Finance Minister, Enoch Godongwana, delivered his first budget speech for the 2022/2023 fiscal year on Wednesday 24th February 2022. Godongwana was hailed for a balanced approach that brings much-needed relief for hard-pressed consumers. Several tax reliefs measures were announced to increase investment and consumer spending in South Africa, which in turn should assist in stimulating the economy. It was highlighted that the primary focus would be on reducing fiscal deficit and stabilising debt, while spending will be focused on education, health, the fight against crime and corruption and to improve capital investment.
This year’s Budget had a few unexpected surprises, especially the proposal not to increase tax rates in any of the brackets. Government is rather focusing on expanding specialised audit and investigative skills in the tax and customs sectors, as well as establishing a dedicated division in SARS to improve compliance of wealthy individuals (with an asset value exceeding R50 million) and complex financial arrangements.
It was announced that the South African GDP is expected to grow by 2.1% and that over the medium term on average 1.8%. To ease investor concerns and support a faster recovery and better economic growth over the long term, a more rapid implementation of economic reforms together with fiscal consolidation is needed.
Tax collections have exceeded expectations since the Medium Term Budget presentation and Government now estimates tax revenue for 2021/2022 to be R1.55 trillion, R62 billion more than projected. This windfall in tax collection is mainly due to higher commodity prices.
WHAT WERE THE KEY CHANGES?
An inflationary relief of a 4.5% in the personal income tax brackets and rebates.
A 50% increase in the employment tax incentive by increasing the maximum monthly value to R1,500.
No change to the general fuel levy or the Road Accident Fund (RAF) levy.
Increases in excise duties on alcohol and tobacco between 4.5 % and 6.5 %.
For most businesses, payroll is a non-core function, but still an essential process. Tax and labour legislation governing payroll is becoming increasingly complex and difficult to fully comply with. Besides legal compliance, optimising your remuneration and payroll structures is critical to ensure the most tax-efficient way of paying employees, or yourself as the owner of the business.
Outsourcing your payroll also improves the confidentiality of highly sensitive staff remuneration. It ensures the employer is not reliant on a single individual to manage the payroll and instead provides you with continuity and access to a team of experts. This saves time, improves security, maintains segregation of duties, ensures compliance, and mitigates the possibility of fraud. Outsourcing your payroll allows you to focus on your core business, rather than the administrative burden of managing your payroll and the headaches that go with it.
CHANGES FOR THE PERIOD 1 MARCH 2022 TO 28 FEBRUARY 2023
Tax thresholds
There has been a slight upward adjustment on the tax-free thresholds for personal income taxes as follows:
Rebates
The primary, secondary and tertiary rebates were increased as follows:
Medical tax credits
Monthly tax credits for medical scheme contributions had a slight increase as follows:
Individuals and special trusts
Lower income individuals will benefit the most due to the inflation adjustments made to the personal income tax brackets this year.
The personal income tax rates for the 2022/2023 tax year are listed below.
Corporate income tax
A semi-sweet reduction
The corporate income tax rate will be reduced to 27% for corporates with a year of assessment ending on or after 31 March 2023. For corporates with a year end of February, tax relief will only come into effect from the 2024 tax year This is one of the many reductions expected, and we look forward to government reducing the corporate tax rate even further. The idea is to broaden South Africa’s tax base. On the not so sweet side, Treasury will be restricting interest expense deductions and limiting assessed loss set-off’s for companies.
Limitation on utilising assessed losses
Setting aside a few exceptions, South African corporates are, at present, allowed to use the full balance of an assessed loss to shield taxable income in a year. Under the amended legislation, effective for years of assessment ending on or after 31 March 2023, a company can only offset a balance of an assessed loss against the higher of R1 million, or 80% of taxable income arising in a specific tax year. The impact of this amended legislation is demonstrated in the following example:
Company XYZ has an assessed loss brought forward of R2,500,000 and makes taxable income of R2,000,000 for the year ending 30 June 2023.
Taxable income for the year R2,000,000
Less: greater of R1million or R2,000,000 x 80% R1,600,000
Taxable income subject corporate tax R400,000
Tax payable @ 27% R108,000
Assessed loss brought forward from the prior year R2,500,000
Assessed loss utilized in the current yea R1,600,000
Assessed loss carried forward to the following year R900,000
Therefore, this limitation will only affect corporate taxpayers with taxable income of more than R1,250,000.
Individual taxpayers will continue utilising the full brought forward assessed loss against taxable income.
The deductibility of interest paid to tax exempt persons
To strengthen the application of these rules (i.e., to increase the amount of “interest” that does not qualify for a tax deduction), the 2021 legislative cycle included changes to section 23M of the Income Tax Act, effective 31 March 2023, as follows:
- Expanding the definition of interest to include payments made under interest rate swap agreements, the finance cost element of finance leases, and foreign exchange differences.
- It applies where there is a “controlling interest”.
