CPE 15:
Budget and Tax Update –
2006
“This is the year of plenty, when all South Africans will reap
the fruits of economic growth.”
Trevor Manual
Objectives
To obtain and understanding of the 2006 budget
reforms and its impact on the taxation of
individuals and companies in South Africa
2
Contents
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Module 1:
Module 2:
Module 3:
Module 4:
Module 5:
Module 6:
Module 7:
Module 8:
2006 Budget Review
Income Tax for individuals
Fringe benefits
Capital Gains Tax,
Donations Tax & Estate
Duty
Company Tax
Value Added Tax
Capital Allowances
Sundry Tax Matters
3
Module 1
Budget Review: 2006
4
Module 1
Introduction
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The subjects of every state ought to contribute
towards the support of government in proportion
their respective revenues.
The tax that each individual is bound to pay ought
to be certain and not arbitrary.
Every tax ought to be levied at a time or in a
manner which is most convenient for the
taxpayer.
Every tax ought to be contrived to take out and
keep out of the pockets of the people as little as
possible over what it brings into the treasury of
the state.
Adam Smith (The wealth of Nations – 1776)
5
Module 1
Overall Comments
 Strong economic data translated to tax
cuts across the board
 Revenue surplus reflective of increased
compliance culture
 Aimed at stimulating growth, employment
and consumer spending
Generally, the budget was in line with
Governments’ strategy to improve
administration and further enhance
compliance!
6
Module 1
Effect

Personal income tax
Adjust personal income tax rate structure
Increase in interest and dividend exemption under 65 years
Increase in interest and dividend exemption 65 years and over
Increase thresholds for Learnership allowances
Increase PAYE withholding rate on motor
allowances and fringe benefit on company cars
Capping of medical scheme contributions

Reduction in retirement fund tax

Small business tax relief

Taxes on property
Increase thresholds of donations tax and estate duty
Adjust table for transfer duties

Stamp duties

Taxes on goods and services
Increase in duties on alcohol
Increase in duties on tobacco products (52% incidence)
Abolish ad valorem excise duties on certain products
Zero rating of municipal property rates

Budget 2006/07 proposals
R billion
(12,125)
(13,500)
(50)
(45)
(80)
1,370
180
(2,400)
(400)
(4,540)
(40)
(4,500)
(10)
348
725
645
(22)
(1,000)
(19,127)
7
Module 1
Personal Income Tax


Net tax relief of R 12,1 bn
Primary rebate increased from R 6 300 to
R 7 200 pa

Tax brackets adjusted across the board

Interest and dividend exemptions

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Increased to R 16 500 and R 24 500 for under and over
65’s respectively
Foreign interest and dividend exemption increased from
R 2000 to R 2500 per year
8
Module 1
Motor & Travel benefits
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Monthly fringe benefit of company car increased
from 1,8% to 2,5 % of determined value
Travel allowances impacted by the revision of
tables and the increase in the deemed private
travel from 16 000 to 18 000 km
60% of travel allowance to be included for PAYE
purposes (2006: 50%)
9
Module 1
Medical expenses


Monthly caps introduced for medical aid
contributions:
- R 500 pm for member
- R 500 pm for 1st dependent
- R 300 pm for each further dep.
Any excess above the threshold is taxed as a
fringe benefit
Medical expenses may only be claimed to the
extent that it exceeds 7,5% of taxable income
(previously 5%)
10
Businesses
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Module 1
RSC and JSB levies abolished w.e.f 30/06/2006
Small business threshold increased to revenue of
R 14m, and:
 Rate of 0% on taxable income of < R40000
 Rate of 10% on income of R 40001 to R300000
 Rate of 29% on taxable income > R300000
Tax amnesty for small business with turnover of
under 5 million subject to certain
conditions……..thereby broadening the tax base.
11
Module 1
Intellectual Capital Development

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Learnership allowances increased as follows:
 R 20 000 from R 17 500 for existing
employees
 R 30 000 from R 25 000 for new employees
Accelerated allowances for R&D expenditure
 150% of current expenditure deductible
 Capital allowance accelerated to 50:30:20
12
Module 1
Other direct taxes
 Transfer duty rate decreased across all
levels:

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0%
5% over R500k
25k + 8% over R 1m
Exemptions & exclusions increased for
each of the following:

