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Budget 2018 Tax Highlights

  • South Africa
  • Tax planning and consultancy - Budget

22-02-2018

The Minister of Finance, Malusi Gigaba, delivered South Africa’s 2018 Budget speech to Parliament on 21 February 2018. In his speech the Minister noted that there is an expected R48.2 billion revenue shortfall estimate in the 2017/2018 financial year. According to the Minister, the tax proposals this year are expected to raise an additional R36 billion for the fiscus. It is expected that the largest contribution to the additional tax is R22.9 billion from the one percentage increase in Value-Added Tax (“VAT”). It is predicted that personal income tax will bring in R505.8 billion and corporate tax R231 billion in the 2018/2019 financial year.

The following increases in tax rates, inter alia, were proposed in order to raise the revenue stream for the 2018/2019 financial year:

• VAT to be increased from 14% to 15% with effect from 1 April 2018;

• an increase of 52c/litre for fuel, consisting of a 22c/litre increase in the general fuel levy and 30c/litre increase in the Road Accident Fund levy, with effect from 4 April 2018; and

• estate duty to be increased from 20% to 25% for estates above R30 million, with effect from 1 March 2018.

There will be no increase in the personal tax rate in the 2018/2019 financial year. According to the Minister, “an additional personal income tax rate increase in 2018/19 would have greater negative consequences for growth and investment than a VAT increase.” Furthermore, despite speculations regarding the introduction of a wealth tax, the Minister made no announcements in this regard.

The Minister proposed additional tax amendments/refinements to the provisions of the Income Tax Act, 1962 (“Income Tax Act”) during his Budget Speech. A summary of certain of these proposals is set out below. Notably, the enacting legislation in respect of these proposals will only be referred for public comment later in the year.

Tax treatment of cryptocurrency transactions:

National Treasury has been considering the provisions of the tax laws in relation to their application to cryptocurrency trading in South Africa. The view of the government is that cryptocurrencies pose great risks to the income tax system due to their volatility and uncertainty and further that the supply of cryptocurrency can cause administrative difficulties to our VAT system.

Accordingly, National Treasury has proposed to amend the VAT and income tax legislation with a view of providing clarity on the tax treatment of cryptocurrencies in South Africa.

Share buybacks

In 2017, National Treasury introduced anti-avoidance rules in the Income Tax Act, to counter share buybacks and dividend stripping transactions. The rules were aimed at preventing taxpayers from entering into transaction which have the effect of stripping dividends out of a target company, resulting in a devaluing of the target.

In terms of these rules, subject to requirements being met, dividends that are received within 18 months of a disposal by way of a share buyback, must be added to the proceeds of a taxpayer and thus be made subject to capital gains tax or income tax, as the case may be, as opposed to an exempt dividend.

However, it has come to government’s attention that these anti-avoidance provisions negatively impact on certain legitimate transactions and arrangements and accordingly, government has proposed to review these rules.

Review of Venture Capital Company (“VCC”) rules

Government has proposed a review of the stringent rules applicable to the VCC tax incentive regime, which aims to encourage investment in small and medium-sized business. The South African Revenue Services has experienced administrative and technical challenges in the implementation of the VCC incentive and as such government has proposed a review of the tax provisions contained in section 12J of the Income Tax Act, with a view to providing clarity on certain rules and potentially amending the rules to be less stringent in order to attract more investment for small to medium sized business.

Extension of the application of controlled foreign company (“CFC”) rules to foreign companies held through foreign trusts and foundations

The Taxation Laws Amendment Act (2017) extended the application of the CFC rules to foreign companies held through foreign trusts and foreign foundations. The CFC rules have an effect of taxing the net income of a foreign company (with South African shareholders holding directly or indirectly 50% or more of the participation or voting rights in that company) in South Africa.

The draft Taxation Laws Amendment Bill (2017) included rules that extend the CFC rules to include foreign trusts and foundations, and foreign companies. However, government has decided to withdraw and postponed the introduction of these rules due to their broad application and complexity. These rules will however be reconsidered and refined and potentially re-introduced.

The details of the proposed tax amendments outlined above will be encompassed in the Taxation Laws Amendment Bill 2018.

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