2008 Budget & Tax Update

PART 1 - BUDGET 2008

2008 BUDGET - TAX PROPOSALS

Highlights

6

Individuals /

6

Tax tables 2008/09

6 Tax tables 2007/08

7

Rebates

7 Tax threshold

7 Tax saving per annum

7 Interest and taxable dividend exemption

Monthly monetary caps for tax-free medical scheme contributions

Annual exclusion for capital gains or losses

Annual exclusion in year of death for capital gains or losses

8 Primary residence exclusion for capital gains or losses

8 Corporate tax rates

8 Normal tax (basic rate)

8 Tax rates for qualifying small business corporations

8 Presumptive turnover tax for very small businesses

9 Secondary tax on companies (STC)

Trusts

Other taxes

Estate duty / 9

Donations tax

Capital gains tax (CGT)

Transfer duty

10

Commentary / 11
Headline corporate income tax rate /

11

Second phase of STC reforms /

Impact of capital distributions /

Learnership allowance for apprenticeships /

Tax incentives to support industrial policy /

Urban development zones /

16

Housing for low-income workers /

16

SUPPORT FOR SMALL AND MEDIUM-SIZED BUSINESSES /

16

A simplified tax regime for very small businesses

Venture capital tax incentive

INDIVIDUALS

Medical scheme contributions

Handicapped persons

Standard income tax on employees

Bursaries for relatives of employees

Travelling allowances

Subsistence allowances

Residential accommodation for foreign skilled expatriates

Repayable employee benefits / 19
Personal use of cellular phones and laptops /

Reform of the retirement savings regime

PUBLIC BENEFIT ORGANISATIONS /

Restrictions on PBOs

Donations to multilateral humanitarian organisations

Extending tax-exempt status to PBOs providing student loans

Cap for PBO-provided housing

Biodiversity conservation and management /

Electricity levy

Fuel taxes /

Road Accident Fund levy /

Alcoholic beverages and tobacco products /

Financing options for provincial and local government /

Other proposed tax amendments /

Business issues /

Group relief and the de-grouping charge / 22

Broad-based share incentive schemes

Share incentive schemes /

Intellectual property arbitrage /

Community association governing bodies (body corporates)

Consideration for government business licenses

Water pipelines for electrical power generation

Depreciation of small business non-manufacturing equipment

Removal of the municipal market exemption

Merger of deemed employee regimes

Increased exemption threshold for the spreading of deductions

Inward foreign research and development (R&D) investment

Inward foreign JSE listing / 24
Repatriations from foreign cooperatives /

Multi-tier controlled foreign companies (CFCs) /

Debt cancellation between offshore group CFCs /

Refinement of share distributions and recapitalisations /

Extended tax-preferred liquidation period /

Reorganisations involving depository receipts /

Intra-group capital distributions /

Shares issued in exchange for assets /

Financial year end /

Retirement savings lump sums and provisional tax calculations /

Election for tax-free rollover reorganisation treatment /

VAT /

VAT compulsory registration threshold /

E-commerce /

Nominal or passive foreign-controlled local activities /

Reforming the VAT treatment of business reorganisations

Vocational training

Termination of refunds into third-party bank accounts

Revised taxation of public entities /

Long-term insurers – expense and profit transfer formula /

Provisional tax system /

Administrative penalties /

Submission of supporting documents /

Bare dominium financing structures /

Trust distributions to beneficiaries /

Outside contributions added to estate redistributions /

Traditional communities /

Tax reform measures under review

Tonnage tax

Private equity transactions

Protecting the tax base

Supporting sustainable development

General anti-avoidance rule to protect the estate duty /

Estate duty assessment /

Life insurance/pension benefits and estate duty /

Stamp duty on leases /

Industrial Development Zones (IDZs) /

Reversing the burden of proof for the intent to evade /

2010 FIFA World Cup

Diamond export levy /

Technical corrections /

Measures to enhance tax and customs administration /

PART 2 - TAX UPDATE /

DEVELOPMENTS OVER THE LAST YEAR /

Interpretation notes /

Regulations and government notices /

Retirement notes /

Tax judgments /

Brochures and guides issued by SARS / 34
Interest rate changes /

UIF threshold /

AMENDMENTS TO LEGISLATION /

Dividends & STC

STC group relief

Company reorganisations

Definition of “group of companies”

