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South Africa Consults On 2011 Budget Bills

Monday, June 6, 2011

South Africa’s National Treasury has released for public comment a draft of the 2011 Taxation Laws Amendment Bills (TLAB) that give effect to most of the 2011 Budget tax proposals, as well as to additional urgent measures.

For example, the TLAB provide for further personal income tax relief through adjustments to tax brackets and rebates, amounting to ZAR8.1bn (USD1.2bn); the introduction of a third rebate of ZAR2,000 per year for taxpayers aged 75 years and older; and an increase in the tax-free interest-income annual threshold from ZAR22,300 to ZAR22,800 for individuals aged below 65 years and from ZAR32,000 to ZAR33,000 for individuals aged 65 years and older.

In addition, the bills also include an increase in the transfer duty exemption threshold from ZAR500,000 to ZAR600,000 and introduction of a reduced 3% bracket from ZAR600,000 to ZAR1m; a rise in the capital gain annual exclusion from ZAR17,500 to ZAR20,000; adjustments to the turnover tax exemption threshold for micro businesses from ZAR100,000 to ZAR150,000 per year; and an extension of the learnership tax incentive for a further five years.

The TLAB gives effect to the 2011 Budget proposal to convert expenditures associated with medical aid contributions into tax credits. In addition, a discussion paper on a more comprehensive conversion into credits for all other current medical deductions will be published shortly for public comment and consultation.

In 2011, changes are being made to the taxation of long-term insurance to prevent the use of key person plans as a means of avoiding fringe benefit tax. It is said, however, that these changes have highlighted the need to revise the whole system as applied to policyholders and beneficiaries.

Furthermore, the bills make the final adjustments to the new dividends tax, which will be implemented from April 1, 2012, to replace the secondary tax on companies. Most notably, foreign dividends will effectively become subject to the same 10% level of tax. The value extraction tax (the successor to deemed dividend treatment under the secondary tax) will be dropped in favour of a 'facts and circumstances' approach to deemed dividends.

It is also proposed that a tax framework will be enacted that will allow for the government to issue Islamic bonds. The regime will essentially allow for asset-based financing with the yield giving rise to tax that is equivalent to interest. These bonds will serve as the standard for risk-free Islamic financing within South Africa.

With regard to international corporate taxation, the TLAB remove the potential for double taxation by South African multinationals operating abroad through a variety of legislative measures, such as the use of a revised source system and through the addition of special tax credits in the case of foreign withholding taxes imposed on South African-sourced management fees. The bills also remove a number of practical anomalies associated with the “headquarter company” regime introduced in 2010.

The bills also contain substantial revisions to the activities associated with a controlled foreign company (CFC). The revised rules eliminate the current transfer pricing penalty but require an arm’s length analysis when determining whether income is attributable to exempt active business activities. The anti-avoidance rules have also been revised to eliminate the use of discretionary trusts (and other forms of de facto ownership) employed to undermine the CFC regime, and to treat each cell of an offshore cell company as a separate company.

Given the need for further consultation, the 2011 Budget’s proposals on the retirement contribution base and the tax treatment of contributions to retirement funds, which included proposed thresholds for tax deductions up to 22.5% and limited to ZAR200,000 per annum, and to the imposition of the one-third lump sum and two-thirds annuity split for provident funds, will first be addressed in discussion documents for public comment, after which legislation will be considered, either in late 2011 or in 2012. It is expected that the discussion documents will be published in July 2011.

In like manner, further details on the taxation of gambling winnings will be published for public comment by the end of July 2011. This will focus on the design and administrative aspects of the tax.

The TLAB are published for public comment before formal introduction in parliament. The National Treasury and the South African Revenue Service will consider all the comments received by July 4, and thereafter submit a response document in August. The draft bills will then be revised and formally introduced in parliament by the Minister of Finance (expected to be in early September).