2003 BUDGET PROPOSALS

Prepared by F Suleman & Assoc.
E-mail: fsuleman@ion.co.za

The following is a summary of the Minister of Finance’s budget proposals announced on 26 February 2003.

Highlights

Foreign exchange and tax amnesty on illegal overseas funds

• Retirement Fund Tax is reduced from 25 per cent to 18 per cent as from
• 1 March 2003
• The interest income exemption is raised to R10 000 for taxpayers under age 65 and to R15 000 for taxpayers aged 65 and over
• R13.3 Billion in tax cuts for individuals
• VAT, company tax rates, STC rate, CGT rates, donations tax and estate duty are unchanged
• No change to taxation of travel allowances

Foreign exchange and tax amnesty

Any individual (not company, trust or close corporation) can apply for amnesty unless that individual is aware of an enforcement investigation by the date of filing directed against their foreign activities in terms of the Exchange Control or Income Tax Act.

Individuals may file for exchange control and/or Income Tax amnesty relief and the following conditions will apply:

All applications for relief must be filed from 1 May 2003 until 31 October 2003.

• Individuals applying for Exchange Control amnesty relief must do so with an authorised dealer, and individuals filing for Income Tax amnesty must do so with SARS.
• The filing for Income Tax amnesty relief must be accompanied by an individual income tax return for the year of assessment ending on 28 February 2003 that fully discloses all foreign income.
• The filing for Exchange Control and/or Income Tax amnesty relief by an individual must contain proper disclosure (such as a complete statement of offshore assets and liabilities).

Individuals filing for Exchange Control amnesty relief are subject to:

• A one-time 5 per cent Exchange Control levy to the extent any foreign assets are repatriated back to South Africa; or
• A one-time 10 per cent Exchange Control levy to the extent any foreign assets remain offshore.
• In both cases a zero per cent levy will apply for all assets that can be held legally offshore under the normal Exchange Control limits (currently R750 000).
• Individuals filing for Income Tax amnesty relief must pay all taxes due on foreign income earned during the year of assessment ending on 28 February 2003.

Individuals filing for Exchange Control amnesty relief are released from all civil penalties and criminal liabilities stemming from the illegal shift of funds offshore in contravention of Exchange Controls on or before 28 February 2002. Individuals filing for Income Tax amnesty relief are released from all income taxes, interest, civil penalty, and criminal penalties stemming from the failure to disclose gross income or capital gain from foreign sources if that income or capital gain arose on or before 28 February 2002.

Increase in interest income exemptions

The domestic interest income exemption is currently R6 000 for taxpayers under 65 years of age and R10 000 for taxpayers age 65 and over. It is recommended that the exemption be raised to R10 000 and R15 000 respectively as from 1 March 2003.

Tax cuts for individuals

Tax cuts have been introduced across all levels of income. The revised tax scales mean:

• The income tax threshold for persons under the age of 65 is raised from R27 000 to R30 000 – that is, people earning less than R30 000 a year will pay no income tax.
• The tax threshold for taxpayers aged 65 and over increases to R47 222.

• The minimum tax rate of 18% now applies to taxable income of up to R70 000 (previously R40 000).

• Someone earning R100 000 a year will pay R3 640 less tax and those earning
• R500 000 will pay R6 240 less tax.

• Rates and brackets are to be adjusted to provide relief for fiscal drag, with the maximum rate remaining at 40%.  The maximum rate applies from R255 000 upwards.

The primary rebate is increased to R5 400 a year for all taxpayers. The secondary rebate is increased to R3 100 a year for individuals aged 65 years or older.

Foreign dividends

The current system of taxing foreign dividends has the unintended effect of discouraging dividend inflows. In order to eliminate this disincentive, the tax on foreign dividends will be removed where a South African taxpayer has a meaningful interest in the foreign subsidiary paying the dividend. It is unclear whether this provision will apply only to corporates or also to individuals. What would qualify as “meaningful interest” is also unclear.

There is no change to the current exemption on foreign interest and dividends of R1 000 out of the total exemption.

Foreign exchange

The following new dispensation will apply with immediate effect:

The distinction between the settling-in allowance for emigrants and the private individual foreign investment allowance for residents is to fall away and there will now be a common foreign allowance for both residents and emigrants of R750 000 per individual (or R1,5 million in respect of family units).

• Amounts up to R750 000 (inclusive of amounts already exited) will be eligible for exiting without charge.   Holders of blocked assets wishing to exit more  than  R750 000 (inclusive of amounts already exited) must apply to the Exchange Control Department of the South African Reserve Bank to do so. Approval will be subject to an exiting schedule and an exit charge of 10 per cent of the amount. The same dispensation will apply for new emigrants.

