BUDGET 2018 | HIGHLIGHTS & NEW TAX RATES

BUDGET 2018

via PWC Budget

Personal Income Tax

As many pundits predicted, the Minister of Finance announced a new 45% tax bracket for individuals which will apply to taxable income in excess of R1.5 million. The tax rates below that have remained unchanged and the income levels at which they apply have been slightly adjusted, but not enough to offset the effects of inflation. By way of example, the impact of the tax changes at the various income levels will be as follows:

 

According to the Minister of Finance, the impact of the tax proposals are that the additional revenue for the Fiscus from personal income tax is R16.5 billion while the introduction of the new tax bracket will result in additional revenue of R4.4 billion. These new tax rates, combined with increases in the fuel levy as well as the usual increases in “sin taxes” will hit certain sectors of the economy quite hard. Certainly, taxpayers with taxable income in excess of R1.5 million will find themselves significantly worse off. Notwithstanding the relatively bad news regarding the new 45% tax bracket, the Minister of Finance did announce some good news for employers and employees.
For example, if an employer grants a bursary or scholarship to dependents of its employees, provided the employee’s remuneration does not exceed R600,000 (up from R400,000), then such a scholarship or bursary will be exempt from tax in the employee’s hands to the extent that it does not exceed R20,000 (up from R15,000) per dependent per year (for education below NQF level 7) and R40,000 (up from R60,000) per dependent per year (for education at NQF level 7 and above). In addition to the above, the travel allowance tables have been adjusted upwards as well as the rate at which employers can reimburse employees for business travel from R3,29 to R3,55 per kilometer and for 12,000 kilometers rather than the previous 8,000 kilometers.
Furthermore, the medical credit which members of medical aid funds can claim against their tax liability has increased from R286 to R303 for the first two dependents and thereafter from R192 to R204 per month per dependent. For those employees who travel for business purposes and are paid a subsistence allowance by their employees, the deemed amounts have also increased from R372 to R397 per night away for meals and incidentals and, where the allowance is for incidentals only, the amount increases from R115 to R122.
It’s interesting to note that a new 45% bracket has been introduced for individuals earning more than R1,5 million per year and that this is purported to affect only 100,000 people. To counter arbitrage opportunities, the dividends tax rate has also been raised to 20% effective immediately. The effective tax rate for distributed company profits then increases from 38,8% to 42,4%. Clearly, there is still a difference, albeit a small one of 2,6%. Given that many people earning in excess of R1,5 million may be able to adjust their salaried earnings and take the difference by way of dividends, the effective rate of tax for many of these high earners will be 42,4%.
Sandwiched in the Annexure C proposals is a paragraph which could have major tax implications for South African residents which hold foreign companies through an interposed trust. Currently the interposed trust breaks the controlled foreign company link with the consequence that the attribution rules under section 9D do not apply. Treasury has announced that it will propose specific countermeasures to curb these abuses.
Corporate Tax - Dividends tax
The increase in the dividends tax rate from 15% to 20% will largely impact South African individual taxpayers and non-resident taxpayers that are tax resident in countries that do not have double tax agreements with South Africa. Dividends paid by South African tax resident companies to other South African tax resident companies are generally exempt from dividends tax, while dividends paid to non-residents who reside in countries that have in-force double tax agreements with South Africa generally enjoy a reduction in the dividends tax rate. The increased tax burden on individual taxpayers may potentially result in new innovative products and schemes where taxpayers attempt to make use of the arbitrage in the rates levied on companies and also potentially relief afforded by double tax agreements.
Corporate Tax - Write-off of debt
Corporate taxpayers will welcome the proposed relief for the write off of debt in dormant group companies or companies under business rescue.  The current income tax rules do not provide for inter-group relief where recoupments arise due to the write off or forgiveness of debt which was used to fund tax deductible operating expenditure. The write off of the debt on liquidation gave rise to tax liabilities which could not be settled which prohibited the liquidation or deregistration of companies. The extension of the relief to companies in liquidation as well as South African companies within the same group, would align the tax treatment of loans used to fund tax deductible expenditure with the current tax treatment of loans utilised for other purposes which currently already enjoy relief under the legislation dealing with capital gains tax. We expect that mining companies will also welcome the alignment of the tax treatment of the write-off of debt associated with capital expenditure which at present results in a recoupment of the debt that is written off.
Corporate Tax - Share buy-backs
Following the announcement in 2016 that Treasury will pay closer scrutiny with regard to share buy-back transactions.  As expected it has been announced that specific countermeasures will be introduced to curb the use of share buy-back schemes to avoid the tax consequences that would arise had the shares been disposed of in a traditional manner.
Corporate Tax - Utilisation of “contributed tax capital” to make distributions to foreign shareholders
Currently, South African companies may potentially utilise their “contributed tax capital” (an artificial term introduced into the Income Tax Act which comprises of capital contributed to the company by shareholders) to make distributions to foreign shareholders in a tax exempt manner.  Distributions from “contributed tax capital” does not attract dividends tax and in most cases would also not attract capital gains tax (provided the distributing company does not hold significant investments in local immovable property) in the foreign shareholder’s hands.  It is proposed that the tax legislation be amended to prevent the perceived abuse of the definition of “contributed tax capital”.
Corporate Tax - Base erosion and profit shifting
Treasury has confirmed its commitment to the focus on base erosion and profit shifting and its participation in OECD initiatives and recommendations. A number of legislative amendments have been made already and we will see a continued implementation of more measures to ensure the protection of South Africa’s tax base. Government has committed to the automatic exchange of financial information from 1 September 2017, which would facilitate transparency with regard to the tax affairs of multi-national groups across the globe.

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