ON THE SCALES 2 OF 2012 NATIONAL BUDGET 2012

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1 ON THE SCALES 2 OF 2012 NATIONAL BUDGET 2012 On 22 February 2012 the Finance Minister, Pravin Gordhan delivered his National Budget Speech. Whilst we have demonstrated resilience in the face of global economic uncertainty and turmoil, the time has come for us put in extra effort to ensure growth and progress. We have to work smarter and harder. Our challenges remain the same as in the previous year, namely job creation, reducing poverty, building infrastructure and expanding the economy. This will be achieved by, inter alia: allocating a total of R77.8 billion towards an expanded public works programme with a view to prioritising job creation. identifying 43 major infrastructure projects at a cost of R3.2 trillion. applying an additional R850 million to improve university infrastructure in the education budget (of R207 billion) in 2012/2013. additional funding in the health sector, including an extra R1 billion for the National Health Insurance pilot projects. growing expenditure on social grants from R105 billion in 2012/1013 to R122 billion in 2014/2015. interventions continuing to be put in place to speed up service delivery and ensure the provinces are financially sustainable. greater urgency being applied in the resolution of youth employment, which is being discussed at Nedlac. Economic growth of 2.7 per cent is projected for South Africa in 2012, increasing to 3.6 per cent in 2013 and 4.2 per cent by The unemployment rate remains high at 23.9 per cent, which is still higher than the unemployment rate in The Minister projected a budget deficit of 4.6 per cent for 2012/13, declining to 3 per cent in 2014/15. Total spending will reach R1.1 trillion next year, representing some 32 per cent of GDP. There was a focus on better planning and management of infrastructure projects. To encourage growth and job creation, it is proposed to provide tax relief for small businesses and introduce various strategies to lower the cost of doing business, and make it more efficient. The usual threshold adjustments to individual tax brackets were made but these were countered by indirect tax increases like sin taxes and fuel levies. Consultation on financial sector reforms continue, which include the introduction of a twin peaks system of financial regulation, appropriate capital adequacy standards for banks and insurers and simplifying cross border investments. In addition there will be a focus on encouraging household savings and wide consultation on social and retirement reform proposals. On the Scales is produced by Alexander Forbes Legal Services department to provide clients with information on employee benefits. The issues need to be carefully considered taking into account the specific circumstances of each of our clients. February 2012

2 Summary Social Security Framework Social Grants Child support grants will increase from R265 to R280 per month. The old age and disability grants will increase from R1 140 to R1 200 per month with an additional R20 per month for persons older than 75 years. Social Security Reform Retirement Reform The main proposal is to establish a mandatory statutory fund to provide pensions, life insurance and disability benefits. A uniform tax treatment for all contributions to different types of retirement funds will be introduced, with an additional tax incentive for low-income earners and persons 45 years and older. The system will further aim to align the design of the pension and provident funds to be more uniform by taking account of vested rights and appropriate transitional arrangements. Health reform National Health Insurance (NHI) will be phased in over a 14 year period commencing in the 2012/2013 tax year. Phasing in includes the financing and implementation of NHI. Retirement Funds Tax-free retirement lump sums and withdrawals remain unchanged. Contributions by employers are to be included as a fringe benefit for employees and all contribution by employers and employee will be subject to limits. The limits will be as follows: o A limit to tax deductible contributions of 22.5 per cent of defined earnings capped at R for o persons younger than 45; and A limit to tax deductible contributions of 27.5 per cent of defined earnings capped at R for persons 45 years and older. Low income earners will receive a tax deduction for contributions limited to R irrespective of the above limit. They will also receive a tax deduction from retirement benefits for non-deductible contributions. Retirement payouts from provident funds are expected to be limited to 1/3 of the fund savings. Government will consider the anomalies of tax treatment on payouts from SA funds and foreign funds in order to align these. The abovementioned proposals are all expected to be effective from 1 March Pension interests payable from the GEPF upon divorce will be aligned with tax principles applied to private sector funds. Savings and Investments With effect from 2014, individuals will be permitted to save up to R a year with a lifetime limit of R in registered savings and investment products that would be free of tax on interest, CGT and dividends. The current tax free interest regime will be reviewed and possibly phased out. There is no change to the current tax free interest rate exemptions. Individual Tax The Income Tax Tables and Rebates have been adjusted to take account of fiscal drag. No changes are proposed to Estate Duty or Donations Tax. 2

