2007 Tax Related Budget Proposals

The following is a summary of the tax related budget proposals announced by the Minister of Finance on 21 February 2007.

HIGHLIGHTS

  • Income tax relief for individuals
  • Abolishing of retirement fund tax
  • Sale of shares held for more than three years treated as capital
  • Interest and dividend income tax-free thresholds increased
  • STC rate reduced to 10% and to be replaced by dividend tax
  • No change in VAT, CGT, Donations Tax or Estate Duty rates
  • Wage subsidy and social security tax reform

INDIVIDUALS

Income tax tables and rebates
The tax brackets have been adjusted to provide relief across all levels of income for the year of assessment ending 28 February 2008.

  • The income tax threshold for persons under the age of 65 is raised from R40 000 to R43 000 – that is, people under the age of 65 earning taxable income of less than R43 000 a year will pay no income tax.
  • The tax threshold for taxpayers aged 65 increased to R69 000 (previously R65 000).
  • The minimum tax rate is still 18% applicable but now applicable to taxable income up to R112 500 (previously R100 000).
  • The maximum rate remains at 40% and will apply to taxable income exceeding R450 000 (previously R400 000) a year.
  • Individuals younger than 65 earning R150 000 a year will pay R1 415 less tax and those earning greater than R450 000 will pay R6 415 less tax than in the 2007 tax year. These comparisons, however, do not take into account the extra tax that will be payable by some individuals as a result of the changes in the tax treatment of medical aid and medical expenses and the changes in the taxation of travel allowances.
  • The primary rebate increases by R540 from R7 200 to R7 740 a year for all taxpayers. The secondary rebate for individuals aged 65 years and older increases by R180 from R4 500 to R4 680 a year.

Increase in interest and dividend income exemption
The annual exemption relating to interest income and distributions from unit trusts for individuals younger than 65 year of age will increase from R16 500 to R18 000 and for those over 65 years of age and from R24 500 to R26 000 for taxpayers aged 65 and over.

Abolition of retirement fund tax
With effect from 1 March 2007 no tax will be imposed on the rental and interest income of retirement funds.

Motor vehicles
The deemed private mileage used to determine the deductible portion of a travel allowance remains at 18 000 km from 1 March 2007. The proportion of the monthly allowance subject to PAYE also remains at 60%. The new cost table has been published, effective from 1 March 2007.

The monthly taxable value of a company car remains at 2,5% per month of the determined value of the car and a second company car 4% per month.

Donations to Public Benefit Organisations
The annual deduction allowed for donations to Public Benefit Organisations (PBOs) is increased to 10% (previously 5%) of taxable income.

Retirement fund thresholds
Withholding taxes on lump sum retirement fund payments to persons with taxable income less than R43 000 per year (the revised income tax threshold) will be abolished.

Medical aid contributions and medical expenses
The method of calculating the taxable fringe benefit where an employer pays part or all of an employee’s medial aid contributions and a revised deduction for medical expenses (including medical aid contributions) introduced effective 1 March 2006 remains. The tax-free fringe benefit for medical aid contributions will now be limited to a fixed amount of R530 (previously R500) each for the taxpayer and first dependant and R320 (previously R300) for each additional dependant. Medical aid contributions and qualifying medical expenses paid by the taxpayer may be deducted to the extent that they exceed 7,5% of taxable income.

Wage subsidy and social security reform
By 2010 a wage subsidy to help alleviate the high rate of unemployment amongst the youth and to facilitate social security reform would be introduced.

Capital gains tax (CGT)
The following monetary limits will be increased for tax years commencing on or after 1 March 2007:

  • The annual exclusion will increase from R12 500 to R15 000.
  • The annual exclusion in the year of death will increase from R60 000 to R120 000.
  • The primary residence exclusion remains at R1,5 million.
  • The exclusion of capital gains on the disposal of qualifying small business assets remains at R750 000.

Estate duty
The estate duty exemption will increase from R2,5 million to R3,5 million from 1 March 2007.

The rate of estate duty on the dutiable value of the estate remains unchanged at 20%.

Donations tax
The annual donations tax exemption for natural persons will increase from R50 000 to R100 000 from 1 March 2007.

The rate of donations tax payable at a flat rate on the value of all property donated (in excess of the exemption) remains unchanged at 20%.

Lump sum death benefits
Payment of lump sums outside the Compensation for Occupational Injuries and Diseases Act (1993) in respect of death while at work be tax free up to a monetary cap of R300 000.

