Describing the introduction of capital gains tax in October 2001 as “an important step in broadening the tax base”, finance minister, Pravin Gordhan announced that, to broaden the base further, the capital gains tax inclusion rate for companies and other trusts will be increased from 50% to 66.6%. This increase will be effective from March 1 2012.
The secondary tax on companies (STC) will be scrapped on March 31 2012, with a withholding tax on dividends being implemented as of April 1 2012, at a rate of 15%.
“This will align South Africa’s treatment of dividends with that in most other countries,” said Gordhan.
Special economic zones will also be established within the country. The Minister of Trade and Industry has published draft legislation to provide for the creation of such zones, and Gordhan said “tax relief is under consideration for businesses that invest in these zones, including a reduction in the corporate income tax rate and support for employment and training expenses”.
Special emphasis is given to improving competitiveness in industry, investment in technology, encouragement of enterprise development and support for agriculture, including R&D tax incentives specifically targeting technology investment.
Tax administration
Gordhan commented on the scale of tax reliefs being proposed, and praised the compliance levels of many South African taxpayers.
“Whereas several nations around the world are confronting severe austerity measures and significantly higher taxes, we are able to propose tax relief of R2.3 billion ($288 million) overall, in part because of the strength of our tax policy and administration, and in part because millions of South Africans pay their taxes and duties in full and on time,” he said.
Despite this, during 2012, South Africa will establish a dedicated ombud for tax matters. The office is intended to provide taxpayers with a low-cost mechanism to address administrative difficulties that cannot be resolved by the South African Revenue Service (SARS).
He also announced further simplification initiatives, including the consolidation of administration within the tax law.
“The Tax Administration Bill has been approved by parliament. It incorporates the common administrative elements of current tax law into one piece of legislation, and makes further improvements in this area. The Bill is expected to be promulgated and most of its provisions brought into force in 2012.”
Other measures
Other measures announced include amendments to the mark-to-market taxation of foreign currency and other financial instruments, which will be phased-in, the possible introduction of a carbon tax during 2012, and changes to the taxation of financial transactions.
South Africa has a financial transaction tax on securities transfers, at a rate of 0.25%. Gordhan proposed that the exemption for brokers should be abolished, with transactions for the broker’s benefit being taxed at a lower rate. The inclusion of financial derivatives in the base of the securities transfer tax is also under consideration, said Gordhan.
REACTION:
Despite Gordhan’s claims that “the underlying principles are that the tax system should be fair, efficient, transparent, certain and, where possible, uncomplicated”, some of the measures announced have not been received well.
Leonard Brehm, national chairman of Grant Thornton SA
“The minister said the government is committed to an environment that will encourage business investment. Why then did he put the capital gains tax rate up by one third and dividend tax rate up by 50%? This simply punishes investors.”
Ben Strauss, director at Cliffe Dekker Hofmeyr, a member of the DLA Piper Group
“The budget pays lip service to increasing employment and encouraging savings. Generally, the budget is aimed at milking the rich. While this is good politics, in the long run it is bad for investment and growth.”
“While the minister spoke about encouraging saving, the increase of the rate of dividends tax and capital gains tax will be a huge disincentive.”
“Investors will welcome the proposal to allow deductions for tax on interest on the price of controlling interests in companies. The property industry will welcome the look through taxation of property loan stock companies.”
“It is likely that the ombud will be dysfunctional like most other government agencies in South Africa.”
Barry Garven, partner at Bowman Gilfillan
“There was nothing too unexpected in the budget, but the huge surprise was the introduction of dividends tax at 15%, rather than at 10%. This comes, as our American friends would say, out of leftfield and I imagine a lot of dividends will be declared before the April 1 implementation date.”
“One of the big things we can see the revenue is worried about is deductions for interest, and the nature of instruments – are they really debt instruments, equity instruments etc.”
“We need to see how the tax ombud functions in practice. But whoever is appointed, he or she should be independent of the revenue service.”
Mark Linington, head of tax at Webber Wentzel
“The increased CGT rates were a surprise, as was the increased rate for dividends tax. It will be even more important now for foreigners to invest in South African companies from a country with a favourable tax treaty. Many of the treaties reduce the dividends tax rate to 5%.”
“There was some speculation that estate duty would be abolished in return for an increased CGT rate. It seems we are getting one without the other.”
“There are far-reaching proposals that could adversely impact M&A activity. For instance, it is proposed that the legislation be introduced to discern debt from equity. I don’t think this will be possible as the attributes of debt and equity are very subjective.”
“They have also proposed that interest deductions for South African companies be limited to a percentage of EBITDA. This could obviously have a serious negative impact on M&A deal-flow, particularly in the private equity space.”
“Though establishing a dedicated ombud for tax matters is a step in the right direction, there is a concern that no one will take it seriously as the tax ombud is not going to be independent of the revenue service.”
David Nathan, senior partner at Grant Thornton
“Trusts continue to be hammered in respect of capital gains tax which does not bode well for wealth creation.”
“We were disappointed that dividend tax has effectively been increased by 50% - from 10% to 15%.”