3 Medical Schemes Contributions Tax credits to replace tax deductible medical scheme contributions on 1 March Tax credits for the main member and first dependant will be R230 each and R154 for each additional dependant. Taxpayers 65 years and older and disabled persons will receive an additional tax credit. Individuals - Capital Gains Tax (CGT) CGT effective tax rate for individuals increased from a maximum rate of 10 per cent to 13.3 percent due to higher inclusion rate. Annual exclusion to increase to R and exclusion upon death to increase to R Exemption for small business owners aged 55 and older disposing of business assets or businesses will also increase by 100 per cent. Corporate Tax Proposals New dividend tax to be introduced on 1 April 2012 at a rate of 15 per cent Effective corporate Capital Gains Tax (CGT) rate to increase from 14 per cent to 18.6 per cent. All types of property investment vehicles to be regulated on par due to similar tax incentives. The Industrial Development Zones (IDZ s) will be revived by introducing new tax incentives. Tax incentives for employers and developers constructing houses of less than R A withholding tax of 15 per cent to be introduced on interest payments to foreign investors. Tax demarcation of debt funding versus equity funding will be reviewed to limit excessive debt. Direct and indirect debt funding to acquire a controlling interest in a company will be aligned. Small business return filing to be reduced from 18 returns per annum to 2. Tax treatment of keyman policy premiums as well as long and short term insurers to be reviewed. Tax Administration The Tax Administration Bill to be promulgated in A Tax Ombudsman will be established during the course of Other Increases on duties for alcoholic beverages vary between 8 and 20 per cent. Increases on duties for tobacco products vary between 5 and 8 per cent. The general fuel levy increases by 20 cents for both petrol and diesel from 4 April Increases in the RAF levy by 8 cents from 4 April Gambling tax to be effective from 1 April Electricity levy to be increased from 2.5c/kWh to 3.5c/kWh. A revised policy paper on CO2 emissions tax will be published in 2012 for comment. Social Security Framework Child support grant: The grant will increase on 1 April 2012 from R265 per month to R280 per month. Old age and disability grants: These grants will increase on 1 April 2012 from R1 140 per month to R1 200 per month. An additional grant of R20 per month will go to recipients aged 75 and older. 3

4 Social Security Reform Retirement Reform The Minister expressed concern on the fact that South Africa confronts severe inequalities and high unemployment and therefore proposes to improve the social security system. The proposed social security reforms are intended to create a fair and sustainable system, with the aim of protecting all South Africans and promoting a supplementary savings culture. The main proposal is to establish a mandatory statutory fund to provide pensions, life insurance and disability benefits. The proposed national security fund will be based on the principle of social solidarity, with risk shared across the workforce but receiving the full support of the Government. The Minister has indicated that too few people save for their retirement. This has called for an urgent need to the review of savings and to the reform of the retirement fund landscape. The introduction of contributions to a mandatory fund will address some of these problems. The four main concerns are: inadequate life saving; low levels of preservation on exits from employment; high fees and charges associated with retirement funds; and low levels of annuitisation. A uniform tax treatment for all contributions to different types of retirement funds will be introduced, with an additional tax incentive for low-income earners and persons 45 years and older. The system will further aim to align the design of the pension and provident funds to be more uniform by taking account of vested rights and appropriate transitional arrangements. Health Reform This year s budget confirmed the Government s green paper on National Health Insurance (NHI) which was introduced in Following consultations on the complexities of the proposed plan, the green paper proposed a 14 year implementation period which will take place in 3 phases. It is also suggested that the new public fund will be established by the end of the first 5 years of the first phase with full implementation by The intention is to first establish this within the Department of Health before introducing it as a public entity. At present there are over 500 private medical schemes. Government is considering the future role and consolidation of these schemes. Retirement Funds Taxation of Lump sum benefits on retirement The tax tables on retirement remain unchanged: Proposed rates Taxable lump sum 2012/2013 rates Rate of tax 0 R (previously 0 R ) 0 per cent of amount R R R0 plus 18 per cent of amount exceeding R R R R plus 27 per cent of amount exceeding R R and above R plus 36 per cent of amount exceeding R

