Budget & Tax Update March 2016

1. Budget & Tax UpdateMarch 2016

2. 2016 Budget

3. Where is most of our tax collected?* *Figures per Budget Review 2016 3

4. 2015 Budget Highlights • Postponement of the annuitisation requirement for provident funds and tax-free transfers from pension to provident funds • Announcement of a special VDP programme for offshore assets and income • Sharp increase in CGT inclusion rates • Measures to prevent tax avoidance through trusts • Increase in the transfer duty rate on property sales over R10 million • General fuel levy increase by 30 cents per litre • Sin taxes increase • New tyre levy to be introduced 4

5. Tax Tables – Individuals 5

6. Rebates 6

7. Tax Thresholds 7

8. Monthly Medical Scheme Contribution Tax Credits 8

9. Local Interest Exemption 9

10. Capital Gains Tax Exclusions 10

11. Capital Gains Tax Effective Rates – YOA commencing 1 Mar 2016 11

12. Travelling Allowance • Deemed expenditure table has changed with effect from 1 March 2016 • See revised table in notes • No increase in the bands • Fixed cost, 2% to 3% increase • Fuel cost, 4.7% decrease • Maintenance cost, 5.1% increase • No change in limit on cost of R560 000 • Reimbursive travel allowance where business km’s less than 8 000 p/a increased from R3.18/km to R3.29/km (3.5%) 12

13. Retirement fund lump sum withdrawal benefits 13

14. Retirement fund lump sum benefits or severance benefits

15. Corporate Tax Rates – YOA ending between 1 April and 31 March 15

16. Withholding Tax Dividends Tax (s64C – N) • 15% unchanged Royalties (s49B) • 15% from 1 January 2015 Interest paid to non-residents (s50A – H) • Exempt if paid by any sphere of SA government, a bank or debt is listed • All other at 15% with effect from 1 March 2015 Service fees (s51A – H) • 15% from 1 January 2017 (NB Proposal to withdraw see later) Foreign entertainers and sportspersons • 15% Disposal of immovable property by non-residents • 5% individual, 7,5% company, 10% trust 16

17. Small Business Corporations – YOA ending between 1 Apr and 31 Mar No mention of the Davis Tax Review Committee recommendation to replace the reduced tax regime with an annual refundable tax compliance rebate 17

18. Micro Businesses – YOA ending between 1 Mar and 28/29 Feb 18

19. Subsistence Allowances Travel in the Republic • meals and incidental costs: R372 (was R353) per day • incidental costs only: R115 (was R109) per day Travel outside the Republic • daily amount for a few countries changed from 1 March 2016 19

20. Transfer duty – Natural and juristic persons No mention of any change to the definition of “date of acquisition” and “property” to align the terms with other legislative provisions 20

21. Fuel Levies To be increased by 30.0c/lon 6 April 2016 (2015 – 80.5c/l ) • General fuel levy on petrol and diesel increases by 30.0c/l(2015 – 30.5c/l) • Road Accident Fund levy on petrol and diesel was not increased (2015 – 50c/l) Total = 443c/l on petrol; 428c/l on diesel Percentage of pump price at Feb 2016 – Petrol 37%; Diesel 45% 21

22. Sin Taxes • Excise duties increases on 24 February 2016: • Cigarettes from R12.42 per pack of 20 cigarettes to R13.24 (6.7%) • Cigars from R64.96 to R69.28 per 23g (6.7%) • Traditional beer no increase • Malt beer from 124c to 135c on a 340ml can (8.5%) • Wine from R3.07 to R3.31 a litre (8%) • Sparkling wine from R9.75 to R10.53 a litre (8%) • Spirits from R48.13 to R52.07 on a 750ml bottle (8.2%)

23. Tax on Sugar-Sweetened Beverages • SA has the worst obesity rate in sub-Saharan Africa • Denmark, Finland, France, Hungary, Ireland, Mexica and Norway have introduced a tax on sugar-sweetened beverages • Proposed date of introduction in SA is 1 April 2017

24. Skills Development • Learnership Allowance and Employment Tax Incentive • Both are due to expire during 2016 • S 12H – Learnership agreements signed before 1 October 2016 • ETI – 31 December 2016 • Reviews are in process • Possible 1 year extension if reviews are not complete • S 10(1)(q)(ii) exemption for employer provided bursaries to relatives of employees • Remuneration proxy will be increased from R250 000 to R400 000 • Exemption limits to be increased from R10 000 to R15 000 for NQF level 1-4 and from R30 000 to R40 000 for NQF levels 5-10 • Ninth Schedule - Education and training based public benefit activities • Proposed expansion of the list of PBAs relating to education and training • Accommodate industry-based training organisations • Allow access to PBO status

25. Environmental Taxes • Carbon Tax Bill released in November 2015 will be amended based on public comment • New Tyre levy from 1 October 2016 on imported tyres at a rate of R2.30 per kg of tyre • Incandescent globe levy will increase from R4 to R6 per globe from 1 April 2016 • Plastic bag levy will increase from 6c to 8c per bag from 1 April 2016 • Motor car emissions tax will increase by 11% on cars and 12% on double cabs • Renewable energy capital allowances to be expanded to include indirect infrastructure costs

26. Retirement Reforms • Implementation date • 1 March 2016 sees a change to the tax treatment of contributions to and withdrawals from retirement funds • Government proposes to postpone the requirement for provident fund members to annuitise to 1 March 2018 • Rollover of excess RAF and Pension Fund contributions to 1 March 2016 • S 11(k) will be amended to allow for the rollover • Order of allowable deductions • S 11(k) will be changed to allow the deduction before the S18A deduction • Review of foreign pension contributions and withdrawals • Review will be conducted and we can expect changes

27. Provisional Tax • Para 20 of the 4th Schedule - Underestimation penalties • Retirement lump sums and severance benefits are excluded • Amounts in Para (d) of the definition of gross income are also excluded • Para (d) amounts are not taxed according to the lump tables • Currently there is no penalty for underpaying provisional tax on these amounts • Proposal to remove reference to Para (d) amounts that are not taxed according to the lump tables from the proviso to Para 20 of the 4th Schedule • Result will be that underestimation penalties will apply if these amounts are not taken into account when making an estimate of taxable income for provisional tax purposes

28. Provisional Tax (continued) • Another proposal to amend Para 20 of the 4th Schedule • Date on which estimate for 2nd provisional tax payment must be submitted • No understatement penalty will apply if an estimate for the 2nd period is submitted before the due date of the subsequent provisional tax payment • Proposal that this window be closed on the date of assessment of the relevant year

29. Hybrid Debts Instruments – S 8F • Subordination agreements • S 8F(b) includes in the definition of hybrid debt instrument, any instrument in respect of which a company owes an amount and the obligation to repay is conditional upon the MV of the assets of that company not being less than the MV of liabilities of that company • The above catches standard subordination agreements • Proposal to exclude debt instruments that are subject to subordination agreements • Double non-taxation • Measures will be introduced to eliminate mismatches associated with hybrid debt instruments where the issuer is not SA resident • This will avoid non-taxation in both countries

30. Avoidance Scheme in respect of Share Sales • Mechanism to avoid the tax consequences of shares sold by a company • Seller receives payment in the form of a dividend, exempt from income tax and dividends tax • Buyer subscribes for new shares and price constitutes CTC • Such a transaction is in substance a share sale and should be subject to tax • Widespread use of these arrangements merits an investigation into whether countermeasures are needed

31. Taxation of Government Grants • The 11th Schedule sets out the government grants that are exempt from normal tax • Grants of a capital nature still fall out of gross income • Proposal that all government grants be included in gross income and the 11th Schedule be the sole mechanism to determine whether these are taxable or not

32. Withdrawal of WHT on service fees – S 51A - H • WHT on service fees came into effect on 1 January 2016 • Unforeseen uncertainty on application of domestic tax law and rights afforded by DTAs • Proposal to withdraw the WHT on service fees • These will be dealt with under the provisions of reportable arrangements in S 35 of the TAA

33. Bad Debt Deduction • S 11(i) provides for a deduction of any bad debt provided that amount is or was included in taxable income • A foreign denominated loan made by a SA taxpayer results in exchange differences that are included in taxable income • Assuming the lender is not a money-lender, if such a loan becomes bad no deduction is available under S 11(a) • Amendment is proposed to S 11(i) to address this and allow the deduction of exchange differences that have been included in taxable income

34. VAT – Non-Executive Directors’ Fees • A non-executive director may be subject to both employee’s tax and VAT • Views differ on which should apply • These issues will be investigated to provide clarity

35. VAT – Company Cars • VAT Reg 2835 sets out method to establish the determined value of a company car for output tax purposes • Para 7(1) of the 7th Schedule sets out the method to establish the determined value of a company car of income tax purposes • These differ from each other • Employers have had to maintain 2 sets of records • Proposal to align VAT provisions with the 7th Schedule

36. VAT – Alignment of prescription period • Input tax can be deducted from output tax attributable to a later tax period • The proviso to S 16(2)(n) requires that the later period falls within 5 years from the date the tax invoice should have been issued • It is proposed that this time period be limited in certain instances to the tax period in which the time of supply occurred • In addition it is proposed that the time limit for the payment by SARS of refunds be clarified

37. TAA – Objection and condonation periods • S 104 and the Dispute Resolution Rules allow 30 business days in which to object to an assessment • This is too short in practice resulting in many applications for condonation • Dispute Resolution Rules will be amended to allow • a longer period for lodging an objection; and • might also impact on the provisions for failing to comply with the prescribed time periods • S 104 might be amended to allow for an extended condonation period

