Some perspective on the 2017/2018 Budget

by | Apr 26, 2017 | Advisory Services, Uncategorized | 0 comments

On the 22nd Minister Pravin Gordon announced his 2017/2018 Budget, and in short, he did what most of us expected – raised personal taxes. To provide more perspective to some of the key changes that we believe will affect you, please refer:

  1. With effect from 1 March 2017, a 45% marginal tax rate is applicable to individuals with a taxable income of R1.5 million and above. Unfortunately, salary earners will feel the impact the most as their expenditure is limited against “remuneration” as defined. Other non-employment individuals such as sole proprietors will have more options to consider, including the incorporation into companies. Incorporation can be done tax-free in terms of section 42 of the Income Tax Act 58 of 1962 (“the Act”). On a company level the relationship between salary and dividends can be managed (i.e. 45% vs 20%) and depending on the nature of the trade, access to the small business corporation tax rate is available. In terms thereof, the first R75 750 is tax-free, between R75 751 and R365 000 it is 7% and between R365 001 and R550 000 it is 28%. The normal company income tax rate is 28%.
  1. Being Considered – in terms of section 10(1)(o)(ii) of the Act, any remuneration that a SA tax resident earns whilst working for any employer outside SA, for an aggregate period of more than 183 days in a 12 month period (of which, 60 days must be continuous), is exempt from income tax in SA. These tax residents are however seldom taxed in the foreign country where the services were physically rendered. This and despite the fact that the services originating from the source being located in a foreign country, are the reasons for creating an internationally acceptable taxation link for the said country.

It is now being proposed that where the remuneration component is not subject to tax in a foreign jurisdiction; the income tax exemption will not be granted in SA.

Please note that section 10(1)(o)(ii) does not apply to sole proprietors as there has to be an employer and employee relationship.

Furthermore, it is doubtful whether the current provisions of section 10(1)(o)(i) will be affected. This section exempts the remuneration earned by a person as an officer or crew-member of a ship, engaged in the international transportation of passengers or goods for reward from normal tax, if that person was outside South Africa for a period exceeding 183 days in aggregate during the year of assessment.

  1. With effect from 22 February 2017, a 20% dividends withholding tax (DT) is chargeable to shareholders (non-resident persons, trusts and Individuals) of local SA resident companies.

One of the reasons in supporting the increase is that DT in South Africa is below the average Economic Cooperation and Development (OECD) rate which is around 42%. In line with globalisation of tax this makes sense however in line of the SA objective to provide foreign investment, this may not be ideal, as many of the double taxation agreements with SA may in any event reduce this rate to 15%, 5% or 0%.

Hence local shareholders will mainly be affected i.e. SA resident individuals and SA resident trusts however any local dividend that accrues to or is paid to a local SA resident company is exempt from dividends tax.

This means where a holding company is introduced in a corporate or trust structure to facilitate optimal business practices, all the dividends that accrue from the subsidiaries to the holding company, remains tax-free. Such a Holding Company can provide a security and group treasury function.

  1. With effect from 1 March 2017, a 20% income tax charge is levied against the receipts of foreign dividends, bearing in mind that that this rate may be reduced by reason of the provision of Double Taxation Agreements, or, by reason of the full participation exemption contained in section 10B, which may reduce this rate to as much as zero.
  1. With effect from 1 March 2017, a 45% flat income tax rate in trusts is levied (excluding special trusts, where the rates applicable to natural persons apply). It must be noted that the local trusts seldom incur this tax rate as the tax avoidance rules contained in section 7, as read with section 25B of the Act (and its CGT counterpart), result in the tax liabilities to be borne by either the donor and/or trust beneficiaries.
  1. With effect from 22 February 2017, an increase in the withholding taxes that apply to non-residents who dispose of fixed property located in South Africa. This withholding tax is not a final tax, and a non-resident may elect to submit a tax return and pay capital gains tax on the actual disposal. However, in the past some non-residents did not elect to do so and hence lead to the erosion of the SA tax base. In most cases, Conveyancers are obliged to withhold the following taxes from the proceeds, prior to remittance, the net amount to the foreign seller, namely:
  • a natural person – 7.5% (before 5%)
  • a company – 10% (before 7.5%); and
  • a trust – 15% (before 10%).
  1. Furthermore, with effect from 1 March 2017, the minimum threshold to which Transfer Duty is payable on the acquisition of fixed property, has been increased to R900, 000.00, where after an incremental sliding scale applies with the maximum being 13% for properties with a value of R10 million.
  1. Being proposed, although there are no changes to the current Value Added Tax (VAT) rate of 14%, there is a strong indication that this may be on the cards next year (2018/2019), subject to political sentiment. However, the removal of the zero rating of fuel is being proposed, which, together with the increase in the fuel levy by 30 cents/liter and RAF to 9 cents/liter (the latter two being effective 5 April 2017) , will result in another unexpected increased cost for the consumer.
  1. In November 2015, the Group of 20 governments endorsed a package of measures to curb base erosion and the shifting of profits to low-tax countries (referred to “BEPS”). The base erosion and profit shifting project is now being implemented by these countries, including SA. BEPS practices include transfer pricing transgressions.For example not charging any interest on a loan granted by a SA resident to an offshore trust, may become more and more difficult to justify, as this will fall into a BEPS practice.

Similarly, in 2015, the Budget Review announced that measures would be introduced on the treatment of foreign companies held by interposed trusts. However, no specific countermeasures were introduced in this regard. SARS are considering introducing specific countermeasures to curb abuses. Traditionally an offshore company held via an offshore trust did not fall into the definition of a control foreign company, furthermore, any dividends resulting from such a company that accrued to the foreign trust which (in the same tax year) distributed to a SA resident could be argued that that foreign dividend is tax free in terms other applicable legislation. As part of the BEPS action steps CFC legislation has CGC of their target list and will definitely be extended to include these types of structures.

On 1 March 2017, section 7C of the Act took effect, which imposes a yearly donations tax charge on persons providing interest-free loan accounts to local and/or offshore trusts. Section 7C is subject to various exemptions, for example, if the loan relates to a primary residence that is owned by the trust, no donations tax liability will arise by reason of the interest-free loan.

Similarly, with regards to an interest free loan to an offshore trust, no donations tax liability will arise where the loan is compliant with section 31. Section 31 (transfer pricing) requires that a commercial transaction between a non-resident and resident connected parties must reflect commercial terms – i.e. loans must carry a market related interest rate. However, some practitioners are promoting the view that, as an alternative to both, sections 7C and 31, a taxpayer may opt to nevertheless apply section 7(8) of the Act. In terms of section 7(8) of the Act, a SA tax resident must impute the income of a non-resident trust to him if such income arose from a donation, attribution or other disposal made by him to the trust (there is a similar provision dealing with the CGT side). Section 7(8) arose because of the “lack of interest”.   Historically, the application of section 7(8) could have resulted in a less onerous outcome for a SA tax resident i.e the imputation of a foreign dividend would have been taxed at 20%(before 15%) whereas the actual interest charged on the loan which accrues to the taxpayer is taxed at his marginal rate.

However, in our view, such argument is unlikely to succeed, in that, both section 7(8) (which impose income tax) and section 7C (may nevertheless still apply as this imposes a donations tax liability) could apply.

Lastly, it must be borne in mind that with effect from 16 March 2015, where a person that is a tax resident obtains a beneficial interest in a non-resident trust and made a contribution exceeding (or which is likely to exceed) R10 million, is a reportable arrangement to SARS. In such tax structure the abovementioned issue will be under SARS scrutiny.