• Accelerated depreciation for urban development zones
• It is proposed that taxpayers investing in under-utilised designated urban areas receive special depreciation allowances for investment undertaken for construction or refurbishment of buildings. Taxpayers refurbishing a building within a zone will receive a 20 per cent straight-line depreciation allowance over a 5-year period. If taxpayers construct a new commercial or residential building within such a zone, they will receive a 17-year write-off period with a 20 per cent write-off in the first year and 5 per cent write-off thereafter. This benefit will be available to owners as users of the building or as lessors/financiers of these investments, and will only be available for four years.  The effective date of the qualifying expenditure has not been advised.
• Extension of accelerated depreciation window period for manufacturers
• The current 4-year write-off regime is limited to investments occurring on or before 28 February 2005.  It is proposed that the 28 February 2005 sunset limitation be removed.
• Business asset reinvestment relief
• Comprehensive tax relief will be provided for ordinary income tax and capital gains tax when the sale proceeds of movable depreciable business assets are reinvested in other movable assets within an 18-month period.

• Claiming losses on sale of depreciable business assets
• It is proposed that the scrapping regime be eliminated in favour of a regime in which taxpayers can deduct losses from ordinary revenue on the sale of devalued depreciable business assets with short useful lives.
• Research and development costs
• Among other changes, a 40, 20, 20, 20 per cent four-year write-off period for capital expenditure is proposed, consistent with manufacturing sector provisions. The requirement for the research and development to be approved by the CSIR is to be removed.
• Small businesses: enhanced start up expenses
• In order to stimulate small businesses, it is proposed that taxpayers receive a double deduction for expenses initially incurred with respect to a new business, capped at the first R20 000 of available deductions.
• Small businesses: extending scope of relief
• The existing threshold of the first R150 000 of taxable income, which attracts the 15 per cent graduated company tax rate remains unchanged.

• The small business benefits are currently limited to companies with an annual turnover of less than R3 million. It is proposed to raise this threshold to R5 million.
• Companies will not be prevented from receiving small business tax relief merely because those companies have shareholders with de minimus levels of ownership in another company.

Value Added Tax (VAT)

The VAT rate remains unchanged at 14%.

The monetary threshold for the total expected annual receipts in respect of the letting of commercial accommodation is to be increased from R48 000 to R60 000 per annum.

It is proposed to also make it compulsory for registered VAT vendors to provide their VAT registration number for inclusion on an invoice when making a purchase above R1 000.

Taxation of Trusts

Trusts, other than the following, are taxed at a flat rate of 40 per cent. Special trusts and testamentary trusts established for the benefit of minor children are taxed at the individual tax rates.   No changes are proposed.

Transfer duty

It is proposed to reduce the transfer duty rates for property acquired on or after 1 March 2003 as set out below.

• Property value and rates of tax:
• R0 - R140 000  - 0%
• R140 001 – R320 000  - 5% on the value above R140 000
• R320 001 and above   - R9 000 plus 8% on the value above R320 000

Provisional tax threshold

Individuals below the age of 65 who earn taxable non-employment income of more than R10 000 a year must register as provisional taxpayers.   This level remains unchanged.

Duties on beverages and tobacco products

Duties on beer (excluding sorghum beer), cider, wines, spirits and tobacco are increased.

Fuel levy

The General Fuel Levy is increased from 98 cents to 101 cents per litre on 93-octane petrol and from 81 cents to 85 cents per litre for diesel.

Road Accident Fund levy increase

The Road Accident Fund levy is increased by 3 cents a litre to 21,5 cents a litre as from 2 April 2003.

Ad Valorem Duties

There will be lower excise duty on lower priced cars.  Ad Valorem excise duty on computer equipment is to be abolished as from 1 April 2003.

Removal of stamp duties on insurance and fixed deposits

It is proposed that, with effect from 1 April 2003, Stamp Duty on insurance policies and fixed deposit receipts will be eliminated.

Directors salaries and PAYE

It is proposed that rules regarding PAYE be amended to address certain inequities without placing directors of private companies in a better position than salaried employees.

Advance rulings

SARS is actively reviewing the possibility of introducing a formal advance rulings process. A discussion document will be released in this regard.

Proposed measures to enhance tax collections

PAYE, VAT and UIF funds

• It is proposed that disbursing agents and other responsible persons become directly liable if they have direct or indirect authority over the above funds.
• Tax exemption for gold share companies to be removed
• Domestic holding companies of gold mining shares are currently exempt from certain taxes. It is proposed that this exemption be removed as from 1 January 2004.

