Budget 2007 Tax proposals National Treasury and SARS 28 February 2007

1. Budget 2007Tax proposalsNational Treasury and SARS 28 February 2007

2. The broad underpinnings of the 2007 tax proposals are: • Supporting economic growth, investment, job creation, business development and confidence • Promoting financial security of households and reducing their vulnerability through retirement reforms that encourage savings • Supporting macroeconomic policy, including monetary policy, objectives.

3. Tax Revenue

4. Revised tax revenue estimates for 2006/07 • PIT is expected to reach R139 billion, which is R6,5 billion above the original estimate, mainly as a result of rising employment and real salary increases. • In the first four months of 2006/07, the number of registered individual taxpayers increased by 176 000, taking the total number to 4,9 million. • The revised estimate for CIT is R114,8 billion, which is R19,6 billion or 20,6 per cent higher than originally budgeted due to higher-than-expected company profits and improved compliance. • VAT receipts are expected to total R134,6 billion, about R3,3 billion above the 2006 Budget estimate.

5. Composition of budget revenue

6. PIT, VAT and CIT as a % of total budget revenue

7. STC and RFT as a % of total budget revenue

8. Tax revenues as a % of GDP

9. Forecasting tax revenue

10. Tax revenue buoyancy / estimation • The graph above shows the “average” responsiveness of gross tax revenue to changes in nominal GDP • It averages 1.06. Meaning that on “average” a 10% increase in nominal GDP results in slightly more than a 10% increase in nominal tax revenues. • Higher commodity prices, higher levels of employment and robust consumption expenditure has resulted in above average growth in tax revenues in recent years • Tax policy reforms, improvements in tax administration and tax compliance also impact on tax revenue collections • There are indications that the relatively high tax revenue buoyancy of the last three years might be slowing down

11. Summary of main tax proposals (1) The 2007 Budget will provide net tax relief of R12,4 billion. The tax proposals include: • 2007 - reduce the STC rate from 12,5 per cent to 10,0 per cent and broadening the base. 2008 - replace the secondary tax on companies with a dividend tax • Abolishing the retirement fund tax • Streamlining tax and regulatory aspects of retirement funds • Increasing the tax-free interest and dividend income monetary thresholds • Treating the sale of shares (equities) held for more than three years as capital gains • Personal income tax relief for individuals amounting to R8,4 billion • Increasing various monetary thresholds: • Estate duty, CGT on death & donations tax.

12. Summary of main tax proposals (2) • Further relief for Public Benefits Organisations • Stamp duties on short term leases abolished • Improved depreciation allowances for rail transport, introduce depreciation allowances for new commercial buildings and certain environmental capital expenses • Protecting South Africa’s intellectual property rights tax base • Increasing excise duties on tobacco products and alcoholic beverages • Increasing the general fuel levy and the Road Accident Fund (RAF) levy. • Consider introduction of a tax on the windfall gains of synthetic fuel producers and a progressive incentive mechanism for new investments in synthetic and biofuel plants

13. Tax Proposals 2007/08

14. Retirement reform and social security

15. Retirement reform and social security (1) • The proposed reforms to retirement saving is part of the broader social security reforms, are aimed at providing an efficient and equitable framework for individuals to provide for their retirement. • The tax treatment of retirement savings to complement regulatory and institutional reforms. • Reforms to the tax system seek to maintain sufficient incentive to provide adequately for retirement, while addressing inequities and complexity in the current system. • A uniform and more equitable tax treatment of contributions to pension, provident and retirement annuity funds to be phased in over time. Favourable tax treatment of a basic savings element, some tax encouragement of a supplementary component, and no special tax treatment above a specified ceiling.

16. Retirement reform and social security (2) • Retirement Fund Tax (RFT) will be abolished with effect from 1 March 2007. The RFT rate was reduced form 18% to 9% last year. Consistent with the shift to an EET model for taxation of retirement savings. Will result in improved returns for retirement fund members and should be seen as a part of the reforms proposed to limit the tax deductibility of retirement fund contributions by high income individuals. • Introduction of a wage subsidy by 2010. The objectives of such a subsidy are: • (i) to reduce the direct costs of employment to help alleviate the high rate of joblessness; and • (ii) to facilitate the proposed social security reform process.

