Tag Archives: budget

Budget 2018

Following the annual national budget speech delivered by Finance Minister Malusi Gigaba on 21 February, we highlight some of the most significant matters arising below:

  • The much-debated VAT rate has been increased from 14% to 15%, which was widely expected although hugely unpopular given the political sensitivity coupled with the effect that this will have on the poor;
  • The corporate income tax and transfer duty rates have been left unchanged;
  • The CGT inclusion rate (40% for individuals, 80% for companies or trusts) was left unchanged too (although we do expect these to go up to 50% / 100% in the near future);
  • “Bracket creeps” or “stealth taxes” had a significant impact on the current budget and refer to marginal tax brackets not being adjusted upwards for the effect of inflation annually. This year, no adjustments will be made to the top 4 tax brackets for individuals. Assuming that inflation is 6%, it will therefore be 6% “easier” for taxpayers to fall into a higher tax bracket compared to last year.
  • A new estate duty / donations tax bracket is to be introduced for donations or estates in excess of R30 million, and which will attract tax at 25%. Amounts below this threshold will still be taxed at the prevailing rate of 20%.
  • The above and other most significant changes can be summarised as follows:

 

WAS

NOW

Top marginal PIT rate

45%

45%

VAT rate

14%

15%

Tax rate for trusts

45%

45%

Estate duty for estates > R30m

20%

25%

CGT annual exclusion

R40,000

R40,000

Primary rebate for individuals

R13,635

R14,067

The Minister also alluded to the following matters which would be subject to legislative intervention or refinement during the course of the legislative year ahead:

  • Interaction of anti-avoidance rules relating to share buybacks and dividend stripping and the general reorganisation rules are to be reviewed, since current rules may affect legitimate transactions (especially in the preference share funding context);
  • Appropriateness of the current high tax exemption as part of the “controlled foreign company” (CFC) regime will be considered. However, legislation targeting foreign companies held by foreign trusts (which have SA resident beneficiaries) and classifying these as CFCs will be reintroduced;
  • To further encourage venture capital company investments, the appropriateness of the current passive investment income threshold is to be revisited, as well as the timing of the “group company” disqualification requirement;
  • The “official rate of interest” (used to calculate tax consequences of interest-free or low-interest loans), currently at prime less 2.5%, is to be increased; and
  • Further refinements will be made to the new “debt relief” legislation introduced in 2017 to remove anomalies.

This article is a general information sheet and should not be used or relied upon as 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 financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Bracket creep, VAT and the 2017 Budget

Year on year the personal income tax tables are adjusted and based on which individuals are taxed based on an increasing sliding scale based on their income earned and therefore into which tax bracket they would fall. The annual adjustments are partly to provide for tax relief or an additional burden on certain salary earners, and partly to provide for the effect of inflation.

Consider for example the primary rebate of 2015/2016 (R13,257) compared to that of the 2016/2017 tax year (R13,500). This has now been increased to R13,635 for the 2018 fiscal year. Applying the lowest tax threshold of 18% thereto, this translates into the annual income tax free receipts of R73,650 in 2016 being increased to R75,000 in 2017, and to R75,750 subsequently for 2018.

This means that the threshold at which individuals are taxed increased by 1.8% and 1% effectively over the past two years. In non-real terms therefore tax relief was effected for those individuals earning at the lower end of the tax bracket: where a salary of R6,138 per month would have been income tax free in 2016, this amount in 2018 is now R6,313.

Taking into account that inflation is considered to have averaged between 5% to 7% over this period though, in real terms therefore even those on the lower end of the income are paying more taxes on income in real terms in 2018 than would have been the case in 2016. The effect of so-called “bracket creep” (whereby taxes are effectively increased through the effect of tax brackets not being adjusted sufficiently to cater for inflation) is a phenomenon acutely effecting not only the rich, but the poor too, and especially so over the past two years.

The observation above is relevant in the context of the debate surrounding the potential change in the VAT rate. VAT is considered to represent a regressive tax system whereby everyone, rich or poor, pays the same amount of tax based on consumption of goods (subject to certain basic goods that are exempted). The personal income tax regime in contrast represents a progressive tax system whereby the rich are taxed proportionately more and at increased rates based on their respective income levels. The political dynamics therefore dictate that a pro-poor tax system be focussed more heavily on income tax with increasing tax brackets rather than a flat VAT rate applied to everyone across the board. It is for this exact same reason why there is so much rhetoric and political noise in the media opposing an increase in the VAT rate, especially where the pro-poor movements such as the trade union movement and the SACP are involved.