• Limiting losses from secondary trades
• It is proposed that losses from secondary trades such as farming, letting of holiday accommodations, as well as from hobby-like activities such as yachting and car collecting, be ring-fenced.
• Outsourcing of debt collection
• It is proposed that the rules involving the secrecy waiver be clarified to cater for outsourcing the collection of undisputed taxes to private collection agencies.
• Extension of appointment of collection agents’ powers
• It is proposed that this effective tool be extended to tax acts, such as the Customs and Excise Act as well as the Transfer Duty Act.

• Liquidations to avoid taxes
• It is proposed that the shareholders of a liquidated company and other relevant parties become liable for the taxes of the failed company to the extent those parties receive liquidated assets during or shortly before liquidation.
• Penalties in respect of PAYE and transfer duty
• It is proposed that penalties up to 200% be imposed for violating the above taxes.

INDIVIDUAL TAX SAVINGS

Income tax payable in 2003/2004 – taxpayers younger than 65.

Taxable income	2002/2003 tax	2003/2004 tax	Tax reduction
R	R	R	R
30 000	540	0	540
50 000	4 840	3 600	1 240
70 000	9 840	7 200	2 640
100 000	18 340	14 700	3 640
150 000	35 340	29 700	5 640
200 000	53 740	47 800	5 940
500 000	172 940	166 700	6 240
800 000	292 940	286 700	6 240
1 000 000	372 940	366 700	6 240

Income tax payable in 2003/2004 – taxpayers 65 and older.

Taxable income	2002/2003 tax	2003/2004 tax	Tax reduction
R	R	R	R
47 000	1 090	0	1 090
60 000	4 340	2 300	2 040
80 000	9 340	6 600	2 740
120 000	21 840	17 100	4 740
150 000	32 340	26 600	5 740
200 000	50 740	44 700	6 040
500 000	169 940	163 600	6 340

INCOME TAX RATES : YEAR OF ASSESSMENT ENDING 29 FEBRUARY 2004

PERSONS OTHER THAN COMPANIES

NATURAL PERSONS

 Taxable income   Tax rates

  R

 0 -           70 000   18% of each R1

   70 001 -         110 000          R12 600 + 25% of the excess over         R70 000

  110 001 -          140 000         R22 600 + 30% of the excess over       R110 000

  140 001 -          180 000         R31 600 + 35% of the excess over       R140 000

  180 001 -          255 000         R45 600 + 38% of the excess over       R180 000

  255 001 +          R74 100 + 40% of the excess over       R255 000

• 2004
•   R       R

   Aged 65 and over                                  42 640       47 222

REBATES FROM TAXES		2003	2004
Primary                             -   All natural persons		R     4 860	R    5 400
In addition to the above    -   Persons 65 and over		3 000	3 100

CORPORATE TAX RATES

NORMAL TAX
Non-mining companies	Basic rate		30%	30%
Close Corporations	Basic rate		30%	30%

Tax rates for qualifying small business corporations in 2003:

• 15 per cent on the first R150 000 of taxable income.
• 30 per cent on taxable income in excess of R150 000
• The annual turnover limit to qualify has been increased from R3m to R5m

SECONDARY TAX ON COMPANIES (STC)

Rate of STC on dividend declarations:

 17 March 1993 to 21 June 1994     15%

 22 June 1994 to 13 March 1996     25%

 On or after 14 March 1996     12,5%

OTHER TAXES

ESTATE DUTY

Rate of estate duty on dutiable value of the estate:

 Death prior to 14 March 1996    15%

 Death on or after 14 March 1996 but before 1 October 2001 25%

 Death on or after 1 October 2001    20%

 Primary abatement – unchanged     R1 500 000

DONATIONS TAX

Payable at a flat rate on taxable value of all property donated in excess of R30 000

(2003: R30 000):

 Prior to 14 March 1996      15%

 From 14 March 1996 to 30 September 2001   25%

 From 1 October 2001     20%

CAPITAL GAINS TAX

Effective capital gains tax rates remain unchanged as follows:

Taxpayer	Inclusion Rate (%)	Statutory Rate (%)	Effective Rate (%)
Individuals	25	0 – 40	0 – 10
Trusts
Unit	-	30	-
Special	25	18 – 40	4,5 – 10
Other	50	40	20
Companies
Ordinary	50	30	15
Small business corporation	50	15 – 30	7,5 – 15
Permanent establishment	50	35	17,5
Employment company	50	35	17,5
Life assurers
Individual policyholder fund	25	30	7,5
Company policyholder fund	50	30	15
Untaxed policyholder fund	-	-	-
Corporate fund	50	30	15