38. TAA – Special VDP • New OECD standard for exchange of information between tax authorities comes into effect from 2017 • Taxpayers with undisclosed assets offshore beware • SARS and SARB will relax VDP rules to allow taxpayers to regularise their offshore assets • Media Statement issued 24 February 2016 • SARS and SARB will work jointly • Window period of 6 months from 1 October 2016 • Individuals and Companies can apply • Offshore Trusts will not qualify • Settlors, donors, deceased estates or beneficiaries of foreign discretionary trusts must elect to have the trusts offshore assets and income deemed to be held by them • No-name voluntary disclosure can be made i.t.o. S 228 of the TAA

39. TAA – Special VDP (continued) • Tax relief available • If undisclosed offshore income was used to acquire offshore assets before 1 March 2015 then only 50% of the undisclosed income will be taxed • Offshore investment returns from 1 March 2010 onward will be included in taxable income and taxed in full • Investment returns prior to 1 March 2010 will be exempt • Interest on tax debts arising will commence only from 1 March 2010 • No understatement penalty will apply • No criminal prosecution

40. TAA – Special VDP (continued) • Exchange Control relief available • Available to individuals and companies • On all excon contraventions prior to 29 February 2016 • Levy based on market value of offshore assets at 29 February 2016 • 5% if assets are repatriated to SA • 10% if assets are kept offshore • No reduction for any unutilised portion of the R10 million foreign capital allowance • Levy must be sourced from foreign funds • If foreign funds are insufficient then additional 2% is added to extent that levy is settled with local assets • Full details of the tax relief will be released in the Rates and Monetary Amounts Bills, 2016 and Exchange Control Regulations

41. 2015 Amendments

42. 2015 Amendment Acts • The Rates and Monetary Amounts and Amendment of Revenue Laws Act No. 13 of 2015 – 17 November 2015 • Taxation Laws Amendment Act No. 25 of 2015 – 8 January 2016 • Tax Administration Laws Amendment Act No. 23 of 2015 - 8 January 2016 42

43. Taxation Laws Amendment Act No. 25 of 2015 - 8 January 2016

44. Individuals

45. Bursary and Scholarship exemption for basic education (S 10(1)(q)(bb)) Current legislation implies that the exemption of the first R10 000 of a bursary or scholarship granted to the relatives of employees applies to qualifications that begins at Grade 9 Grades R to 8 do not qualify, which is most of basic education This was not the intention of the legislation, which was to increase the level of exemption and cover both basic and further education The amendment expands the exemption to include Grades R to 8 as intended Effective 1 March 2013

46. PAYE and Provisional tax: Medical tax credits for employees over 65 (S 6B(3), para 9(6) of 4th Schedule) Currently the additional medical expenses tax credit from qualifying medical expenses and medical aid contributions that exceed three times the credit for those over of the age of 65 are not incorporated in the monthly PAYE and provisional tax calculations These additional medical expenses tax creditsare claimable on assessment As a result employees over the age of 65 experience a decrease in take-home pay throughout the year and experience cash flow difficulties through the year The amendment provides that medical tax credits related to medical scheme contributions by those over the age of 65 be taken into account for both monthly PAYE and provisional tax calculations Effective 1 March 2016

47. Consistent tax treatment on all retirement funds (definition of ‘pension fund’) Contributions by both employers and employees to pension, provident and retirement annuity funds will qualify for a tax deduction, capped at a lesser of: • 27.5% of the greater of taxable income or remuneration; or • R350 000 per annum • Contributions by employers to pension, provident and retirement annuity funds on behalf of employees will become a taxable fringe benefit in the hands of the employee • On retirement, members of pension, provident and retirement annuity funds will be required to take 1/3 of their retirement benefit as a lump sum and 2/3 of their retirement benefit will be paid to them every month as an annuity until they die • Effective 1 March 2016

48. Consistent tax treatment on all retirement funds (definition of ‘pension fund’) Vested rights are preserved and members over 55 years at 1 March 2016 are exempted from the requirement to annuitise The de minimis threshold is increased from R75 000 to R247 500 Members who do not have a retirement benefit exceeding R247 500 at retirement will not be required to annuitise Effective on 1 March 2016

49. Closing loophole to avoid estate duty (S 3 of Estate Duty Act) Individuals with a RAF are allowed to work beyond the regular retirement age and still contribute to their retirement Lump sum retirement assets are excluded from the dutiable portion of the estate upon death This provided opportunity for individuals to use RA contributions to avoid estate duty Contributions to RAFs that did not receive a deduction, since they were above the threshold, could pass to the nominated beneficiaries free of estate duty

50. Closing loophole to avoid estate duty (S 3 of Estate Duty Act) Amendment provides that contributions made on or after 1 March 2015 to a retirement fund that did not receive a deduction would be included in the dutiable part of the estate for estate duty purposes Contributions that did not receive a deduction which have been included as part of any lump sum payouts to the retirement fund member or that have been used to offset the tax liability for annuity payments to retirement fund members will not be included in the dutiable value of the estate (to avoid any potential double counting) Effective 1 January 2016 and applies in respect of the estate of the person who dies on or after that date and applies in respect of contributions made on or after 1 March 2015 50