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Property below R 500k
500k to R 1m
Over R 1m
Donations Tax
Estate Duty
R 30k to R 50k
R 1,5m to R 2,5m
CGT exclusions raised
13
Module 1
Other
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Tax on retirement funds slashed by 50%
to 9%
Forex allowances increased
Increased RAF fuel levy
Increased sin taxes
14
Module 1
Opinions


Corporate tax rates and/or STC rate
should have been reduced??
Forex controls should have been relaxed??
You decide!!!!
15
Module 2
Income tax for individuals
•Tax rates and rebates
•Deductions & exemptions
•Employees’ and Provisional Tax
•Personal Service Companies & Trusts
16
Module 2
Framework for tax computation
Gross Income
Exempt Income
Income
Deductions
Capital Gain
TAXABLE INCOME
XXXX
(XXX)
XXX
(XXX)
XXX
XXX
17
Module 2
Tax rates & rebates
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Progressive tax rates based on income
Tax brackets have been adjusted to provide
relief at all income levels
The primary rebate applicable to all natural
persons have been adjusted to R 7 200 from
R 6 300, providing all income brackets with a
R900 tax benefit
Over 65 rebate unchanged - 4500 pa
Thresholds, i.e. the income level at which no tax
is payable:
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Under 65
Over 65
R 40 000 (2005: R 35 000)
R 65 000 (2005: R 60 000)
Rebates are proportionately reduced in certain
instances
18
Module 2
Rate Income
2006
Income
2007
Tax relief
18%
0 – 80k
0 – 100k
25%
80k – 130k
100k – 160k
30%
130k – 180k
160k - 220k
35%
180k – 230k
220k – 300k
20k taxed at 18% not 25%
= R 1400+R 900 = R 2300
30k taxed at 25% not 30%
= R 1500
40k taxed at 30% not 35%
= R 2000
70k taxed at 35% not 38%
= R 2100
38%
230k – 300k
300k – 400k
100k taxed at 38% not 40%
= R 2000
19
Module 2
Example
 Mr A earns taxable income of R 400k pa. His tax
situation for the 2006 and 2007 years are:
2006
R 86k + 40% of amt
over R300k (R40k) –
R6300
Tax = R 119 700
2007
R 79k + 38% of amt
over R300k (R38k) –
R 7200
Tax = R 109 800
20
Module 2
Exemptions
 All dividends received from SA companies
are exempt from tax
 Interest earned is exempt to the
following extent:
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Person under 65
Person over 65
R 16500 (2006: R 15000)
R 24500 (2006: R 22000)
Foreign interest & dividends are exempt
to the amount of R 2500 (2006: R2000)
Capital element of purchased annuities
R 30k of lump sums on retrenchments are
21
exempt from tax in certain cases.
Module 2
Deductions


Medical expenses are deductible, but limited to
the following:
 Under 65 – amounts over 7,5% of taxable income
before this deduction, after taking into account
monthly cap deductions
 Over 65 – no limit
Contributions to retirements funds are limited to:
 Pension funds – greater of 7,5% of RFE or
R 1750 – no carry forward of disallowed
 Retirement annuity – greater of 15% of non RFE or
R 1750, carry forward disallowed
 Provident fund – no deduction
22
Module 2
Deductions
 Shares acquired ito broad based employee
share option scheme:


market value of shares granted to employee
Reduced by any consideration paid by the employee
23
Module 2
Employees’ tax: SITE

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SITE is an instrument by which the minimum tax
liability is determined by the employer on the
first R 60 000 of employee remuneration
Onus of assessment rests with employer
The following are excluded:
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Directors’ remuneration
Self employed persons
Remuneration which may be set off against
assessed loss
SITE = minimum liability and is not
refundable
Refunds: Employer vs SARS
24
Module 2
Employees’ tax: PAYE
 Employee remuneration which is not
subject to SITE is subject to PAYE per
monthly tables – employer deducts and
pays to SARS
 Specific inclusions for PAYE:

