Budget Speech 2017 Insights from Grant Thornton

FEBRUARY 24, 2017
Budget Speech 2017 Insights from Grant Thornton

Key executives from Grant Thornton South Africa provide commentary and snippets following Finance Minister Pravin Gordhan’s National Budget Speech presented this afternoon, Wednesday 22 February 2017:

GENERAL Comments:

“The Minister highlighted the creation of a better investment environment and this is most certainly welcomed. However, we need to see real action fast – investment is the only way we can kick start South Africa’s economy.”

Paul Badrick, CEO of Grant Thornton Johannesburg

“The 2017 Budget delivered by the Minister Gordhan today was going to be  a difficult balancing act, with tax revenues falling short of previous estimates. To achieve the objectives of government, Minister Gordhan had to act like ‘Robin Hood’ in raising the marginal rate of tax to 45% from wealthy taxpayers earning more than R1,5 million. The real test will be how these additional taxes will be spent on enhancing services to needy citizens.”

Chris Smith, Director: Tax, Grant Thornton.

“Minister Gordhan strongly re-iterated to all of us today that real transformation is a key goal in every aspect of social and economic activity in our country. He mentioned transformation more than 50 times!   The Minister stated: ‘We need to bring all stakeholders onto an inclusive growth and transformation path’.  He rightly exhorts all of us to take our responsibility in a partnership to achieve this and quotes Oliver Tambo’s ‘ … vision of South Africa  in which black and white will work together in  peace and prosperity’ and Albert Luthuli’s ‘…here in South Africa with all our diversities of colour and race, we will show the world a new pattern for democracy’.”

Gillian Saunders, Head of Advisory Services at Grant Thornton

On the new Top Personal Income Tax rate:

“While the introduction of a new top personal income tax rate of 45% for high income earners with taxable incomes above R1.5 million is laudable, it will only result in an extra R4.4bn to the coffers. If the Minister had increased VAT by 1% this would’ve brought R20bn to the national coffers.”

Paul Badrick, CEO of Grant Thornton Johannesburg

“The increased burden on high net worth individuals was to be expected but one wonders whether the combined effect of the creation of a super tax bracket with a tax rate of 45%, the taxation of trusts at the same rate and the increase of dividends tax from 15% to 20% might be the tipping point that will sadly encourage further flight of capital and skills from the country.”

Mike Betts, Partner: Tax, Grant Thornton

“The increase in the top marginal tax rate for individuals was not unexpected, although the extent thereof is surprising. There is again no significant bracket creep relief for medium to high income earners. Although South Africa has a progressive tax system, the Minister has used individual taxpayers, specifically the higher income earners, as the scapegoat for government’s inability to structurally reform and grow the economy, promote foreign investment and create jobs.”

Eugene du Plessis, Partner and Leader: Tax, Grant Thornton

“Unsurprisingly, Finance Minister Gordhan proposes that individuals with high taxable income will be paying marginally more capital gains tax. While the inclusion rate for capital gains was not increased for individuals, the increase of the marginal income tax rate to 45% for individuals with the taxable income over R 1.5 million effectively increases the maximum effective capital gains tax rate to 18% from 16.4%.”

Bruce Russell, associate director at Grant Thornton Cape

On transformation

“It was interesting to note that the Minister will be looking at radical transformation to support growth in the economy. Whilst transformation should be mass-based and must benefit the most disadvantaged there has to be robust and workable partnerships with cartels and big businesses to achieve this. This also means that small black businesses must have access to capital funding which is currently in short supply. Overall we commend the Minister on his stance on transformation and the growth implications it will have on the economy over the long term.”

Yugen Pillay, Partner and Regional Lead: Public Sector at Grant Thornton

On increasing the dividend withholding tax rate:

“The increase in the dividend withholding tax rate is effective immediately. This means that any dividend declared from today will be subject to 20% withholding tax. The effective tax rate applicable to companies therefore increases from 38.8% to 42.4%. Although this might still be below the OECD average, it could have the unintended consequence of deterring investors which South Africa sorely needs.”

