Income Tax Proposals 2019

Country Careers | Income Tax Proposals 2019
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Herewith a summary (not meant to be a complete version) of the most significant proposals for the Budget 2019 as tabled this afternoon by the Minister of Finance:

The main tax proposals for 2018/19 are:

  • A one percentage point increase in VAT to 15 per cent.
  • No adjustments to the top four income tax brackets, and below inflation adjustments to the bottom three brackets.
  • An increase of 52c/litre for fuel, consisting of a 22c/litre increase in the general fuel levy and 30c/litre increase in the Road Accident Fund levy.
  • Higher ad valorem excise duties for luxury goods.
  • Increased estate duty, to be levied at 25 per cent for estates above R30 million.
  • Increases in the plastic bag levy, the motor vehicle emissions tax and the levy on incandescent light bulbs to promote eco-friendly choices.

Increasing the VAT rate
Government proposes to raise VAT by one percentage point, from 14 per cent to 15 per cent, effective 1 April 2018. The increase is necessary to meet new spending commitments and prevent further erosion of the public finances. VAT was last adjusted in 1993, and is lower than the global and African averages.

Raising luxury ad valorem excise duties
Effective 1 April 2018, the maximum ad valorem excise duty for motor vehicles will be increased from 25 per cent to 30 per cent. The classification of cellular telephones will be updated to include “smart phones” to ensure they attract ad valorem excise duties. In addition, the ad valorem excise duty rates, now at 5 per cent and 7 per cent, will be increased to 7 per cent and 9 per cent, ensuring that households spending more on luxury goods contribute proportionately more to revenue.

Increasing the estate duty rate
In line with Davis Tax Committee recommendations, and in keeping with the progressive structure of the tax system, the 2018 Budget proposes to increase estate duty from 20 per cent to 25 per cent for estates worth R30 million and more. To limit the staggering of donations to avoid the higher estate duty rate, any donations above R30 million in one tax year will also be taxed at 25 per cent. Both measures will be effective from 1 March 2018.

Environmental and health taxes
In addition to raising revenue, tax policy supports efforts to protect the natural environment and promote sustainable use of limited resources.

  • Cabinet adopted the Carbon Tax Bill in August 2017. Parliament has convened hearings following the release of the draft bill in December 2017. The bill is expected to be enacted before the end of 2018. Government proposes to implement the tax from 1 January 2019 to meet its nationally determined contributions under the 2015 Paris Agreement of the United Nations Framework Convention on Climate Change.
  • To reduce litter and dissuade consumers from buying plastic bags, the plastic bag levy is to be increased by 50 per cent to 12 cents per bag, effective 1 April 2018.
  • The environmental levy on incandescent light bulbs will increase from R6 to R8 to incentivise more energy-efficient behaviour. This measure will take effect from 1 April 2018.
  • The vehicle emissions tax will be increased to R110 for every gram above 120 gCO2/km for passenger vehicles and R150 for every gram above 175 gCO2/km for double cab vehicles, effective 1 April 2018.

Fuel taxes
Government proposes to increase the general fuel levy by 22c/litre and the Road Accident Fund levy by 30c/litre, effective 4 April 2018.

Personal income tax rates and bracket adjustments

2017/18
 2018/19
 R0 – R189 880 18% of each R1
 R0 – R195 850 18% of each R1
 R189 881 – R296 540 R34 178 + 26% of the amount above R189 880
R195 851 – R305 850 R35 253 + 26% of the amount  above R195 850
 R296 541 – R410 460 R61 910 + 31% of the amount above R296 540
R305 851 – R423 300 R63 853 + 31% of the amount  above R305 850
 R410 461 – R555 600 R97 225 + 36% of the amount above R410 460
R423 301 – R555 600 R100 263 + 36% of the amount  above R423 300
 R555 601 – R708 310 R149 475 + 39% of the amount above R555 600
 R555 601 – R708 310 R147 891 + 39% of the amount above R555 600
 R708 311 – R1 500 000 R209 032 + 41% of the amount above R708 310
 R708 311 – R1 500 000 R207 448 + 41% of the amount above R708 310
 R1 500 001 and above R533 625 + 45% of the amount above R1 500 000
R1 500 001 and above R532 041 + 45% of the amount above R1 500 000
 Rebates
Rebates
 Primary R13 635
Secondary R7 479
Tertiary R2 493
Primary R14 067
Secondary R7 713
Tertiary R2 574
 Tax threshold
 Tax threshold
 Below age 65 R75 750
Age 65 and over R117 300
Age 75 and over R131 150
Source: National Treasury
 Below age 65 R78 150
Age 65 and over R121 000
Age 75 and over R135 300

Excise duties on tobacco and alcohol

Government proposes to increase excise duties on tobacco products by 8.5 per cent, and excise duties on alcohol by between 6 per cent and 10 per cent. The National Treasury and the Department of Health will explore additional measures to reduce consumption of tobacco products, including a minimum price and stronger enforcement.

