulting in an under-payment of employees’ tax. Furthermore, additional amendments may be required to make sure that employer payments do not result in a further taxable benefit in the hands of the employee.
Voluntary Disclosure Program
In order to encourage taxpayers to disclose non-compliance and to regularize their tax affairs, a voluntary disclosure program (“Amnesty”) will be implemented. This program will come into effect for a window period from 1 November 2010 to 31 October 2011. Although the full amount of tax will still remain due, their relief will be allowed with regard to interest and penalties if the disclosure is complete; SARS was not aware of the default; and a penalty or additional tax would have been imposed had SARS discovered the default in the normal course of business.