2016 / 2017 Budget changes and proposals relevant to the financial planning environment.
The 2016 Budget saw a reduction of R5.65 billion in personal income tax payable by individuals.
This was made up of R5.5 billion to partially reduce the effect of inflation on tax payable by lower and medium income earners and R1.1 billion due to an increase in monthly medical scheme tax credits, less R950 million due to the increase in capital gains tax.
Expect more taxes on the wealthy in future
Although minister Gordhan did not raise estate duty or donations tax this year, and did not introduce an additional tax bracket to tax top income earners at an even higher personal income tax rate, he did mention that Treasury is looking at the Davis Tax Committee’s recommendations on these matters. Investors need to remain cognisant of the possibility of an increase in these taxes in the near future.
1. Personal Income Tax
The highest marginal tax rate for individual taxpayers remained unchanged at 41% as did the rate of tax for trusts (other than special trusts). The personal income tax rates for individuals and special trusts for the 2016/2017 tax year are tabulated below.
The Budget provided for some changes to personal income tax, including adjustments to the three lower taxable income tax brackets and the primary rebate providing some relief for lower income individuals from the effect of inflation.
However, even individuals younger than 65 earning R1 million per annum are paying slightly less tax.
This means that a taxpayer younger than 65 and earning a taxable income of R75 000 or less per annum, or a taxpayer 65 and older but younger than 75 and earning a taxable income of R116 150 or less per annum, or a taxpayer of 75 years and older and earning a taxable income of R129 850 or less per annum, will not pay any income tax in the 2016/2017 tax year.
The example below demonstrates of the changes on individuals younger than 65:
2. Capital Gains Tax (CGT)
The effective rates of CGT have increased because now 40% of capital gains will be included in taxable income for individuals instead of 33.3%, and 80% of capital gains will be included for trusts instead of 66.6%. This results in the increase of the effective rate of CGT from 13.7% to 16.4% for individuals, and from 27.3% to 32.8% for trusts. (For companies the increase in the inclusion rate is the same as for trusts (80%) resulting in an increase in the effective rate from 18.65% to 22.4%).
For individuals (but not trusts) the first R40 000 of capital gains will be exempt, an increase from R30 000.
This makes investment products with tax benefits, such as a retirement annuity and a tax-free savings account very attractive.
3. Interest Exemption
The interest exemption threshold has not been changed as a result of the tax-free investment vehicles that were introduced on 1st March 2015.
The exemption amounts therefore remain as follows:
a) R23 800 per annum for taxpayers under the age of 65
b) R34 500 per annum for taxpayers aged 65 years and older
It is expected that these amounts will remain unchanged in the future.
4) Voluntary Disclosure Program
Because of the multinational and worldwide disclosure of bank account and investment details under the Common Reporting Standards, there is pressure worldwide to disclose offshore investments and bank accounts and to “come clean”. In South Africa there is a Voluntary Disclosure Programme (VDP) in the Tax Administration Act. This is useful but does have certain shortcomings, particularly in relation to offshore assets. A significant disadvantage is that there is no equivalent for exchange controls.
An additional VDP has now been announced to cover a six-month period commencing 1 October 2016, governing both tax and exchange controls.
As regards the “ordinary” VDP rules, one of the situations where it may not be applied for is if a potential applicant is aware of a pending audit or investigation. An amendment will clarify what is meant by “pending”.
5) Taxation of Small Businesses
One of the requirements for a SBC is that the business has a gross income of less than R20 million in a financial year.
The tax rates for small businesses for financial years ending on any date between 1 April 2016 and 31 March 2017:
6) Transfer Duty
The level below which no transfer duty is paid remains at R750 000 with only 3% charged on the value up to R1.25 million. The major change is an increase of 2%, to 13%, where the value of property acquired exceeds R10 million.
7) Medical Tax Credits
With effect from 1 March 2016, the initial tax credit (for contributions to medical schemes) for all tax payers is R286, and for a taxpayer and his or her first dependent is R572. An additional credit of R192 is afforded to each additional dependent.
For taxpayers younger than the age of 65 an additional tax credit will be given of an amount equal to 25% of the aggregate of:
a) the amount by which their contribution exceeds four times their tax credit (for contributions), plus
b) their out of pocket expenses that exceeds 7.5% of their taxable income (excluding any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit).
For taxpayers 65 years of age or older, or who are disabled or who have any disabled dependents, an additional tax credit will be given of an amount equal to the aggregate of:
c) 33.3% of the amount by which their contribution exceeds three times their tax credit (for contributions), plus
d) 33.3% of their out of pocket expenses.
8) Retirement Reform
The Revenue Laws Amendment Bill 2016 has been enacted to amend the Income Tax Act to delay annuitising provident funds at retirement until 1 March 2018.
Changed tax deductions on contributions to retirement funds to be implemented on 1 March 2016 as scheduled
Members of all retirement funds will now be able to deduct their contributions (and contributions made on their behalf by their employers) up to a maximum of 27.5% of the higher of taxable income or remuneration, subject to an annual ceiling of R350 000. Contributions made by employers on behalf of employees will still be treated as a taxable fringe benefit in the members’ hands.
9) Changes Proposed for the Future
- Transfers of tax-free savings accounts between service providers
The implementation date to allow transfers of tax-free investments between service providers will be postponed from 1 March 2016 to 1 November 2016 to provide service providers additional time to finalise the required administrative processes. Draft regulations outlining the transfer process will be published in the near future.
- Including passive income in taxable income for the purpose of retirement contribution deductions
The current wording of section 11(k) of the Income Tax Act, which introduces the harmonised tax regime for retirement contributions, does not allow for contributions to any retirement fund to be offset against passive income. It is proposed that section 11(k) be amended to allow for retirement contributions to be deducted against passive income, subject to the available limits. The intention is for members to be able to include passive income, such as living annuity income and interest income, in the taxable income figure used to determine the maximum allowable deduction for their retirement fund contributions from 1 March 2016.
- Revising foreign pension contributions, annuities and pay outs
When the residence-based taxation system was introduced in 2001, section 10(1)(gC) was added to the Income Tax Act to exempt foreign pensions derived from past employment in a foreign jurisdiction (i.e. from a source outside of South Africa). Questions regarding the treatment of contributions to foreign pension funds, and the taxation of payments from foreign funds, raise a number of issues. A review is required to determine the appropriate treatment, taking into account the tax policy for South African retirement funds.
- Changes to the tax treatment of transfers to trusts
To limit taxpayers’ ability to transfer wealth to trusts without paying estate duty or donations tax, it is proposed that any assets transferred to a trust through a loan should be included in the estate of the founder at death, and that interest-free loans to trusts be categorised as donations. Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered.