Budget & Tax Update 2009

1. Budget & Tax Update2009

2. The morning ahead • 2009 Budget • 2008 Tax update

3. PART 1 BUDGET 2009

4. Main tax proposals • Personal income tax relief of R13.6 billion • Fuel taxes to increase by 23c (petrol) and 24c (diesel) per litre • RAF levy to increase by 17,5c per litre • Increased sin taxes • Green taxes • New luxury motor vehicle excise taxes to tax carbon emissions • Tax on energy-intensive light bulbs • Increase in the plastic bag levy from 3c to 4c per bag • Incentives for investments in energy efficient technologies

5. Tax collections2003 - 2010

6. Tax collections2003 - 2010

7. Personal income tax relief

8. Tax tables

9. Rebates

10. Tax threshold

11. Interest and taxable dividend exemption

12. Basic interest exemption 2003 - 2010

13. Capital exemptions

14. Company tax ratesYears of assessment ending between 1/4/09 and 31/3/10

15. Small business corporations

16. Turnover tax for micro businesses

17. STC

18. Other tax rates

19. Individuals • Medical scheme contributions • monthly monetary caps increased from R570 to R625 for each of the first two beneficiaries and from R345 to R380 for each additional beneficiary • No tax-free fringe benefit on medical scheme contributions • Tax deduction to be claimed (based on monthly cap) • Deduction to be replaced with a tax credit in 2 years’ time

20. CGT on sale of primary residence • Proceeds up to R2 million to be disregarded • Primary residence exclusion remains at R1,5m

21. Increase in “sin” taxes • Malt beer - increased by 7c to 79c per 340ml can • Unfortified wine - increased by 14c to R1.98 per litre • Fortified wine - increased by 32c to R3.72 per litre • Spirits - increased by R3.21 to R25.05 per 750ml • Cigarettes - increased by 88c to R7.70 per packet of 20.

22. Other proposals • SITE system may be discontinued by 2010/2011 • Travel allowances to be deductible only if supported by a log book; “deemed” business expenses to be scrapped from 2011

23. New subsistence allowance rates • Travel in the Republic • meals and incidental costs: R260 per day • incidental costs only: R80 per day • Travel outside the Republic • daily amount is available on the SARS website

24. Estate duty • R3,5m abatement • Benefit for both spouses • 1-year usufruct schemes to be closed down • 5-year additional assessment rule to be reconsidered

25. Relief for winding up dormant property-holding companies • Various pressures exist to liquidate entities with inactive real estate (e.g. vacant land and residential property). To alleviate these pressures, it is proposed that rollover relief be provided to facilitate these liquidations for a transitional period

26. Small business corporations • Permitted investments for shareholders to include shelf companies

27. ‘Green taxes’ • Incentives for cleaner production • Plastic bag levy increases from 3c to 4c per bag • Taxation of incandescent light bulbs - R3 • Emission reduction credits • Motor vehicle ad valorem duties and emission taxes • International air passenger departure tax • Fuel levies

28. VALUE-ADDED TAX • Voluntary registration threshold • False statement on VAT forms • VAT registration verifications • VAT implications of reorganisations

29. PART 2 TAX UPDATE

30. Medical expenses (section 18) • Taxpayers with a handicap or a handicapped spouse/ child receive deductions for all medically-related expenses (without 7.5% hurdle) • The terms ‘handicapped person’, etc are outdated • Uncertainty as to the type of expenses that will qualify for deduction • Definition of ‘handicapped person’ replaced with ‘disabled person’ • condition must last longer than 1 year and diagnosed by a registered medical practitioner • Types of deductible expenses • List to be reviewed annually

31. RETIREMENT BENEFITS • Pre-retirement withdrawals from retirement funds • Allocations to spouses upon divorce • Default preservation of withdrawal benefits • Annuitisation of death benefits • Preservation funds • Unclaimed benefit funds • Transfers from pension to provident funds

32. Withdrawal benefits (s 1, s 6 & para 7 of Second Schedule) • Tax-free amount increased from R1 800 to R22 500 less amounts utilised on/after 1 March 2009 • Applies to aggregate of withdrawal benefits received over the tax-payer’s life-time • Tax calculated in terms of the special tax table • Effective 1 March 2009

33. Tax table for withdrawal lump sum benefits for 2009/2010

34. Divorce settlements from retirement funds (paras 2, 2B, 4 & 6 of Second Schedule) • Divorce order payments to ex-spouse from retirement fund from were taxed in the hands of the member • right of recovery of tax from non-member spouse • Amendment • The non-member will pay the tax on amounts awarded to him/her from the member’s retirement fund • Effective 1 March 2009

35. Default withdrawal benefits (para 4(1) of Second Schedule) • Background • All withdrawal benefits taxed; no incentive for reinvestment of default withdrawals • Amendment: • Only taxed once the member withdraws the cash

36. Transfers from pension to provident funds (para 2 of Second Schedule) • A transfer from a pension to a provident fund is a taxable event as employee contributions to pension funds are tax-deductible but there is no deduction for provident fund contributions

37. EMPLOYERS AND EMPLOYEES • Expatriate accommodation • Deduction for repayable remuneration • Deemed employees • Additional learnership deduction for apprenticeships • Payroll giving • Personal use of business cell-phones and computers • Broad-based employee share schemes • SITE re-determination

