This year’s Budget provides households with the opportunity to benefit from a tax incentive for investing in solar panels and businesses are now able to access an expanded renewable energy initiative.
Below we out some of the key tax proposals arising from the budget:
Whilst tax rates remain unchanged:
- Effective 1 March 2023, the brackets for transfer duties, retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits will all be adjusted upwards by 10 % to compensate for compounding inflation.
- Personal income tax brackets will be fully adjusted for inflation, resulting in the increase of the tax-free threshold from ZAR 91 250 to ZAR 95 750.
- To promote the use of solar panels on residential rooftops a rebate of 25% of the cost of the solar panels will be permitted, subject to a maximum of ZAR 15 000. The rebate applies in respect of new solar panels (excluding invertors and batteries) brought into use between 1 March 2023 and 29 February 2024. To qualify for the allowance, solar panels must be purchased and installed at a private residence and a compliance certificate issued from March 2023 to 29 February 2024 is required.
- There is a proposal to temporarily expand the tax incentive which is available for businesses to promote renewable energy. Currently the cost of assets generating renewable energy can be deducted over three years on a 50%/30%/20% basis, or in the case of photovoltaic solar energy generation up to 1 megawatt, a deduction of the entire cost is permitted. The incentive will be generously increased to a 125% deduction (of the cost of all renewable energy assets in the first year. To qualify for the deduction, the asset must be brought into use for the first time between 1 March 2023 and 28 February 2025.
- There is a proposal to extend the established R&D tax incentive (provided for in section 11D of the Income Tax Act), for another 10 years, from 1 January 2024 to 1 January 2034, with a built in 6-month period for projects to commence before a taxpayer applies. The definition of R&D will be amended with the aim of simplifying the definition and aligning the definition with the OECD Frascati Manual.
- The incentive programme for urban development zones will be extended to 31 March 2025 to allow for further engagement.
- For the second year running, tax collected by SARS has exceeded expectations. This has largely been driven by increased commodity prices. SARS has also credited a portion of the excess to improved tax compliance and administration.
- SARS intends to simplify and modernise the current Value Added Tax (VAT) administrative framework. To achieve greater certainty, measures may include advance rulings and legislation to enable SARS to conclude bilateral advance pricing agreements.
- The Pay as You Earn (PAYE), and personal income tax administration reform announced in the 2020 Budget continues over the medium term. Work has begun to implement the automated collection of monthly employer and employee data, which is intended to end employer PAYE annual reconciliation. This reform will be extended to third party data providers.
Key business tax proposals
- In 2022 SARS announced an intention to withdraw two long-standing practice notes: Practice Note 31 (allowing the deduction of expenses against interest income in a non-trading context) and Practice Note 37 (deduction of fees paid for e.g. the completion of tax returns). Due to the public comments received, withdrawal of the practice notes will be deferred to 1 March 2024. Government will consider legislative change to cater for legitimate transactions impacted by the withdrawal, which legislative change will coincide with the withdrawal of the practice notes.
- In terms of the current provisions of the Income Tax Act, if a non-resident company becomes a South African tax resident (for example by virtue of its place of effective management being located in South Africa), Contributed Tax Capital (CTC) equal to the market value of the particular classes of shares in issue immediately before the date that the company becomes South African tax resident is created and allocated to each class of shares (based on their respective market values). As a result of certain transactions being identified, National Treasury is proposing to limit the instances in which such CTC will be created to deal with the potential avoidance of dividends tax. The offending transaction typically involves a non-resident company that holds shares in a profitable South African operating company through a foreign intermediary, shifting the foreign intermediary’s place of effective management to South Africa and has the effect of achieving a return of cash to foreign shareholders without the payment of any South African withholding taxes.
- In 2021 the rules to limit the deduction of interest on debt owed to certain related parties who are not subject to tax (e.g., non-residents holding companies) were overhauled. Following the amendments there were a number of uncertainties, which will now be clarified. One such amendment will be to remove the reference to ‘assessed losses’ in the definition of ‘adjusted taxable income’ and to restrict the add back to a ‘balance of assessed loss’ brought forward.
- Dividends or foreign dividends in respect of ‘third-party backed shares’ (typically preference shares where a party other than the issuer provides security) are taxable, except if the funding derived from the issue of the shares was used to acquire shares in an operating company. An amendment is proposed to subject the dividends or foreign dividends to tax if the operating company is no longer held by the purchaser.
