1 2010 Budget and Tax Update. 2 2010 BUDGET 3 Main Tax Proposals Personal income tax relief of R6.5 billion Fuel taxes to increase by 25.5 c per litre.

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2010Budget and Tax

Update

2

2010 BUDGET

3

Main Tax Proposals

• Personal income tax relief of R6.5 billion

• Fuel taxes to increase by 25.5 c per litre

• Voluntary disclosure programme

• Curbing of avoidance schemes

• Increased sin taxes

• Cash grant for hiring unskilled youth

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Tax Tables - Individuals 2010/2011 2009/2010

Taxable Income (R) Rates of Tax Taxable Income (R) Rates of Tax

0 - 140,000 18% 0 - 132,000 18%

140,001 - 221,000 R25,200 + 25% 132,001 - 210,000 R23,760 + 25%

221,001 - 305,000 R45,450 + 30% 210,001 - 290,000 R43,260 + 30%

305,001 - 431,000 R70,650 + 35% 290,001 - 410,000 R67,260 + 35%

431,001 - 552,000 R114,750 + 38% 410,001 - 525,000 R109,260 + 38%

552,001 and above R160,730 + 40% 525,001 and above R152,960 + 40%

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Rebates

2011 2010

Primary Rebate R R

Under 65 10 260 9 756

Over 65 5 675 5 400

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Tax Thresholds

2011 2010

Primary Rebate R R

Under 65 57 000 54 200

Over 65 88 528 84 200

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Interest and Taxable Dividend Exemption

2011 2010

R R

Under 65 22 300 21 000

Over 65 32 000 30 000

Foreign 3 700 3 500

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Capital Gains Tax Exemptions

2011 2010

R R

Annual Exclusion 17 500 17 500

Primary Residence Exclusion 1,5 m 1,5 m

- disregard gains & losses if proceeds do not exceed 2 m 2 m

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Company Tax RatesYears of assessment ending between 1/4/10 and 31/3/11

2011 2010

Non-mining companies 28% 28%

Close corporations 28% 28%

Personal service provider companies 33% 33%

Non-resident companies 33% 33%

STC: 10% on net amount of dividends declared

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Taxable income Rate of tax

R

0 - 57 000   0%

57 000 - 300 000  10% of the amount over R57 000

300 000 -   R24 580 + 28% of the amount overR300 000

Small Business Corporations (Years of assessment ending between 1/4/10 and 31/3/11)

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Turnover Tax ForMicro Businesses

(year of assessment ending 28/2/10 and 28/2/11)

Turnover (R) Rate of tax

0 - 100 000 0%

100 001 - 300 000 1% of the amount over R100 000

300 001 - 500 000 R2 000 + 3% of the amount over R300 000

500 001 - 750 000 R8 000 + 5% of the amount over R500 000

750 001 - R20 500 + 7% of the amount over R750 000

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Individuals

• R6,5 billion relief: revised tax tables, rebates and exemptions

• Focus on tax avoidance and tax structuring

• SITE to be abolished from 1 March 2011

• Gambling winnings to be taxed

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Fringe Benefits

• Company car and other fringe benefit rules to be revised

• Employer deductions to be fully reflected in employee’s gross income

• Employee insurance packages to be taxed on a monthly basis

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Medical Aid Contributions

• Monthly caps to increase from R625 to R670 (7.2%) for each of the first

two beneficiaries and from R380 to R410 (7.9%) for each additional

beneficiary• Proposed conversion to a tax credit system

deferred until 2012/13

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Lump Sum Gratuities

• R30 000* exemption to be merged into the retirement fund lump sum benefit system - aggregation principle will apply.

