2011 Budget and Tax Update

1. 2011 Budget and Tax Update

2. 2011 BUDGET

3. Main Tax Proposals • Personal income tax relief of R8.1billion (2010: R6.5 billion) • A third rebate for individuals 75 years and older • Conversion of medical deductions to tax credits • Transfer duty relief • Taxation of gambling winnings • Tax treatment of contributions to retirement funds • Fuel taxes to increase by 18c per litre (2010: 25.5c) • Increased sin taxes

4. Tax Tables - Individuals

5. Rebates

6. Tax Thresholds

7. Interest and Taxable Dividend Exemption

8. Capital Gains Tax Exemptions

9. Capital Gains Tax Exemptions

10. Travel Allowance Deemed Expenditure Table • Changed with effect from 1 March 2011 • Page 10 and 11 of notes • Fewer bands now increase by R60 000 • Limit on cost increased to R480k from R400k • Reimbursive travel allowance where business km’s less than 8 000 p/a increased from R2,92/km to R3,05/km

11. Retirement Fund Lump Sum Withdrawal Benefits

12. Retirement Fund Lump Sum Benefits on Retirement or Severance

13. Corporate Tax RatesYears of assessment ending between 1/4/11 and 31/3/12

14. Small Business Corporations(Years of assessment ending between 1/4/11 and 31/3/12)

15. Turnover Tax For Micro Businesses (year of assessment ending 28/2/11 and 29/2/12)

16. Medical Aid Contributions • Monthly caps to increase 1 March 2011 • from R670 to R720 (7,46%) for each of the first two beneficiaries and • from R410 to R440 (7,31%) for each additional beneficiary • Proposed conversion to a tax credit system will be introduced on 1 March 2012 • Look out for discussion doc in March 2011

17. Subsistence Allowances • Travel in the Republic • meals and incidental costs: R286 (was R276) per day • incidental costs only: R88 (was R85) per day • Travel outside the Republic • daily amount per country also changed from 1 March 2011 (pg 12 to 20 of notes)

18. Transfer Duty

19. Fuel Levies • To be increased by 18c/l on 6 April 2011 • General fuel levy on petrol and diesel increases by 10c/l • Road Accident Fund levy on petrol and diesel increases by 8c/l cents per litre • Total = 261.5 c/l on petrol; 246.51c/l on diesel

20. Sin Taxes • Excise duties on: • Cigarettes increases from R8.94 per pack of 20 cigarettes to R9.74 • Beer increases from 85c to 91c on a 340ml can • Wine increases from R2.14 to R2.28 a litre

21. National Health Insurance • NHI to be phase in over 14 years • Considerations for funding: • Payroll tax (payable by employers) • Increase in the VAT rate • Surcharge on individual’s taxable income • Look out for announcements in 2012 budget

22. Contributions to Retirement Funds • Current tax treatment on contributions to pension, provident and RAF to be changed from 1 March 2012 • Employer’s contribution will be deemed a taxable benefit. Employee will be allowed to deduct up to 22,5% of taxable income • Two thresholds will apply • Minimum annual deduction of R12 000 • Maximum annual deduction of R200 000 • The taxable income on which the deduction (22,5%) is determined will be streamlined

23. Lump Sum Withdrawals From Provident Funds • Currently 1/3 of the value of a pension or RA fund can be withdrawn on retirement and 2/3 must be used to buy an annuity • 100% of the value of a Provident fund can be withdrawn on retirement • Proposal to apply same 1/3 treatment to provident funds

24. Gambling • Effective 1 April 2012 • Gambling winnings above R25 000 • Subject to 15% final withholding tax • Includes National Lottery • Similar to India, Netherlands and USA

25. Business Taxes • Dividends tax • STC will be replaced 1 April 2012 • Internal company restructuring • Relief for insolvent debtors if debts cancelled or reduced • Venture capital companies • Provisions to be reviewed • Islamic finance • Additional products to be addressed this year – ijara (finance lease) • R&D tax incentive • Approval process to be introduced before claim can be made

26. Skills Development and Job Creation • Learnership tax incentive • Set to expire in September 2011 • Incentive to be extended for further 5 years • Analysis to be undertaken in 2011 • Youth employment subsidy • In form of tax credit through the PAYE system • Industrial development zones • IDZ incentives to be expanded for labour-intensive projects in IDZ’s

27. International Tax • Headquarter company regime • Review of problems with current rules leading to double tax and residence-based tax • CFC’s refinement of rules • Review of overly complex and unintended loopholes

28. Other Proposals • Capital gain foreign currency rules • Individuals and non-trading trusts are taxed on realised currency gains • Must maintain currency pools • Provisions to be removed due to cost benefit considerations • Travelling judges • Home to work is private • Judges presiding over multiple courts or a court that is located far from home • Government vehicles are provided for this purposes • Unusual work travel to be eligible for tax relief as if business

29. Other Proposals • Foreign dividends received • Currently subject to exemptions are taxed at marginal rates • Given changes to taxation of local divs coming in 1 April 2012 • Exemptions and taxation of foreign dividends received will be amended to bring in line with local treatment • SA branches of foreign companies • Tax rate 33% with no STC • On introduction of new div tax the rate might have to be reduced to avoid non-discrimination provisions in DTA’s

30. Other Proposals • CGT treatment on capital distributions and pre 2001 assets • Capital distributions should reduce cost and not trigger a gain or loss • Currently these are subject to gains or losses • Revised and simplified system to determine base cost of pre 2001 assets to be considered • Once in place capital distributions can be aligned with international practice (reduce cost)

31. VAT Proposals • Fixed property • Transfer duty payable by vendor on purchase from non-vendor • Input tax limited to the transfer duty paid • Proposal to delink input claim and will be lower of: • Selling price • Open-market value • Municipal value • VAT inclusive purchase price + improvements, by the non-vendor selling the property