What the above effect of bracket creep illustrates though is that Treasury is nevertheless, in an indirect manner, systematically also increasing the tax burden on the poor through bracket creep, yet in a more subtle manner whereby it is at the same time avoiding getting involved in the political quagmire that is the VAT rate. An implicit acknowledgement perhaps from Treasury that the wealthy alone cannot absorb increased tax burdens?

This article is a general information sheet and should not be used or relied upon as 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 financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Budget 2017

Following the annual national budget speech delivered by Finance Minister Pravin Gordhan on 22 February, we highlight some of the most significant matters arising below:

 A new tax bracket will be introduced targeting the wealthy as well as trusts. It is proposed that trusts will from now on be taxed at 45% on all taxable income, while individuals earning more than R1.5million per tax year will pay 45% income tax on such income (estimated to be around 103,000 individuals);

  • The dividends withholding tax rate is proposed to be increased from 15% to 20%. This is linked to the above increase in individual income tax rates to prevent wealthy individuals from exploiting the arbitrage opportunity that may exist in receiving fees in a company and having these paid out as a dividend;
  • The much debated VAT rate has been left unchanged, which was widely expected given the political sensitivity coupled with the effect that this may have on the poor;
  • Increase in withholding taxes on non-residents disposing of immovable property situated in SA;
  • The “duty free” threshold for transfer duty (tax levied on purchasers of immovable property) has been increased from R750,000 to R900,000;
  • The corporate income tax, donations tax and estate duty rates have been left unchanged;
  • The CGT inclusion rate (40% for individuals, 80% for companies or trusts) was left unchanged too;
  • The above and other most significant changes can be summed up as follows:
  WAS NOW
Top marginal PIT rate 41% 45%
Dividends tax 15% 20%
Tax rate for trusts 41% 45%
Estate duty abatement R3.5 m R3.5 m
CGT annual exclusion R40,000 R40,000
Primary rebate for individuals R13,500 R13,635

The Minister also alluded to the following matters which could expect legislative intervention or refinement during the course of the year:

  • Renewed focus on transfer pricing and cross-border tax avoidance schemes;
  • Further refinements to anti-avoidance legislation introduced in 2016 as applies to trusts;
  • Section 42 “asset-for-share” relief to be extended to also provide for the assumption of contingent liabilities (as opposed to only applying to the issuing of shares or the assumption of existing debt);
  • Share issue and buy-back transactions (commonly used as part of corporate restructurings whereby CGT is avoided) are to be addressed as part of an anti-avoidance effort;
  • The anti-avoidance provisions linked to “third-party back shares” (section 8EA) are to be relaxed;
  • Further refinement and relaxation of the VCC regime as relates to rules restricting such investments;
  • Measures will be introduced whereby foreign companies held by foreign trusts with SA beneficiaries will be drawn into the SA tax net under the “controlled foreign company” regime

This article is a general information sheet and should not be used or relied upon as 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 financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Tax rates announced in the budget

On 24 February 2016, Min. Pravin Gordhan tabled National Treasury’s annual budget. While it contained a few surprises (both for what it said and that which it did not), the focus in studying the budget has always been the new tax rates proposed.

Below we set out the new rates that will apply going forward. The two most significant changes are the increase in the capital gains tax inclusion rate, as well as the introduction of yet another transfer duty scale for properties purchased with a value in excess of R10 million.

It is important to note that although not approved by Parliament as yet, the below rates are unlikely to be changed.

Income tax rates for individuals for the 2016/2017 tax year:

Taxable income (R)

 

Rates of tax (R)

 

0 – 188 000

 

18% of each R1

 

188 001 – 293 600

 

33 840 26% of the amount above 188 000

 

293 601 – 406 400

 

61 296 31% of the amount above 293 600

 

406 401 – 550 100

 

96 264 36% of the amount above 406 400

 

550 101 – 701 300

 

147 996 39% of the amount above 550 100

 

701 301 and above

 

206 964 41% of the amount above 701 300

 

Interest Exemptions from Income Tax (unchanged):

 

2017

 

Person younger than 65

 

R23 800

 

Person 65 and older

 

R34 500

 

Medical credits available to be deducted against an income tax liability:

  Per month   2017

For the taxpayer who paid the medical scheme contributions   R286

For the first dependant   R286

For each additional dependant(s)   R192

 

The following rebates will apply for individuals against their tax liability calculated in accordance with the above:

Cumulative Rebates from Income Tax for Individuals:

Tax Rebate

 

Primary

 

R13 500

 

Secondary (65 and older) (unchanged)

 

R7 407

 

Tertiary (75 and older) (unchanged)

 

R2 466

 

Income Tax for companies is still levied at 28%, whilst the rate is retained at 41% for trusts.

