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 rate applies.
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.