Detailed Budget speech tax proposal summary

The National Budget speech was delivered in parliament on 24 February 2021 by the Minister of Finance, Tito Mboweni.

The backdrop to this year’s Budget was the ravages to lives, personal livelihoods, businesses and the economy caused by Covid-19. The challenges of last year’s Budget are amplified by the pandemic and budgetary consequences which could not have been contemplated last year this time. Vaccines and their rollout across the country, looms highest on the priority list. Government has set aside R10 Billion as well as a contingency reserve of R 5 Billion to R12 billion to make provision for further purchases of vaccines and other emergencies. This is vital for the health of our people and our economy.

It is a huge concern that our borrowing requirement will remain well above R500 billion in each year of the medium term and that gross loan debt will increase from R3.95 trillion in the current fiscal year to R5.2 trillion in 2023/24.

Treasury expect to collect R1.21 trillion in taxes during 2020/21, which is about R213 billion less than the 2020 Budget expectations. This is the largest tax shortfall on record.

In 2021/22 government expects to collect R1.37 trillion, provided their underlying assumptions on the performance of the economy and tax base hold.

Against this background we were pleased to see that the Minister did not increase personal taxes or allow for fiscal drag to increase collections. Without government adjustment to the tables and rebates, fiscal drag causes income to move into higher tax brackets. Instead the Minister increased the tax tables and rebates by five percent which was welcome relief under trying circumstances. The Budget Review noted that new tax increases at this time could harm the economy’s ability to recover. Additional revenue from indirect taxes will be offset by personal income tax relief.

The Minister also announced that corporate income tax rate will be lowered to 27 per cent for companies with years of assessment commencing on or after 1 April 2022. This will be done alongside a broadening of the corporate income tax base by limiting interest deductions and assessed losses. Government will give consideration to further rate decreases to make our tax system more attractive in a revenue-neutral manner. The insights of the Davis Tax Committee will be leveraged as they undertake this reform.

Although there were many tax proposals, this publication will be limited to those which are of concern to financial advisers.

A. Personal income tax

The personal income tax brackets and the primary, secondary and tertiary rebates will be increased by 5 per cent for 2021/22, which is above expected inflation rate.

This provides relief to households by ensuring that inflation does not automatically increase the individual tax burden. This adjustment will reduce tax revenue by R2.2 billion. Most of the relief benefits lower- and middle-income households. If the tax tables were not adjusted, this would have raised R11.2 billion.

1. Personal tax tables for individuals and special trusts

The table below reflects the proposed personal tax tables for individuals and special trusts:

Income Tax year 2021/2022

2. Tax Rebates

The table below reflects the proposed tax rebates for individuals:

3. Tax thresholds

The Primary, Secondary and Tertiary rebates will be increased by 5 per cent. The change in the rebate will mean that persons with taxable income as follows will pay no tax.

The tables below illustrate the difference in tax paid by individuals in the 2021/22 tax year from that paid in the 2020/21 tax year based on the tax tables and rebates.

Individuals (younger than age 65)

Individuals (Age 65 - 74) 2021/2022

Individuals Age 75 and over 2021/2022

B. VAT

There was no increase in the VAT rate from the current 15%.

C. Estate Duty and Donations Tax

No changes in the 2021 Budget.

With effect from 1 March 2018, the estate duty rate was increased from 20% to 25% for estates worth R30 Million and more. To limit the staggering of donations to avoid the higher estate duty rate, any donations above R30 Million in one tax year are also taxed at 25%.

D. Capital gains tax (CGT)

No changes announced to the taxation of capital gains.

The capital gains tax inclusion rates remain as follows:

• Individuals: 40% (The maximum effective capital gains tax rate for individuals remains 18%.

• Companies: 80% (This remains the same at an effective rate of 22.4%.)

• Trusts: 80% (The effective rate applicable to trusts remains at 36%.)

• Special trusts: The maximum effective rate applicable to special trusts remains at 18%.

E. Interest Exemption

No Change. The interest rate exemptions will not be adjusted for inflation.

Individuals will be encouraged to invest in the new tax-free savings accounts instead.

In the circumstances the threshold at which tax is paid on interest income remains the same.

F. Tax-Free Savings Accounts

No change. The amount which can be contributed to a Tax Free Savings account is R36 000 per year. The lifetime allowance is R500 000.

G. Transfer Duty

No change.

H. Medical Tax Credits

Government proposes an inflationary increase to the value of the medical tax credits in 2021/2022 from R319 per month to R332 for the first two beneficiaries, and from R215 per month to R224 for the remaining beneficiaries. It is a welcome surprise as it was announcement in the 2018 Budget Review that the credit would be adjusted by less than inflation to help fund the rollout of national health insurance over the medium term.