17. RFT Rate and % share of budget revenue

18. Savings & Retirement reform • Retirement thresholds • The amount that may be withdrawn in to form of a lump sum is limited to 1/3 of the fund value or the full amount if it will not produce a cost effective annuity • This cost effective annuity is currently set at R1 800 per annum but research have shown that this amount should be higher. The revised amount will be proposed later this year. • Tax free portion of the 1/3 lump sum on retirement to be increased and the formulas to calculate this amount will be simplified • Streamlining retirement fund regulation • This Income Tax Act and SARS interpretation notes contain a number of regulatory requirements applicable to retirement funds • These regulatory requirements will be streamlined and effectively moved to the Pension Funds Act

19. Long-term insurers and foreign collective investment schemes • Long-term insurers make investments on behalf of policy holders • In many cases the policy holders choose where these funds should be invested and these selections determine the percentage “shareholding” in foreign companies • Because the long-term insurer does not have full control over decisions of where funds should be invested, policy holders may move the foreign company into and out of the CFC regime • This creates a huge administrative burden for domestic insurers • It is proposed that this administrative and tax burden be alleviated by disregarding investment choices of policy holders from being deemed to be shareholding by the long-term insurer

20. Investment, economic growth, job creation, business development and business confidence

21. Headline CIT rate vs. Effective Corporate tax rate

23. STC reform and dividend tax at shareholder level (1) • Government proposes to phase out the secondary tax on companies and replace it with a dividend tax. • Phase one: reduce the rate and broaden the base. The dividend tax will apply at a rate of 10 per cent, down from the current 12,5 per cent rate on the secondary tax on companies. The base of taxable dividends  will broaden beyond the current narrow interpretation of profits. • Phase one will become effective from 1 October 2007, except for certain immediate anti-avoidance measures taking effect as of 21 February 2007. • Phase two, commencing in 2008, will entail conversion to a dividend tax on shareholders, with administrative enforcement through a withholding tax at company level. The implementation of this phase will depend on the renegotiation of several international tax treaties.

24. STC reform and dividend tax at shareholder level (2) • Anti avoidance measure: The STC exemption amalgamation transaction contained in section 44(9) of the Income Tax Act, 1962, is withdrawn. This exemption has resulted in a permanent loss of STC revenues, rather than a deferral, which is the intent of the amalgamation provisions. A more targeted exemption for amalgamation transactions will be considered. • Broadened tax base: To cover all distributions by companies and not just those from profits, since the determination of what constitutes profits available for distribution can be a complex and uncertain area of law. • It is envisaged that the withholding tax will be a final withholding tax and that companies paying dividends will have to determine whether a reduced withholding tax rate applies as a result of the application of a double tax treaty.

25. STC Rate and % share of budget revenue

26. Depreciation: Commercial buildings • Purpose: Reduce the cost of doing business • Rates and conditions: • 5% (20 years) for commercial and retail buildings • 5% (20 years) for improvements, renewals and upgrades • Depreciation only applies to new and unused buildings • No depreciation for property dealers on their trading stock

27. Depreciation - rail & ports • Purpose: • support initiatives to upgrade rail transport infrastructure • alleviate the transportation congestion and bottlenecks at our ports • Depreciation rates: • 20% (5 years) for rail rolling stock (locomotives and wagons) • 5% (20 years) for port infrastructure

28. Depreciation: Environmental expenses • Currently, capital expenditures incurred by businesses to meet environmental obligations do not qualify for tax depreciation allowances • These environmental related expenses include dams, septic tank installations, etc. to treat and contain waste • In the interest of consistency and to encourage prudent environmental practices environmental capital expenditures will henceforth qualify for tax depreciation allowances • We are in the process of acquiring information as to what these capital assets are in order to determine the appropriate tax depreciation rates

29. Tax treatment of gains on sale of shares • Gains (profits) on sale shares are either taxed as capital gains or ordinary income • The test is a subjective one and is dependent on the intent of the buyer. This results in uncertainty for the taxpayer and SARS • It is proposed that capital gains tax applies to the sale of shares held for longer than 3 years (10% and 14.5%) • The facts and circumstances test will still apply to shares held for less than 3years • Anti-avoidance measure – does not apply where taxpayers move newly acquired assets into a company held for three years (e.g. shelf company)

30. Individuals and unincorporated businesses

31. PIT rates and thresholds

32. Personal income tax relief • Total PIT relief for individuals total R8.4 billion. Relatively moderate in comparison to last year. Take account of fiscal drag and tax base broadening • Primary and secondary rebates increased to R7 740 and R4 680 respectively • All income tax brackets increased • Income tax threshold increased from : • R40 000 to R43 000 for persons less than 65 years; and • R65 000 to R69 000 for persons 65 years and older • Monetary caps for tax free medical aid contributions increased from R500 to R530 for each of the first two beneficiaries and from R300 to R320 for each additional beneficiary