Sections 42 and 43 combined

Amalgamation transactions

Degrouping charge

Deemed capital on share sales

Blocked foreign funds

Retirement fund lump sum benefits

Tax on retirement fund lump sum benefits

Surplus distributions /

Tax-free payouts relating to membership of public sector funds before 1March 1998 /

Changes to the definitions of “pension fund” and “retirement annuity fund”

Employees’ tax withheld from lump sum benefits

Divorce settlements

Occupational death benefits

Exemption for foreign services

Deduction for annuities

Deemed cost rule for connected persons

Scrapping allowance

Deduction for commercial buildings

New capital allowance provisions

Rolling stock

Port assets

Environmental expenditure

Provision of medical services

Qualifying medical expenses

Deduction for donations to qualifying entities

Residential accommodation for expatriates

Travel benefits

Intellectual property

Assets acquired in exchange for shares

Amalgamation of sporting and professional bodies /

Rebate for foreign taxes paid /

Research and development allowance

Assessed losses

Foreign exchange transactions

Withholding of employees’ tax from share scheme gains

Capital gains tax amendments

Extraordinary Dividends

Capital distributions

Share buybacks of listed shares

Base cost of an asset

Withholding tax on disposals by non-residents

Regulations prescribing circumstances under which the Commissioner may write-off or compromise an amount due /

Monetary limits in the Taxation Laws Amendment Bill, 2008 /

PART 1 – BUDGET 2008

2008 BUDGET TAX PROPOSALS

HIGHLIGHTS

Personal income tax relief for individuals amounting to R7.7 billion
Corporate income tax rate to reduce by one percentage point from 29% to 28%
STC to be replaced by a final withholding tax on dividends in 2009
Simplified turnover tax for small businesses with annual turnover up to R1million
Compulsory VAT registration threshold increases to R1million
Tax incentives to encourage venture capital equity investments in small and medium sized businesses
R5 billion over the next 3 years in targeted tax incentives to encourage investment in labour-intensive or strategic sectors
Learnership allowances to be expanded to encourage apprenticeships
Electricity levy of 2 cents per kilowatt hour to be introduced

The notes that follow draw extensively from the SARS Budget Tax Proposals 2008/9 and Chapter 4 of the 2008 Budget Review published by National Treasury.

INDIVIDUALS

Personal income tax relief of R7.7 billion has been proposed.

Tax tables 2008/9

Taxable income
R / Rate of tax
0 / - / 122 000 / 18%
122 001 / - / 195 000 / 21 960 / + / 25%
195 001 / - / 270 000 / 40 210 / + / 30%
270 001 / - / 380 000 / 62 710 / + / 35%
380 001 / - / 490 000 / 101 210 / + / 38%
490 001 / - / 143 010 / + / 40%

Tax tables 2007/8

Taxable income
R / Rate of tax
0 / - / 112 500 / 18%
112 501 / - / 180 000 / 20 250 / + / 25%
180 001 / - / 250 000 / 37 125 / + / 30%
250 001 / - / 350 000 / 58 125 / + / 35%
350 001 / - / 450 000 / 93 125 / + / 38%
450 001 / - / 131 125 / + / 40%

Rebates

2008/09
R / 2007/08
R
Primary / 8 280 / 7 740
Secondary / 5 040 / 4 680

Tax threshold

2008/09
R / 2007/08
R
Below age 65 / 46 000 / 43 000
Age 65 and over / 74 000 / 69 000

Tax saving per annum

Taxable income / Age below 65
R / Age above 65
R
R46 000 – R100 000 / 540 / 900
R120 000 / 1 065 / 1 425
R150 000 / 1 205 / 1 565
R200 000 – R250 000 / 1 955 / 2 315
R300 000 / 2 955 / 3 315
R400 000 / 3 855 / 4 215
R500 000 and above / 4 655 / 5 015