Monthly Medical Tax Credits for all taxpayers

I. Social Security

The social security grants are increased as follows

J. Indirect Taxes

K. Corporate Tax Rate

The Minister announced that the corporate tax rate will be reduced from 28% to 27% with effect from 1 April 2021. However there was no real detail regarding this in the Budget Review documents.

L . Unemployment Insurance Fund

The UIF contribution ceiling will be set at R17 711.58 per month from 1 March 2021.

M. Dividend Withholding Tax

No changes to the dividend withholding tax rate were announced which remains at 20%.

Additional tax amendments to be expected during the 2021/22 year of assessment.

AA. Retirement Reforms

1. General retirement announcements

The NEDLAC constituencies have agreed to accelerate the introduction of auto-enrolment for all employed workers, and the establishment of a fund to cater for workers currently excluded from pension coverage, as an urgent intervention towards a comprehensive social security system.

Annuitisation for provident funds takes effect from 1 March 2021, and provident fund members will continue to enjoy a tax deduction on their contributions.

2. Regulation 28

National Treasury will this week publish draft amendments to Regulation 28 for public comment. The proposed amendments to Regulation 28 will seek to make it easier for retirement funds to increase investment in infrastructure.

3. The minimum value for paid-up retirement annuities

This has not been adjusted since 2007/08. This value will increase from R7 000 to R15 000 from 1 March 2021.

4. Allowing members to use retirement interest to acquire annuities on retirement

Although this was not easily understood from the Budget Review, it seems to reflect reform which has been requested by the IRFA for a number of years.

On retirement, a member of a retirement fund (except historically from a provident fund) must purchase a pension with at least two thirds of the retirement benefit/interest. There is a SARS practice note, GN 18, which provides that there are three methods of purchasing a pension, but the member may only exercise one method. The three methods are as follows:

• An annuity provided by the fund;

• An annuity bought by the fund from an insurer in the name of the fund;

• A member owned annuity with an insurer

This is extremely restrictive and is not in line with the later regulations to the Pension Funds Act which allow trustees to incorporate more than one method in the fund’s annuity strategy. For example, a member might want to split his or her pension between a guaranteed annuity offered by the fund and a living annuity in the member’s name with an insurer. Currently, under GN 18 this is not available to the member.

This intention by National Treasury to provide more flexibility is welcomed as it will potentially enhance a member’s retirement outcome.

5. Applying tax on withdrawals of retirement interest when an individual ceases to be a tax resident

When an individual ceases to be a South African tax resident, there is no obligation to withdraw from the fund. The member may leave his or her money in the fund. However, when the member becomes a non-resident and then decides to withdraw or retire, the double taxation agreement between the country of residence and South Africa might result in tax being paid in the country of residence instead of in South Africa. Consequently, South Africa provided the tax deduction to the member but might never recover the tax.

The government proposes a new tax framework which imposes a deemed retirement fund withdrawal tax on individuals when they cease to be a South African resident. When the individual ceases to be a South African tax resident, the individual will be deemed to have withdrawn from the fund on the day before he/she ceases to be a resident. The provisions are not completely clear from the Budget review and we will need to await the proposed draft legislation. However, it seems to intend that the member will not have to pay the tax until the member actually withdraws; retires or dies during fund membership.

It seems that the withdrawal tax (including associated interest) payment will be deferred until payments are received from the retirement fund. The member will be entitled to delay payment of the tax until the funds are accessed. When the individual eventually receives payments from the fund, the tax will be calculated based on the prevailing lump sum tables or in the form of an annuity. If an annuity is purchased, a tax credit might be provided.

As stated above, the general intention is understood but the detail will only be able to be understood when the draft Bill is released later in the year.

6. Transfers between retirement funds by members who are 55 years or older.

With effect from 1 March 2021, all pre-retirement transfers between funds are tax free.

This proposal appears to apply to a member who has been retired from an employer and becomes a deferred member of a retirement fund. Currently the member may only retire from that fund; or transfer to a retirement annuity fund and a preservation fund, and retire later from the transferee fund.

It seems that Treasury intends for a deferred member to be permitted to transfer to employer funds too. This was a proposal put forward by industry organisations. We will attempt to get more clarity on this.

7. Clarifying the calculation of the fringe benefit in relation to employer contributions to a retirement fund

From 1 March 2016, all employer contributions to a retirement fund on behalf of employees were considered taxable fringe benefits for the employees. If the contribution contains a defined benefit component, the fringe benefit is to be calculated in accordance with the seventh schedule of the Income Tax Act and the employer must provide the employee with a contribution certificate. An anomaly arises in instances where a retirement fund provides both a retirement benefit in relation to the defined contribution component and a self‐insured risk benefit.

The current interpretation of the legislation would result in the classification of the total contribution to the fund as a defined benefit component because self‐insured risk benefits are not considered a defined contribution component. It is proposed that self‐insured risk benefits be classified as a defined contribution component to ensure that retirement funds that provide both defined contribution component retirement benefits and self‐insured risk benefits can provide the fringe benefit value based on the actual contribution.