- Tax relief in section 46 of the Income Tax Act does not apply to the extent that a company unbundles the shares in an underlying company to non-resident or exempt shareholders holding at least 5% in the unbundling company. Where the distribution was partially disqualified from the relief, shareholders are afforded a step up in their base cost in respect of the unbundled shares. Further consideration will be given to apportion the tax paid by the unbundling company between the unbundling company shares and the unbundled company shares, in situations where the unbundling company is not in a taxable position due to having capital losses or assessed losses. We will have to wait for the Draft Taxation Laws Amendment Bill to be published to understand precisely what National Treasury has in mind here.
- Where a company acquires an asset in exchange for the issue of shares, the tax cost of the asset is established in terms of section 40CA of the Income Tax Act. In 2021 this section was extended to also apply to assets acquired in terms of tax rollover relief. The interaction between section 40CA and the tax rollover relief provisions will be addressed to clarify the cost established by the acquiring company for purposes of claiming income tax allowances.
- The debt reduction rules could trigger tax for a debtor who benefits from a compromise or concession of a debt. The rules do not apply to debt owing by a dormant group company, except if the debt funded an asset that was subsequently disposed of by the dormant company in terms of tax rollover relief. An amendment is proposed to explain the sequence of events (i.e., If the exclusion applies where the debt reduction occurs before or after the asset is disposed of in terms of tax rollover relief).
International Tax and Exchange Control
- The Organisation for Economic Cooperation and Development’s (OECD) guidelines issued in respect of Pillar Two, focusing on base erosion and profit shifting, proposes an approach to ensure that all internationally operating businesses with global annual revenue of more than EUR 750 million pay an effective tax rate of at least 15%, regardless of where the businesses are headquartered or which jurisdictions they operate in. A draft position on Pillar Two will be published for public comment and draft legislation will be prepared for inclusion in the 2024 Taxation Laws Amendment Bill.
- Foreign dividends received or accrued from shares listed on a South African stock exchange will not be exempt where the foreign dividends are directly or indirectly funded by amounts that were deductible in South Africa. Similarly, foreign dividends qualifying for the so-called partial exemption that results in a 20% tax rate on such amounts, will no longer be partially exempt where the foreign dividend arises directly or indirectly from amounts that were deductible in South Africa.
- The foreign business establishment definition that applies to prevent the attribution of the net income of controlled foreign companies (CFC) will be amended to provide that the foreign business establishment exemption will not apply if the foreign business does not perform all core functions but outsources some of those functions to a third party, other than in those instances where outsourcing is expressly permitted in terms of the CFC rules.
- The flow through of income distributions by South African tax resident trusts to non-resident beneficiaries will not be allowed and will likely be taxed in the hands of the trust. This change will align the income tax treatment to the existing capital gains tax treatment. This treatment will be contrary to the way most countries tax foreign beneficiaries of trusts (where they are intended to be a flow through).
- Paragraph 64B of the Eighth Schedule to the Income Tax Act provides for an exemption on the disposal of equity shares held in non-resident companies by a South African resident provided certain requirements are met. National Treasury is proposing that such exemption should not apply to transactions between companies that form part of the same group of companies (presumably as defined in section 1 of the Income Tax Act) or in instances where the shareholders (or ultimate shareholders) of the seller and purchaser are substantially the same.
- In addition to the above, the current provisions of paragraph 64B also provide for an exemption in respect of foreign returns of capital in the hands of South African shareholders provided that certain requirements are met. In the case of the sale of an equity share, one of the requirements is that a qualifying interest (10% of the equity shares) must have been held for a period of at least 18 months prior to the disposal of the shares (the 18-month rule). The foreign return of capital exemption does not contain an 18-month rule and National Treasury is proposing that the provision be amended to include the 18-month rule in respect of foreign returns of capital.
- Exchange control: In the 2020 Budget Speech, the Minister of Finance announced that sweeping reforms would be enacted to the South African exchange control system, whereby, to quote from documents released at that time: “over the next 12 months, a new capital flow management system will be put in place. All foreign-currency transactions will be allowed, except for a risk-based list of capital flow measures… This change will increase transparency, reduce burdensome and unnecessary administrative approvals, and promote certainty.”