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60% of travel allowance (2006: 50%)
Payments to directors of private companies
Payments to members of CC’s
Labour brokers without exemption certificates
Annuities from Annuity funds
25
Module 2
Casual / Part time employment
PAYE must be deducted at a rate of 25%in respect
of employees who:
 Work for an employer for less than 22 hours per
week OR
 Who work for an employer without reference to a
period.
Exemptions:
 Employee works regularly for less than 22 hours
per week and provide written undertaking that
they do not render services to another employer.
 An employee who is in standard employment.
 Pensions paid to pensioners
26
Module 2
Employer’s Responsibility

Where employer fails to deduct full employees’ tax:
 Employer becomes personally liable
 SARS may absolve employer where SARS
believes that there is a prospect of recovering
from employee, if satisfied as to intent
 If employer not absolved, then may recover from
employee and hold back tax certificate until
recovered
 Employer liability is deemed to be a penalty and
not deductible for tax purposes
 SARS could levy penalty of up to twice the
unpaid tax.
27
Provisional Tax
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Module 2
Provisional tax is a method of paying tax due
during a year based on ‘basic amount’ or
estimated income for that year.
1st payment for 50% of the estimated tax
liability is due 6 months before year end and the
2nd payment of 50% at year end.
Total provisional tax paid should be based on
latest assessment or estimated income and should
not be less than 90% of final tax due.
Provisional tax is reduced by the amount of
employees’ tax paid during the period
Optional 3 payment could be made within 6
months from end of year – (7 mths for Feb year
28
ends)
Module 2
Provisional Tax - Individuals
Any capital gain previously assessed is excluded
from the basic amount for provisional tax
purposes
 Taxable portion of lump sum is excluded from the
basic amount for provisional tax purposes
Interest and penalties
1st pmt –
No penalty for late submission, only for
late payment
2nd pmt 20% for late submission, 10% for late
payment

In addition where estimate is less than 90% of actual
income, a penalty of 20% is levied on the diff of the
actual tax and the tax paid on the estimate
29
Module 2
Personal Service Companies & Trusts
 Any entity which renders services by a
person connected to the company & one of
the following apply:

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The person would be an employee but for the
entity;
Person is subject to the supervision of client
ito work;
Payments regularly – like remuneration
80% of earning derived from one company
Entity not PSC if 3 or more employees for
full year
30
Module 2
Personal Service Companies & Trusts
 Any remuneration earned by Personal
Service subject to 34% PAYE.
 Deductions in determining income is
limited to remuneration paid to member,
director and employees of entity.
31
Module 2
Ring-Fencing Assessed Losses

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
Sec 20A effective years ending on or after 1
March 2004.
Applies to individuals whose taxable income
before setting off assessed loss is equal to or
exceeds the level at which maximum rate of tax
is applicable. (2007 : R400k /2006 : R300k)
Applies in 1 of 2 situations:



The taxpayer has during a five year period incurred a
loss in the relevant trade in at least three years OR
The trade in respect of which the assessed loss is
incurred is included in the list stipulated in the act.
Does not apply if the trade constitutes a business
in which there is a reasonable prospect of
deriving taxable income within a reasonable
period.
32
Module 3
Fringe benefits
•Traveling allowances
•Employer owned vehicles
•Medical aid contributions
•Holiday accommodation
•Local and overseas travel
•Broad based share option scheme
33
Module 3
Travel Allowances

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
Beware of excessive allowances!! – deemed salary and
PAYE is to be deducted.
60% (2006:50%) of fixed travel allowances are
included in remuneration and subject to PAYE – the
full allowance is disclosed
Re-imbursive travel is not subject to PAYE on the
following conditions:
 Total mileage does not exceed 8000km pa
 The rate per km does not exceed 246c per km
(2006: 238c)
Reimbursement for actual travel is not subject to
PAYE
34
Module 3
Travel Allowances

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The taxable fringe benefit is calculated by reducing
the benefit received by a rate per km in respect of
business mileage travelled
The fixed rate per km is reduced of not for full year
Where no log book is maintained, the first 18 000 of
travel is deemed to be private with the balance
deemed to be business subject to a maximum of 14
000 km – all deemed figures are apportioned for part
of a year
The rate per km is determined by SARS and is
influenced by the value of the vehicle, limited to a
maximum of R 360 000.
35
Module 3
Employer owned vehicles

The employee is taxed on 2,5% per month (2006:
1,8%) of the ‘value’ of the vehicle and 4% per month
on the 2nd vehicle if two vehicles are provided:



‘Value’ of vehicle is reduced by 15% for each 12 month
period, where second hand
The benefit is reduced if responsible for any cost as
follows:



Reduced by the value paid by the employee for use
All private fuel used
Maintenance costs
0,22% monthly
0,18% monthly
Exclusions:
 The vehicle is available to all employees and private
use is negligible and incidental
 Required for employee’s work after hours
36
Module 3
Employer owned vehicles

Where travel allowance is received in addition to
company car:

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Company car is taxed at 4%
No portion of consideration paid by employee may be
deducted, if not for actual business travel
Where private travel is less than 10 000km and
accurate records are kept, SARS may reduce the
value placed on private use
37
Module 3
Medical Aid Contributions

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
The contribution by the employer to the
employees’ medical aid is taxable insofar as the
contribution exceeds R 500 for the first 2
beneficiaries and R 300 for each other
beneficiary
For 2006, the benefit was the deemed to be the
excess of two thirds of the employees medical aid
cost i.e. where 50% was paid by the employer, no
fringe benefit accrued
No value contributions:


Employee retired from employer due to ill health or
other infirmity
Dependents of an employee who died and was employed
at time of death or of a deceased retired employee
38
Module 3
Holiday Accommodation


The fringe benefit to the employee is the
prevailing market rate if the accommodation is
owned by the employer
actual rental if the accommodation is rented
Subsistence Allowances: Local Travel


Where an allowance is paid to an employee, the
employee must travel within 1 month to avoid
PAYE being deducted from that allowance
Deemed allowances include:
 R60 per day or part thereof for incidentals
 R196 per day for meals and incidentals
39
Module 3
Subsistence Allowances: Overseas


Where an allowance is paid to an employee, the
employee must travel within 1 month to avoid
PAYE being deducted from that allowance
Deemed allowances include:
 $ 190 for meals and incidentals outside the
Republic
General


Fringe benefits are generally the difference
between the market value of the benefit
provided to the employee and the consideration
paid by the employee
40
VAT implications for employer
Module 3
Share options – Section 8A


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

Any gain obtained by exercise, cession or release of
any right to acquire any marketable security
As a consequence of services as a director or
employee
Gives rise to a tax liability on the date that the right
is exercised
Taxable gain is the difference between the market
value at date right or option is exercised and the
consideration paid for the right/share
Relief is provided to the taxpayer where the
restrictions in respect of disposal of shares
41
Module 3
Broad based employee share plan – S 8B




S 8B introduced from 26 October 2004.
Purpose: To encourage long-term empowerment of
employees through the receipt of shares at less than
market value without adverse tax consequences.
Applicable to any “qualifying equity shares” as
defined.
Any gain from the disposal of any qualifying equity
share which is disposed of within 5 yrs from date of
grant must be included in income, except:

Disposals on death and insolvency or qualifying equity
shares exchanged for other qualifying equity shares
42
Module 3
Broad-based employee share plan (BBESP)

BBESP is a plan in terms of which:
 Equity shares in that employer are acquired by
employees for a consideration not exceeding the
minimum required by the Co’s Act.
 If employees participate in any other share plan of
the employer, then not allowed to participate in
the BBESP and at least 90% of other employees
entitled to participate.
 The persons acquiring these shares have full voting
rights and dividends.
 No restrictions must be placed on disposal of
shares, except:
 That shares may not be disposed of for at least five
years from date of grant
43
Module 3
Broad based employee share options – S 8B




Furthermore, the initial receipt of those shares
are tax exempt.
Loans to employees to buy such shares are not
subject to fringe benefits tax.
If the employee is no longer a resident within 5
years of being granted those shares, the shares
are deemed not to have been disposed of
If the employee dies and the executor sells the
shares, section 25 does not apply to tax the
estate or heir on the proceeds.
44
Module 3
Broad based employee share options – S 8B



Employer companies may issue shares up to a limit
of R9 000 per employee in current tax year and
immediate preceding two tax years.
A tax deduction up to R3 000 per employee per
annum for 3 years will be allowed.
Where the employee holds those shares for at
least 5 years, there will be no tax consequences
except for CGT.
45
Module 4
•Capital Gains Tax
•Donations Tax
•Estate Duty
46
Module 4
Capital Gains Tax (CGT)