BB. Individuals employment and savings

1. Reviewing the nature of long‐service awards for fringe benefit purposes

The Income Tax Act (1962) permits an employer to grant a long‐service award (in the form of an asset or a non‐cash benefit) to an employee as a no value fringe benefit provided that the value of this award does not exceed R5 000. It is proposed that awards, other than in the form of cash or an asset should be considered.

2. Clarifying the timing of disposal rules in respect of an asset acquired from a deceased estate

At present, there is timing uncertainty around when the heirs are regarded as having acquired an asset from the estate of the deceased. Legislation is proposed so that the disposal by the estate occurs on the date when the liquidation and distribution account becomes final.

3. Tax treatment of the cession of a right to receive an asset

Certain disposals that are regarded as either “gross income” or donations in terms of the Act. Some taxpayers have devised schemes which entails the cession of a right to receive the use of an asset to a trust for no or little value. This tax avoidance technique will be closed.

4. Strengthening anti‐avoidance rules in respect of loan transfers between trusts

Section 7C will be further amended to close new anti‐avoidance measures where loans are transferred to trusts to avoid Estate Duty.

5. Clarifying the rules dealing with withholding tax exemption declaration

The Act contains provisions for withholding tax on royalties and interest. The declaration that is available on interest, where the person can declare their exempt status from tax in terms of a double taxation agreement, will be extended to royalties.

6. Value‐added tax

Zero‐rating of super fine maize meal: The VAT Act will be amended to include super fine maize meal in the list of grades of maize meal that qualify for zero rating.

The VAT Act does not make provision for micro‐insurer conducting a micro‐insurance business. It is proposed that the VAT Act be amended to make provision for the VAT treatment of micro‐insurance.

CC. Tax Administration

1. Rebuilding the South African Revenue Service

The Commission of Inquiry into Tax Administration and Governance by SARS (the Nugent Commission) made 27 recommendations to address governance failures at the institution. To date, the Commissioner for SARS has implemented 14 of these recommendations, including re-establishing the Large Business Centre, and units focusing on litigation, compliance and integrity. The performance of the previous executive committee was reviewed, and operational policies related to VAT refunds, settlements and debt collection contracts are being amended.

This year, SARS has started legal processes to recover unwarranted expenditure and handed over case files on persons identified in the Nugent report. The inter-agency working group on criminal and illicit economic activities completed 117 investigations, yielding revenue of R2.7 billion.

Customs and excise operations are reducing the illicit movement of goods across borders, assisted by specialised cargo scanners, resulting in 3 393 seizures valued at R1.5 billion for the fiscal year to January 2021.

Following the recommendations of the Davis Tax Committee, SARS will focus on consolidating wealth data for taxpayers through third-party information. This will assist in broadening the tax base, improving tax compliance and assessing the feasibility of a wealth tax.

An additional spending allocation of R3 billion will be provided to SARS to modernise its technology infrastructure and systems, expand and improve the use of data analytics and artificial intelligence capabilities, and participate meaningfully in global tax compliance initiatives. A digitalised SARS is intended to lower costs of compliance, simplify tax administration and improve collections.

2. Tax-deductible donations

SARS has detected that receipts are being issued by entities that are not approved to do so. To ensure that only valid donations are claimed and to enhance SARS’ ability to pre‐populate individuals’ returns, SARS is going to require more information in the receipts.

3. Aligning periods for refunds of dividends tax for cash and in‐kind dividends

Treasury intends standardising the period within which a taxpayer may claim a dividends tax refund for in‐kind dividends to the date of payment of the dividend, as with other dividends.

4. Administrative non‐compliance penalties for non‐submission of six‐monthly employees’ tax returns

SARS may impose a penalty for the non‐submission of the six‐monthly employees’ tax returns by employers. Adjustments will be made for the penalty to be more effective in enhancing compliance

5. Provisional taxpayers with shorter tax years

It is proposed that a first provisional tax payment and return not be required when the duration of a year of assessment does not exceed six months, due to death and other valid reasons.

6. Review of voluntary disclosure programme

The voluntary disclosure provisions will be reviewed in 2021 to ensure that they align with SARS’ strategic objectives and the policy objectives of the programme.

Comment:

South Africa has great challenges. Government debt is at 80.3% of GDP, projected at 87.3% in 2023 and at 88.9 per cent in 2025/26, and the public sector wage bill continues to be a concern. High government debt levels increase the cost of borrowing across the economy. Servicing this rising debt takes away resources that could have been invested in infrastructure. The South African economy is expected to rebound by 3.3 per cent this year, following a 7.2 per cent contraction in 2020 and average 1.9 per cent in the next two years.

On the bright side, individual taxpayers were given relief against fiscal drag in our tax tables, tax rebates and even in our medical tax credits.

ENDS