33. Monetary thresholds • Tax free interest income • younger than 65 years from R16 000 to R18 000 • aged 65 years and above from R24 500 to R26 000 • CGT • annual exclusion from R12 500 to R15 000 • CGT– threshold below which no CGT is paid on death • from R60 000 to R120 000 • Estate duty, exempt threshold • from R2.5 million to R3.5 million • Donation tax – threshold below which not donation tax is paid • from R50 000 to R100 000 per annum • Tax-free lump sum for employment related deaths • Certain payments to employees as a result of death whilst on duty are exempt from tax but other similar payments are taxable • It is proposed that payments of less than R300 000 paid as a direct result of death of an employee whilst on duty be exempt from tax

34. Stamp duty - leases • Stamp duties on short-term lease (for a period of less than five years) to be abolished • Long-term leases: where the total aggregate of the lease period exceeds five years remain subject to stamp duties • The cap on the stamp duty payable on long-term leases is aligned to the maximum rate of duty payable in terms of the Transfer Duty Act, i.e. is 8% of the value of the lease • The proposed amendments will apply to leases or agreement of leases executed as from 1 March 2007

35. Stamp duties and UST imposed on shares • Stamp duties on unlisted shares and UST on listed shares to be merged into one Act • All secondary trade in shares (listed and otherwise) will be subject to a single securities tax • The general objective is to, over time, eliminate the Stamp Duty Act and also to eliminate any distinctions between the nature of security taxes on listed and unlisted shares • Exemptions that currently exist will be simplified

36. Corporate reorganisations and BEE transactions (1) • Corporate reorganisations and BEE transactions and funding arrangements sometimes trigger unintended taxes (CGT and STC) Problem areas: • Broad-based share incentive schemes In 2004, government introduced a tax incentive to facilitate broad-based share employee ownership. As a result, employees can now receive up to R9 000 worth of shares tax-free over a three year period (with companies eligible for up to R3 000 of deductions per annum). This incentive was partly driven by the need to have more broad-based schemes that would include rank-and-file employees. Unfortunately, usage of the incentive appears to be minimal. This incentive will accordingly be reviewed for possible change.

37. Corporate reorganisations and BEE transactions (2) • Anti-avoidance financial instrument company provisions Anti-avoidance rules were designed to ensure that company restructuring were limited to active companies. However, calculations are often excessively burdensome. It is proposed that the financial instrument rules be deleted or be mitigated in favor of a simpler anti-avoidance mechanism. • Intra-group transfers The company restructuring rules allow for the tax-free rollover of assets within a single group of companies as if the group were a single entity. However, this rollover treatment comes at the price of the de-grouping charge. It is proposed that the de-grouping charge apply only if the group break-up occurs within six years after the intra-group asset transfer (in line with the system in the United Kingdom).

38. Corporate reorganisations and BEE transactions (3) • Share buy-backs of listed shares In these structures, the operating company issues ordinary shares to the BEE entity. In return, the BEE entity issues preference shares (which operate as a quasi-loan) to the operating company. If the ordinary shares reach a predetermined value, the BEE entity sells a portion of the ordinary shares for cash and redeems the BEE preference shares. Rules are required to ensure that the ultimate dual dispositions do not give rise to unwarranted gain while simultaneously ensuring that the proposed structure does not trigger artificial losses. • Connected person sales of depreciable property In situations where BEE partners obtain ownership levels nearing 50 per cent the transfer of depreciable assets to the BEE entity often becomes subject to certain anti-avoidance rules that prevent the BEE entity from depreciating newly obtained assets at currently existing market values. While the general need for these avoidance rules is accepted, it is proposed that these anti-avoidance rules accommodate situations where avoidance is unlikely to be the driver.