32. VAT Proposals • Exemption for imported services • Threshold on certain imported goods of R100 • No threshold for imported services • Proposal to include exemption for services and increase both exemptions to R500 • Relief for unpaid debt between group companies • Period of 12 months in which to settle debt • Inter-group debt is often not settled • Relief to be considered provided no input can be claimed by the seller until the claw back must be made by the purchaser

33. Estate Duty • Primary abatement • Unchanged at R3,5mill, plus • Unused portion of the primary abatement of a pre-deceased spouse • The effectiveness of estate duty is being reviewed, with several options under consideration

34. 2010 AMENDMENTS

35. SITE(Sections 5(1A) and 6(5) and para 11B(2) of the Fourth Schedule) • SITE introduced in 1988 • Final tax on first R60 000 of net remuneration • Intended to limit number of tax returns • Resources required elsewhere

36. SITE(Sections 5(1A) and 6(5) and para 11B(2) of the Fourth Schedule) • SITE to be eliminated • SITE-minimum and SITE-only – gone for y.o.a ending after 28 Feb 2011 • Phase-out relief for SITE-only taxpayers • 2012: 1/3 of additional tax • 2013: 2/3 of additional tax • 2014: 3/3 of additional tax

37. SITE (Sections 5(1A) and 6(5) and para 11B(2) of the Fourth Schedule) Mr X & Mr Y earn ‘net remuneration’ as follows:

38. SITE(Sections 5(1A) and 6(5) and para 11B(2) of the Fourth Schedule) • Under SITE rules: • Mr X’s tax liability was NIL • Under new rules: • Mr X’s tax liability is R16 940 (subject to phase-out)

39. Official Rate of Interest(Para 1 of the Seventh Schedule) • Used for fringe benefit and STC purposes • Linked to the repurchase or equivalent rate • Rand denominated loans – SA repurchase rate + 1% • Foreign loan – equivalent rate + 1% applicable to foreign currency • Automatically adjusted at beginning of the month following month when the repurchase rate is changed

40. Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule and para 1 of the Fourth Schedule) • Travel allowances have become more restrictive • Change to motor vehicle fringe benefits • Both should now reach similar outcomes • Change effective 1 March 2011 • Starting point is presumption that use is deemed private and operating expenses are incurred by employer

41. Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule and para 1 of the Fourth Schedule) • Value of benefit = 3.5% of determined value • Determined value = • Now includes VAT • Maintenance plan included in purchase price • At least 3 years or 60 000km • Inclusion of 3.5% is reduced to 3.25% per month • Value is reduced by consideration pd by employee for use but not for ongoing license, insurance, maintenance and fuel • Remuneration = 80% of the 3.5% or 3.25%

42. Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule) • On assessment employee can reduce the fringe benefit value for business use and private expenses he/she incurred • Across-the board reduction – ratio of business use over total use x 3.5% (or 3.25%) - logbook • Reduction for private use to the extent employee pays for insurance, licenses, fuel and maintenance costs

43. Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule) • Reduction for private usage insurance, licence and maintenance costs • Ratio of private use over total use x actual insurance, licence and maintenance costs • Reduction for private usage fuel costs • Private usage x deemed fuel amount per table • If employer reimburses any part of these costs: • Above reductions cannot be claimed • Correct bottom pg 55 of notes – delete second last sentence The across-the-board reduction for business use is not reduced by the amount reimbursed

44. Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule and para 1 of the Fourth Schedule) • Example 1: Employer covers all costs • Cost of vehicle = R300,000 (Incl VAT) • Logbook = total 40,000km, business 10,000km • Employer pays all costs • Gross value of fringe benefit = R300,000 x 3.5% x 12 = R126,000 • Remuneration = R126,000 x 80% = R100,800 • Business reduction on assessment = R126,000 x 10,000/40,000 = R31,500 • Net fringe benefit = R94,500

45. Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule and para 1 of the Fourth Schedule) • Example 2: Employee pays private fuel • Same facts as example 1 except employee pays for fuel relating to private use • Remuneration = R100,800 • On assessment, claim reductions for business and private use • Business usage = R31,500 • Fuel cost R0.87 x 30,000km = R26,100 • Net fringe benefit = R126,000 – R31,500 – R26,100 = R68,400

46. Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule and para 1 of the Fourth Schedule) • If employee receives both company car and travel allowance • No deduction can be claimed on assessment • Normal reductions relating to the fringe benefit on the company car are still applied

47. Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule) • Temporary non-use • If for any reason the vehicle is not used by the employee for private purposes • No reduction in taxable value • Use of more than one vehicle • If all are used primarily for business purposes then taxable value based on vehicle with highest determined value (SARS now has discretion to allow use of another vehicle)

48. Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule) • Use of more than one vehicle (cont.) • If all vehicles are not used primarily for business purposes (e.g. a vehicle is used by a spouse) • Taxable benefit of all vehicles is included in remuneration and gross income • 3.5% (or 3.25%) same for all vehicles

49. Motor Vehicle Fringe Benefits(Para 7 of the Seventh Schedule) • Value deemed to be NIL • Pool car • Is available to and used by employees in general • Private use is infrequent or incidental to business use, and • Not normally kept at home overnight • 24 hour service vehicles • Nature of duties requires regular use of vehicle outside of normal working hours • Private use not permitted other than: • Travel between home and work, or • Infrequent or incidental to business use

50. Motor Vehicle Fringe Benefits(Para 1 of the Fourth Schedule) • Remuneration - 80% business use • NB: Applies to both travel allowance and company cars • If employer is satisfied that 80% of the use of the vehicle for the full year will be for business purposes • Only 20% of the allowance or fringe benefit must be included in remuneration (normally 80%)