Eugene du Plessis, Partner and Leader: Tax, Grant Thornton

“The dividends tax rate increase from 15% to 20% may require individual shareholders to rethink their exit strategies. Currently the maximum effective capital gains tax rate of 16.4% versus a dividends tax 15% may encourage an exiting shareholder to secure their exit by way of a share buy-back. With the increased highest marginal tax rate for individuals with taxable income over R 1.5 million to 45%, the highest effective capital gains tax rate for individuals is marginally lower at 18% than the newly proposed dividends tax rate of 20%.”

Bruce Russell, associate director at Grant Thornton Cape

On share disposal by way of share buy-backs

“Shareholders disposing of shares by way of share buy-backs should consider concluding these arrangements before the end of February 2017. The Finance Minister has proposed to introduce measures that prevent the deferral of income tax where a shareholder disposes of shares by way of a share buy-back. No mention is made of when these anti-avoidance provisions will apply from, however it would not be surprising if these measures commence from 1 March 2017.”

Bruce Russell, associate director at Grant Thornton Cape

On increasing the tax rate applicable to trusts:

“An increase in the tax rate applicable to trusts from 41% to 45% sends a further signal that trusts are receiving specific focus from Treasury and SARS. Although there will always be room for trusts in estate planning, tax reasons become less and less attractive.”

Eugene du Plessis, Partner and Leader: Tax, Grant Thornton

On the tax treatment of trusts:

“It is with some degree of relief, at least for now, that no further proposals made by the Davis Tax Commission regarding the taxation of trusts were referred to in today’s budget speech.  However, steps taken by taxpayers to minimise or eliminate exposure to tax through the use of vertical structures involving trusts and companies both locally and offshore are receiving closer attention under the anti-avoidance rules.  This means that taxpayers who have trusts in place as part of their financial planning will certainly need to continue treading carefully.”

Carin Grobbelaar, Associate Director: Tax at Grant Thornton Winelands

On relief for companies:

“We welcome relief of companies under business rescue relating debts which have been waived or forgiven and were used to finance operating expenditure. These waivers resulted in companies facing cash flow problems having to divert their cash to pay taxes on recoupments instead of trying to use their cash to trade back to solvency.

Chris Smith, Director: Tax, Grant Thornton

“Further relief relating to debts settled for non-cash considerations is great news for struggling debtors and clarification that SARS requires only the previous interest deduction as a recoupment provides clarification for taxpayers of the tax liabilities.”

Chris Smith, Director: Tax, Grant Thornton.

“New rules to counter dividend stripping will be announced to deal with third party loans. One hopes that such anti-avoidance rules will be drafted in a manner that does not attack true sale transaction by independent parties where finance has been obtained.”

Chris Smith, Director: Tax, Grant Thornton.

On Local Municipalities

“We totally support Minister Gordhan’s four ‘game changers’ for local municipalities. These will assist in ensuring that municipalities can deliver and will, as the Minister says, transform the lives of millions of people. This mirrors our own firm’s purpose and approach to working with municipalities in these four areas, Municipal Standard Charts of Accounts (MSCOA), revenue management, asset management and supply chain audits. Let’s deliver vibrant citizen economies for South Africa.”

Gillian Saunders, Head of Advisory Services at Grant Thornton

On Housing

“Minister Gordhan rightfully mentioned that we are striving for an inclusive and shared economy (at Grant Thornton we have call this a “citizen economy) but our towns and cities remain divided, and poverty is concentrated in townships and rural areas. One of the ways to counteract this is to provide affordable and gap housing in urban, economically active areas.  The Minister has proposed that the threshold for transfer duty on housing will increase from R750 000 to R900 000.  This will definitely assist in increasing home ownership.  But reducing the threshold alone will not increase access to housing – we need to increase housing supply which means that we need to make land available for development and development costs need to be constrained so that a significant number of affordable homes can be built in urban, economically active areas.”