5 Tax treatment of contributions to retirement funds The Minister has proposed changes to improve the tax administration system, in an attempt to promote equity on individual and employer contributions to the different types of retirement funds. With effect from 1 March 2014, the proposed changes are as follows: All employer contributions will be regarded as a fringe benefit in the hands of employees and all contributions by employees and employers then being subject to the below mentioned limits. Individual taxpayer deductions will fall into two categories: Persons aged younger than 45 will receive a tax deduction for contributions limited to 22.5 per cent of the higher of employment or taxable income but limited to R ; or Persons aged 45 or older will receive a tax deduction for contributions limited to 27.5 per cent of the higher of employment or taxable income but limited to R Low-income earners will automatically receive a tax deduction for contributions up to R per annum irrespective of the above limits and their non-deductible contributions will be tax exempt upon retirement. Retirement payouts from provident funds Lump sum withdrawals on retirement from pension and provident funds will be restricted to one-third of accumulated savings. The Minister has indicated that consultations will take place with interested parties to promote a uniform approach to retirement fund withdrawals and protecting vested rights of provident fund members. This is likely to be effective from 1 March Withdrawals from funds following false job terminations Withdrawals from occupational funds are not permitted before reaching normal retirement age in terms of retirement fund rules, unless the employee terminates his services with the employer. Employees sometime terminate their employment to gain access to their fund benefits. In some instance the employee resigns and is rehired a few days later. Access to withdrawals under these circumstances is strictly prohibited and if this practice is allowed it will threaten the retirement fund s approval status with SARS. Taxation of payouts from South African or foreign funds There are currently a number of anomalies in the tax treatment of lump sum and annuity payouts from South African and foreign retirement funds depending on where the taxpayer is resident. Importantly what should be considered is where the services relating to the payout was rendered. This will receive extensive consideration in 2012/2013. Taxation of divorce order related retirement benefits The awarding of part of a retirement fund interest to an ex-spouse upon divorce became payable immediately during 2007, if payable by a private sector fund. This same principle will now apply to the Government Employees Pension Fund (GEPF) and the tax dispensation applicable to private sector funds will be mirrored. Savings and Investments With effect from 1 March 2014, individuals will be permitted to save up to R a year with a lifetime limit of R in registered savings and investment products that would be free of tax on interest, CGT and dividends. The current tax free interest regime will be reviewed and possibly phased out. There is no change to the current tax free interest exemption amount. The net for Securities Transfer Tax will be widened to including broker transactions with effect from 1 April

6 Individual Tax Personal tax tables (natural persons) The personal income tax tables have been adjusted to compensate for fiscal drag. The maximum marginal rate of 40 per cent is reached at taxable income of R (previously R ). Direct personal income tax relief to individuals should amount to R9.5 billion. Old: 2011/2012 tax year TAXABLE INCOME (R s) RATES OF TAX % of each R R % of the amount above R R % of the amount above R R % of the amount above R R % of the amount above R R % of the amount above R New: 2012/2013 tax year TAXABLE INCOME (R s) RATES OF TAX % of each R R % of the amount above R R % of the amount above R R % of the amount above R R % of the amount above R and above R % of the amount above R Rebates The primary rebate will be increased to R per year (currently R10 755). The secondary rebate which applies to individuals aged 65 and older will be increased to R6 390 per year (currently R6 012). The third rebate which applies to individuals aged 75 and older will be increased to R2 130 per year (currently R2 000). The threshold below which individuals are not liable for personal income tax will be increased as follows: For persons younger than 65, it will be increased from R to R63 556; For persons between the ages of 65 and 74, it will be increased from R to R99 056; and For persons 75 years and older, it will be increased from R to R No changes will be introduced to estate duty and donations tax. Medical Schemes Contributions The current tax deduction for medical scheme contribution will be replaced with a tax credit on 1 March Tax credits for the main member and first dependant will be R230 each and R154 for each additional dependant. Taxpayers 65 years and older as well as disabled members or dependants will receive an additional tax credit. Individuals - Capital Gains Tax (CGT) The effective rate of Capital Gains Tax (CGT) on individuals has increased due to the inclusion rate being increased from 25 per cent to 33.3 per cent. The maximum effective rate will increase from 10 per cent to 13.3 per cent. 6

