South African Budget Unveiled
Friday, February 24, 2012
Despite the concerns previously expressed over prospective South African public
sector debt levels, Minister of Finance Pravin Gordhan’s 2012 Budget confounded expectations by looking for reduced fiscal
deficits, rather than increases, in the next three years, despite tax relief measures and significant
increases in government spending.
Tax revenue recovered during 2010/11 and 2011/12, following the decline seen
in 2009/10 during the global recession. It was, in fact, revised upwards for
the 2011/12 year by ZAR2.9bn (USD375m) - to ZAR738.7bn - largely due to higher
corporate income tax collections, and is expected to reach ZAR828.7bn in the
next financial year. On that basis, revenue from tax would stabilize at about
25% of gross domestic product (GDP).
Total government revenue for 2012/13 is forecast at ZAR904.8bn, with expenditure
at ZAR1.058 trillion, resulting in a budget deficit of 4.6% of GDP for the 2012/13
fiscal year (compared to 4.8% in 2011/12). However, Gordhan said the country's
finances remain in good health, and pointed out that the deficit should be brought
down to 4% and 3% of GDP in 2013/14 and 2014/15, respectively.
Annual public sector borrowing is therefore also expected to decline from 7.1%
of GDP in 2011/12 to 5% in 2014/15; with total debt peaking at a total of 38.5%
of GDP in 2014/15 - up from 36% in 2012/13.
The new tax proposals in Gordhan’s budget include modest personal income tax relief, to take account of inflation, together with the
introduction of a tax credit for contributions to medical schemes from March
1 this year. Reform of the tax treatment of contributions to retirement funds
is also envisaged, to take effect in 2014.
To encourage voluntary savings, consideration is being given to the introduction
of tax-exempt short and medium-term savings products. The proposal is that individuals
should be permitted to save up to ZAR30,000 a year, with a lifetime limit of
ZAR500,000, in registered savings or investment products that would be free
of tax on interest, dividends or capital gains.
The design and costs (banking and other fees) of these savings and investment
vehicles may be regulated to help lower-income earners to participate. The government
proposes to introduce such vehicles by April 2014, and a discussion document
will be published by May 2012 to facilitate consultation.
As expected, the secondary tax on companies will be terminated on March 31,
2012, and a 15% withholding tax on dividends implemented on April 1.
This, it was said, will align South Africa’s tax treatment of dividends
with that in most other countries. Pension funds will benefit from this transition
as they will receive dividends tax free.
Gordhan added that the introduction of capital gains tax (CGT) in October 2001
was an important step in broadening the tax base. However, in order to reduce
the scope for tax arbitrage and broaden the tax base further, effective CGT
rates will be increased with effect from March 1, 2012.
The CGT inclusion rate for individuals and special trusts will be increased
from 25% to 33.3%, shifting their maximum effective capital gains tax rate to
13.3%. The inclusion rate for companies and other trusts will increase from
50% to 66.6%, raising the effective rate for companies to 18.6% and for other
trusts to 26.7%.
Further tax relief will be given to small businesses and micro-enterprises.
The tax-free threshold for small business corporations is increased to ZAR63,556, with the 10% tax rate reduced to 7% and the threshold up to which that
rate applies increased to ZAR350,000, after which the normal 28% corporate
Furthermore, with effect from next month, qualifying micro-businesses (within
the ZAR1m turnover limit) will be able to pay turnover tax, value-added tax
(VAT) and employees’ tax twice a year, meaning that the number of returns
and payments they have to make per year will be reduced from about 18 to just two.
Within the corporate tax code, Gordhan said that further steps will be taken
to limit excessive debt financing; amendments to the mark-to-market taxation
of foreign currency and other financial instruments will be phased-in; the governance
and tax treatment of property loan stock entities will be aligned with the present
treatment of regulated property unit trusts; and tax relief is proposed for
housing developers and employers who provide housing below ZAR300,000 per unit.
The Minister of Trade and Industry has also published draft legislation to
provide for the creation of special economic zones. Tax relief is under consideration
for businesses that invest in these zones, including a reduction in the corporate
income tax rate and support for employment and training expenses.
Gordhan pointed out that South Africa already has a financial transaction tax
on securities transfers at a rate of 0.25%. It is now proposed that the current
exemption for brokers should be abolished, while the inclusion of financial
derivatives in the base of the securities transfer tax is also under consideration.
He reminded his audience that the recent Voluntary Disclosure Programme attracted
approximately 18,000 applications, and has yielded almost ZAR1bn in additional
tax so far. It has, Gordhan added, also provided useful insights into areas
of non-compliance that will receive future attention.
These insights include the under-declaration of income such as rental income, foreign
income and capital gains; the claiming of excessive income deductions; the under-declaration
of VAT outputs and inflating of VAT inputs; the abuse of share incentive schemes
by corporate executives; and the abuse of benefits granted to foreign persons
employed in South Africa.
Poor tax compliance, he continued, is also apparent in respect of trusts and
in parts of the construction sector, and the role of tax practitioners and other
intermediaries will come under scrutiny. Within the trading sectors, customs
officials will continue to focus attention on the under-valuation of imports,
especially in textiles.
The new Tax Administration Bill has been approved by parliament. It incorporates
the common administrative elements of current tax law into one piece of legislation,
and most of its provisions will be brought into force in 2012. During 2012, South Africa
will also establish a dedicated ombudsman for tax matters.