BUDGET & TAX UPDATE Presented by DIETER SCHULZE

1. BUDGET & TAX UPDATEPresented byDIETER SCHULZE

2. The morning ahead • 2005 Budget • 2004 Tax update • The Taxation Laws Amendment Act 16 of 2004 • The Revenue Laws Amendments Act 32 of 2004 • The Second Revenue Laws Amendment Act 34 of 2004 • Share incentive schemes • Assets acquired or disposed of for contingent or unquantified amounts • Assets acquired in exchange for shares issued • Deferral mechanism for disposal or acquisition of equity share • Withholding tax on sale of immovable property by non-residents • Registration of tax practitioners • Advanced tax rulings • VAT

3. 2005 BUDGET • Company tax rate reduced to 29% • Tax and compliance concessions for small business • No change to VAT, STC, CGT, Donations tax or Estate Duty rates • Significant increase in tax threshold those aged 65 and over • Changes to travel allowance and company cars

4. Personal income tax • Reduction in personal tax • Tax thresholds • Rebates • Interest exemption • Pensioners

5. Medical scheme membership • Current 2/3 tax free, para 12A of 7th schedule • Encourage broader medical scheme coverage • Extend benefits to self employed • Effective 1 March 2006 • 2/3 to be replaced with a monthly monetary cap that will take into account number of dependants

6. Motor vehicle allowances • System of deemed business/pvt mileage • Abuse by high income earners • Encourages purchase of higher value vehicles • Unfairly influences household travel choices

7. Motor vehicle allowances – Cont. • Deemed cost & mileage method to be changed from 1/3/2005 • Fixed cost element • Residual value of 30% after 5 years • Value capped at R360,000 • Deemed private km’s • 14,000 up to 16,000 – 2006 y.o.a • 16,000 up to 18,000 – 2007 y.o.a

8. Motor vehicle allowances – Cont. • If using actual costs • Finance charges or lease payments limited to value of R360,000 • W&T limited to value of R360,000 and determined over a period of 7 years from date of original purchase • Company car taxable value • 1,8% up to 2,5% - 2007 y.o.a • 4% Second company car remains

9. Subsistence allowance • Tax free per diem allowance - no need to keep slips • Local R60 or R196 • Foreign US$190 • Concerns of abuse • In future allowance must be closely linked to travel • Foreign per diem limits to be revised

10. Withholding tax on visiting entertainers and sportspeople • Taxed in SA on SA source income • Tax compliance has been poor • Final withholding tax to be introduced • On gross payments to entertainer or sportsperson • 5% for residents of African countries • 15% for residents of other countries

11. TRANSFER DUTY • Individuals only • Threshold for transfer duty increased from R150k to R190k • Max rate of 8% for values over R330k • Rate remains 10% for corporate taxpayers

12. Corporate initiatives • Reduction in corporate tax rate • From 30% down to 29% • Immediate 1% neither here nor there • Sign of things to come

13. Corporate initiatives – Cont. • Reduction in other rates linked to the corporate tax rate • SA branches from 35% down to 34% • Employment companies from 35% down to 34% • Personal service company • Labour broker • Long-term insurer policyholder funds and corporate funds from 30% down to 29% • Gold mining companies formula changed

14. Corporate initiatives – Cont. • Tonnage tax regime for shipping industry • Facilitating company restructuring • Refining film incentives • Government grants • Stamp duty on new issue of shares • Duty on debit entries on bank accounts • Business activities of PBO’s

15. TAX STIMULUS IN SUPPORT OF SMALL BUSINESS

16. Small business corporation • Definition (sec 12E) • excludes personal services, to be expanded • Include personal services • Provided employees • 4 or more full time, excl member or s/holder or connected • involved in core operations • Turnover limit up from R5mill to R6mill

17. Small business corporation – Cont. • Old tax rate • R0 - R150,000 15% • R150,001 and above 30% • New tax rates • R0 - R35,000 0% • R35,001 - R250,000 10% • R250,000 and above 29% • Accelerated depn allowance 50:30:20 on non-manufacturing assets purchased after 1 April 2005 • Manufacturing assets 100% write off • Removed R20,000 double deduction at start-up

18. Small business • Small retailers VAT package • Simplified method of accounting for Std and Zero rated supplies • Ready for implementation 1 April 2005 • Applies to vendors with turnover of <R1mill • VAT return filing every 4 months from 1 Aug 2005 • Ease VAT compliance • Assist with cash flow • Repeat offenders can be put back to 2 months

19. Small business • Skills development levy • Obligation on every employer in SA who • is registered with SARS as employer, or • annual payroll > R250,000 • 1% based on remuneration as defined • R250,000 threshold to increase to R500,000 • Drop the obligation, …..is registered with SARS as employer

20. Small business • Small PBO’s • Comprehensive application form and supporting documentation. Process of registration will be simplified. • Detailed annual tax returns to be simplified

21. Anti-avoidance measures • Section 103 • Past it’s sell-by date • Ineffective • Sec 103 to be overhauled • Discussion paper to be circulated in 2005 • Provisions dealing with bribes, penalties and other illegal activities to be introduced • Clarify inclusion in income and deductibility

22. INDIRECT TAXES • Duties on tobacco products • Duties on alcoholic beverages • Duties on sun cream and digital cameras • General fuel levy and Road accident fund levy

23. RSC levies • RSC levies discontinued 30 June 2006 • Replaced with alternative tax instruments or funding arrangements • Alternatives to be agreed by Sept 2005 • Supreme Court - Dividends received by certain holding companies subject RSC • Act to be amended to make clear • To show they are all heart, no retroactive application