- Net interest expense deduction will be capped at 30% (previously 40%) of taxable income before interest and capital allowances (EBITDA).
- Curbing the circumvention of the rules by using back-to-back loans.
- Ensuring that the rules apply even if the interest is subject to interest withholding tax in South Africa.
Business is therefore advised to revisit the application of section 23M to interest paid once the revised rules become effective.
Changes to the intra-group transaction rule
The intra-group transaction rule allows for tax-neutral transfers of assets within a group of companies.
In the 2022/2023 Budget Speech the Finance Minister stated that further provisions will be introduced in which the base cost can be disregarded if nil. The lawmakers recognised that there are still circumstances where the nil base cost can result in economic double taxation.
Contributed tax capital changes postponed
Treasury intends to revise and clarify contributed tax capital. The reason behind this is that some companies are exploiting this legislation by allocating contributed tax capital to certain shareholders based on a share premium contribution, which is not allocated to all shareholders.
Concerns have been raised by the public in relation to the proposals by government to amend the definition of “contributed tax capital”, the effective dates for these changes will be postponed to 1 January 2023. This will allow Government more time to consider the impact of the amendment.
Debt forgiveness rules are being broadened
The debt forgiveness rules set out a cascade of adverse tax consequences that are triggered when debt is forgiven or converted to equity.
There is an apparent flaw regarding assets that were sold in prior years and where the borrower claimed a scrapping allowance or realised a capital loss. Treasury suggested that the debt forgiveness rules be revised to make it clear that the rules also apply to the scrapping allowance or capital loss realised upon the disposal of assets in prior years.
Sunset clause on certain corporate tax incentives
Treasury normally introduces tax incentives to promote specific areas of need, however, it was decided that as the following incentives were not having the impact hoped for, they will be discontinued:
- Section 12O, which provided an exemption in respect of films, will end on 31 December 2021.
- Section 12F, which deals with tax deductions in respect of airport and port assets, will end on 28 February 2022.
- Section 13sept, which deals with deductions in the disposal of low-cost residential units on loan, will end on 28 February 2022.
- Section 12DA, which related to tax deductions in respect of rolling stock, will not be renewed after the 28th of February 2022.
Section 11D, which is the research and development (R&D) tax incentive, will be extended until 31 December 2023 to create certainty for taxpayers.
Employment tax incentive (“ETI”) expansion
The ETI incentive, which is intended to motivate businesses to employ the youth, has been increased by 50%. According to Government, youth unemployment in South Africa was at 56,2% during the third quarter. To qualify for ETI an employer must employ a person between the age of 18 and 29 and the employee can not earn more than R6,500 per month.
ETI reduces the total PAYE liability by the amount of ETI that can be claimed. The maximum amount that an employer can claim in the first 12 months for a qualifying employee is R1,500 and a maximum of R750 for the second 12 months.
To curb the abuse of such incentives, Government proposes to impose understatement penalties on reimbursements not claimed properly.
Value-Added Tax (VAT)
Once‐off electronic services for non‐resident suppliers
Overseas suppliers of e-services are required to register as VAT vendors in South Africa if they make taxable supplies of e-services of R1 million or more in a 12-month period. It is proposed that where an overseas e-services supplier makes a once-off supply of e-services in excess of R1 million, that a specific exception to the rule requiring registration be considered.
Customs and excise
Sin tax
An increase of between 4.5% – 6.5% on alcohol and tobacco duties is effective from 24th February 2022.
Plastic bag levy
In line with South Africa’s stated intention to adhere to the global call for a greener future, the plastic bag levy will increase by 3c per bag, costing a consumer 28c per bag after 1 April 2022.
Motor vehicle emissions and incandescent globe taxes
In the 2022/2023 budget speech it is proposed that the vehicle emissions tax rate on passenger cars increases from R120 to R132/gCO2/km and on double cabs from R160 to R176/gCO2/km from 1 April 2022. The incandescent light bulb levy will be increased from R10 to R15 per light bulb from 1 April 2022.
Sugar tax
Beverages with more than 4g of sugar content per 100ml will be increased from 2.21c/g to 2.31c/g from 1 April 2022.
Tax on individuals
Ceasing residency in South Africa
A person is a tax resident in South African when:
- You are ordinarily resident, or
- They pass the physical presence test requirements.
South African citizenship is determined by the Department of Home Affairs and is usually determined by place of birth. Therefore, if you are a tax resident of South Africa, it does not necessarily mean you are a South African citizen.
When an individual ceases to be a South African tax resident, their year of assessment is deemed to end on the day immediately before they cease South Africa tax residency. The individual’s next succeeding year of assessment will commence on the day their tax residency ceased. Therefore, two returns will be required in a 12-month period, which lapses over one income tax year.
Section 9H (exit tax) of the Income Tax Act is trigged on the date that the taxpayer ceases to be a South African tax resident, this section deems the sale of certain worldwide assets held by the taxpayer.
