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  • A Budget that Aims to Make a Difference

A Budget that Aims to Make a Difference

24 February 2017

Shohana Mohan, Head of Individual and Expatriate Tax BDO Johannesburg

This year’s budget, announced by Finance Minister Pravin Gordhan on February 22 2017, shows a clear determination to set in motion the action that is necessary to achieve the goals of the National Development Plan (“NDP”). Tax revenue collection is our nation’s main tool to reallocate resources to achieve progressive realisation of economic and social rights as envisaged in the NDP.

While it is a bitter pill to swallow after learning that every R1 earned above R1,500 000, R0.45 cents will go the tax office and only R0,55 to the pocket, those taxpayers that fall in this bracket, should be looking at the spending programmes the tax revenue collection will be funding.

Personal income tax is the biggest source of revenue collection in the fiscus. In 2017 it made up R482 billion of the total collected. In 2018, its forecast to make up just over 46% of total tax revenue collections.

The new budget aims to boost that collection mechanism. The tax rate hike means if you earn above R1.5 million per annum, you’ll move into the new top marginal tax bracket. That tier will now be taxed at 45%. Previously the marginal rate at the top tier was 41%, for people earning above R701 300.

This jump to a new tax tier is an alternative to going all-out and introducing a wealth tax, which our current financial systems and infrastructure is not geared for. This increase, together with the partial relief for the tax adjustments for fiscal drag, will raise an additional R16.5 billion.

Tax take-aways from this year’s budget.

The tax rates have been adjusted for fiscal drag, in line with inflation, to benefit lower income earners, but effects will be felt at the top end. In the previous year, the effective capital gains tax rate for a person earning above R1.5 million was 16.4 per cent. In the New Year, we’re going to be looking at an 18% effective tax rate.

Added to that, on the individual side, the South African Revenue Service (SARS) has raised the withholding tax on the sale of immovable property by non-residents, from 5% to 7.5%.

Regarding trusts, SARS has now increased the tax rate for trusts to 45%. So your effective capital gains tax rate for a trust is now 36%.

The maximum contribution to a tax-free investment account increases in line with inflation from R30 000 to R33 000 per annum. The lifetime limit of R500 000 remains unchanged.

Regarding transfer duty, property valued at below R900 000 will not attract the duty.

Then, there’s always the Annexure C, comprising proposals to be considered and tabled for discussion and the legislative process before these proposals can be enacted.

One of the focus areas for individuals includes a relook at the foreign remuneration exemption. This exemption is regarded as being too favourable for taxpayers who work cross-border and who are not subject to tax in the host country. If services are rendered in a non-tax paying jurisdiction and the exemption requirements, i.e. the 61 continuous days and 183 aggregate days in a period of 12 months is met, the remuneration may potentially not be subject to tax in either location. This results in double non-taxation and opposed to double taxation. The proposal is to amend legislation so only amounts that have been taxed in the other country will be exempt going forward.

Regarding the taxation of interest free loans to trusts, a further proposal is aimed at extending anti-avoidance measures regarding interest-free loans made to Companies that are owned by Trusts. Still in Annexure C, some proposed retirement reform. Current legislation does not cater for a person who’s reached retirement age, say age 55, to not withdraw their funds from their retirement fund, but to transfer to another approved retirement fund without being taxed. SARS is looking to change this. According to the new proposals, you would only be taxed at the time you really withdraw.

What they’re saying is because people can now work for longer and life expectancy has increased, a retiree should not be forced to retire from a fund. Instead, the retiree should be in a position to elect to transfer the proceeds from a pension or provident fund to an approved fund without incurring a tax implication.

Retirement reform encourages people to save for longer, so they can sustain themselves and not become a burden on the state.

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