We caught up with 2oceansvibe Media’s accountants, Galbraith Rushby, who gave us this thorough analysis on the 2013 Budget Speech and what it means for you and me. In English that you can understand! Click for more.

Personal Income Tax

The minister of finance indicated that personal tax relief in 2013/14 would be R7 billion. This is down from the previous budget speech of R9.5 billion. A person earning R200 000 per year now saves R86 per month. When considering electricity price increases, rates increases, petrol increases, that is a bleak saving and the saving of R7 billion by taxpayers seems to be largely a marketing guise and will not benefit most people. When you consider that the increase in just the fuel levy will increase the tax burden by approximately R6.8 billion there is little to actually celebrate.

Important Changes

Disability or income protection policies – Disability insurance policies that fall outside the ambit of retirement funds are treated differently, depending on whether they compensate for the loss of future income (deductible) or compensate against loss of personal capital, such as the loss of an arm (not deductible). Many policies blur this distinction. The amendments are that all non-retirement fund disability and income protection policies will be non-deductible contributions but the payouts would not be taxable.

Staff housing and accommodation – Where an employer transfers a house to an employee at a price below market value, a taxable fringe benefit is triggered. The fringe benefit tax is often unaffordable for low-income employees. There is proposed yet unspecified relief provided to lower income earners in such cases.

Medical tax credits – Monthly tax credits for medical scheme contributions will be increased from R230 to R242 for the first two beneficiaries and from R154 to R162 for each additional beneficiary, with effect from 1 March 2013.

Non-retirement savings – In the 2012 Budget Review, tax-preferred savings and investment accounts were proposed as alternatives to the current tax-free interest-income caps, to encourage greater savings (allegedly). A discussion document was published in September 2012. Government intends to proceed with the implementation of tax-preferred savings and investment accounts. All returns accrued within these accounts and any withdrawals would be exempt from tax. The account would have an initial annual contribution limit of R30 000 and a lifetime limit of R500 000, to be increased regularly in line with inflation. This will be introduced from April 2015.

Interest exemption – With effect from 1 March 2013, tax-free interest-income annual thresholds will be increased from R33 000 to R34 500 for individuals 65 years and over, and from R22 800 to R23 800 for individuals below 65 years. This will fall away after the introduction of the tax preferred savings accounts.

Retirement savings reforms – Individuals’ contributions to pension and retirement annuity funds are tax deductible. To promote savings, the deductibility of such contributions, as well as contributions to provident funds and employer contributions that will constitute fringe benefits, will be increased to 27.5 per cent of the greater of remuneration or taxable income (excluding retirement annuity or lump sum income). An annual cap on deductible contributions of R350 000 will be applied.

Taxpayers with multiple sources of income – People receiving multiple incomes are often faced with a higher-than expected tax liability on assessment, due to the aggregation of these incomes. Steps under consideration unfortunately are not tax relief but higher levels of withholding by employers and temporary relief in the case of widows and widowers.

No return required – Individuals with a single source of taxable employment income currently do not have to submit tax returns if their taxable income is below a threshold of R120 000 per year. The threshold is raised to R250 000.

Understatement penalties- The penalty provisions will be refined and relief will be provided for bona fide errors.
Withholding tax extended to cross-border service fees – Government proposes that the withholding regime be extended to cross-border service fees, subject to treaty relief. To facilitate administration, the withholding regimes in respect of interest, royalties and cross-border service fees will become effective from 1 March 2014. Prior changes to interest and royalty withholding will also be deferred until this date.

