IN A NUTSHELL: South Africa Budget 2023

The South African Minister of Finance delivered his annual budget speech with accompanying fiscal, tax, and other related proposals earlier this week. This installment of the budget speech occurred against a myriad of problems in South Africa, and the energy crisis in particular, which only seems to be getting worse each year. It is also widely expected that South Africa will imminently be greylisted by the Financial Action Task Force.

Tough times indeed for those in South Africa and, with these issues in mind, we set out below some of the key takeaways from the 2023 Budget speech.

Renewable energy and the energy crisis

It is proposed that all businesses should receive a 125% allowance for investment in electricity generation projects, regardless of the size of the project. This is however a double-edged sword given the changes that will soon come into effect regarding the limitation on the use of assessed losses by companies. Companies would do well therefore to consider the potentially negative impact on their cash tax liability in the subsequent year under the proposed new dispensation, noting that under the current dispensation, this cash tax liability would almost certainly not have arisen until four years after the project was brought to life.

Households will also be permitted to claim a rebate of 25% on the cost of solar panels, installed on or after 1 March 2023 and limited to R15 000 over a two-year period. The rebate only extends to the cost of solar panels, and not to other costs relating to batteries, inverters, etc. Given that the cost of solar panels is typically not significant in relation to the total cost of rooftop solar systems, in our view that the rebate is not worth much.

Revenue collection and outlook

In comparison to the 2021/2022 actual tax collection, perhaps surprisingly it appears that South Africa will exceed budgeted tax collections for the 2022/2023 year. Tax revenue collections for 2022/23 are expected to exceed the 2022 Budget estimate by a whopping R93,7 billion.

The predicted tax revenue for the 2022/2023 financial year includes:

1. Personal income tax – R602 billion
2. Value-added tax (“VAT”) – R426 billion
3. Corporate income tax -R345 billion
4. International trade (including Customs duties) – R77 billion
5. Fuel levies – R79 billion

A few other noteworthy mentions, some of which are pretty depressing:

• Eskom will be receiving a R254 billion cash injection for debt relief(sigh);
• R1 billion is to be allocated to South African Airways to assist the carrier with the ongoing business rescue process (head scratch);
• R36 billion will be allocated to the Covid-19 fund;
• The 2023 budget decreases the consolidated budget deficit to its lowest since 2017/2018; and
• Economic growth is estimated to be only 0,9%

Additional policy and administrative amendments – Retirement Provisions

So, as we all know, when a kindly employer contributes to a retirement fund on an employee’s behalf, it is deemed that the employee made the contribution. Well now, it is now proposed that the legislation be amended to include that benefit in the employee’s taxable income before a deduction is granted.

Sin taxes

Excise duties on alcohol and tobacco will be increased by 4,9%, which is below the current inflation, good news for our sinning friends. It is also a welcome relief for many that the Health Promotion Levy, or “sugar tax” will not increase until April 2025.

Clarifying anti-avoidance rules for low-interest or interest-free loans to trusts

Section 7C contains a deemed donation provision on low-interest or no-interest loans to or in trust structures. The exemption to this rule will now be clarified where it relates to the purchase of a primary residence. Measures will also be put in place to curb perceived abuse of this provision by using foreign-denominated loans. So let’s wait and see how these changes will impact us.

Extending the anti-avoidance provision to cover foreign dividends from shares listed in South Africa  

It is proposed that the round-tripping anti-avoidance rules be extended to include scenarios where  South Africans earn foreign dividends from offshore companies which are listed on the South African stock exchange, where those foreign companies earned amounts from a South African source, which in turn qualified for a tax deduction in South Africa.

Interaction between the anti-avoidance rule and exemption applying to foreign dividends

The South African Income Tax Act, 58 of 1962 (“ITA”) contains provisions that determine that a tax-deductible amount should not be received by a resident or a controlled foreign company as an exempt amount. It is proposed that these anti-avoidance rules be extended to scenarios where only 20% dividends tax is payable on amounts that are fully deductible at the corporate (27%) or marginal rates (max 45%).