* Last adjusted in 1984

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Subsistence Allowances • Travel in the Republic meals and incidental costs: R276 (was R260)

per day incidental costs only: R85 (was R80) per day

• Travel outside the Republic daily amount per country

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Estate Duty

• Double tax on death: CGT and Estate Duty– Estate duty to be reviewed

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Tax Administration

• Increased focus on enforcement and collections

• Level of tax compliance has "deteriorated”

• Third party information and "targeted lifestyle audits"

• Enhanced focus on "large taxpayers and high-net worth individuals”

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Voluntary Disclosure Programme

• 1 Nov 2010 – 30 Oct 2011

• Some relief for Penalties Exchange control Criminal prosecution

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VAT• Possible relief

for claw-back on temporary rentals by developers

renting of furnished residential accommodation

• 12-month claw-back rule to be relaxed on

deregistration (to avoid double-tax)

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Youth Employment Grant

• Two-year cash grant For tax-compliant businesses, non-governmental

organisations and municipalities

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Urban Development Zone (UDZ) Allowance

• New buildings: 20%(first year); 8% p.a. (next 10 yrs)

• Low cost housing in UDZ New buildings: 25% (first year); 13% (next 5 yrs);

10% (year 7) Improvements to existing buildings: 25% p.a.

• Enhanced allowances to be considered for private developers who improve another party's land

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Dividends Tax• Definition of “dividend” to be refined• New definition of “foreign dividend” • Transitional issues • Practical problems relating to in specie dividends• Further refinements to the withholding system

where companies would pay dividend tax on a shareholder’s behalf

• Implementation 2011 (/2012?)

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Corporate Tax• Attack on sophisticated tax avoidance schemes• Interest cost allocation for financial institutions• Offshore protected cell companies• Schemes channeling deductible amounts to

residents • Restricting the interest exemption for non-residents

investing in financial instruments other than South African bonds, unit trusts or publicly available interest bearing instruments

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Headquarter Companies

• Exchange control and tax relief to be considered for various types of headquarter companies located in South Africa

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Fuel Levies • To be increased by 25,5c/l on 7 April 2010

General fuel levy on petrol and diesel increases by 10c/l

Additional 7.5c/l for the funding of the new petroleum pipeline between Durban and Gauteng

Road Accident Fund levy on petrol and diesel increases by 8c/l cents per litre

• Total = 243.5 c/l on petrol; 228.51c/l on diesel

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Green Taxes

• Carbon emissions tax to be introduced on new

passenger vehicles from 1 September 2010

• Congestion, pollution and landfill taxes to be

considered

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Sin Taxes

• Tax on - Cigarettes increases from R7.70 per pack of 20

cigarettes to R8.94 Beer increases from 79c to 85c on a 340ml can Wine increases from R1.98 to R2.14 a litre

• Expected revenue: R2.3bn 2010/11

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2009 AMENDMENTS

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Primary Residence Exclusion

(Para 45 (1) (b) of the Eighth Schedule)

• Capital gains & losses on proceeds up to R2million disregarded Applies only where... (see Para 45(4)) Effective for years of assessment commencing

on or after 1 March 2009 NB: Primary residence exclusion remains at

R1,5m

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Travel Allowance: Repeal of Deemed Kilometer Method

(S 8 (1)(b)(ii) & Para. 1 of the Fourth Schedule)

• The deemed kilometre method (first 18 000 km traveled per year deemed to be private travel) to be repealed from 1 March 2010

• Amount included in “remuneration” increased from 60% to 80%– from 1 March 2010

• Can still claim business travel expenses for actual kilometers recorded in a log book

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Conversion of the STC to Dividend Withholding Tax

• 10% tax on dividends will fall on the shareholders

• A number of exemptions (e.g. pension funds; company-to-company)

• Treaty reductions (5% on re-negotiated DTAs)

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Conversion of the STC to Dividend Withholding Tax

• Withholding obligation on the company payer (or a

regulated intermediary)

• New definition of “dividend” and “contributed tax

capital”

• Anti-avoidance rules will become effective on

implementation

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Controlled Foreign Companies (S 9D)

“Foreign Business Establishment” definition • Fixed place• Located outside South Africa• Conducted continuously and regularly• Takes into account certain activities of CFC group

members if located in the same foreign country

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Controlled Foreign Companies (S 9D)

“Foreign Business Establishment” definition

• Establishment located in foreign country solely or mainly for non-tax avoidance reasons

High tax jurisdictions

• CFCs will be exempt from tax in SA if subject to high foreign country taxes

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Depreciation on Improvements (ss 11D, 12B, 12C, 12D(2), 12F, 12I and 37B)

• Amendments clarify that the depreciation allowance applies equally to improvements associated with underlying assets. Depreciation of improvements should be determined as if the improvement were a stand-alone asset.

