The South African Budget Speech 2021
As expected, Finance Minister Tito Mboweni’s 2021 Budget Speech dealt with a wide range of economic issues well-known to South Africans, including the impact of the COVID-19 pandemic, high Government debt, the need for infrastructure investment and job creation as well as measures to combat corruption. No specific detail was provided on previously announced plans to reduce the public sector salary bill, something that is heavily disputed by unions and others.
Gross tax revenue for 2020/21 is expected to be 10.6 percent lower than the previous year and R213 billion lower than the budget for 2020/21. A good increase in collections during the last few months, however, means that the shortfall is about R 100 billion less than the Medium Term Budget anticipated a few months ago.
As expected, no increase in taxes was announced – in fact certain tax relief measures were announced. Previous plans to introduce tax measures to increase tax revenue by R40 billion over the next few years have also been withdrawn. In line with Government communication over the last few years, this is based on the fact that South Africa’s tax rates are regarded as high, which makes us uncompetitive. It is also based on scientific research that, if taxes are increased beyond a certain limit, it becomes ineffective with a negative effect on economic growth. At the same time though Government is continuing with reducing tax deductions and incentives. Changes like these are less visible and have the same effect as increasing tax rates.
Below is a summary of the tax proposals that will typically affect high net worth individuals, their structures and their businesses.
Personal tax (and donations tax)
- Personal tax brackets and tax rebates will be adjusted in favour of the taxpayer, above the rate of inflation, by 5 percent. Medical tax credits only see an inflationary increase (4 percent) from R319 to R332 for the first two members and from R215 to R224 for all other members.
- The inclusion rates of 40 percent for individuals and 80 percent for companies and trusts for capital gains tax (CGT) purposes remain unchanged.
- Section 7C of the Income Tax Act addresses the transfer of wealth by no or low interest loans to trusts or companies owned by trusts. These provisions have been amended over time to counter attempts to undermine the intention of the provision. Further changes are being proposed to prevent a situation where section 7C is side stepped by transferring loans between trusts.
- Tax on withdrawals of retirement interest when an individual ceases to be a tax resident: When an individual ceases to be a South African tax resident, retirement funds are not always subject to withdrawal tax. To prevent the retirement fund interest only being taxable in the new tax jurisdiction in terms of a tax treaty, it is proposed that the taxpayer will be deemed to have withdrawn from the fund on the day before he or she ceases to be a South African tax resident. If the investment is left in a South African retirement fund, then the tax payment will be deferred until payments are received from the retirement fund.
- Transfers between retirement funds by members who are 55 years or older: The Income Tax Act stipulates that any transfer by a member of a pension, provident or retirement annuity fund (who has opted to retire early) into a similar fund would be considered a taxable transfer. A change will be made to allow tax‐free transfers into more or similarly restrictive funds by members who have already opted to retire.
- In light of the large-scale migration to working at home over the past year, current travel allowances and home office expenses will be investigated and redressed.
Business tax
Some of the more important announcements include:
- Reducing the corporate tax rate to 27 percent: Somewhat unexpectedly, the corporate tax rate will be reduced from 28 to 27 percent. This, however, only becomes applicable for companies with years of assessment commencing on or after 1 April 2022. As a result of this, the effective CGT rate for companies will decrease to 21.6 percent.
- Curtailing corporate interest deductions and limiting the use of assessed losses: These two measures were announced during last year’s Budget Speech but are being postponed to 2022 as a result of the pandemic-related economic stress.
- Venture capital incentive: The sunset date for the venture capital company incentive, which was initiated in 2009 to encourage retail investments in smaller businesses, will not be extended beyond 30 June 2021.
- Tax administration: The Voluntary Disclosure Programme will be reviewed in 2021 to ensure that it aligns with SARS’ strategic objectives. After public consultation, the Advance Tax Ruling system will be amended to give effect to improvements identified in the consultation process.
- Other: The budget documentation deals with a myriad of other specific proposals or matters that will be investigated with a view of reforming. These include refinements of the corporate reorganisation, controlled foreign company and hybrid debt anti-avoidance rules.
Exchange Control
In the 2020 Budget Speech, the Minister announced that the formal emigration process with the Reserve Bank (SARB) will be abolished with effect from 1 March 2021 and that “loop structures” would be allowed after certain amendments to the Income Tax Act had been promulgated.
The tax changes are now in effect and from 1 January 2021, new loop structures will be allowed with a reporting requirement by the Authorised Dealer to SARB. The Exchange Control Manuals were simultaneously amended.
Unreported loop structures that were in existence at 31 December 2020 are however still unauthorised and the parties need to make submissions to SARB to regularise them.
The emigration process going forward will be dealt with by SARS who will assess residency on a regular basis and any flow of funds out of South Africa will follow the same process as for residents with a Tax Clearance Certificate required before the transfer will be processed by the Authorised Dealer.
SARB have indicated that the Exchange Control Regulations and Manuals will be updated within the next 30 days and that certain transitional arrangements will be in place for up to a year. Hopefully this will clarify the future process.
As always, if you have any queries or would like to discuss the draft legislation in more detail, please contact your Relationship Manager, or our in-house tax specialists.
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Disclaimer
This document has been prepared for information only. Draft laws and regulations contained herein are subject to change and may differ from the final version. Accordingly, this document may not be relied upon as a statement of the law or regulatory requirements, or as an indication of policy. No information provided herein may in any way be construed as advice. Professional advice must be sought before any action is taken based on the information provided herein. The distribution or possession of this document in certain jurisdictions may be restricted by law or other regulatory requirements. Persons into whose possession this document comes should inform themselves about and observe any applicable legal and regulatory requirements in relation to the distribution into, or possession of this information, in that jurisdiction. This document has been approved for issue in South Africa by Stonehage Fleming Financial Services (Pty) Ltd, an authorised Financial Services Provider (FSP No. 9587). © Copyright Stonehage Fleming 2021. All rights reserved.