Taxation of non-resident beneficiaries of SA trusts

An alignment is proposed between the application of the conduit-pipe principle legislated in the ITA between income and capital gains which may be flowed through to non-resident beneficiaries of South African trusts. The current rules do not allow for capital gains to flow through to non-resident beneficiaries, whereas income may be. The amendment would most likely have the effect that all amounts are taxable in the SA Trust, so this will be an important change to monitor.

Refining the participation exemption for the sale of shares in foreign companies

The conditions for the participation exemption on the sale of foreign shares to apply will be tightened to exclude situations where the sale is to a non-resident company within the same group, or where the ultimate shareholders of the acquiring company are the same as any other group company.

It is also proposed that the qualification for the application of the participation exemption contained in the controlled foreign company rules pertaining to the return of foreign capital be extended to include an 18-month ownership requirement. These changes may have a material impact on restructurings so be careful!

Extending the time period to submit a return where taxpayers disagree with an auto-assessment

SARS may make an assessment based on an estimate where a taxpayer does not submit a return, whereafter the taxpayer may then submit a revised return within 40 days. It is proposed that SARS may extend the 40-day period to align with the end of the annual filing season.

Third-party data and personal income tax administration reform

The government is building on the tax administration reform system which decreases the administration of taxpayers and the accuracy of taxes paid. This includes the prospect of providing monthly employer and employee data in a fully automated fashion. This could result in PAYE annual reconciliations becoming a thing of the past, a very welcome message for all employers.

“Loop” Structures

Unfortunately, no further clarity was provided on the exchange control process to be followed by South Africans re-investing in South Africa through an offshore structure (i.e. so called “loop structures).

The repeal of Practice Note 31 and Practice Note 37

On 16 November 2022, SARS notified taxpayers of their intention to withdraw Practice Note 31 with effect from years of assessment starting on or after 1 March 2023, due to the perceived abuse of the tax deduction concession provided for in Practice Note 31. However, it was announced in the budget speech that the withdrawal of this Practice Note will be postponed until SARS has considered whether any changes could be made in the tax legislation to accommodate legitimate commercial transactions affected by the withdrawal of Practice Note 31.

The withdrawal of Practice Note 37 will also be postponed until adequate tax amendments can be made to reduce the impact of the withdrawal on legitimate transactions.

Clarifying the foreign business establishment exemption for controlled foreign companies (CFCs)

Possibly as a result of a recent Supreme Court Case, SARS is of the view that there is a gap in the current FBE exemption. National Treasury has therefore proposed that the FBE exemption be amended to make it clear that in order to qualify as an FBE, all important functions for which a CFC is compensated need to be performed by that CFC (or by any other CFC in the same country as that CFC), provided certain conditions are met. This should be monitored closely as it could lead to material SA tax on your foreign company’s profits.

Base erosion and profit shifting: The two-pillar solution

The government has indicated that a draft discussion paper on the implementation of Pillar Two will be published for public comment, and that draft legislation will be prepared for inclusion in the 2024 Taxation Laws Amendment Bill. How (and if) this will be implemented in SA remains to be seen.

Budget VAT and diesel refund Proposals

Although no changes were proposed to the general fuel levy or the Road Accident Fund levy, in order to limit the impact of the energy crisis on food prices, it was proposed that the diesel fuel levy refund will be extended to manufacturers of foodstuffs for a period of 2 years, from 1 April 2023 until 31 March 2025.

Proposed changes in respect of the VAT legislation include:

• Amendments that will apply to the short-term insurance industry: Prior year changes made to section 72 of the VAT Act (1991), which related to the SARS’s discretionary powers over VAT decisions affected rulings made before 21 July 2019, including Binding General Ruling 14. The government, therefore, proposes making changes to the VAT Act to clarify the VAT treatment of specific supplies in the short-term insurance industry;
• Changes to clarify the VAT treatment of prepaid vouchers in the telecommunications industry;
• Amendments to clarify the meaning of “adjusted cost” in relation to the temporary letting of residential property; and

Amendments to clarify the VAT rules dealing with the documentary requirements for gold exports.

So that’s it, nothing too radical but some potentially worrying changes ahead, if any of these points raise red flags for you, or if you’d like to discuss how the changes could impact your business, do reach out.