PwC’s tax comments on the 2020 Budget Review

Personal Income Tax

Given the worsening economic realities still facing the Minister of Finance this year, it came as a pleasant surprise that he provided 5.2% adjustments to the individual tax brackets and rebates, resulting in real personal income tax relief for the already stretched individual taxpayers.

The net result is that, with effect from 1 March 2020, the maximum rate of 45% applies to taxable income in excess of R1,577,301 (up from R1,500,000) while the lowest rate of 18% applies to taxable income up to R205,900 (up from R198,850) with similar adjustments to the brackets in between. There will also be 5.2% increases in the primary, secondary and tertiary rebates, resulting in the tax-free threshold increasing from R79,000 to R83,100 for taxpayers under 65 years of age.

It was widely expected that the medical tax credit available to taxpayers who are members of medical aid schemes would not be increased, however, it has in fact been increased nominally from R310 to R319 per month for each of the first 2 dependents and from R209 to R215 per month for every subsequent dependent.

As regards the much talked about taxing of foreign remuneration that comes into effect on 1 March 2020, the proposed exemption will be increased from R1 million to R1.25 million. The Minister also announced a comprehensive review of the pay-as-you-earn system with a view to implementing a more modern automated process. Details in this regard are, however, unclear at this stage.

Barry Knoetze, Associate Director, PwC

Streamlining Personal Income Tax Compliance

A welcome announcement in the Budget is that the legal framework and administration of pay-as-you-earn will be reviewed with a view to implementing a more modern, automated process. This is likely to be of benefit both to employers and employers by simplifying the administrative burden of the employees' tax system.

Greg Smith, Senior Manager, PwC Tax Technical

International Tax

In relation to corporate cross-border business, there are limited proposals. One of the main proposals is to impose a stricter cap on related-party interest-payments. Whereas the current formula-based rule sets a cap approximating 40% of the company's earnings, the new proposal is to reduce the cap to 30%.

The Budget commentary also includes a specific reference to the OECD's evolving proposals on the digitalisation of the global economy, albeit simply noting that "SA participates in these discussions". However, this may be seen as a signal that National Treasury expects to implement the OECD proposals (expected to be finalised later this year).

Several further refinements to anti-avoidance rules are proposed in relation to areas such as the so-called participation exemption (both on foreign share disposals and on foreign dividends), and transfer pricing rules for controlled foreign companies. Some elements of the participation exemption restrictions are directly linked to the intention to soften the exchange control rules on so-called 'loop' structures.

Osman Mollagee, International Tax Partner, PwC

Reviews of Corporate Tax Incentives, and Sunset Dates

With a view to ensuring that Government gets enough “bang for its buck” from corporate tax incentives, the Budget makes a significant announcement regarding reviews of these incentives.

In this regard, it is proposed that a 28 February 2022 sunset date be introduced for tax incentives relating to airport and port assets, rolling stock and loans for residential units. In addition, all of these incentives will be reviewed in order to determine whether they should be extended.

In a similar vein, the incentive relating to inductrial policy projects will not be renewed beyond 31 March 2020, and the urban development zone incentive will be extended for one year while it is reviewed.

It was also announced that, generally, sunset dates will be inserted in all incentives where they do not currently exist in order to prevent incentives continuing indefinitely without adequate foresight.

Greg Smith, Senior Manager, PwC Tax Technical

Limitations on assessed losses

From a corporate tax perspective, a significant development is that, with effect for years of assessment ending on or after 31 December 2021, companies will only be able to claim assessed losses against 80% of taxable income.

The effect of this proposal is that companies with assessed losses will be required to pay corporate income tax on at least 20% of their taxable income, despite the level of assessed losses brought forward. This would have an impact on the recognition of deferred tax assets in the financial statements of companies.

Greg Smith, Senior Manager, PwC Tax Technical

ENDS