On the 22nd of February 2017, the Minister of Finance, had the daunting task of announcing the 2017/2018 budget to our nation. Faced with a personal income tax revenue shortfall of R28 billion due to a slowdown in the economy, the unemployment rate reaching close to 27% and the debt to GDP ratio reaching over 50% at the close of 2016 it was certainly expected that measures would be implemented by the minister to increase revenue levels.
In addition to certain tax changes being implemented, there were also numerous legislative change proposals and references to current legislation being scrutinised within tax committees.
In this article, I will attempt to only deal with the more immediately relevant changes and proposals in a brief manner.
I then turn to the tax changes which were immediately implemented for the commencement of the 2017/2018 tax year.
A new so-called “super tax” bracket has been created to increase the revenue stream collected by the South African Revenue Services (“SARS”) from the top earning individual taxpayers. Any individual earning above R1, 500, 000.00 per annum shall be forthwith taxed at a rate of 45% for every rand earned above that amount. This increases the maximum effective rate of Capital Gains Tax (“CGT”) for individuals from 16.4% to 18%. We use the following comparative example to show the difference between a person earning R3, 000, 000.00 per annum in the 2016/2017 tax year versus the same person earning R3, 000, 000.00 in the 2017/2018 tax year (ignoring any rebates, deductions, CGT or different sources of income)
2016/2017 Tax Year
R3, 000, 000.00 income taxed @ 41% according to the 2016/2017 tax tables.
= R206, 964.00 + [(R3, 000, 000.00 – R 701, 300.00) × 41%]
= R206, 964.00 + R942, 467.00
= R1, 149, 431.00 tax payable
2017/2018 Tax Year
R3, 000, 000.00 income taxed @ 45% according to the 2017/2018 tax tables.
= R533, 625.00 + [(R3, 000, 000.00 – R1, 500, 000.00) × 45%]
= R533, 625.00 + R675, 000.00
= R1, 208, 625.00 tax payable
This group of registered individual tax payers are only estimated to be around about 100 000 people and will add an additional R16.5 billion to the fiscus.
The effective tax rate of trust will be at a flat rate of 45% up from 41% in the 2016/2017 tax year, with the maximum effective rate of CGT increased from 32.8% to 36%.
Section 7C or the “Loans to Trust”
On the 19th of January 2017, the Taxation Laws Amendment Act of 2016 was published inserting Section7C to the Income Tax Act as an anti-avoidance measure.
Section 7C was introduced by this Amendment Act to prevent taxpayers from using trust structures to avoid estate duty and donations tax.
This section will apply in instances where a loan (advance or credit) is made by a natural person to a trust where that person is a connected person in relation to that trust. It also includes a loan made to a trust by a company, where the loan is made at the instance of a person that is a connected person in relation to that trust and that company.
To clarify a “connected person” will apply in the following instances:
- A loan made by a person (the lender) to a trust where that-
- lender is a beneficiary of the trust; or
- the lender’s spouse, child or any relative to the third degree in relation to the lender, is a beneficiary of that trust;
- A loan is made by a company to a trust where:
1 Act 58 of 1962.
- a shareholder with at least 20% of the shares of that company or 20% of the voting rights is also a beneficiary of the trust, or
- the spouse, child or relative to the third degree in relation to that shareholder (who holds more than 20% of the shares of the company or 20% of the voting rights) is a beneficiary of the trust.
What is the practical impact that Section 7C will have?
Firstly, the section determines that no deduction, loss or allowance (including a capital allowance) can be claimed by the trust in respect of the disposal of the loan by way of a reduction, a waiver or the failure to claim payment of the loan. This provision will apply in respect of all loans that exist between connected persons and their trusts as described above, irrespective of whether the loan is interest-bearing or not.
Secondly, if the trust incurs no interest on this loan or incurs interest at a rate below the official interest rate plus 100 basis points (which is currently 8% per annum). An amount equal to the difference between the actual interest paid by the trust and this official rate of interest shall be treated as a donation that is made to that trust by that person. If the loan is made by a company to the trust at the instance of more than one connected person in relation to that company and trust, the donation will be treated as being done in the same ratio as their shareholding in that company during that year of assessment.
