National Budget: what it means to you

What does the National Budget, presented by Minister of Finance Enoch Godongwana, mean to South Africans? We posed this question to the PwC team.

As is always the case, the National Budget presentation covered a wide range of topics. We spoke to various experts from PwC South Africa to get their thoughts and comments on each specific area. This is what they had to say.

TAX REVENUE

As predicted, tax revenues are expected to be well above projections at R1,55 trillion (largely attributable to elevated commodity prices). “There will be no significant tax increases and neither the general fuel levy nor the Road Accident Fund levy will be increased. This is welcomed and will support the economic recovery,” notes Kyle Mandy, partner at PwC.

PERSONAL INCOME TAX

The Minister of Finance announced in the Budget Review that there would be an inflation adjustment to the individual tax brackets and rebates.

The net result is that, with effect from 1 March 2023, the maximum rate of 45% applies to taxable income in excess of R1,731,600 (up from R1,656,600) while the lowest rate of 18% applies to taxable income up to R226,000 (up from R216,200) with similar adjustments to the brackets in between. There will also be an approximately 4,5% increase in the primary, secondary, and tertiary rebates. The tax-free threshold has now increased from R87,300 to R91,250 for taxpayers under 65 years of age.

“It was expected that the medical tax credit available to taxpayers, who are members of medical aid schemes, would be adjusted. They have been increased from R332 to R347 per month for each of the first two dependents and from R224 to R234 per month for every subsequent dependent,” says Barry Knoetze, associate director at PwC.

“In an attempt to assist in addressing youth unemployment, National Treasury has announced an increase in the maximum employment tax incentive from R1,000 to R1,500. This can be claimed by qualifying employees for the first 12-month period, while a maximum of R500 to R750 can be claimed for the second 12-month period. This takes effect from 1 March 2022,” he says.

Knoetze explains that National Treasury has confirmed that it will continue to look into changes to the taxing of retirement fund lump sums when a taxpayer ceases to be a tax resident: “However, this will require the re-negotiation of several double tax agreements, which they intend to commence within the coming year. National Treasury will also continue to look into instituting a two-pot system for the preservation of retirement benefits. It is disappointing to note that no mention was made about adjustments for expenses incurred by employees working from home.

“It was also announced that, with effect from 2023, provisional taxpayers with business interests who have personal assets in excess of R50 million will be required to make more detailed disclosure in their tax returns of certain of their personal assets and liabilities,” he continues. “These will need to be disclosed to SARS at market value rather than at cost.”

CORPORATE TAX (BUSINESS GENERAL)

As announced in the 2020 Budget Review, the government intends to restructure the corporate income tax system. According to Angus du Preez, partner at PwC, the headline tax rate for companies will be reduced to 27% in this regard, effective for tax years ending on or after 31 March 2023. The reduction in tax rate is aimed at making South Africa a more competitive investment destination to support economic growth.

“In order to ensure that the rate reduction does not reduce tax revenue, it will be accompanied by other tax base-broadening measures, which will also become effective from the same date. The base-broadening measures include limitations on the utilisation of assessed losses and interest expense deductions,” he explains. “More specifically, it is proposed that companies (excluding certain smaller companies) with assessed losses will only be entitled to set off a maximum of 80% of their assessed tax losses against their taxable income in a specific year.

“This proposal should not necessarily result in additional tax but would impact the timing of tax payments by companies with assessed losses,” Du Preez continues. “Additionally, the existing rules on the limitation of interest deductions are proposed to be broadened to be better aligned with the OECD/G20 recommendations on base erosion and profit shifting, in order to ensure tax revenue neutrality with the above restructure of the corporate income tax system.”

INTERNATIONAL TAX

Similar to the previous year, no major international tax reforms have been announced. The amendments seem to target the controlled foreign company (CFC) rules contained in section 9D. That’s according to Raagesh Singh, associate director, international tax services at PwC.

Some of the exclusions in section 9D refer to provisions of the Long-term Insurance Act. “In July 2018, the Insurance Act came into effect, replacing certain parts of the Long-term and Short-term Insurance Act. Some definitions referred to by section 9D are no longer contained in the new Insurance Act and amendments are proposed to fix this,” says Singh.