Interest and taxable dividend exemption

2008/09
R / 2007/08
R
Natural persons below age 65 / 19 000 / 18 000
Age 65 and over / 27 500 / 26 000
Of the above, the amount that can be applied to foreign interest and dividends / 3 200 / 3 000

Monthly monetary caps for tax-free medical scheme contributions

2008/09
R / 2007/08
R
First two beneficiaries / 570 / 530
Each additional beneficiary / 345 / 320

Annual exclusion for capital gains or losses

2008/09
R / 2007/08
R
Natural persons / 16 000 / 15 000

Annual exclusion in year of death for capital gains or losses

2008/09
R / 2007/08
R
Natural persons / 120 000 / 120 000

Primary residence exclusion for capital gains or losses

2008/09
R / 2007/08
R
Natural persons / 1 500 000 / 1 500 000

CORPORATE TAX RATES

Years of assessment ending between 1 April and 31 March
Normal tax (basic rate) / 2008/09 / 2007/08
Non-mining companies / 28% / 29%
Close corporations / 28% / 29%
Employment companies / 33% / 34%
Other companies / 28% / 29%
Taxable income of a non-resident company / 33% / 34%
Closely held passive investment companies / 40% / 29%

Tax rates for qualifying small business corporations

Years of assessment ending between 1 April 2008 and 31 March 2009
Taxable income
R / Rate of tax
R
0 / - / 46 000 / 0%
46 001 / - / 300 000 / 10% of the amount over R46 000
300 000 / - / R25 400 / + / 28% of the amount over R300 000
Years of assessment ending between 1 April 2007 and 31 March 2008
Taxable income
R / Rate of tax
R
0 / - / 43 000 / 0%
43 001 / - / 300 000 / 10% of the amount over R300 000
300 000 / - / R25 700 / + / 29% of the amount over R300 000

Presumptive turnover tax for very small businesses

Years of assessment still to be announced
Turnover
R / Rate of tax
0 / - / 100 000 / 0%
100 001 / - / 300 000 / 2% of the amount over R100 000
300 001 / - / 500 000 / R4 000 / + / 4% of the amount over R300 000
500 001 / - / 750 000 / R12 000 / + / 5.5% of the amount over R500 000
750 001 / - / 1 000 000 / R25 750 / + / 7.5% of the amount over R750 000

Secondary tax on companies (STC)

Rate of STC on dividends declared -
17 March 1993 – 21 June 1994 / 15%
22 June 1994 – 13 March 1996 / 25%
14 March 1996 – 30 September 2007 / 12.5%
On or after 01 October 2007 / 10%

Trusts

The tax rate on trusts (other than special trusts) remains unchanged at 40%.

OTHER TAXES

Estate duty

Rate of estate duty on the dutiable amount of an estate -
Death prior to 14 March 1996 / 15%
Death between 15 March 1996 and 30 September 2007 / 25%
Death or after 01 October 2007 / 20%
Primary abatement: R3 500 000 (2008: R3 500 000)

Donations tax

Payable at a flat rate on the value of property donated by a resident -
Prior to 14 March 1996 / 15%
Between 15 March 1996 and 30 September 2007 / 25%
On or after 01 October 2007 / 20%
Annual exemption for natural persons: R100 000 (2008: R100 000)

Capital gains tax (CGT)

The effective CGT rates are as follows:

Taxpayer /

Inclusion

Rate (%) /

Statutory

Rate (%) /

Effective

Rate (%)
Individuals / 25 / 0 – 40 / 0 – 10
Trusts
Unit / - / 28 / -
Special / 25 / 18 – 40 / 4.5 – 10
Other / 50 / 40 / 20
Companies
Ordinary / 50 / 28 / 14
Small business corporation / 50 / 0 – 28 / 0 – 14
Employment company / 50 / 33 / 16.5
Foreign company / 50 / 33 / 16.5
Closely held passive investment companies / 50 / 40 / 20
Small companies subject to turnover tax / 0 / 0 / 0
Life assurers
Individual policyholders fund / 25 / 30 / 7.5
Company policyholders fund / 50 / 28 / 14
Untaxed policyholders fund / - / - / -
Corporate fund / 50 / 28 / 14

Transfer duty

Transfer duty rates remain unchanged.