Small business Tax amendments

This category always seems to be the big winner and this year is no exception. The R14 million turnover threshold for small business corporations be increased to R20 million and that the graduated tax structure for such corporations be revised as follows
Turnover tax is still around, thankfully and still provides fertile planning ground. The tax rates remain unchanged from the 2012/13 budget speech and are as follows:

Business Tax Amendments

Special economic zones – In certain special economic zones, the Minister of Finance will authorise the following tax incentives, after consultation with the Minister of Trade and Industry:

• A 15 per cent corporate income tax rate for businesses in such areas.
• An employment incentive allowing for a tax deduction for employment of workers earning less than R60 000 per year.
• An accelerated depreciation allowance for buildings in these areas, based on the existing regime for urban development zones, to encourage developers to invest more in industrial premises.
• Public-benefit organisations – Donations to approved section 18A PBOs are deductible up to 10 per cent of taxable income in the year the donation is made. Donations in excess of this figure cannot be carried forward, which reportedly discourages large donations. Government proposes to allow donations in excess of 10 per cent of taxable income in any given year to be rolled over as allowable deductions in subsequent years.

Restricting debt to prevent base erosion – SARS intends to close what it considers artificial and excessive debt and proposes the following:

Artificial debt: Some debt instruments will be re-characterised as shares (along with the underlying yield) if they contain certain features. SARS concern is debt that does not have a realistic possibility of being repaid in 30 years or debt convertible to shares.
Connected person debt: Excessive debt issued to connected person concerns SARS if the creditor is exempt from tax on the interest. Limits will be imposed so that the interest on this form of debt does not exceed 40 per cent of earnings after interest after other debts are taken into account. Excess interest will be allowed to roll over for up to five years.

Acquisition debt: In corporate restructuring, use of acquisition debt against future earnings impacts taxable profits for years to come. Interest on excessive debt will be allowed to roll over for up to five years.

VAT registration of foreign businesses – Amazons success was that it did not need to charge VAT on the products that it sold and SA consumers got a product cheaper as there was no VAT payable. The law requires vendors to register with SARS, collect VAT and pay it to SARS. In the case of imported services or digital supplies, such as e-books or music, no border post or post office can perform the function as collecting agent, as is the case with physical goods. The net result is that the local consumer can buy imported digital goods or services without paying VAT. Government proposes that all foreign businesses supplying e-books, music and other digital goods and services in South Africa be required to register as VAT vendors. How this is to be policed I am not sure.

Streamlining registration and filing for businesses and individuals – A single registration process for multiple tax products will be launched to simplify registration for all businesses. VAT registration will be streamlined to ease the compliance burden. A new company income tax form will be introduced that requires fewer fields to be completed by smaller businesses.

Reforming the taxation of Trusts

In the last budget speech SARS eluded to them looking at how trusts operate and the tax treatment of trusts. There are now several changes that will take effect during the 2013/2014 tax year. There have been a few high profile cases were SARS have lost money. They consider certain aspects of local and offshore trusts to be a problem for global enforcements due to their flexibility and flow-through nature. They are also worried of their use to avoid estate duty. The proposals will not apply to trusts established to attend to the legitimate needs of minor children and people with disabilities. The proposals are as follows:

Discretionary trusts should no longer act as flow-through vehicles. Taxable income and loss (including capital gains and losses) should be fully calculated at trust level with distributions acting as deductible payments to the extent of current taxable income. Beneficiaries will be eligible to receive tax-free distributions, except where they give rise to deductible payments (which will be included as ordinary revenue). Therefore interest distributed to a beneficiary does not stay interest but becomes fully taxable. Capital gains would also be fully taxable to the beneficiary and would not retain its nature and taxed as a capital gain.

Distributions from offshore foundations will be treated as ordinary revenue. This amendment targets schemes designed to shield income from global taxation.

General Amendments

Plastic bag and incandescent light bulb levies – The levy on plastic shopping bags of 4c/bag will be increased to 6c/bag from 1 April 2013, and the environmental levy on incandescent light bulbs from R3 to R4 per bulb from 1 April 2013.

Fuel levy – Government proposes to increase the general fuel levy and Road Accident Fund levy by 22.5c/l and 8c/l respectively with effect from 3 April 2013.

The sin taxes – Tobacco levy will increase by between 5.8% and 10%, spirits by between 5.7% and 10% and beer by 7.5%.

Brought to you by Galbraith Rushby