The Minister of Finance’s 2012 budget speech contains various amendments to tax and other legislation that may affect
investors. These are:
As expected, the replacement of secondary tax on companies (STC) with dividend withholding tax (DWT) will be implemented on 1 April 2012.The tax, generally expected to come in at the same level as the STC rate of 10%, will now be levied at a rate of 15%.
The increase in the rate was explained on the basis that it will help to mitigate some of the revenue losses when switching from STC to the new DWT. The estimated net loss as a result of these changes was valued at R1.9 billion.
Transitional STC credits initially expected to last up to five years will be reduced to three years.
To enhance equity and to bring SA more in line with the practice in developed countries, effective capital gains tax rates
will be increased.
CGT for individuals and special trusts will increase from 25% to 33.3%. This increases the maximum effective tax rate from 10% to 13.3%. The rate for companies and other trusts will increase from 50% to 66.6%, increasing the effective rate from 14% to 18.6% for companies and 26.7% for other trusts.
To limit the impact of the CGT increase on middle-income households, the exemption thresholds for individual capital gains and for primary residences have been adjusted significantly.
The annual exclusions for net capital gains will change as follows:
All the above changes will come into effect from 1 March 2012.
Due to South Africa’s low household savings rate, consideration is being given to the introduction of tax-exempt short
and medium-term savings products. It is hoped that these products are going to encourage voluntary savings. The proposal is that individuals should be permitted to save up to R30 000 a year, with a lifetime limit of R500 000, in registered savings or investment products that would be free of tax on interest, dividends or capital gains. The maximum limit of R500 000 is to ensure that high net worth individuals do not benefit disproportionately. Treasury also said that the design and costs (banking and other fees) of these savings and investment vehicles may be regulated to help lower-income earners to participate. The current tax free interest income thresholds will be reviewed and possibly phased out as part of this reform.
Government is planning to introduce these changes on 1 April 2014 and will publish a discussion document in mid-
The proposed retirement reforms that were mentioned in last year’s Budget Speech were revisited this year with some adjustments. Contributions by employees and employers to pension, provident and retirement funds will be tax deductible by individual employees at a rate of 22.5% of the higher of employment or taxable income for individuals below 45 years of age and 27.5% for those above 45.
Annual deductions will be limited to R250 000 and R300 000 per annum respectively and a minimum monetary threshold of R20 000 will apply to allow low-income earners to contribute in excess of the prescribed percentages. Nondeductible contributions (in excess of the thresholds) will be exempt from income tax if, on retirement, they are taken as either part of the lump sum or as annuity income.
These amendments are envisaged to come into effect on 1 March 2014.
Last year’s proposal to subject lump-sum withdrawals from provident funds to the one-third limit that applies to pension funds and retirement annuities was not mentioned or expanded upon.
It was also mentioned that the Department of Labour would establish a provident fund for domestic and farm workers by
March next year.
National health insurance is to be phased in over a 14-year period beginning in 2012/13. The new system will provide
equitable health coverage for all South Africans.
Over time, the new system will require funding over and above current budget allocations to public health. Funding
Alongside options for increased tax revenue, the role of user charges is also being investigated. A discussion paper will
be published by end-April 2012.
As part of the global response to mitigate climate change, a revised policy paper on a carbon tax will be published this year for a second round of public comment and consultation. As set out in the Climate Change Response White Paper approved by Cabinet in 2011, the need to price carbon emissions and the phasing in of a tax instrument for this purpose are accepted.
From 1 April 2013, the exemption from Securities Transfer Tax (STT) for brokers who acquire shares for their own benefit will be abolished and instead broker transactions (including buying shares used in derivative hedging) will merely be taxed at a lower STT rate. The base of STT may also be broadened to include derivatives.
The Tax Administration Bill has been approved by Parliament. It incorporates the common administrative elements of current tax law into one piece of legislation, and makes further improvements in this area. The bill is expected to be promulgated and most of its provisions brought into force in 2012.
During 2012, South Africa will establish a dedicated Ombud for tax matters. The office is intended to provide taxpayers with a low-cost mechanism to address administrative difficulties that cannot be resolved by SARS.
The principles of the four fund trustee system of taxation relating to long-term insurers will come under review. Longterm insurers hold and administer assets on behalf of various categories of policyholders, in addition to managing assets for the benefit of shareholders. In recognition of these relationships, long-term insurance products are subject to the four funds system, with the insurer being taxed on returns on assets as trustee for the policyholder. However, once the system moves beyond basic theory, it is often unclear whether issues should be determined from a policyholder perspective or a corporate shareholder perspective, and how the two perspectives can be combined.
A short paper on long-term insurers will be circulated for comment by mid-2012.
The financial industry has been urged to take more urgent steps to reduce costs and introduce more appropriate and transparent saving and investment products, including annuities. Treasury believes that fees for many products in the financial sector remain too high and that the high costs in savings products undermine the national objective of getting more people to save.
Treasury believes that there is also much to be done to improve market conduct practices in the financial sector. The
‘treating customers fairly‘ initiative will be accelerated to protect customers more vigorously.
The medical tax credits mentioned in last year’s Budget Speech as a more equitable form of relief than medical deductions will come into effect from 1 March 2012.
For individuals under 65 years the tax credit for contributions to medical schemes will be introduced at a rate of R230 a month for each of the first two beneficiaries and R154 for each additional beneficiary. Any medical scheme contribution in excess of four times the total allowable tax credits, together with out-of-pocket medical expenses, may be claimed provided that the total exceeds 7.5% of taxable income.
Individuals 65 years and older and taxpayers with disabilities currently claim all medical scheme contributions and outof-pocket medical expenses.
Following last year’s Budget Speech proposal on gambling, it is proposed that a national tax based on gross gambling revenue should be introduced. This will be done as an additional 1% levy on a uniform provincial gambling tax base. A similar base will also be used to tax the national lottery.
This will be effective from 1 April 2013.
The limits associated with the above remain unchanged.