Small Business Corporations are not taxed at a flat rate of 28%, but according to the below table for tax years ending between 1 April 2016 and 31 March 2017:

Taxable income (R)

 

Rate of tax (R)

 

0 – 75 000

 

0%

 

75 001 – 365 000

 

7% of the amount above 73 650

 

365 001 – 550 000

 

20 395 21% of the amount above 365 000

 

550 001 and above

 

59 150 28% of the amount above 550 000

 

Capital gains tax is calculated by including 40% (previously 33.3%) of an individual’s net capital gains (less R40,000) in their taxable income to be used for calculating their income tax liability (see table above). The inclusion rate for ordinary trusts and companies are increased to 80% (previously set at 66.6%).

The VAT rate has been retained at 14%. The same applies to donations tax and estate duty, both still levied at 20%.

Transfer duty applicable to individuals:

Value of the property (R)

 

Rate

 

0 – 750 000

 

0%

 

750 001 – 1 250 000

 

3% of the value above 750 000

 

1 250 001 – 1 750 000

 

15 000 6% of the value above 1 250 000

 

1 750 001 – 2 250 000

 

45 000 8% of the value above 1 750 000

 

2 250 001 – 10 000 000

 

85 000 11% of the value above 2 250 000

 

10 000 001 and above

 

R937,500 13% of the value exceeding R10 000 000

 

Turnover tax rates:

 Taxable turnover (R)

 

Rate of tax (R)

 

0 – 335 000

 

0%

 

335 001 – 500 000

 

1% of the amount above 335 000

 

500 001 – 750 000

 

1650 2% of the amount above 500 000

 

750 001 and above

 

6 650 3% of the amount above 750 000

 

This article is a general information sheet and should not be used or relied upon as 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 financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Ten tips for small business owners during tough financial times

AWhen the economy is slow, small business owners struggle to survive, many for the first time. Financial problems consume valuable time and business resources, yet must be dealt with proactively. Use the resources your banker provides; he has the expertise and cares about your business and its financial well-being. Once you have read these tips and you think you need help, call your banker and ask for advice.

1. In tough times cash is king. Have a close look at every purchase you need to make, and decide if it is worth the money. Will the product generate enough cash to pay for itself? If not, don’t buy it.

2. Let your budget show the way. Without a budget you will find it difficult to cope with hard financial times. Adapt it regularly and do the same with your personal expenses. If you don’t keep track of expenses, they will become a bottomless pit into which all your cash will disappear.

3. Look at your business’s financial position and performance objectively. Do you get maximum returns from your investments? Could you sell those that are not making you money? When times are hard, survival is the only goal.

4. Examine how your debt is structured. If you have an imbalance between short term and long term debt you should restructure your long term debt so that you can pay back the short term debt over a longer period. Be careful not to take a loan against long-term assets, except if you are in critical need of money.

5. Prepare for your meeting with your banker. Make sure you have all cash flow and balance sheets and inventories at hand for your banker. That will make your review time more productive. Write down any ideas regarding your financial position and discuss them with your banker.

6. Ask your banker about the Small Business Administration (SBA) guaranteed loan programs. Your banker could be able to restructure your business debt over a longer period if the SBA is prepared to provide a credit guarantee on your loan to the bank. If your business is situated in a qualifying rural area, you may qualify for a guaranteed loan. Ask your banker about any additional resources which may be of use to your business.

7. Review your insurance coverage. Increase your deductibles and your premium will decrease. Items that are low-risk or obsolete should be removed from your inventory list.

8. Examine your life insurance policies. Some whole life policies have provisions that enable you to borrow against the cash surrender value at very low rates, or you could deduct the cost of the premiums from the cash surrender value. Determine whether your life insurance is worth the money or whether you couldn’t get by at a lower cost. Make sure all key personnel in your company have life insurance so that business can continue in any of the key players’ absence.

9. Deal with financial problems immediately. As soon as a financial problem arises, deal with it immediately. Keep your banker informed of any problems and make him part of your inner circle of confidants. Use your team as a soundboard to discuss financial difficulties and brainstorm solutions.

10. Get some perspective. Sometimes you need to get some distance from your work to solve the problems. Take a weekend off or go and watch a movie – whatever you do, leave your worries behind for a short while and focus on something else – it will make you and your business a lot stronger.

This article is a general information sheet and should not be used or relied on as 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 financial adviser for specific and detailed advice.