Lee-Anne Bac, Director: Advisory Services at Grant Thornton

On Public Procurement:

“It was pleasing to note that the Minister will be introducing additional reforms to public procurement. Currently the fragmented regulatory environment over procurement means that fraud and particularly corruption is flourishing, further diverting funds away from being properly spent on service delivery operations. We commend the Minister on taking a firm stance on fraud and corruption and for using technology via the central supplier database to clamp down on this type of expenditure. We look forward to hearing more on the ‘single procurement authority’ which will be effective in managing the current exposure to fraud and corruption and will result in cost savings across the different sectors of government.” 

Yugen Pillay, Partner and Regional Lead: Public Sector at Grant Thornton

On VAT

“We are pleased that the VAT treatment relating to leasehold improvements will be clarified. This has been a very contentious matter and a headache for many lessees and lessors alike. We hope that all permutations of leasehold improvements will be addressed in a comprehensive Interpretation Note that will especially cover the time and value of the supplies between related parties.”

Cliff Watson, Director: Tax at Grant Thornton

Clampdown on dividend tax planning by SA inbound investors

“SA inbound corporate investors often aggressively exploited the definition of contributed tax capital by making capital distributions to avoid dividend tax which would otherwise be payable on dividends paid by their SA subsidiary company. We welcome Treasury’s announcement of planned changes to the definition of contributed tax capital to curb this practice.”

Steve Curr, Tax Director Grant Thornton Cape

Corporate reorganisation rules to cater for contingent debt

“The rules allowing corporates to enter into certain transactions on a tax neutral basis are to be amended to cater for the assumption of contingent debt by a purchaser as part of the transaction. This measure will better align the tax regulations with business practice.”

Steve Curr, Tax Director Grant Thornton Cape

Relaxation of the Venture Capital Regime (VCR)

“We applaud Treasury's announcement that they intend to relax the qualifying requirements for the Venture Capital Regime, in order to encourage investment in small to medium sized enterprises.”

Steve Curr, Tax Director Grant Thornton Cape

Changes looming for controlled foreign companies held by foreign trusts

“Treasury intend to re-examine previously announced measures to combat the circumvention of the controlled foreign company rules by the use of foreign trusts. It is surprising that that have taken so long to move on this issue.

Steve Curr, Tax Director Grant Thornton Cape

On foreign-earned employment income exemption

“A potential unintended consequence of the proposed change to the foreign-earned employment income exemption, is that employers will now face significant difficulties in mobilising its employee workforce to work on these foreign based projects. This could result in significant lost revenues for such employers. At the very least, it could result in unbudgeted increased labour costs and administrative obligations for such employers.”

James Hourigan, Director: Tax, Grant Thornton

On infrastructure:

“In today’s Budget Speech by Minister Gordhan, there was no mention of any new major infrastructure projects and programmes.  Rather, the Minister re-emphasised the conclusion of existing projects. This is to be expected in an environment where tax revenue lags economic growth. We welcome the new focus on and budget for increased maintenance of existing infrastructure to expand the life thereof particularly in the view of limited new infrastructure programmes.”

Christelle Grohmann, Director: Advisory Services, Grant Thornton

“Given the dearth of new infrastructure investment, we welcome Minister Gordhan’s reinforcement  of the need for partnerships with private sector to achieve infrastructure development and much needed economic growth.”

Christelle Grohmann, Director: Advisory Services, Grant Thornton

On Tourism:

“Minister Gordhan has again, as he did in his Mid-term Budget statement during October last year, recognised tourism as a sector with huge job creation potential. To this end he allocated an additional R494 million for tourism promotion. This is to be truly welcomed; the proposed tourism vote is R2,1 billion, up 6,5% on the 2016/2017 amount, and now with the additional amount is up 31%. This is great news, but sadly some of it will simply go towards mitigating South African Tourism’s spending power in overseas markets, where rand strength has eroded purchasing,  and sadly detracts for our destination’s value for money attractiveness.”

Gillian Saunders, Head of Advisory Services at Grant Thornton