Where the lender is a natural person, the R100 000 annual donation exemption contained in Section 56, can be applied in respect of this deemed donation.
The following is excluded from this provision:
- A trust that is a public benefit organisation as approved by the Commissioner in terms of Section 30(3);
- (3) If a trust incurs—
- “(b) interest at a rate lower than the official rate of interest as defined in paragraph 1 of the Seventh Schedule.”
- The official rate of interest is defined in paragraph 1 of the Seventh Schedule to the Income Tax Act 58 of 1962 as amended by section 93 of the Taxation Laws Amendment Act 25 of 2015 as follows-
- “(a) in the case of a debt which is denominated in the currency of the Republic, a rate of interest equal to the South African repurchase rate plus 100 basis points; or (b) in the case of a debt which is denominated in any other currency, a rate of interest that is the equivalent of the South African repurchase rate applicable in that currency plus 100 basis points:’’
- A trust that is a small business funding entity approved by the Commissioner in terms of Section 30C;
A loan that was provided to a trust by a person with a vested interest in the trust or in return for a vested interest in the trust, and the beneficiaries of the trust hold a vested interest in all the receipts and accruals and assets of the trust, and-
- no beneficiary of the trust can hold or acquire an interest in the trust other than a vested interest in all income and assets of that trust;
- the vested interest of each beneficiary is determined solely by reference to and in proportion to the assets, services or funding contributed by that beneficiary to that trust;
- none of the vested interests held is subject to a discretionary power of the trustees,
A trust that is a ‘special trust’ as defined (that is, set up for minors or disabled persons);
A loan that was wholly or partly used to fund the acquisition of a property used as a primary residence by that person or that person’s spouse and the loan relates to part of that loan that funded the acquisition of the property,
- A loan that is an affected transaction as defined in Section 31(1) of the Income Tax Act;
- A loan that was provided to the trust in terms of an arrangement that is a Sharia Law compliant finance arrangement as contemplated in Section 24JA, had the trust been a bank; and
- A loan that is subject to the provisions of Section 64E(4).
This section will apply in respect of any amount that is owed by the trust before, on or after the 1st of March 2017.
CORPORATE TAX AND DIVIDEND TAX
As from the 22nd of February 2017 the dividend withholding tax rate has increased to 20%. Companies tax has remained unchanged at 28%, however with the increase of dividend withholding tax, a shareholder being a natural person or a trust will pay tax at an effective rate of 42.4% up from 37.4%.
LIMITATION OF THE FOREIGN PENSION EXEMPTION
Section 10(1)(gC) of the Income Tax Act is amended from 1 March 2017 to clarify when foreign pensions will be exempt (this exemption applies in respect of lump sums, pensions or annuities received from retirement funds).
When the residence-based system was introduced in 2001, Section 10(1)(gC) was included in the Income Tax Act to exempt the receipt of foreign pensions arising from employment outside of the Republic.
Prior to 1 March 2017, the provisions of Section 10(1)(gC) allowed a SA tax resident who is employed outside of the Republic to receive those retirement benefits (that they accumulated while outside the country) free from tax.
The way this section was interpreted resulted in SA tax residents (who were employed outside of the Republic) receiving a tax deduction on contributions made to a SA retirement fund (local retirement fund) whilst they were abroad. They then also enjoy the exemption in respect of the receipt of the retirement benefits attributed to the employment abroad.
The amendment of the section results in the exemption being limited to only apply to retirement benefits from foreign retirement funds and will include exemptions where foreign retirement funds were transferred to local retirement funds for the benefit of that taxpayer.
The transfer duty exemption up to R750, 000.00 in the 2016/2017 tax year has been raised to R900, 000.00, providing extra relief in the transfer of immovable property.
It should be noted that no transfer duty is payable if the transaction is subject to Value added tax(“VAT”).
Although the abovementioned changes are not an exhaustive list of changes implemented, they are certainly changes that will impact on a large volume of South Africans. When implementing a strategic business- or individual financial structure, it may be prudent to seek legal advice on the most efficient tax vehicles available in meeting the goal.
“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”- Winston Churchill
- by Douglas Hewitt, a candidate attorney at Barnard Incorporated Attorneys
- Article published on 11 April 2017
Barnard Inc is an attorneys firm in Centurion, Pretoria.