- Insurers – Changes are proposed to address the impact of International Financial Reporting Standard (IFRS) 17 on cell captive arrangements.
- Deposit insurance schemes – Legislation in respect of the deposit insurance scheme (to protect depositors in the event of bank failure) was passed in 2022. This will be followed by tax law to address the tax implications of the scheme.
- Sharia-compliance – Various tax acts provide for Sharia-compliant financing arrangements. Government will extend the scope of these provisions and ensure uniformity across all tax statues.
Mining and Resources
- Oil and gas companies are liable for a royalty, payable in terms of the Mineral and Petroleum Resources Royalty Act. The rate is currently variable based on profitability with a minimum rate of 0.5% and a maximum of 5% per annum. Following a recent review of the tax regime for oil and gas companies and a consultation process, government proposes to retain the flexibility of the royalty rate, which is determined by profitability. However, to ensure that the country is adequately compensated for the loss of its finite resources, the minimum royalty rate will be increased from 0.5 per cent to 2 per cent, with the maximum remaining at 5 per cent.
- The Carbon Offsets Regulations, which came into effect on 1 June 2019, set out the eligibility criteria for carbon offset projects, a procedure whereby taxpayers can claim the carbon offset allowance and administration of the carbon offset system. These regulations make provision for a utilisation period up to 31 December 2022 for carbon offsets from projects under taxable activities. When this utilisation period was included in the regulations, it was aligned with the initial first phase of the carbon tax. In the 2022 Budget, the first phase of the carbon tax was extended by three years from 1 January 2023 to 31 December 2025. It is proposed that the utilisation period also be changed in the Carbon Offsets Regulations to align it with the extension of the first phase of the carbon tax.
Individuals and employees
- Inflationary relief is for Individuals in the form of the adjustment of personal income tax brackets, increased medical tax credits, a 10% upward adjustment of the tax brackets applicable to retirement fund lump sum benefits payable upon retirement and to retirement fund lump sum withdrawal benefits. On the downside, it is proposed that section 7C of the Income Tax Act (the anti-avoidance rules in respect of interest-free or low-interest loans to trusts) will be further refined to deal with those instances where a loan to a trust is denominated in foreign currency and to refine the exclusion in respect of a loan used to purchase a primary residence.
- Proposals regarding Employees’ Tax include a proposal regarding the obligation of a non-resident employer to register with SARS and pay employees’ tax, unemployment insurance fund contributions and skills development levies. In those cases where employees participate in foreign share schemes, it is proposed that the employer could request SARS to take into account foreign tax credits when determining the tax to be withheld in respect of share scheme gains. In respect of remote working, a discussion document will be released this year to explore the effect of remote work on the personal income tax regime, including a review of home office and travel allowances.
- Retirement funds can expect several changes. Although the implementation date of the two-pot retirement system remains set for 1 March 2024, additional work is required in respect of so-called seed capital; defined benefit funds and legacy retirement annuity funds. Proposals regarding access to funds in the context of a retrenchment will be part of a second implementation phase. Several regulatory and tax changes are also proposed. Click here for more detail.
Value Added Tax
- Despite lower net VAT collections due to larger-than-expected VAT refunds associated with zero-rated exports, there is no proposal to increase the VAT rate or to expand the VAT base. There are various proposed amendments in respect of a number of issues such as the temporary letting of residential property, specific supplies in the short-term insurance industry, the VAT treatment of prepaid vouchers in the telecommunications industry and a number of proposed changes regarding ‘valuable metals’.
- Minor changes in respect of public benefit organisations (PBOs) include a clarification that the three unconnected persons who accept fiduciary responsibility must be natural persons, not juristic persons. SARS will further be explicitly empowered to expand the list of section 18A approved organisations on their website to include not only PBOs with section 18A approval, but also other entities with section 18A approval.
- A 10% increase of the transfer duty table threshold, which means that properties below ZAR 1,1 million will not be subject to transfer duty.
- It is proposed that SARS be empowered to extend the period within which the taxpayer who disagrees with an auto assessment is required to submit their request to SARS to make a reduced or additional assessment by submitting a true and full return. This will allow the deadline for the request to be aligned with the end of the filing season for non-provisional taxpayers.