CGT is triggered by a disposal of an asset
A capital gain or loss is the difference between the
proceeds & the base cost – including all costs incurred
acquiring and improving the asset
Base cost for assets:




Acquired before Oct 2001 – value determined at that
date plus expenditure after that date
Acquired after Oct 2001 – actual costs in incurred in
acquiring or creating the asset
Base cost is reduced by amounts included in normal
tax computation, e.g. Repairs and maintenance
All gains and losses are calculated and the net amount
is included in the income of the taxpayer at the
inclusion rate
47
Module 4
Capital Gains Tax (CGT)
 Exclusions:






Annual - R12 500 (2006: R 10k pa)
Primary residence, limited to R1,5 m (2006:R1m)
Small business exemption of R 750k (2006: R500k)
Personal use assets
Capital losses are not included in income but
carried forward
Inclusion and effective rates:
Inclusion
Effective
Individual
25%
0-10%
Company
50%
14,5%
Trust
50%
20%
48
Capital Gains Tax (CGT)

Module 4
Deemed disposals:


Paragraph 12 of the 8th Schedule deals with events
treated as disposals and acquisitions. Because
paragraph 12 deems a disposal to have taken place,
the same person is deemed to dispose of the asset
and then to reacquire it.
This means that a capital gain or capital loss arises
on the disposal and a new cost of the asset is
established for the purposes of determining the
capital gain or capital loss on the actual disposal of
the asset.
49
Capital Gains Tax (CGT)

Module 4
Deemed disposals:




A person ceases to be a resident of South Africa
An asset of a non-resident become part of
(deemed acquisition) or ceases to be part of
(deemed disposal) a South African permanent
establishment of a non-resident
A capital asset becomes trading stock
Personal use assets become capital assets and vice
versa
50
Module 4
Rollover relief




Rollover relief applies by using two different
methods
Roll-over relief means that recognition of the
capital gain is deferred until a future date.
Most common instances:
 Transfer of assets between spouses
 Involuntary disposals
 Reinvestment in replacement assets
Where rollover is elected, so much of the gain as
relates to any allowances claimed on the
replacement assets should be recognised
51
Module 4
Donations Tax
 Tax of 20% levied on property
gratuitously disposed of, except:
Donations by natural persons < R50k pa
(2006: R30k)
 Donations by private companies < R 10k
 Donations between spouses
 Donations by public companies (tax
purposes)
 Donations to PBO’s

52
Module 4
Estate Duty
 Payable on net value of property at
time of death
 Levied at the rate of 20%
 Certain property is deemed to be
property of the deceased:
Insurance policies on life of deceased
 Property which deceased could have
disposed of at time of death

53
Module 4
Estate Duty
 Exemptions & deductions:
The first R2,5 million of assets (2006:
R1,5 million)
 Any bequest to PBO
 Any bequest to surviving spouse
 Certain expenses
 Certain claims against the estate

54
Module 5
•Company & CC Tax
-
Normal tax
-
Small Businesses
-
STC
55
Module 5
Company and CC normal income tax
 Close Corporations = companies for
tax purposes
 Companies & CCs are subject to
normal taxation at rate of 29% - not
small businesses and PSC
 Rebates limited to:

Foreign tax credits
56
Module 5
Small Business
Small business threshold increased to revenue of R 14m,
and:
 Rate of 0% on taxable income of < R40000
 Rate of 10% on income of R 40001 to R300000
 Rate of 29% on taxable income > R300000
Criteria



All shareholders/member are natural persons and hold
no shares in any other private company or members
interest in other CC’s.
Gross income criteria – R14m (2006 : R6m)
Not more than 20% of gross income comprises
collectively of investment income or personal services.
 Personal services company will qualify if employs 4
full-time non-related employees for core
operations.
57
Module 5
Secondary Tax on Co’s (& CCs)




Tax levied on the distribution of profits in the
form of dividends at rate of 12,5%
STC is levied on the net dividend, i.e. the amount
by which dividends declared exceeds dividends
received
Having regard to STC, the total effective tax
rate applicable to companies & CC’s is:
 36,89% = [(12,5/112,5) x 71] + 29%
Certain distributions of profits are deemed to be
dividends for STC purposes
58
Module 6
•Value Added Tax
59
Module 6
Value Added Tax (VAT)



