Setting the tone:
“We owe a lot of people a lot of money” – Hon. Min. Tito Mbweni, Budget Speech 2021
This sentence is probably the most memorable one with South Africa’s borrowing requirement remaining above R500 billion in each year over the medium term, increasing our gross loan debt from R3,95 trillion in the current fiscal year to R5,2 trillion in 2023/2024.
South Africa would want to attract multinational companies to our country and inject foreign direct investments to improve our fiscal position. Amidst load-shedding (which has been our reality for the past 13 years), uncertainty and bail-outs relating to state-owned entities, challenges at all levels to maintain (at the very least) basic infrastructure and services for its people and factions within the ruling party, it is rather interesting that a widely expected populist budget speech was not delivered.
What about taxes:
South Africa currently has the largest tax shortfall on record. Against this background, the key takeaways include the following:
Introduction of wealth tax
This could simply not hold water and it comes as no surprise that a widely speculated “wealth tax” was not introduced in this year’s budget speech. Taking into account the current rates of donations tax, capital gain tax and estate duty (with the recent amendments to estate duty), in addition to personal income tax rates at 45% at top level, Treasury could not risk introducing another burden on top individual taxpayers if it aims to stimulate the economy. It simply could not risk placing another burden on taxpayers who are already leaning towards diversifying their investment in several jurisdictions to ensure a ZAR-hedge (given frail economic and political circumstances). The focus is on stabilising public finances, and in the process to keep tax increases to a minimum, thereby not decreasing tax morale amongst South African taxpayers even more. The tax increases proposed in the October 2020 Medium Term Budget Policy Statement will not be introduced. Davis Tax Committee recommendations will be implemented to consolidate wealth data for taxpayers through third party information to broaden the tax base, to improve tax compliance, and to assess the feasibility of a wealth tax. A dedicated unit will be established by SARS to improve compliance of individuals with wealth and complex financial arrangements.
Ceasing tax residency and taxation of retirement funds:
Should a South African tax resident cease to be tax resident (versus when becoming non-resident for exchange control purposes), he/she will now face an “exit tax” on retirement funds which may be maintained in South Africa. The amendments will be drafted as if the South African tax resident withdrew the retirement interest on the day before he ceased to be a tax resident.
With reference to the budget speech, the proposed amendment results in amounts from retirement funds to be deemed from a South African source, even though the individual receiving the retirement benefit is no longer a South African tax resident. Further clarity would have to be provided hereon, as the date on which you become a non-resident for tax purposes may be difficult to determine.
Section 12J tax incentive:
Most notably, and unfortunately, the sun will set on Section 12J of the Income Tax Act 58 of 1962 (“the Act”), i.e. the Venture Capital Company (“VCC”) regime on 30 June 2021.
This tax incentive was introduced into the Act in 2008 aiming at raising equity funding for SME’s which would have otherwise have struggled to attract investment. The purpose of Section 12J was job creation and economic certainty, and ultimately capital had to be put on risk. Based on data received from 100 of 380 qualified VCC’s at SARS-level, Treasury concluded that the original purpose was not achieved with perceived abuse of this specific tax incentive by the wealthy.
This is unfortunate, especially taking into account that most VCC’s have not exited from their investments with the most recent (i.e. 2015) amendments in mind. SARS are yet to see what the fiscus’ yield will be on exit and for this reason, it might have been more prudent to analyse these results before terminating the sun-set clause. Legitimate SME’s and start-ups may now be demotivated to continue their innovation efforts in South Africa.
Corporate income tax (“CIT”):
Albeit by 1%, and commencing on or after 1 April 2022, CIT is proposed to be reduced from 28% to 27% meaning that companies will reap the actual benefits in 2023. This proposed decrease in CIT is in line with recent countries like France, Belgium, Monaco, Zimbabwe and Colombia who also reduced their CIT. The corporate income tax base will at the same time be broadened by limiting interest deductions (seemingly especially to connected parties) and the limitation on the application of assessed losses, but further rate decreases will be considered to make our tax system more attractive.
Should the CGT inclusion rate of 80% for companies not be increased when the CIT reduction takes effect, the effective CGT rate for companies will also be reduced, which should be welcomed by corporate taxpayers.
Other notable proposals:
- Treasury will consider the tax treatment of travel and home office expenses in light of the COVID-19 pandemic and subsequent migration to “working from home.” This will be tackled in a phased approach over a few years.
- The Voluntary Disclosure Programme (“VDP”) system will be reviewed during 2021 which is a welcomed announcement given the delayed turnaround times and systemic issues experienced with the VDP system.
- The interaction between sections 24BA, 40CA and 42 in relation to regulating the base cost of assets acquired by a company in exchange for the issue of shares will be clarified.
- Inflation linked fuel levy increase by 15c per litre for petrol and above inflation increase by 9c per litre for diesel with effect from 7 April 2021.
- RAF levy increase by 11c per litre with effect from 7 April 2021.
- The UIF contribution maximum is increased to R17 711.58 with effect from 1 March 2021.
- An increase of 8% on specific excise duties on tobacco and alcohol.
- Reduced levy of 12.5c per bio-based shopping bags, while retaining the current 25c per normal plastic shopping bag.
- Clarification of the timing of the disposal of an inheritance to an heir from a deceased estate to be the date on which the liquidation and distribution account becomes final.
- The tightening of anti-avoidance rules where loans are transferred between trusts and the founder of the one trust is related to beneficiaries of the other trust.
Closing comments:
Generally, it is anticipated that the public will receive the budget neutrally due to no glaring tax increases. Although there were no considerable tax increases, taxpayers will be hit indirectly with inter alia fuel and RAF levy increases and sin taxes, together with the increase in the UIF maximum contributions.
Essentially, to stimulate South Africa’s promising economy (with innovation and bright minds abound) and to relieve unemployment, it boils down to Treasury and the fiscus focussing on specific goals and sectors where we already have the infrastructure to leverage from, and on tax compliance. In doing so, the tax base will be broadened and there will be a shift in focus from top-end taxpayers, be it companies and / or individuals, to a more balanced tax base. Furthermore, there seem to be an underlying intention of encouraging inward investment into South Africa, as well as a clear shift to controls on capital flows and the reporting thereof. Should this come to fruition, we could have a good story to tell our children with a legacy to hone for future generations.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)