39. Public benefit activities

40. PBOs: Tax free trading income threshold and tax deductible donations • Trading income generated by PBOs which does not exceed 5 per cent of their total income or R50 000, whichever is the greater, is not subject to income tax • It is proposed to increase the R50 000 threshold to R100 000, however, the 5% rule will remain • Both individuals and companies may deduct, for income tax purposes, up to 5 per cent of their taxable income of donations made to selected public benefit activities (18(A)) • To further encourage charitable contributions, it is proposed that the threshold for tax deductible donations be increased to 10 per cent for both individuals and companies

41. Amateur and professional sports - national sporting bodies • Amateur sporting activities are classified as public benefits activities and are exempt from income tax whilst professional sporting activities are not • Some national sporting organisation that are responsible for both amateur and professional sporting codes did split the legal entities and administration of amateur sports from professional sporting activities in order to enjoy the tax free status for amateur sports • However, the splitting of amateur and professional sporting activities into separate legal entities created more problems • It is now proposed that sporting bodies may elect to retain both amateur and professional sports within he same legal entity. Such an entity will be subject to income tax. However, qualifying expenses incurred with income generated by professional sports to develop amateur sporting activities will be tax deductible

42. Indirect taxes

43. Fuel Taxes • Both the general fuel levy and the Road Accident Fund (RAF) levy will increase by 5 c/l respectively from 4 April 2007 (total increase of 10 cents per litre) • In additional to raising revenue the general fuel levy also seeks to internalise negative externalities associated with fuel use • Raising the relative price of liquid fuels encourages more efficient fuel use and suppresses demand for transport fuels • This indirectly reduces air pollution externalities and generates environmental benefits • Increases in the RAF levy aims to: • address the existing backlog in claims payments; and • facilitate improvements in the claims handling capacity of the RAF

44. Biofuels • Cabinet has endorsed the Draft Biofuels Industrial Strategy to be finalised by May 2007 in consultation with relevant stakeholders • This includes discussion with Treasury on matters including the: • appropriateness of the current biodiesel fuel tax concession; and • possible extension of the concession to bioethanol • The National Treasury will review and consider an appropriate tax regime for all biofuels during 2007

45. Windfall gains by the synthetic liquid fuel producers • Task Team submitted a final report to the Minister of Finance on 9th February 2007 • The report reflects the view of the Task Team and not necessarily that of the Minister of Finance or the National Treasury • The report make recommendations with respect to both fiscal and regulatory issues • Recommendations with respect to regulatory reforms referred to the Minister of Minerals and Energy • The Minister of Finance will respond to the fiscal recommendations by the end of July 2007, after taking into account comments by the industry and other interested parties. The Minister will take into account the cost structure of synthetic fuel producers and the country’s long-term liquid fuel requirements

46. Windfall gains by the synthetic liquid fuel producers (2) • Fiscal recommendations: • An additional tax on existing synthetic fuel volumes in line with a permanent structural increases in oil commodity prices ( above US$45 to US$55 barrel of crude oil) (2) A progressive incentive regime for investments in new synthetic fuel and biofuel plants. • A subsidy / tax credit when crude oil prices are below (say) US$40 and s sliding scale tax when crude oil prices rise above (say) US$65. • All biofuels (biodiesel and bio ethanol) to qualify for a lower general fuel levy. Currently biodiesel qualifies for a 60 discount. • Other comments • All other comments by the Task Team are noted and remains the views of the Task Team

47. Updating customs definition • Definition of customs duties in Customs and Excise Duty Act (1964) is outdated • Customs duties is incorrectly defined to include excise duties on imports • Internationally excises on imports are classified as excise duty revenue and not customs duty revenue. • About 10 to 20% of customs revenue is excise revenue on imports • Reclassification will allow greater consistency in international comparisons of tax revenues • More accurate trend analysis of customs revenues will be facilitated • SACU Member States will be consulted to effect similar changes to their legislation

48. Alcoholic beverages • Excise duties increased to maintain total tax burden (excise duties plus VAT) of 23% on wine products, 33% on malt beer, and 43% on spirits • Proposed increases: • Malt beer 8.0% • Alcoholic Fruit Beverages 8.0% • Unfortified wine 8.5% • Fortified wine 10.0% • Sparkling wine 10.0% • Spirits 10.5%

49. Tobacco products • Excise duties increased to maintain total tax burden (excise duties plus VAT) of 52% for all tobacco products • Proposed increases: • Cigarettes 10.7% • Cigarette tobacco 5.3% • Pipe tobacco 5.8% • Cigars 10.5% • Appropriate tax treatment of smokeless tobacco (snus) to be investigated

50. Ad valorem excise duties • Phasing out of ad valorem duties on products that are no longer “luxury” items or generate little revenue: • Air conditioners installed in vehicles • Domestic dish washing machines • photographic cameras and related equipment • sunglasses, binoculars, telescopes, and • various types of picture projectors and related equipment