Budget 2018 – Key changes
Provided by Hogan Lovells South Africa
By Natalie Napier
22 Feb 2018
The 2018 Budget was presented by Minister Malusi Gigaba before parliament on 21 February 2018.
The 2018 tax proposals are projected to raise ZAR36 billion.
The key changes announced are:
- An increase in the value-added tax rate from 14% to 15%.
- A below inflation increase in the personal income tax rebates and brackets, with greater relief for those in the lower income tax brackets.
- An increase in the ad-valorem excise duty rate on luxury goods from 7% to 9%.
- A higher estate duty tax rate of 25% for estates greater than ZAR30 million.
- A 52 cents per litre increase in the levies on fuel, made up of a 22 cents per litre for the general fuel levy and a 30 cents per litre increase in the Road Accident Fund Levy.
- Increases in the alcohol and tobacco excise duties of between 6% and 10%.
Donations tax will increase to 25% in respect of any donations exceeding ZAR30 million.
There have been no increases in the corporate tax rate (28%) or in the top three personal income tax rate brackets.
The capital gains tax rates and transfer duty rates remain unchanged.
In addition, there are a number of other proposed tax amendments which will be implemented. We have highlighted some of the more pertinent proposals.
Addressing the abuse of disguised sale of shares using share buybacks
Further clarity will be provided regarding the anti-avoidance provisions dealing with share buybacks and dividend stripping.
Tax implications of controlled foreign companies and offshore foreign trusts
Despite the removal of the proposed legislation to create a controlled foreign company through a foreign trust, the proposal will be revisited in 2018. Taxpayers with off-shore foreign trusts in jurisdictions where tax payable is less than 75% of what would have been payable in South Africa will be required to include the foreign net income in their South African tax calculations.
Companies can claim a deduction if they used debt funding to acquire a qualifying controlling interest in an operating company. In 2015, the legislation was amended to prevent the abuse of this deduction. To qualify for this deduction, an operating company is now defined as a company where at least 80% of its receipts and accruals constitute income for tax purposes. However, amendments to the current provisions are needed to clarify when this test should be applied. In addition, it is proposed that the legislation be reviewed to determine whether this test should be applied when an operating company transfers its business as a going concern to a company that forms part of the same group of companies as that operating company.
Venture capital company
It is proposed that the legislation be amended to address rules relating to the investment income threshold limitations in the qualifying company test, as well as when the controlled company test needs to be applied. The rules relating to the connected person test also need to be reviewed, specifically the rule for retroactive withdrawal of venture capital company status.
Regulations prescribing foreign electronic services
The 2017 Budget Review announced that regulations prescribing foreign electronic services subject to VAT would be broadened to include cloud computing and other online services. Updated draft regulations prescribing foreign electronic services and supporting amendments to the VAT legislation have been published for public comment.
Tax treatment of cryptocurrency transactions
Cryptocurrencies pose risks to the income tax system as they are extremely volatile and their sustainability is uncertain. At the same time, the supply of cryptocurrency can cause administrative difficulties in the VAT system. To address these issues, it is proposed that the income tax and VAT legislation be amended.
Interest paid to the non-resident beneficiary of a trust
In the current tax rules regarding interest paid to a non-resident beneficiary from a trust, it is unclear who bears the withholding obligation after vesting. Furthermore, the rules dealing with trust income and beneficiaries do not deem the trust to have paid interest to beneficiaries if they are non-residents. A rule will be considered to address this anomaly.
Tax treatment of contributions to retirement funds situated outside South Africa
The Income Tax Act currently exempts all retirement benefits from a foreign source for employment rendered outside of South Africa from taxation. The interaction of this exemption with double taxation agreements and other provisions of the Income Tax Act will be reviewed to ensure that the principle of allowing deductible contributions only in cases where benefits are taxable is upheld.
A revised Carbon Tax Bill was published in December 2017 for public consultation. The bill is expected to be enacted before the end of 2018. Government proposes to implement the tax from 1 January 2019 to meet its nationally determined contributions under the 2015 Paris Agreement of the United Nations Framework Convention on Climate Change.
The sugar tax will be implemented 1 April 2018.
- Budget 2017: Personal income tax
- 2016 South African budget speech summary
- Proposed “sin” tax on sugar sweetened beverages