2014 BUDGET SPEECH REVIEW


Investing & Money
piece written on the 26th February 2014 by  

Each year the budget speech is delivered and it’s a huge amount of information, nearly impossible to consume by individuals like us. Fortunately my accountant from Galbraith Rushby publishes a bit of a tl;dr (too long, didn’t read). The update has just arrived in my inbox and it thus gives me a chance to share it with all of you:

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This afternoon saw the delivery of Pravin Gordan, the minister of finance’s 5th budget speech and the 2014/2015 finance budget. It took 1 ½ hours to get through and was very lacklustre and, as most commentators have said, boring. This year’s full budget review was an exciting 272 pages, challenge accepted.

This year’s budget speech seemed to be more focused on spending and less on tax, highlighting what has been achieved. The reason for this seems to be that there are very little changes to the tax law, thankfully, after all the recent changes.

I have not dealt with how the money is being spent but I have focused more on how the tax changes will affect you as an individual and you as a business.

I think the key area’s of change that have stemmed out of this budget speech are:

  • VAT relief on fuel
  • Mentioned amendments coming for small business
  • Interest rates at SARS increase to 9.00% from 1 May 2014

Personal Income Tax

The minister of finance indicated that personal tax relief in 2014/15 would be R9.25 billion. This is up from the previous budget speech of R7.00 billion. A person earning R200 000 per year now saves R106 per month (2014: R86). When considering all the increased costs (rates, fuel levy) this seems somewhat low.

Tax Tables

Important Changes – Individuals

Tax free lump sum – An increase in the tax-free lump-sum amount paid out of retirement funds from R315 000 to R500 000

Medical tax credits – Monthly medical scheme contribution tax credits will be increased from R242 to R257 per month for the first two beneficiaries, and from R162 to R172 per month for each additional beneficiary, with effect from 1 March 2014.

Exercise duties – Increases in excise duties on alcoholic beverages and tobacco products are proposed, adding 9 cents to the price of a 340ml can of beer and 68 cents to a packet of 20 cigarettes. Whisky goes up by R4.80 a bottle. These increases take effect immediately.

Fuel Levy – General fuel levy increase is limited to an inflation-related 12 cents per litre on 2 April 2014, and the road accident fund levy will increase by 8 cents per litre.

Personal insurance policies – The tax treatment of life and disability premiums and policy proceeds was aligned in 2013, with effect from 1 March 2015. The premiums will not be deductible and the policy proceeds will be tax free.

Interest exemption – Interest from a South African source earned by any natural person under 65 years of age, up to R23 800 per annum, and persons 65 and older, up to R34 500 per annum, is exempt from taxation.

Interest earned by someone outside SA – Interest is exempt where earned by non-residents who are physically absent from South Africa for at least 182 days during the 12 month period before the interest accrues or is received and who were not carrying on business in South Africa through a fixed place of business during that period of 12 months. From 1 January 2015 the debt from which the interest arises must not be effectively connected to a fixed place of business in South Africa.

VAT relief on fuel sales – Because petrol, diesel and illuminating paraffin are zero-rated for value-added tax (VAT) purposes, the resulting difference from a standard rating, when used by final consumers, is regarded as tax expenditure. It was assumed that 20 per cent of petrol sales was used for business purposes (by VAT vendors) and would have qualified to claim input VAT. For diesel, it was assumed that 90 per cent of sales was used for business purposes and would have qualified for input VAT.

Small business tax amendments

This category always seems to be the big winner and this year is no exception but something on the horizon has alarm bells ringing.

The updated tax tables for a small business are as follows:

Tax

Turnover tax is still around, thankfully and still provides fertile planning ground. The tax rates remain unchanged from the 2014/15 budget speech and are as follows:

Tax

What was concerning was the commentary that said that Judge Davis, the head of the Tax Committee has made some recommendations in an effort to ease compliance burden:

The turnover tax regime will be amended to further reduce the tax burden on micro-enterprises.
Consideration is being given to replacing the graduated tax structure for small business corporations with a refundable tax compliance credit.
There is a view that the small business corporations are being used as a tax advantage and eroding the tax base and it is not achieving the desired results.

Business tax amendments

Going concerns – VAT legislation and an accompanying interpretation note 57 on the VAT treatment when a going concern is sold require clarification. The legislation requires the supply to be made to a registered vendor. According to the interpretation note, the recipient must agree that at the effective date it will be a vendor. The legislation will be amended to remove the uncertainty regarding whether a person must be a vendor before the acquisition of the going concern.

Employer-provided residential accommodation – The value of the fringe benefit for employer-provided accommodation is determined in relation to the “rental value” representing the value of the use of the accommodation. Depending on the circumstances in which the employer provided the accommodation, different methods are used to calculate the rental value. It is proposed that the valuation of the fringe benefit resulting from employer-provided accommodation be reviewed. Should the actual value of the use of the accommodation be less than the calculated rental value, the employer may apply for a tax directive from SARS for a lower amount. In instances where the employer provides rental accommodation sourced from a third party to an inbound expat employee, the calculated rental value is often higher than the actual value. As a result, employers often apply for a tax directive to ensure that the employee is taxed as a fringe benefit on the actual (market) value of the use of the accommodation. It is proposed that if employer-provided accommodation is rented by the employer from an unconnected third party, the value of the fringe benefit should be the cost to the employer in providing the accommodation.

Reforming the taxation of trusts

There were no updates in this budget speech which is great as that means we probably have another year reprieve. Based on the 2013/2014 budget speech, the below are out expectant changes.

  • Discretionary trusts should no longer act as flow-through vehicles. Taxable income and loss (including capital gains and losses) should be fully calculated at trust level with distributions acting as deductible payments to the extent of current taxable income. Beneficiaries will be eligible to receive tax-free distributions, except where they give rise to deductible payments (which will be included as ordinary revenue). Therefore interest distributed to a beneficiary does not stay interest but becomes fully taxable. Capital gains would also be fully taxable to the beneficiary and would not retain its nature and taxed as a capital gain.
  • Distributions from offshore foundations will be treated as ordinary revenue. This amendment targets schemes designed to shield income from global taxation. We will keep a watchful eye on these amendments.

International amendments

Secondary adjustment for transfer pricing – Applying the secondary adjustment in the form of a deemed loan is an administrative burden, both for the taxpayer and SARS. The accounting treatment of the deemed loan’s repayment and interest is difficult, because there is no legal obligation to repay the loan. It is recommended that the transfer pricing provision be amended to state that the secondary adjustment is deemed to be a dividend or capital contribution depending on the facts and circumstances.

Foreign dividends of controlled foreign companies owned by individuals – If a resident individual’s controlled foreign company receives a taxable foreign dividend, the effective tax rate on the dividend is 21 per cent. It is proposed that the ratio be changed to reflect the fact that an individual, not a company, is taxed with reference to the foreign dividend.

Currency of reacquisition of assets of individuals ceasing to be resident – A person who ceases to be a resident is subject to a deemed disposal and reacquisition of shares in a property company owning property in South Africa. However, it is not clear in which currency the shares reacquisition takes place. This has an effect on the tax calculation when the shares are sold or otherwise disposed of by the nonresident. It is proposed that this should be clarified.

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I still have to go through this a couple of times to build a real understanding of what everything means, but this is certainly easier than going through the 240 odd pages!