COMPANIES

Corporate tax rate remains unchanged
The corporate tax rate of 29% remains unchanged and the STC rate is reduced to 10% (previously 12,5%) effective from 1 October 2007. STC will be replaced by a dividend tax at company level. Other rates linked to the corporate rate are as follows:

  • The tax rate for South African branches or agencies of foreign companies remains at 34%.
  • The rate for company policyholder funds and corporate funds of long-term insurers remains at 29%.
  • The gold mining tax formulae are unchanged.
  • The tax rate for employment companies remains at 34%.

Depreciation
The tax regime for the depreciation of fixed and moveable assets will be reviewed to ensure greater consistency. Some interim amendments:

  • The tax depreciation periods for new rail locomotives and wagons are reduced from 14 years to 5 years. New quay walls and other pot facilities to qualify for a 20 years write-off period.
  • Newly constructed and upgraded commercial buildings to qualify for a 20 years depreciation period.
  • Capital expenses relating to environmental capital structures to either qualify for depreciation allowances or immediate deductions, depending on the circumstances.

Corporate reorganisation and BEE transactions
Amendments to the Income Tax Act are proposed to ensure that BEE and other similar restructurings do not encounter undue additional tax expense undermining their ability to raise finance. The following six areas of concern have been noted:

  • Share cross-issue: Unwarranted gains or artificial losses being triggered.
  • Share buy-backs of listed shares: Proposal to treat the repurchase of identical shares leaving the party in the same economical position as before as tax free.
  • Anti-avoidance financial instrument company provisions: Financial instrument rules be deleted to the extent possible and/or be mitigated in favour of a more basic anti-avoidance mechanism.
  • Intra-group transfers: Proposed changes to the tax-free rollover of assets with reference to de-grouping charges.
  • Connected person sales of depreciable property: Review of the anti-avoidance rules to accommodate situations where avoidance is unlikely to be the driver.
  • Broad-based share incentive schemes: These schemes would be review as usage of the incentive appears to be minimal.

SMALL BUSINESSES

Small business corporations
The turnover limit for eligible companies increases from R6 million to R14 million for years of assessment ending on or after 1 April 2006.

Tax rates for qualifying small business corporations for years of assessment ending between 1 April 2007 and 31 March 2008 changed slightly in line with the individual tax thresholds to R43 000 and are as follows:

Taxable income: Tax rate:
R0 – R43 000 – 0%
R43 001 – R300 000 – 10%
R300 001 and over – 29%

Tax amnesty for small businesses
Small business tax amnesty was announced in the 2006 Budget. Applications may be made until 31 May 2007. Legislative clarity to be provided due to technical issues arising in respect of small business tax amnesty in respect of certain trusts.

OTHER

Value-Added Tax (VAT)
The VAT rate remains unchanged at 14%.

  • There is a growing international trend to require foreign e-commerce suppliers of services to register as VAT vendors in countries where they supply services. The practical implications of registering would be considered by SARS with regard to international practice.
  • The supply of dried maize to be eligible for zero-rating regardless of the recipient’s intended consumption.
  • Examination of the VAT rules with reference to company reorganizations to remedy inconsistencies between the VAT and Income Tax provisions.
  • It is proposed to legislatively clarify the definition of financial services as it relates to the VAT treatment applicable to products of short-term and long-term insurers.
  • Commissioner to prescribe another method of apportionment if the turnover-based method to determine input credits for mixed supplies does not give an equitable result.
  • VAT Act to be amended to provide clarity regarding payment dates depending on the means of payment.
  • Amendment of the VAT Act to ensure full documentation requirements exist in terms of deemed supplies.
  • The budget proposes to allow for the destruction of paper cheques if digital images are maintained for a five-year period.

Transfer duty
The transfer duty threshold for natural persons remains unchanged. The transfer duty rates for property acquired by natural persons on or after 1 March 2007 will be as follows:

Property value: Rates of tax:
R0 – R500 000 – 0%
R500 001 – R1 000 000 – 5% on the value above R500 000
R1 000 001 and above – R25 000 plus 8% on the value above R1 000 000

The transfer duty rate for companies and trusts remains at 8%.

Fuel taxes
The general fuel levy will be increased by 5 cents with effect from 4 April 2007 to 121 cents per litre on petrol and 105 cents per litre for diesel. The Road Accident Fund levy increases by 5 cents per litre from 36,5 cents per litre to 41,5 cents per litre.

The fuel tax regime for biofuels and bioethanol in particular will be reviewed during 2007.

Stamp duties
It is proposed that all secondary trade in shares (listed or otherwise) be subject to a single securities tax. The Uncertified Securities Tax Act (UST Act) will be renamed the Securities Tax Act and would include unlisted shares.

The stamp duties on short-term leases (less than five years) will be abolished. The relationship between the VAT Act, Transfer Duty Act and stamp duties on long-term leases will also be examined to provide clarity.