Individuals, employment and savings

Splitting of medical fees tax credits

The Income Tax Act (1962) provides a tax rebate (medical tax credit) for individuals. The medical tax
credit consists of two components: medical scheme fees for approved medical scheme contributions
and additional medical expenses for out-of-pocket medical payments. Government is concerned that
some taxpayers may be excessively benefiting from this rebate, specifically in instances where multiple taxpayers contribute toward the medical scheme or expenses of another person (for example, adult children jointly contributing to their elderly mother’s medical scheme). Where taxpayers carry a share of the medical scheme, contribution or medical cost, it is proposed that the medical tax credit should also be apportioned between the various contributors.

Clarifying the tax treatment and obligations of funds managed by bargaining councils

Bargaining councils were consulted in 2017 regarding the correct tax treatment of employee and employer contributions to, and
payments from, bargaining council funds. A general consensus emerged that the majority of existing funds can be accommodated by withholding taxes on contributions at the employer level, which also has the best administrative architecture in place. Transitionary arrangements can be considered for a small minority of more complicated fund types to ensure smooth implementation.

Removing the fringe benefit for preferential interest rates to employees for housing

In 2014, legislative changes were made to remove the fringe benefit that previously applied to employees with remuneration below R250 000 for the acquisition of low-cost housing with a value below R450 000. In line with government policy to promote the provision of housing, it is proposed that the relief from this fringe benefit tax be extended to loans at preferential interest rates, which are solely for housing use, made to employees who satisfy the same remuneration criteria for loans with a value of less than R450 000.

Retirement reforms

Tax treatment of contributions to retirement funds situated outside South Africa: The Income Tax Act currently exempts all retirement benefits from a foreign source for employment rendered outside of South Africa from taxation. The interaction of this exemption with double taxation agreements and other provisions of the Income Tax Act will be reviewed to ensure that the principle of allowing deductible contributions only in cases where benefits are taxable is upheld.

Align tax treatment of preservation funds upon emigration: Upon formal emigration an individual is able to withdraw the full value of their retirement annuity, after paying the applicable taxes. Government will consider aligning the tax treatment of different types of retirement fund withdrawals in such circumstances.

Allowing transfers to pension and provident preservation funds after retirement: In 2017, amendments were made to allow the transfer of pension or provident fund amounts to a retirement annuity fund after the retirement date of an employee. These amendments expanded the choice of available retirement funds if an individual decided to postpone retirement. Pension preservation and provident preservation funds were excluded as the administration required to disallow once-off withdrawals from these funds was considered too onerous. Industry consultations indicate that the system changes will not be burdensome, thus it is proposed that transfers to pension preservation and provident preservation funds be catered for in the legislation.

Rectifying tax anomalies on the transfer of retirement funds: The transfer of fund amounts between, or within, retirement funds at the same employer has inadvertently led to a tax liability for members, due to the current wording of the legislation. In principle, there should be no additional tax consequence for members if the transfers refer to amounts that have already been contributed to the retirement fund. Legislative amendments will be retrospectively introduced to correct these unintended tax liabilities.

Business (general)

Amendments resulting from the application of debt relief rules In 2017, the Income Tax Act was amended to address the tax consequences of applying debt relief rules. Government has noted concerns about unintended consequences that may arise from the application of these tax amendments. It is proposed that further amendments be made to address these concerns.

Refining anti-avoidance rules dealing with share buybacks and dividend stripping: In 2017, anti-avoidance rules dealing with share buybacks and dividend stripping were strengthened. One of the legislative provisions specified that anti-avoidance rules would override corporate reorganisation rules to prevent taxpayers from stripping dividends out of a target company, and thereby devaluing the company, before a reorganisation transaction. It has come to government’s attention that these changes may affect some legitimate transactions and arrangements. As a result, it is proposed that the interaction of these anti-avoidance rules and some of the corporate reorganisation rules be reviewed. In addition, anti-avoidance rules dealing with share buybacks and dividend stripping regarding preference shares should be clarified.

