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PwC’s tax comments on the 2017 Budget Review

FEBRUARY 22, 2017
PwC’s tax comments on the 2017 Budget Review

Personal Income Tax

As many pundits predicted, the Minister of Finance today announced a new 45% tax bracket for individuals which will apply to taxable income in excess of R1.5 million.  The tax rates below that have remained unchanged and the income levels at which they apply have been slightly adjusted, but not enough to offset the effects of inflation.  By way of example, the impact of the tax changes at the various income levels will be as follows:

Taxable Income

2017/2018 Tax Due

Change from 2016/2017

% Change

 

R100,000

R4,365

-R135

-3.0%

R200,000

R23,174

-R286

-1.22%

R500,000

R115,824

-R636

-0.55%

R1,000,000

R314,989

-R941

-0.3%

R1,500,000

R519,989

-R941

-0.18%

R2,000,000

R744,990

+R19,059

+2.63%

R5,000,000

R2,033,625

+R77,694

+3.97%

 

According to the Minister of Finance, the impact of the tax proposals are that the additional revenue for the Fiscus from personal income tax is R16.5 billion while the introduction of the new tax bracket will result in additional revenue of R4.4 billion.

These new tax rates, combined with increases in the fuel levy as well as the usual increases in “sin taxes” will hit certain sectors of the economy quite hard.  Certainly, taxpayers with taxable income in excess of R1.5 million will find themselves significantly worse off.

Corporate Tax

Dividends tax

The increase in the dividends tax rate from 15% to 20% will largely impact South African individual taxpayers and non-resident taxpayers that are tax resident in countries that do not have double tax agreements with South Africa.

Dividends paid by South African tax resident companies to other South African tax resident companies are generally exempt from dividends tax, while dividends paid to non-residents who reside in countries that have in-force double tax agreements with South Africa generally enjoy a reduction in the dividends tax rate.

The increased tax burden on individual taxpayers may potentially result in new innovative products and schemes where taxpayers attempt to make use of the arbitrage in the rates levied on companies and also potentially relief afforded by double tax agreements.

Share buy-backs

Following the announcement in 2016 that Treasury will pay closer scrutiny with regard to share buy-back transactions.  As expected it has been announced that specific countermeasures will be introduced to curb the use of share buy-back schemes to avoid the tax consequences that would arise had the shares been disposed of in a traditional manner.

Utilisation of "contributed tax capital" to make distributions to foreign shareholders

Currently, South African companies may potentially utilise their "contributed tax capital" (an artificial term introduced into the Income Tax Act which comprises of capital contributed to the company by shareholders) to make distributions to foreign shareholders in a tax exempt manner.  Distributions from "contributed tax capital" does not attract dividends tax and in most cases would also not attract capital gains tax (provided the distributing company does not hold significant investments in local immovable property) in the foreign shareholder's hands.  It is proposed that the tax legislation be amended to prevent the perceived abuse of the definition of "contributed tax capital".  

Write-off of debt

Corporate taxpayers will welcome the proposed relief for the write off of debt in dormant group companies or companies under business rescue.  The current income tax rules do not provide for inter-group relief where recoupments arise due to the write off or forgiveness of debt which was used to fund tax-deductible operating expenditure. The write off of the debt on liquidation gave rise to tax liabilities which could not be settled which prohibited the liquidation or deregistration of companies.

The extension of the relief to companies in liquidation as well as South African companies within the same group, would align the tax treatment of loans used to fund tax deductible expenditure with the current tax treatment of loans utilised for other purposes which currently already enjoy relief under the legislation dealing with capital gains tax.

We expect that mining companies will also welcome the alignment of the tax treatment of the write-off of debt associated with capital expenditure which at present results in a recoupment of the debt that is written off.