The CFC rules have now been extended to deem a CFC to be a resident for the purposes of section 10(1)(l). This closes a loophole that was used to prevent royalties from being imputed in terms of the so-called “diversionary rules”.

“Further amendments have been proposed to account for a situation where amounts from hybrid equity instruments are deemed to be income, and whether the inter-CFC exemption would still apply in such a situation. The key concern is to remove inequitable treatment for both the payor and payee, which does not give rise to the tax neutral treatment that the inter-CFC exemption was designed to achieve,” he advises.

Lastly, says Singh, there will be a widening of the exclusion from the foreign dividend definition for the redemption of a participatory interest in a foreign portfolio of collective investment scheme, to include the sale of a participatory interest in a foreign collective investment scheme’s portfolio.

BASE EROSION, PROFIT SHIFTING, AND DIGITAL SERVICES TAXATION

South Africa is a member of the Steering Group of the OECD/G20 Inclusive Framework, which is tasked with finding consensus-based solutions to tax challenges associated with digitalisation of the economy. In October 2021, the Inclusive Framework agreed on a two-pillar solution and, says Archi Ramana, PwC associate director, transfer pricing, will work on an implementation framework to take effect by 2023.

“Following developments worldwide and corresponding measures being taken by the Inclusive Framework countries, the budget announces legislative amendments to implement Pillar one and Pillar two rules in South Africa, once the framework has been finalised and translated into a local context,” she notes.

EXCHANGE CONTROL (CAPITAL FLOW MANAGEMENT FRAMEWORK)

The new capital flow management (CFM) system was introduced in the 2020 Budget Review, with the objective to allow all foreign-currency transactions, except for a specific risk-based list of capital flow measures. The Minister stated that this change will increase transparency, reduce burdensome and unnecessary administrative approvals, and promote certainty.

According to Michael Butler, International Tax Partner at PwC, there was slow progress on the development and implementation of the CFM system during 2020. In Budget 2021, it was confirmed that National Treasury and the Reserve Bank will continue to develop the legislative framework for the CFM system with the expectation that the system should be substantially completed during the year.

“During the course of 2021, we did not see much activity in this regard, but a number of proposals have now been announced for the year ahead in keeping with the gradual relaxation of exchange controls, which is proceeding further,” he comments.

These proposals include:

Individuals

• The export of dual-listed domestic securities to a recognised foreign share exchange is permitted, and limited to the exchange control allowance amounts.
• Resident individuals may receive and retain gifts from non-residents and may use their single discretionary allowance to participate in online foreign-exchange trading activities, but may not use credit or debit cards to do so.
• Residents may, in future, lend or dispose of authorised foreign assets held offshore to other South African residents, subject to local tax disclosure and compliance.
• South African residents may transfer, for foreign investment purposes, authorised capital of more than R10 million per year through offshore trusts, subject to the current tax application and reporting requirements.
• Authorised dealers may, on a once-off basis, remit abroad the remaining cash balances (of up to R100 000 in total) of people who have ceased to be residents for tax purposes, without reference to SARS.

Companies and Institutional investors

• After a lengthy process, it has been decided that all debt securities referencing foreign assets listed on a South African stock exchange remain classified as foreign.
• The offshore limit for all insurance, retirement, and savings funds is harmonised at 45%, inclusive of the 10% African allowance. The previous maximum limits were set at 30% or 40% for different investors.
• Institutional investors may open foreign-currency accounts with authorised dealers for funding and to accept foreign-currency deposits from disinvestment proceeds of foreign assets, pending the reinvestment of the funds offshore.
• The foreign direct investment limit for companies investing funds offshore will increase from R1 billion to R5 billion.
• Excess income or profits of offshore branches and offices of South African firms may be retained offshore, subject to annual reporting.
• Authorised dealers may process transfers from the parent company to the domestic treasury management companies up to a maximum of R5 billion per calendar year for listed entities (an increase from R3 billion), and up to R3 billion per calendar year for unlisted entities (an increase from R2 billion). Funds transferred under this dispensation may be used for new investments and expansions, as well as other transactions of a capital nature.

Finally, Butler notes that crypto-asset transactions will also be considered going forward.