Transfer duty rates for individuals 2008/9
Property value
R / Rate of tax
0 – 500 000 / 0%
500 001 – 1 000 000 / 5%
1000 001 upwards / R25 000 + 8%
In all other cases the rate is 8% of the consideration.

Commentary

The tax proposals outlined in the 2008/09 Budget are aimed at stimulating economic growth by reducing the tax rate on business and supporting industrial incentives. New initiatives reduce the cost of doing business by cutting red tape, especially for small businesses. The thresholds in the personal income tax brackets and rebates have been adjusted for inflation to avoid the effects of fiscal drag.

Tax collections continue to increase in real terms as a result of improved compliance and cyclical factors. Gross tax revenue in 2007/08 is expected to amount to R571.1 billion, which is R14.5 billion higher than the amount set in the 2007/8 Budget and R5.0 billion higher than the revised figure indicated in the 2007 Medium Term Budget Policy Statement in October 2007. Tax revenue growth, which has a strong cyclical component, is expected to moderate in line with a slower rate of GDP growth over the medium term.

Headline corporate income tax rate

A broadening of the tax base, reduction in tax rates, strengthening of tax administration and enforcement over the past decade have contributed to a more efficient and equitable tax system. Following the positive results yielded as a result of these reforms, the headline corporate income tax rate is to be reduced from 29% to 28%. The lower rate will apply to years of assessment ending between 1 April 2008 and 31 March 2009.

This measure is also intended to reduce the cost of capital, facilitating an increase in private sector investment and stimulating the supply side of the economy. To limit tax avoidance and/or tax arbitrage, given the gap between the corporate tax rate and top marginal personal income tax rate, it is proposed that closely held (passive) companies will be subject to a 40% tax rate.

Second phase of STC reforms

The Minister of Finance announced a reform of the STC regime in the 2007 Budget Speech. The main purpose of this reform is to switch this tax charge from a company-level tax to a shareholder level tax, consistent with international practice. Under the new regime, all distributions will be treated as dividends unless it is shown that the distribution represents a return of capital.

It is proposed that the new rate remain at 10%, that no dividend withholding tax will be applied to dividends declared to income tax-exempt entities and that all STC credits will expire. A 10% final withholding rate for domestic shareholders will apply, except in cases of income tax-exempt entities, such as retirement funds and public benefit organisations (PBOs). The withholding rate for foreign shareholders may be limited by specific tax treaties.

It is also proposed to provide cascading relief (i.e. taxing dividends only when profits reach individuals or non-domestic company shareholders). As an anti-avoidance measure, dividends paid to closely held (passive) companies used to accumulate passive income will be subject to a 10% tax rate.

A discussion document was released by National Treasury on 21 February 2008 and is reproduced below:

CONVERSION OF THE SECONDARY TAX ON COMPANIES (“STC”) TO A SHAREHOLDER DIVIDENDS TAX

BACKGROUND

In South Africa, the taxation of distributed profits is achieved through the Secondary Tax on Companies (“STC”). The STC liability falls on the company distributing the profits. In most tax systems, tax is imposed on the shareholders receiving a dividend. Unfamiliarity with the STC’s different mechanics seems to be a hurdle for foreign investors according to many commentators. At a more substantive level, the STC liability adversely impacts a South African company’s accounting income statement because the company distributing the dividend must subtract this tax charge from its profits. Arguments have also been raised by the private sector that the STC raises the cost of equity financing.

In the 2007 Budget Review, Government proposed to phase-out the STC in favour of a final withholding tax falling on shareholders receiving dividends. This shift will occur in two phases.

(a)Phase one

In the first phase of reform, the rate of STC was reduced from 12.5 % to 10 % with effect from 1 October 2007. This reduction was coupled with a broadening of the tax base through the closing of commonly exploited loopholes.