Refining rules for debt-financed acquisitions of controlling interest in an operating company: Following the proposed suspension of intra-group transactions in 2012, a special interest deduction was introduced instead of allowing implementation of debt push-down structures. Companies can claim this deduction if they used debt funding to acquire a qualifying controlling interest in an operating company. In 2015, the legislation was amended to prevent the abuse of this deduction. To qualify for this deduction, an operating company is now defined as a company where at least 80 per cent of its receipts and accruals constitute income for tax purposes. However, amendments to the current provisions are needed to clarify when this test should be applied. In addition, it is proposed that the legislation be reviewed to determine whether this test should be applied when an operating company transfers its business as a going concern to a company that forms part of the same group of companies as that operating company.

Addressing the abuse of collateral lending arrangement provisions: Since 2015, tax relief has been provided for the transfer of listed shares or both local and foreign government bonds in collateral lending arrangements. If a listed share is transferred as collateral in a lending arrangement, there are no income tax and securities transfer tax implications for 24 months. However, this means that foreign shareholders can reduce their dividends tax rate to zero by taking out a loan with a South African resident company and using the listed shares as collateral. The resident company receives a tax-free dividend and afterwards, per the collateral agreement, pays an amount (called a manufactured dividend) based on the dividend received by that resident company to that foreign company, free of dividends tax. It is proposed that legislation be amended to prevent this abuse.

ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS

Business (financial sector)

In 2014, legislative changes were made to remove the fringe benefit that previously applied to employees with remuneration below R250 000 for the acquisition of low-cost housing with a value below R450 000. In line with government policy to promote the provision of housing, it is proposed that the relief from this fringe benefit tax be extended to loans at preferential interest rates, which are solely for housing use, made to employees who satisfy the same remuneration criteria for loans with a value of less than R450 000.

Clarifying the tax treatment of doubtful debts:

In 2015, the South African Revenue Service (SARS) Commissioner’s discretion in administering the Income Tax Act was reviewed and amended in anticipation of the move to a self-assessment income tax system. In 2015, the Commissioner’s discretion on a doubtful debts allowance under section 11(j) of the act was deleted with effect from a date to be announced. The intention of such a deletion was that, in future, the allowance would be claimed according to criteria set out in a public notice issued by the Commissioner. However, no criteria have been formulated for the claiming of the allowance. To provide certainty, it is proposed that the criteria for determining the allowance should instead be included in the Income Tax Act.

Clarifying tax amendments relating to long-term insurers

The Income Tax Act was amended to introduce the risk policy fund for long-term insurers, effective from 2016. The tax treatment of long-term insurers was also amended due to the introduction of the solvency assessment and management framework. Recent amendments affecting the risk policy fund did not take effect when the fund was introduced. It is proposed that the effective date of the relevant amendments be so changed.

Business (incentives)

Review of venture capital company rules

The uptake of government’s venture capital companies tax incentive regime, which aims to encourage investment in small and medium-sized business, has grown significantly over the past two years. However, administrative and technical issues are obstructing increased uptake. It is proposed that the legislation be amended to address rules relating to the investment income threshold limitations in the qualifying company test, as well as when the controlled company test needs to be applied. The rules relating to the connected person test also need to be reviewed, specifically the rule for retroactive withdrawal of venture capital company status.

Income tax

Adjusting “official rate of interest” in the Income Tax Act: The “official rate of interest” is the current repurchase rate plus 100 basis points (7.75 per cent). This rate is used to quantify the fringe benefit of low interest rate loans provided by employers and the amount of a donation for low interest loans to trusts by connected persons. Given that interest rates lower than prime are now uncommon, it is proposed that the official rate be increased to a level closer to the prime rate of interest. This would allow the benefit of lower rates to be measured with reference to a rate that approximates the rate offered by commercial banks to low-risk clients.

Dividends tax

Repeal of requirement to submit returns by persons who received exempt dividends: In order to ease the administrative burden, it is proposed that the requirement for a person receiving a tax-exempt dividend to submit a return be repealed.

Value-added tax

Correction of tax invoices: In some cases, a vendor may issue a tax invoice that includes incorrect information in addition to correct VAT, value and supply information. As the document issued by the vendor does not qualify as a tax invoice, the recipient is unable to use it to deduct input tax, and may request a new version with the correct information so that it qualifies as a tax invoice. An Amendment is proposed to clarify that, under the circumstances described above, a vendor that cancels the initial document and reissues an invoice with the correct information will not be committing an offence. The amendment will also require the vendor to maintain a proper audit trail across the initially issued document, the manner of cancellation and the reissued invoice.

No Changes to:

  • Capital Gains Tax
  • Dividend Tax
  • Witholding Taxes
  • Transfer Duty

 

Article written of FHBC (Wellington) (Pty) Ltd.