24. COMPLIANCE MEASURES • Single registration for all tax products per taxpayer • E-Filing to be extended • E-stamping from 1 April 2005, transfer duty, tax on retirement funds, STC, air passanger tax • Submission of IT12S • Application for tax clearance certificates for tenders • Government procurement officers to get access to tax status of applicants • Full view of account for taxpayers and tax practitioners

25. COMPLIANCE MEASURES – Cont. • Identifying undisclosed income • Property transactions • High net worth individuals department at SARS • Voluntary disclosure dispensation • Incentive to come clean before SARS gets to you • Waiver of penalties or additional tax

26. MISCELLANEOUS Forthcoming attractions 2005 • Individual home office expenses • Certainty for deductible donations • Whole year learnership allowances for part-year learnerships • Foreign tax credits and provisional tax payments

27. PROGRESS ON IMPLEMENTATION OF TAX REFORM INITIATIVES • Exchange control amnesty • 43,000 applications • 30,000 processed by mid Feb 2005 • Total assets disclosed R65 billion • Levies expected R2,4 billion • To be used for social and residential infrastructure

28. PROGRESS ON IMPLEMENTATION OF TAX REFORM INITIATIVES • Accelerated tax depn urban development zones • Section 13quat allowances • 9 municipalities approved so far • 7 in 2005 • Balance in 2006? • FIFA World Cup 2010 • Tax exemptions required by FIFA • Amendment in pipeline to accommodate

29. 2004 TAX UPDATE

30. DEVELOPMENTS IN 2004 • Taxation Laws Amendment Act 16 of 2004 • 27 July 2004 • Revenue Laws Amendment Act 32 of 2004 • 24 January 2005 • Second Revenue Laws Amendment Act 34 of 2004 • 24 January 2005 • Interpretation notes 20 to 26

31. Taxation Laws Amendment Act 16 of 2004

32. Prescribed interest rate • Linked to the PFMA rate 1 April 2003 • To allow time for SARS to adjust system • Change takes effect from 1st day of 2nd month following date on which PFMA rate changed • Section 1 “prescribed rate” • On refunds at 4% below PFMA rate • On tax owing at PFMA rate

33. Scrapping allowance • Section 11(o), “plant” omitted in error has now been added

34. Entertainment allowance • Section 11(u) • Limited to R2,500 or R300 + 5% of taxable income • Now removed

35. Farming equipment • Section 12B(2), 50:30:20 on cost • Only applies to farmers • Bio fuel producers • The whole production chain will now qualify for the allowance • Machinery, plant, implement, utensil or article • Brought into use for first time

36. Urban development zones • Section 13quat introduced 2003 • Demarcation of municipal areas by 30 June 2004 • Too ambitious • Now open ended

37. UIF interest and penalties • Section 23(d) • Penalties and interest from non-compliance • UIF now added

38. Labour brokers • Para 1 of 4th schedule, defines • Para 2(5)(a) deals with exemption certs • 80% gross inc from 1 client • Provides services of any other labour broker • Provides specified employees • 80% is ignored if 3 full-time, unconnected employees involved in supply of core services

39. PAYE relief on income protection policies • Para 2(4) of 4th schedule • Pension • RAF • Medical aid contributions, 65 or older • Extended to include • Premiums on income protection insurance policies

40. CAPITAL GAINS TAX • Valuation date of person that becomes taxable • Para 1 “valuation date” • Previously applied only to sec 10(1)(cA) • Now extended to all exempt persons who at any time become taxable

41. CAPITAL GAINS TAX – Cont. • Capitalisation shares • Para 78 now clarifies rules • Cap shares acquired on date of distribution • Nil base cost • Except to extend treated as dividend • If dividend then base cost = dividend

42. Revenue Laws Amendment Act 32 of 2004Second Revenue Laws Amendment Act 34 of 2004

43. DONATIONS TO OFFSHORE TRUST • Section 7(8) deemed accrual • Technical deficiency • Excluded non SA sourced income of offshore trust • Amended to ensure that all income of a non- resident trust can be deemed back to the SA donor if applicable

44. SHARE INCENTIVE SCHEMES

45. Gains made by directors or employee • Section 8A • Remains but only applies to • Marketable securities exercised, ceded or released • in whole or in part • if the right was obtained by the director or employee • before 26 Oct 2004

46. Broad-based employee share plan • Section 8B introduced • Incentive to offer shares to all employees • Targets lower income employees • Encourage long-term participation

47. Broad-based employee share plan- Cont. • GeneraI terms for tax free treatment • Tax-free treatment of “qualifying shares” • Even if acquired at no cost or at discount • Qualifying share • Must be in terms of broad-based employee share plan • Total shares received under the plan by employee may not exceed R9,000 in value over 3 years

48. Broad-based employee share plan- Cont. • What is a broad-based employee share plan? • Equity shares for minimum consideration • Within requirements of Companies Act • Company can offer low interest loan • Widespread participation • 90% of permanent, full-time employees with 1 years service • Can ignore temps, part-time staff • Employee may not participate in another share plan • No dividend or voting restrictions • Limitation on sale restrictions, other than • Legislated, buy-out clause, 5 year max restriction

49. Broad-based employee share plan- Cont. • Subsequent sales - Employee • If within 5yrs full proceeds included in income • If after 5yrs gain should be capital • Subsequent sales – Employees’ tax • Employer responsible for withholding any income tax that becomes due

50. Broad-based employee share plan- Cont. • Fringe benefit position • Para (a) of 7th schedule deems a taxable benefit to arise on issue of shares to employee at discount to market value • Specific exclusion added where shares acquired in terms of 8B • Employers position • Section 11(lA) introduced to allow a deduction to employer = market value on date of grant • Limited to R3,000 per employee per y.o.a • If excess can be c/fwd to succeeding y.o.a