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Depreciation on Improvements (ss 11D, 12B, 12C, 12D(2), 12F, 12I and 37B)

• Effective for expenditure incurred in respect of years of assessment ending on or after 1 January 2010

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Lease Improvements Allowance (s 11(g))

• The prohibition against deducting improvements where the lessor is tax-exempt will no longer apply if: – (i) the lessee is leasing land or buildings owned

directly by government (national, provincial or municipal) or indirectly by government (through institutions exempt in terms of section 10(1)(cA) and section 10(1)(t)); and

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Lease Improvements Allowance (s 11(g))

• The prohibition against deducting improvements where the lessor is tax-exempt will no longer apply if: – (ii) the lease is of a duration of 20 years or

more. • Effective for improvements brought into use on or

after 1 January 2009

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Pre-Trade Expenses (s 11A)

• S 24J expenditure now included

• Effective for years of assessment ending on or after 1 January 2005 (backdated)

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Small Business Corporations (S 12E(4)(a)(ii)(hh); para 3(f)(iii) of the Sixth Schedule)

• Inactive or dormant shelf companies added to the list of permitted investments

– A shelf company is inactive or dormant until the company trades or holds assets exceeding R5 000

• Effective for years of assessment ending on or after 1 January 2010

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Learnership Allowance (S 12H)

Type of learner Commencement allowance

Completion allowance

Basic R 30 000 p.a. R 30 000 x no. of completed 12-month

periods

Learner with disability

R 50 000 p.a. R 50 000 x no. of completed 12-month

periods

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Facts: • Employer X enters into a learnership contract with a

learner. • At the end of month 6, the learner leaves Employer X

and moves to Employer Y. • The learner subsequently completes the learnership

with Employer Y. • The learner has no disabilities and the learnership

spans a single year of assessment for both Employer X and Employer Y.

Example

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Example Result: • The commencement allowance is divided pro rata

between Employer X and Employer Y (each based on a 6/12 ratio).

• Employer X is entitled to a commencement allowance of R15 000 (1/2 of R30000), and Employer Y is entitled to a commencement allowance of R15 000 (1/2 of R30 000).

• Employer Y is also entitled to claim the completion allowance of R30000 (i.e. the full amount).

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Facts: • Employer X (Dec year-end) concludes a 3-year

learnership with a learner at the beginning of January 2010.

• The learner changes employment to Employer Y (Dec year-end) at the end of June 2011.

• The learner subsequently completes the learnership with Employer Y.

• Assume the learner does not have any disabilities.

Example

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ExampleResult: 2010: Employer X may claim the full R30 000

commencement allowance. 2011: Employer X may claim R15 000 of the

commencement allowance and Employer Y claims the remaining R15 000.

2012: Employer Y claims the final R30 000 allowance as well as a R90000 completion allowance (R30 000 x 3)

Source: Explanatory Memorandum

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Venture Capital Companies (VCCs) (s 12J)

VCC

(FAIS Compliant)Investor:

Indiv/ListedQualifying

SME

Individual – R750 000 pa deduction limitListed – No limit; subject to 40% shareholding limit in the VCC

80% - R10m gross assets

100% Deduction

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VCC Allowance (Section 12J)

• 100% upfront deduction for investments in VCC ordinary shares

– Capped at R750 000 p.a. for individuals (with a (R2.25 m life-time limit)

– No limit for listed companies (but 40% holding)

– Unlisted corporations are excluded

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VCCs: Excluded Activities (s 12J)

• Dealing in or renting land (excluding hotel keepers)

• Financial services e.g. banking, insurance, money lending, HP financing

• Provision of professional services e.g. legal, tax advisory, broking, management consulting, auditing, accounting and other related activities

• Casinos, other gambling-related activities and any other games of chance

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VCCs: Excluded Activities (s 12J)

• Manufacturing, buying or selling liquor, tobacco products or arms

• Franchisees

• Businesses conducted mainly outside SA

• Investment income exceeds 20% of gross income

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Exemption of Certified Emission Reductions (S 12K)

• CERs represent emission reductions that are verified and certified by the Department of Energy

• Disposals of CERs are exempt from income tax in respect of any person that carries the Clean Development Mechanism (CDM) project registration and implements that project