Duties on beverages and tobacco products
Duties alcoholic beverages are increased with immediate effect on wine products (23 cents), malt beer (33 cents) and spirits (43 cents). Excise duties on tobacco products will be increased by between 5,3% and 10,7% for all categories of tobacco products.
This increases the cost of a 340ml can of malt beer by 5 cents and a packet of 20 cigarettes by 52 cents.

Intellectual property
The introduction of measures to remedy the potential loss of intellectual property and the impact on tax revenue collections.

Small business development
A small business tax compliance cost study has been commissioned to support the development of a more simplified tax regime for very small businesses to be introduced in 2008.

Public entities
A full scale effort to revise the income tax treatment of provincial and municipal entities will be taken forward as time pressures prevented the review in 2007.

Employee tax relief for sole proprietors
In 2006 legislative relief was introduced regarding “deemed employees” applicable to small business operating as trusts or companies. Amendment will be effected to include small business operating as sole proprietors that was inadvertently omitted.

Regulation of tax practitioners
The first phase to register tax practitioners with SARS by 30 June 2005 has been implemented. The second phase envisaged the establishment of an independent regulatory board for tax practitioners. Draft legislation has been released for public comment and should be tabled during the latter part of 2007.

Tax administration

  • SARS has begun modernising its systems and processes to better manage risk and improve the quality of service.
  • Small business tax amnesty to gather pace in the coming weeks until the deadline of 31 May 2007.
  • Technical corrections to be addressed.

INDIVIDUAL TAX SAVINGS

Income tax payable in 2007/2008 – individuals younger than 65.

Taxable income
2006/2007 tax
2007/2008 tax
Tax reduction
R
R
R
R
50 000
1 800
1 260
540
70 000
5 400
4 860
540
100 000
10 800
10 260
540
150 000
23 300
21 885
1 415
200 000
37 800
35 385
1 415
500 000
149 800
143 385
6 415
1 000 000
349 800
343 385
6 415
1 500 000
549 800
543 385
6 415

Income tax payable in 2007/2008 – individuals 65 years and older.

Taxable income
2006/2007 tax
2007/2008 tax
Tax reduction
R
R
R
R
70 000
900
180
720
100 000
6 300
5 580
720
150 000
18 800
17 205
1 595
200 000
33 300
30 705
2 595
500 000
145 300
138 705
6 595
1 000 000
345 300
338 705
6 595
1 500 000
545 300
538 705
6 595

INCOME TAX RATES: NATURAL PERSONS AND SPECIAL TRUSTS
YEAR OF ASSESSMENT ENDING 28 FEBRUARY 2008

Taxable income
Tax rates
R
0 – 125 000
18%of each R1
125 001 – 180 000
R20 250 +25%of the excess overR112 500
180 001 – 250 000
R37 125 +30%of the excess overR180 000
250 001 – 350 000
R58 125 +35%of the excess overR250 000
350 001 – 450 000
R93 125 +38%of the excess overR350 000
450 001 and above
R131 125+40%of the excess overR450 000

NATURAL PERSONS
Tax thresholds

2007
2008
Below 65 years of age
R40 000
R43 000
Aged 65 and over
R65 000
R69 000

Tax rebates

2007
2008
Primary – All natural persons
R7 200
R7 740
Secondary (in addition to the above) – Persons aged 65 and over
R4 500
R4 680

CORPORATE TAX RATES
YEARS OF ASSESSMENT ENDING BETWEEN 1 APRIL 2007 AND 31 MARCH 2008

Normal tax (basic rate) 2007 2008
Non-mining companies 29% 29%
Close corporations 29% 29%
Employment companies 34% 34%
Other companies 29% 29%

Tax rates for qualifying small business corporations will be as follows:
R0 – R43 000 of taxable income – 0%
R43 001 – R300 000 of taxable income – 10%
R300 001 + of taxable income – 29%
Secondary tax on companies (STC)

The STC rate will reduced to by 2,5% to 10% from 1 October 2007.

TRUSTS

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

EFFECTIVE CGT RATES

Effective CGT rates remain unchanged.

Taxpayer Inclusion
Rate (%)
Statutory
Rate (%)
Effective
Rate (%)
Individuals
25
0 – 40
0 – 10
Trusts
Unit
29
Special
25
18 – 40
4,5 – 10
Other
50
40
20
Companies
Ordinary
50
29
14,5
Small business corporation
50
0 – 29
0 – 14,5
Permanent establishment
50
34
17
Employment company
50
34
17
Life assurers
Individual policyholder fund
25
30
7,5
Company policyholder fund
50
29
14,5
Untaxed policyholder fund
Corporate fund
50
29
14,5

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