Tabacks on Budget 2020
Author: Ernest Marais
Service: Andersen Tax
The week building up to Minister Tito Mboweni’s budget speech was filled with rumours about an increase in the VAT rate and a new proposed wealth tax on assets. This time round sanity prevailed and Mr. Mboweni passed a major test in very difficult economic circumstances. This article will briefly touch on why the non-introduction of the above-mentioned taxes is a good thing and discuss the key highlights from Mr. Mboweni’s speech.
Value Added Tax
VAT is a tax on consumption which means that the majority of households in the country would have been adversely affected by an increase in the VAT rate. This is often classified as a “regressive”-tax, being a tax that will negatively impact lower income households proportionally more than high income households. In a country where inequality is a massive issue, the introduction of a further increase on the VAT rate would have been a very controversial.
Unlike a VAT increase, wealth tax is a progressive tax, being a tax that will impose a higher rate on the wealthy than on the poor. In theory, this may be a good tool for the redistribution of wealth and reducing the inequality gap between the rich and the poor; however the introduction thereof in France in 2010, as predicted, had no impact on reducing inequality.
We are of the view that the introduction of a wealth tax in South Africa would have resulted in a flight of capital to international markets, which would in the long term have had the opposite effect upon the South Africa fiscus to what was intended. The ideas of Thomas Piketty, the French economist who focuses on wealth and inequality, may be a good idea on paper; however we share Mr. Mboweni’s sentiment that it is not ripe for implementation in South Africa.
Tax: What can we expect?
Increase in Income Tax Bracket:
SARS will increase the income tax brackets for individuals, which means that effective rates of individual tax payable will be reduced. This is a welcome proposal, to align the income tax payable with inflation.
The transfer duty threshold will increase from R900,000 to R1,000,000 which is a welcome introduction for the property sector.
Tax Exemption for Foreigners working abroad
The tax exemption on foreign income will be increased from R1,000,000 to R1,250,000. This will provide some much needed relief for South African residents working abroad, although we are of the view that the original limitation of this exemption resulted in expatriates permanently emigrating from the country, who could have contributed positively to the South African fiscus.
Tax Free Savings Account
The limitation on tax-free contributions to a tax-free savings account has been increased from R30,000 per annum to R36,000 per annum.
Sin Taxes and Levies
As anticipated, we can expect an increase in levies on the so-called “sin taxes”, with an increased in levies on beer, wine, spirits and cigarettes.
The fuel and road accident fund levy will be increased.
Proposed Changes to Tax Policy
Corporate Tax Rate
Treasury announced that they will be looking into reducing the corporate tax rate to encourage foreign direct investment and promote economic growth. This will align South Africa’s corporate tax rate with the average international corporate tax rate and should have a positive impact on economic growth upon implementation.
Focus on Religious Bodies & Illicit Criminal Activities
The renewed focus that Edward Kieswetter introduced at the South African Revenue Service (“SARS”) prior to the budget was already a positive sign. We can expect SARS to sharpen their focus on illicit and criminal activities.
A special focus on religious bodies, to ensure that they operate within the boundaries of the law, is welcomed.
Anti-Avoidance Rules focused on Trusts
We can expect a further clamp-down on the circumvention of the anti-avoidance rules for trusts and especially the subscription for preference shares in companies owned by trusts by individuals connected to the trusts.
Venture Capital Companies
The Government will review the current regime and may extend the 30 June 2021 deadline for the use of S12J venture capital companies; however one can expect changes to the current regime to close out unintended consequences. The nature of these unintended consequences are yet to be disclosed by the Government and one can only speculate as to what the proposed amendments will look like.
Amending Anti-Avoidance Rules in relation to change of residence of a company
Currently, a company that ceases to be a resident for South African tax purposes is subject to an exit charge. Residents who hold shares in these companies can subsequently dispose of their shares and qualify for the participation exemption on the sale of these shares. The Government will be looking at closing out this loophole.
Elimination of Loop Structures in the Pipeline?
The current tax regime allows for an exemption from tax on any dividends from a foreign company, provided that the South African tax resident holds more than 10% of the equity shares in that foreign entity. If more than 50% of the shares of that foreign company are held by South African tax residents, it is deemed to be a controlled foreign company and dividend income from that company are exempt from tax.
If the loop structures are no longer restricted, it would be possible to set up a structure where a controlled foreign company owns a South African company and all dividends flowing through the foreign company to the individual or trust will be exempt from tax. This will enable South African residents to reduce their tax liability on dividends to zero.
This proposed amendment suggests drastic overhaul on loop structures and the tax act closing out all potential loopholes and tax leakage.
Withdrawing retirement funds upon emigration
Individuals are currently allowed to withdraw their retirements funds and retirement annuities upon emigration for exchange control purposes. The concept of emigration for exchange control purposes will be phased out, which means that a new trigger for the withdrawal of these funds will be reviewed.
Export of Intellectual Property to Non-Related Parties
It has been suggested that the export of intellectual property to non-related parties will no longer be subject to Reserve Bank approval.
Government proposes net interest expense deductions to 30% of earning for the year of assessment commencing on or after 1 January 2021.
Other Key Highlights
The other key highlights of the budget speech included:
Wage freeze for public sector wage bill: The Government can expect a significant reaction from the trade unions on this proposal. We believe that the excessive spending and remuneration packages under the Zuma presidency makes this a compulsory requirement and will certainly indicate a step in the right direction on the international front.
Sovereign Wealth Fund: A sovereign wealth fund is a good idea in theory, to grow and preserve the national reserve; however, the implementation and governance thereof will determine the success of the project. In general, it appears that sovereign wealth funds have been successful in countries with low government debt and budget surpluses. However, they are susceptible to corruption and looting, as the experiences of Malaysia and Angola illustrate.
State Bank: We can also expect the introduction of a new state bank which will introduce the offering of financial services to all South Africans. In the midst of the current South African climate, the potential for corruption posed by this venture has to considered. The rationale behind a state-owned bank within a well established and functioning banking sector remains unclear.
SA Government Debt: The total Government-debt now equals almost 66% of South Africa’s total economy and the repayments on this debt are growing by more than 12% a year. This is an area of grave concern and not sustainable.
On the balance, we are cautiously optimistic about the proposals and the direction in which President Ramaphosa and his team appear to be steering the country. Any drastic increases in taxes would have had the inverse effect of what the Government would have hoped for and discourage any further capital investment into the country. It is unlikely that Mr. Mboweni has done enough to avoid a credit downgrade by Moody’s rating agency, the last one to keep South Africa above “junk status”, but it is certainly a step in the right direction.