Introduced in SA in 1991 at a rate of 10%
and increased to 14% in 1993
Tax levied on supplies – 3 types of
supplies:
 Std rate – goods and services subject
to VAT rate
 0 rate – subject to VAT at a rate of 0%
 Exempt – not subject to VAT
Amount of VAT payable by a vendor is
reduced by input VAT credits
60
Module 6
Value Added Tax (VAT)
 Turnover < R30m – render returns every 2
months.
 Turnover >R30m – render returns every month.
 Where annual turnover likely to be < R2,5million
vendor may apply to be on payments basis if
vendor is natural person or unincorporated body
of persons whose members are natural persons.
 From 1 March 2005 a tax invoice must reflect the
purchasers trade name and VAT registration
number.
 Small business with annual turnover
< R1,2m (previously R1m) may render returns
every 4 months.
61
Module 6
Value Added Tax (VAT)


Municipal property rates to be zero-rated for
VAT purposes commencing for tax periods on or
after 1 July 2006.
Prohibited Inputs
• VAT on entertainment expenses
• VAT on motor cars
• VAT on subscriptions or fees (clubs, social,
sporting, recreational)
62
Module 7
•Capital allowances
63
Module 7
Capital allowances




Capital expenditure would not normally qualify as a
deduction for tax purposes
Wear and Tear may be claimed on items of a capital
nature at rates not exceeding accepted write off
periods ito S 11e
Certain accelerated capital allowances are in place in
order to encourage investment:
 Capex on R& D equipment
 Manufacturing equipment
 Urban Development Projects
 Small business assets
Small assets costing less than R5000 (2006: R2000)
are written off in the year acquired
64
Module 8
•Sundry Issues
65
Module 8
Sundry Issues




South African taxpayers are permitted to invest
R 2m abroad (2006: R 750k)
No requirement to have passports endorsed with
travel allowances…..may have to demonstrate that
tax affairs are in order, if required to do so
R 1m emigration allowance – personal effects
Any capital introduced by residents may be
repatriated at any time
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Module 8
Tax Amnesty

Exchange control amnesty complete.





42 672 applications received.
R68,6billion assets disclosed.
Raised R2,9billion in levies
Raises tax base by R1,4billion.
Small business amnesty





Waiver of taxes for years of assessment ending before
31 March ‘04.
Turnover for 2005 does not exceed R5million.
Non-disclosure penalty of 10% based on 2005 income.
Not available to taxpayers who have already disclosed
amounts concerned or those under investigation.
First phase focused on taxi industry to take effect 1
August 2006.
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Module 8
Further Measures



Modernise Corporate tax system underway –
moving to full self assessment system
General anti-avoidance rule
Personal income tax – E-filing; matching of
information from 3rd parties
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Module 8
Interest Rates

Fringe benefits
•
•
•
•
•
1/9/2003 – 30/11/2003
1/12/2003 – 29/2/2004
1/3/2004 – 31/8/2004
1/9/2004 – 31/8/2004
1/9/2005 -
:
:
:
:
:
12,0%
9,5%
9,0%
8,5%
8,0%
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Module 8
Interest Rates
Late
payment
of tax
Refunds
IRO
successful
appeals
Overpayment Late
of
payment
Provisional
of VAT
Tax
Refund
of VAT
1/10/2003
to
30/11/2003
13,0%
13,0%
9,0%
13,0%
13,0%
1/12/2003
to
31/10/2004
11,5%
11,5%
7,5%
11,5%
11,5%
1/11/2004 -
10,5 %
10,5%
6,5%
10,5%
10,5%
70
Other
Registration of Tax Practitioners
All tax practitioners who provide tax advice or
completes or assists in completing tax returns
must have registered by 30 June 2005.
Exceptions:
• Person who provide advice or completes a return
for no consideration.
• Person who provides advice in anticipation or in
the course or litigation with taxpayer and SARS.
• Where advice is incidental to supply of goods or
services.
• Person who provides tax services as full time
employee to his employer or under the direct
supervision of a registered practitioner.
• Where the tax services relate only to customs
and excise.
71
Questions
72