A further broadening of the base is planned for 2008 (see the discussion document on “the Secondary Tax on Companies: Revising the Base”).

(b)Phase two

The second phase of reform entails the actual conversion of the STC into a dividend tax on shareholders. As stated in the 2007 Budget Review, the implementation of this second phase is contingent on the revision of international tax treaties that limit withholding tax on dividends to zero per cent.

The tax treaties at issue are Australia, Cyprus, Ireland, Kuwait, The Netherlands, Oman, Seychelles, Sweden and The United Kingdom. Most of these treaties have been renegotiated and are awaiting executive signatures and parliamentary ratification. It is anticipated that this phase will be completed by 2009.

PROPOSED DESIGN

(a)General concepts

The new regime will follow the classical system of taxing distributed profits. As a general matter, shareholders will be subject to the new tax. The rate of the new tax will be 10% as is currently the case for STC. This dividend tax will be a separate final withholding tax and dividends will not form part of shareholder income (the latter of which is taxable at marginal rates). As with the STC, the new tax will apply to distributions during the life of the company as well as in liquidation.

(b)Exemptions/deferrals

Non-corporate and non-resident shareholders will generally be subject to tax at a 10 % rate on the full amount of dividends received. However, limited exemptions and deferrals from this withholding tax will be applied as described below. The net effect of these exemptions and deferrals will amount to an estimated loss to the fiscus of R6 billion in the first year.

Distributions to exempt entities – Company distributions to entities that are fully exempt from income tax will similarly be exempt from the new dividend tax. These entities notably include pension funds and Government. Entities that are partially subject to income tax will benefit from an exemption on dividends only if these entities are fully exempt in respect of investment (i.e. non-trading) income. Therefore, public benefit organisations will be exempt from dividend tax, but recreational clubs will be taxed on their dividends because clubs are only exempt from tax on investment income up to a monetary limit.
Treaty relief – The dividend tax rate for non-resident shareholders may be limited if a tax treaty exists between South Africa and the shareholder’s country of residence. Depending on the proposed renegotiation of treaty rates, a 5% imit may apply.
Intra-company dividends – As a general rule, underlying company profits should only be subject to one level of tax on distribution. This principle is critical when profits pass through two or more company levels. The STC system achieves this result in two ways. The first is by taxing the first company that declares the underlying profits as dividends while exempting subsequent dividends associated with these profits via the STC credit system. The second is by permitting an election that STC will not apply in the case of certain intra-group distributions. In a classical system, tax applies only on the last company level. The classical system achieves this result by exempting all inter-company dividends between resident companies (regardless of percentage shareholding) with the tax applying only at the level where dividends are declared to persons other than companies or to non-residents.

Example:

Facts. Company A distributes R100 of profits to Company B. Company B distributes those profits to Company C. Company C in turn distributes those profits to Individual.

STC result. Under the current paradigm, Company A is subject to the STC when distributing profits to Company B (assuming group relief does not apply). Subsequent distributions from Company B to Company C and from Company C to Individual are exempt via the STC credit system.

New dividend tax result. Under the proposed paradigm, no dividend tax applies when Company A declares dividends to Company B nor when Company B declares dividends to Company C (regardless of whether these companies form a group of companies). The dividend tax applies only when Company C declares a dividend to Individual (or to a non-resident).

2008 Budget & Tax Update

2008 Budget & Tax Update

CONTENTS

PART 1 - BUDGET 2008

PAGE

2008 BUDGET - TAX PROPOSALS

Highlights

6

6

Tax tables 2008/09

6

Tax tables 2007/08

7

Rebates

7

Tax threshold

7

Tax saving per annum

7

Interest and taxable dividend exemption

Annual exclusion in year of death for capital gains or losses

8

Primary residence exclusion for capital gains or losses

8

Corporate tax rates

8

Normal tax (basic rate)

8

Tax rates for qualifying small business corporations

8

Presumptive turnover tax for very small businesses

9

Secondary tax on companies (STC)

Transfer duty

10

11

16

16

16

HIGHLIGHTS

Trusts

Inclusion

Statutory

Effective