38. Expatriate accommodation (paragraph 9(7A) of the Seventh Schedule) • No rental value (up to R25 000 pm) on accommodation provided to an employee away from his/her usual place of residence outside the Republic • For up to 2 years from date of arrival (extended from 1 year); or • If the employee spends less than 90 days in the Republic in that year • No exemption if the employee spent more than 90 days in the Republic in the previous year of assessment • General effective date

39. Repayable remuneration(sections 11(nA), (nB), 23(k) & 23(m)(iiA)) • Background • Employee receives remuneration (e.g. maternity pay) but later fails to meet conditions and amount received is repaid to employer • no tax relief for employee • Amendment • Repaid benefit allowed as a tax deduction for employee • PAYE refunded by employer or • Deducted on tax return

40. Deemed employees(ss 11(cA), 12E(4)(a) & 23(k) and paragraphs 1, 2(1A) & 11 of Fourth schedule) • Personal service companies & personal service trusts combined under one category: personal service provider • “Labour broker” retained for individuals only

41. Learnership allowance (apprenticeships)(section 12H) • 2 deductions per year for each year of the apprenticeship • At least 1 deduction in the year the agreement is entered into • Where no formal examination is completed before the completion of the apprenticeship, the additional deductions will only be claimed upon completion • This amount will be equal to the number of years required to complete the learnership as per the initial agreement X 2 • Less the allowance claimed when the agreement was entered into

42. Example • Employee X entered into a 4-year apprenticeship agreement with employer Y. • Employer Y agrees to pay X R25 000 p.a. (fixed for 4 years) • Result • Year 1: employer Y can claim s 12H allowance of R25000 • No additional allowance may be claimed in years 2 and 3 • Year 4: assuming that X has successfully completed the apprenticeship, employer Y can claim an additional allowance of R25 000 x 2 x 4 = R200000 less R25 000 (the amount claimed in year 1) = R175 000 • In essence, the ending additional deduction equals the starting and ending additional deductions for all years of the learnership less the starting deduction for the first year (which has already been taken into account

43. Payroll giving (s 18A & paragraph 2(4) of Fourth Schedule) • Background: • Section 18A deduction for donations to PBOs on assessment • No reduction of PAYE through the year • Scope to encourage PBO donations • Amendment: • Employers can deduct donations when calculating monthly PAYE • Deduction limited to 5% of remuneration • Section 18A deduction limited to 10% of taxable income • Re-determination required on assessment

44. Personal use of employer-provided phones and computers(paras 6 & 10 of Seventh Schedule) • Background: • Employees often receive cell-phones and laptops from employers for business use, but invariably some private use exists which is taxable • Amendment: • To simplify administration, all telephone, and computer equipment (modems, disks, printers, software, etc) is exempt from fringe benefit tax if provided mainly for business use

45. Broad-based employee share schemes (sections 8B & 11(lA)) • Background: • Employer grants qualifying shares to employees • Tax-deduction for employer • No taxable fringe benefit in hands of employee • Qualifying requirements too stringent • Amendment: • Tax-free ceiling raised to R50 000 over 5 years (previously R9 000 over 3 years) • Employee participation lowered from 90% to 80% • Permissible restrictions relaxed • Deduction: R10 000 p.a. over 5 years

46. SITE redetermination • Refunds following broken periods (para 11B(4) of the Fourth Schedule) • Effective 1 January 2008 Example • Mr P worked for 4 months and earned a salary of R5000 p.m. • SITE of R210 was deducted (calculated on an annual salary of R60 000). Mr P's salary for the year amounts to R20 000 and he should therefore not pay any tax. Mr P will now be able to claim the R840 of SITE that was withheld from his salary as a refund when he files a tax return.

47. CORPORATE TAX • STC Reforms • Dividend withholding tax • Transitional arrangements • Revised dividend definition • Refund of withholding tax • Passive Holding Companies

48. Dividend withholding tax (ss 64E and 64F) • 10% tax on the shareholder (beneficial shareholder) • Applies only to dividends declared by SA resident companies • Beneficial owner is exempt from the dividend tax if: • A South African resident company; • A sphere of the SA government (i.e. national, provincial and local) • An exempt parastatal; • A pension, provident or similar benefit fund; • An approved PBO; or • An environmental rehabilitation trust • A shareholder in a “micro business” (refer Sixth Schedule)

49. Examples • Individual owns all the shares of Co.1, which owns all the shares of Co. 2; and Co. 2 owns all the shares of Co. 3. Co. 3 pays a R20 000 dividend to Co. 2, Co. 2 pays a R20 000 dividend to Co. 1; and Co. 1 pays a R20 000 dividend to the individual shareholder Result.The dividends tax only applies once the R20 000 dividend is paid to the Individual. The previous dividends are exempt. • Co. X is listed on the JSE and has 1 million ordinary shares, of which 600000 shares are held by resident natural persons, 300000 shares are held by pension funds and 100000 shares are held by resident companies. Co. X pays a dividend of R5 per share. Result. Dividends paid to resident natural persons are subject to the dividends tax. Dividends paid to pension funds and resident companies are exempt.

50. STC transitional arrangements (ss 64I and 64J) STC credits • Exemption for dividends previously subject to STC • STC credit dividends will be exhausted first • Dividends eligible for STC credits will be allocated pro rata amongst all shareholders within the same class, irrespective of whether they are exempt from the dividend tax • STC credits will be dependent on reporting by initial company payer to payee, failing which there will be no STC credit • STC credits will disappear 5 years after the effective date of the new Dividend Tax