Assessments issued by SARS allow taxpayers to claim a R40,000 capital gain annual exclusion in both years of assessment (prior and post ceasing residency). This could result in a taxpayer benefiting from an R80,000 capital gain annual exclusion during one income tax year.
It has now been proposed that the R40 000 capital gain annual exclusion only applies during one income tax year.
The same applies to the annual interest exclusion of R23,800 (or R34,600 for those over 65 years old) per annum.
Retirement funds “lock-in”
With effect from 1 March 2021, individuals who have ceased tax residency will have their retirement annuity funds “locked-in” for a minimum period of 3 years. A retirement fund will not pay over these funds to the emigrant unless the taxpayer has successfully applied and held an emigration tax clearance certificate through SARS for at least 3 years and have proved that they have been tax resident of a foreign country for a period of 3 years.
These rules will not apply to members of retirement funds if they are aged 55 years and older on 1 March 2021. They will be entitled to take their full benefits on retirement as well as any contributions made to the provident fund after 1 March 2021.
Government has commenced negotiations to review multiple tax treaties to ensure South Africa retains taxing rights on payments from local retirement funds to persons who have changed residency.
Exchange control modernisation (expand)
It was announced that National Treasury would introduce a capital flow management system which would be a smarter, risk-based approach to foreign currency transactions and capital flows. National Treasury is committed to modernization of the system and has given a few proposals:
Residents may now lend or dispose of authorised foreign assets held offshore to other South African residents, subject to local tax disclosure and compliance. Importantly, this relaxation only applies to future gifts received or foreign assets disposed of. Any previous contraventions must be regularized.
- Residents may transfer more than R10 million per year to offshore trusts, subject to tax and reporting requirements.
- Discretionary allowances are now allowed to be used by residents to participate in online foreign exchange trading. Credit or debit cards may, however, not be utilised.
- Residents may receive and retain gifts from non-residents offshore (no repatriation required).
- Authorised dealers may, on a once-off basis, remit abroad the remaining cash balances (up to R100,000 in total) of people who have ceased to be residents for tax purposes, without reference to the South African Revenue Service.
Focus on high-net worth individuals
The High Wealth Individuals Unit (“HWIU”) was established in October 2021 with their focus initially on a selected 1,500 wealthy individuals and their related entities for compliance purposes.
In the 2022 Budget speech, it was proposed that all provisional taxpayers with assets with a market value above R50 million, declare specified assets and liabilities at market value in their 2023 tax returns. This will assist SARS to detect non-compliance of fraud through the existence of unexplained wealth and will possibly provide information to Treasury to investigate the feasibility of a wealth tax as recommended by the Davis Tax Committee.
Carbon tax
In line with the Government climate change commitments, the carbon tax rate increased from R134 to R144 per tons of carbon dioxide equivalent, which amounts to an increase of 7.46%, per ton of carbon dioxide equivalent, effective from 1 January 2022
The carbon fuel levy for 2022 will increase by R 0.01 to R 0.09 per liter for petrol and R 0.10 per liter for diesel from 6 April 2022.
WHAT HAS NOT CHANGED?
Trusts
The income tax rates for trusts (other than special trusts) remain unchanged at 45%.
Interest exemptions
The local interest exemptions remain unchanged:
The exemption on interest earned for individuals younger than 65 years remains at R23,800 per annum.
The exemption for individuals 65 years and older remains at R34,500 per annum.
Foreign interest remains fully taxable.
Dividend’s withholding tax
Dividend’s withholding tax remains at 20% on gross dividends paid by resident and non-resident companies in respect of shares listed on the JSE.
Foreign dividends received by individuals from foreign companies (shareholding of less than 10% in the foreign company) are taxable at a maximum effective rate of 20%.
Interest withholding tax for non-residents
Interest withholding tax remains at 15% on interest from a South African source payable to non-residents. Interest is exempt if payable by any sphere of the South African government, a bank, or if the debt is listed on a recognised exchange.
Retirement lump sum taxation
If a taxpayer is 55 years or older: The first R500,000 of a retirement lump sum remains tax-free.
If a taxpayer is younger than 55 years old: The first R25,000 of a pre-retirement lump sum withdrawal remains tax-free.
Capital gains tax (CGT)
The capital gains tax inclusion rate for individuals and special trusts remains at 40%, and for other taxpayers at 80%.
The annual exclusion for a capital gain or loss granted to individuals and special trusts remains at R40,000. The exclusion granted to individuals remains at R300,000 in the year of death.
Value-added tax (VAT)
VAT charged on the supply of goods and services provided by registered vendors remains at 15%.
Estate duty
Estate duty is levied on property of residents and South African property of non-residents less allowable deductions. The duty is levied on the dutiable value of an estate at a rate of 20% on the first R30 million, and at a rate of 25% above R30 million.
A basic deduction of R3.5 million is allowed in the determination of an estate’s liability for estate duty.
Donation’s tax
Donation’s tax is payable at a flat rate of 20% on the value of property donated.
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