• Effective from 11 February 2009 and applies in respect of disposals on or after that date

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Energy Efficiency Allowance (S 12L)

• Annual notional allowance for energy savings achieved in the production of income

– South African National Energy Development Institute (SANEDI) energy savings certificate required

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Energy Efficiency Allowance (S 12L)

• Basic formula - Energy efficiency

Savings in kWh (x) Applied rate2 (or a number by the Minister)

(Comes into operation on a date determined by the Minister of Finance by notice in the Gazette)

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Employer-Provided Post-Retirement Medical Aid (S 12M)

• Lump sum payment of post-retirement medical scheme contributions to retired employees (or their spouses/dependants) or to an insurer is deductible when paid

– Applies to post-retirement medical scheme lump sums paid on or after 1 September 2009

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Medical Aid Contributions(S 18 & para 12A(1) of the Seventh Schedule)

• Increase in monthly monetary caps from 1 March 2009:

– From R570 to R625 for first 2 beneficiaries, and

– From R345 to R380 for each additional beneficiary

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Medical Aid Contributions(S 18 & para 12A(1) of the Seventh Schedule)

• Tax-free fringe benefit for medical scheme contributions paid by employer removed from 1/3/2010– All contributions by an employer will be taxable

and the employee will get a tax deduction for contributions up to the cap

– Neutral tax impact for both employee and employer

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Provisional Tax Exemption For Taxpayers Over 65

(para. 18(1)(d) of the Fourth Schedule)

• Exemption if– Not company directors and – Only receive employment income, interest,

rental or dividends and• Taxable income up to R80 000: to increase

to R120 000• Effective for years of assessment ending on

or after 1 January 2010

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Provisional Tax(para 19 of Fourth Schedule)

1. Second provisional payment– Rules for calculating estimated taxable income

differ• Tier 1• Tier 2

2. 1st and 2nd provisional tax payments– Basic amount increases by 8% a year if last

assessed more than a year previously

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Tier One - Smaller Taxpayers (to up to R1million ) )

• Largely reverts to previous basis

• No penalty if estimate of taxable income is at least equal to the lesser of -

- The basic amount (adjusted) or

• 90% of actual taxable income for the year

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Tier One - Smaller Taxpayers (to up to R1million )

• Penalty of 20% of the shortfall if the estimated TI is below this level

• Unless the estimate ‘‘was seriously calculated with due regard to the factors having a bearing thereon or was not deliberately or negligently understated’’

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Tier Two - Larger Taxpayers

• Estimated taxable income must be equal to at least 80% of actual taxable income for the year

• 20% penalty of the shortfall if the estimate does not reach this level

• Unless the estimate was ‘‘seriously calculated…(etc)”

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Residential Accommodation Fringe Benefit

(para 9 of the Seventh Schedule)

• “B” in the formula increases from R46 000 to

R54 200

– Effective for years of assessment ending on or after

1 January 2010

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Transfer of Properties Out of Companies and Trusts

(S 9(20) of the Transfer Duty Act, para 51 of the Eighth Schedule, s64B(5)(k))

• Until 31/12/2011 a distribution of a domestic residence from a company or trust to a sole shareholder is treated as a CGT ‘roll-over event’

• The distribution is exempt from STC and transfer duty

• Certain requirements must be met

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Requirements to Qualify(Para 51 of the Eighth Schedule)

• Transfer of an interest in a residence from a company or trust to an individual who:

– Acquires that interest no later than 31/12/2011

– Lived (alone or with his/her spouse) in that residence and used it mainly for domestic purposes from 11/2/09 until date of transfer

– Directly held 100% of share capital or members’ interest in the company (alone or with spouse) from 11/2/09 to date of registration in his/her/spouse’s name

• OR donated or sold that residence to the trust (or financed expenditure)

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Case Law

• Anglovaal v SARS (411/08) [2009] ZASCA 109Whether shares were acquired as a capital investment orTrading stock

• Fourie Beleggings v CSARS (168/08) [2009] ZASCA 37Payment in compensation for cancellation of a contract wasnot capital nature

• Grundlingh v CSARS [2009] SAFSHC 88Whether partnership income from Lesotho was taxable in South Africa

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Thank-you

Fasset Call Centre

086 101 0001

www.fasset.org.za