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On the face of it he hasn’t deviated from the tone set in the MTBPS. In fact, we have received confirmation that a prudent fiscal path will be followed in order to stabilise Government’s debt ratio. However, a year ago we have also warned that revenue is likely to fall short and that the tax payer is likely to fund the shortfall with higher taxes.

Against the backdrop of a revenue shortfall for 2014/15 of R14.7 billion below the 2014 budget review forecast, the Minister announced additional revenue-raising measures. These were relatively limited though, amounting to a net R8.3 billion after adjustments for fiscal drag are accounted for. Discouragingly, the ratio of tax revenue to gross domestic product (GDP) increases to 26.2% by 2017/18; certainly a step backwards.

The marginal personal income tax rate was adjusted by one percentage point for those who earn more than R181 900. This was interesting because, technically, this does enhance progressivity of the tax system (since the marginal tax rate for income earners below this threshold was not adjusted), but it is contrary to the expectation that the richest should shoulder the burden of adjustment. Relief for fiscal drag is worth R8.5 billion to households, but they give R9.42 billion back due to the marginal tax rate increase.

To align itself with the growth objective, a tax structure should, theoretically, be supportive of building savings and encouraging investment. The net effect of tax changes announced in Budget 2015 is a slight skewing in the direction of indirect taxes. It’s not much, but the change on margin is in the right direction.

Further, the Treasury refrained from raising tax rates on the proceeds of savings (for example, dividend tax). In effect, capital gains tax went up marginally as a result of the higher personal income tax rate. To this end the introduction of tax-free savings accounts are welcome, although this intervention may merely prompt substitution (shifting savings from one vehicle to another).

There is also a strong focus on expenditure (indirect) taxes, but not VAT. Excise duties were increased in excess of inflation. The increase in excise duties nets the Treasury an additional R1.84 billion, while the increase in the Road Accident Fund and fuel levy nets the Treasury R6.49 billion in 2015/16. Hence the total increase for indirect taxes is R8.33 billion.

But, after all is said and done, the first objective is to stabilise the debt ratio. The Minister commendably stuck close to his deficit reduction plan as outlined in the MTBPS in October 2014 (the consolidated budget deficit declines to 2.5% of GDP by 2017/18 from 3.9 per cent of GDP in 2015/16). If the main budget primary balance (revenue less non-interest spending) declines over the next three years as outlined in budget 2015 (from -1.7 per cent of GDP in 2014/15 to 0.0% in 2017/18), the total gross loan debt ratio can be expected to stabilise at just below 48% three years from now.

On balance, the rudder has turned. Hopefully, the ship will follow. But, the path to fiscal sustainability remains onerous and long.

As Far as Fiduciary & Tax is Concerned

By Anton Maskowitz and Carien Strauss

Minister Nene’s maiden budget speech has been described as a 'boring budget' or a 'non-event'. On closer scrutiny, and in the words of Judge Dennis Davis, a guest speaker at the South African Institute of Tax Practitioners and the Chairman of the Tax Reform Committee, the budget is indeed boring because it is in fact a 'holding' budget. From this statement it would seem that Minister Nene was confined to the armour he has at his disposal at the moment, but there is probably much more to come. Future tax proposals will therefore depend on the proposals of the Davis Committee and the Judge promised to issue his Report on Wealth Taxes within the next few weeks. He commented during his address at the Budget breakfast that wealth taxes are extremely complex and he would prefer to issue his report for public comment before making his recommendations to Treasury. One of the areas that he will address in his report and which received specific mention during his presentation is estate duty.

The most relevant tax proposals contained in the 2015 Budget were the following:

  • A 1% increase in marginal tax rates for individuals earning in excess of R181 900. This is the first time in decades that the marginal tax rates have been increased resulting in the maximum marginal rate increasing from 40% to 41%.
  • Although capital gains tax inclusion rates have remained unchanged, the effective capital gains tax rates for individuals and trusts have increased due to the 1% increase in marginal rates. The new effective rates are:
    • individuals and special trusts – 13.65% (maximum rate),
    • companies – 18.65%, and
    • other trusts such as discretionary family trusts – 27.31%
  • Maximum rate for transfer duties went up from 8% to 11%, but the thresholds increased and, as a result transfer duty is only payable on properties above R750 000 and the highest rate of 11% applies to properties sold for R2 250 000 or more.
  • The tax levied on fuel will increase by 80.5 cents per litre from 1 April 2015, 30.5 cents going toward the fuel levy and the other 50 cents to the Road Accident Fund.
  • Measures will be introduced to eliminate the use of retirement funds such as retirement annuities ('RAs') in the so called 'death bed' planning schemes, aimed at avoiding estate duty. This practice will now be curtailed by means of two measures:

Firstly, to limit tax planning opportunities, it is proposed that a maximum age at which withdrawals must be taken be introduced which proposal is in line with other countries that have similar retirement funding arrangements. The proposed age is unknown at this stage and will most likely only be communicated in the next Taxation Laws Amendment Bill.
Secondly, it is proposed that an amount equal to the non-deductible contributions made to retirement funds be included in the dutiable estate when a retirement fund member passes away. For example, if an individual made a R5 million lump sum contribution to an RA and at the time of death the remaining non-deductible contributions amounts to R4 million, this amount will be included in his or her estate for estate duty purposes. From this it is evident that Treasury intends to address abuse of the current RA legislation, which was ever only intended for legitimate retirement planning. It seems that individuals who have already made contributions to RAs in order to avoid estate duty and who dies after the proposals are enacted, will unfortunately also be caught by these new proposals given that the triggering mechanism is the date of death.

  • Offshore trusts and CFC rules
  • What also became apparent from Minister Nene’s Budget speech and the comments made by Judge Dennis Davis during his address at the budget breakfast is that there will be increased scrutiny on base erosion and profit shifting ("BEPS") activities focussing on offshore trusts and controlled foreign companies (CFCs). Judge Davis intends to propose to Treasury to include questions on income tax returns which will specifically ask corporates whether they have any entity in their corporate structure located in a tax haven or low-tax jurisdiction and also whether taxpayers have a vested/contingent interest in an offshore trust, or control the offshore trust by way of a 'letter of wishes'. The Judge remarked that in the event that these questions are not answered truthfully, the relevant taxpayers “will be jailed”. In addition, consideration will be given to subject (CFCs) held by interposed trusts to tax in South Africa. This is the strongest indication yet that the benefits of utilising an offshore trust to avoid the CFC rules from applying to a non-resident company, will be eliminated.

    Exchange control allowances will increase from 1 April 2015, and

  • Authorised dealers may process corporate investments up to R1 billion per year, from R500 million previously, as well as the carrying forward of any unused allowance.
  • South African residents’ foreign capital investment allowance will increase from R4 million to R10 million per calendar year or upon emigration, or R20 million per family unit.
  • The subcategories under the individual single discretionary allowance are removed and the annual R1 million allowances may be used for any legal purpose abroad.
  • The dispensation for credit card usage, currently limited to individuals, will be extended to corporates.

The significance hereof is that individuals may, from the 1st of A​pril 2015, remit R11 000 000 per calendar year abroad for investment purposes. Where individuals have already utilised their R4 million allowance to date for the current calendar year, they may apply for a further R6 000 000 on or after the 1st of April 2015.

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