7 The annual exclusion rate for individuals and special trusts will be increased from R to R and the exclusion upon death will increase from R to R The primary residence exemption will increase from R1.5 million to R2 million. Small business exemptions for persons over the age of 55 disposing of business assets or the business as a whole have also been doubled. Dividend tax Corporate Tax Proposals The secondary tax on dividends (STC) will be converted to a dividend tax (DT) with effect from 1 April 2012 as was announced last year. The legislation governing this new tax was already incorporated in previous Tax Amendment Acts. In order to retain an effective tax rate across different types of income and to fund the revenue losses due to the switching from STC to DT, the dividend tax will be levied at a rate of 15 per cent. Capital gains tax On 1 March 2012, the effective capital gains tax rate will be increased from 14 per cent to 18.6 per cent. This will be achieved by increasing the current capital gain inclusion rate from 50 per cent to 66.6 per cent. Property companies There are currently two types of entities investing in property and generating income mainly in the form of rental income and passing it through to investors tax-free. The first is Collective Investment Schemes in Property (CISPs), which is highly regulated and the second is Property Loan Stocks (PLS ), which is less regulated. The governance of these two types of entities will be reviewed and placed on par. Revival of Industrial Development Zones (IDZ) Special streamlined procedures and tax incentive measures will be considered to revive the IDZ policy in order to facilitate the development of certain areas. Development of affordable housing In order to stimulate the provision of housing at a price range of less than R where there is currently a shortage of stock, policy consideration is being given to tax incentives for developers and employers developing at least five such houses. Withholding tax on payments to non-resident investors Foreign investors are subject to withholding tax on royalties and dividends from a South African source, subject to Double Taxation Agreement (DTA) relief. With effect from 2013, interest accruing to these investors from a South African source will also be subject to withholding tax of 15 per cent. Limiting excessive debt In order to limit excessive debt in certain business acquisition transactions, the demarcation of debt and equity will be reviewed. Currently, the effective tax rate of debt financing is lower than on equity financing and this practice encourages the provision of equity finance disguised as debt for tax purposes. Alignment of tax treatment for share acquisition funding Less tax is payable in certain indirect debt funding transactions to acquire shares, than direct debt funding of such transactions. The regime will be aligned by reducing the tax on direct debt funding transactions to acquire a controlling interest in a company. Reducing small business compliance burden Small businesses with a turnover of less than R1 million per annum, currently have to file 18 returns per annum for turnover tax, VAT and employees tax. With effect from 1 March 2013 a combined form for all these taxes to be filed twice a year only. 7

8 Long and short term insurance issues Tax treatment of keyman policy premiums as well as long and short term insurers to be reviewed. Tax Administration Bill Tax Administration The Tax Administration Bill, has been approved by Parliament and incorporates common administrative elements under the tax law. The Bill is expected to be promulgated and will become effective in Tax Ombudsman As of 2012, we will have a dedicated Ombud for tax matters. The office will address low income earning taxpayers administrative issues only. The office will also seek to help SARS with its unresolved administrative burdens. The Ombud will have no jurisdiction to hear matters relating to interpretation of law or policy and this will have to follow the appeal or the advance tax ruling process set out in the Income Tax Act. Sin taxes Other The increase of duties on alcoholic beverages ranges between 8 and 20 per cent, to be phased in over two years. There is no proposal to increase the duty on traditional beer. With regard to the duties on tobacco products, the increases will be between 5 and 8 per cent. Fuel levies With effect from 4 April 2012, the general fuel levy on petrol and diesel will increase by 20 cents per litre and the Road Accident Fund levy will increase by 8 cents per litre. Gambling tax It was proposed in 2011 to introduce a gambling tax with effect from 1 April The Minister has now proposed that a national tax based on gross gambling revenue be introduced from 1 April This will take the form of an additional 1 per cent levy on a uniform provincial gambling tax base. A similar base will be used to tax the national lottery. Environmental taxes The electricity levy will be increased from 2.5c/kWh to 3.5c/kWh. A revised policy paper on CO2 emissions tax will be published in 2012 for public comment. It is accepted that the pricing and implementation of this tax needs to be phased in to minimize the impact on industry competitiveness Conclusion The essence of the Minister s Budget Speech was captured when he said our development requires every one of us to ask what can I do for my country, my people, our future! Government will invest in technology and in people through spending on education, health and social assistance. Job creation remains pivotal here is also a focus on infrastructure spending and the public sector working more efficiently and effectively. Government understand what the private sector has been loathe to invest into an uncertain environment, and the Minister states that the time has come to confront uncertainty and that government is committed to an environment that will encourage business investment, and in return ask business for a long term investment. The private sector must also become more competitive. 8

9 Employment and economic growth are the main drivers of income growth and poverty reduction. Developed nations are barely showing any growth and we must be adaptable and innovative in seizing the opportunities that present themselves in this shifting global environment. He concluded with the view that the budget addressed the challenges set to accelerate growth, expand investment, support economic development and confront poverty and inequality. If you need more information, please contact your consultant. 9