Well there you have it folks, the South African budget speech was delivered by the Minister of Finance this week and as expected in an election year there are no earth-shattering tax proposals or policy changes. Some commentators were expecting an increase in the highest rate of personal income tax (currently 45%) but luckily for some this didn’t happen. Personal income tax has however increased in real terms as this year marked the first time in recent memory that the brackets were not adjusted for inflation. And with today’s high inflation, this is a real tax increase.
The most significant announcement made in the budget speech is that government aims to withdraw some R150 billion from the South African Reserve Bank’s foreign exchange reserves account. While on the one hand, this is certainly much needed relief to plug the hole in our fiscus, it is certainly not ideal in terms of our forex position.
Also of interest is the announcement that the tax legislation concerning secrecy of taxpayers’ affairs will be revised in accordance with the victory by Arena Holdings (Pty) Ltd in the constitutional court that the South African Revenue Service should make Jacob Zuma’s tax filings publicly available. Let’s see what comes of this.
For those of you who are more technically oriented we summarise below the key proposals made that affect individuals, estate planning, corporates, cross border transaction and value-added tax. For the most part these are refinements proposed to existing legislation, rather than major changes.
Happy reading!
- Personal income tax thresholds
No inflationary adjustments will be made to the income tax brackets, which represents an increase in personal income tax in real terms. - Fuel taxes and levies
For the third year in a row the fuel levy remains unchanged. - Medical aids credits
No mention was made of removing the benefit of the medical aid credits for individuals. For now the credits are therefore still available. - Clarifying anti‐avoidance rules for loans to trusts – section 7C
National Treasury is proposing to clarify the interaction between the transfer pricing and the section 7C deemed donations tax anti-avoidance rules when foreign trusts are funded by way of loans from South Africa. The legislation already states that if transfer pricing rules are applied and the loan interest is deemed to be at an arm’s length rate, section 7C would not apply. See here for a previous newsletter on these complex rules.
There is however uncertainty if section 7C could be applied if the interest rate is already at an arm’s length rate, but if the official rate as per section 7C is higher than the arm’s length rate for transfer pricing purposes.
We anticipate that the legislation would be amended to apply the deemed donations tax rules of section 7C on the difference between the higher official rate of interest and the lower arm’s length rate for transfer pricing purposes. This is a very technical area that will impact many South African structures, so we’ll keep you posted as this becomes clearer.
- Transfers between retirement funds by members who are 55 years or older
The rules for the tax-free transfers between retirement funds were previously restrictive as to when involuntary transfers between funds could be seen as tax free. It has now been proposed that the law be amended so that all involuntary transfers between funds would be tax free, which should be good news, and is also one to watch. - Connected person definition in relation to partnerships
Treasury proposes to relax the rules on connected persons in relation to en commandite partnerships whereby all partners in the partnership are connected to connected persons of all other partners. We anticipate that the connected persons rules would be amended to only apply to “qualifying investors” or “disclosed partners”. This is good news and welcome refinement, but don’t think the rules around connected persons are simpler in general! - Amendment of value shifting definition
It was also proposed that the definition of “value shifting arrangements” be amended to exclude arrangements where the individual group companies experience a shift in value, but where the parent company of the group retains the same value. This makes sense and is a welcome tidy-up change. - Controlled foreign company currency translation amendments
National treasury has proposed that the already overly-convoluted controlled foreign company rules to be amended yet again to restrict the translation of income by a controlled foreign company operating in a hyper-inflationary environment into ZAR subject to tax in South Africa. At first glance this proposal is unfair for South African taxpayers with foreign businesses operating in countries with hyperinflation.
In addition to the above, currently an average exchange rate for the foreign tax year of the controlled foreign company is used when translating the controlled foreign company’s net income into ZAR. However, an average rate for the resident’s year of assessment is used when translating foreign taxes payable by that CFC. This results in a mismatch of the average exchange rates used when the year of assessment of the controlled foreign company and the resident differs. To remedy this mismatch, National Treasury proposes using the average exchange rate for the foreign tax year to translate both the net income and foreign tax payable. This makes sense and is a welcome amendment.
- Clarifying the 18-month period in relation to shareholdings by group entities for the purposes of a foreign return of capital
The South African tax legislation currently provides an exemption from capital gains tax in respect of any capital gains or losses arising in respect of any foreign return of capital received or accrued to the disposer by a “controlled foreign company” if the disposer meets the minimum 10% interest test, and the minimum 18 month holding period test. However, the 18-month period did not mention the treatment where the 18-month period was met by more than one group company holding the shares in the foreign company.
National Treasury has now proposed to amend the 18-month holding period requirement to cater for situations where the 18-month period is met as a result of the shares being held by more than one group company for the 18-month period. This will then be aligned with the capital gains tax exemption on the disposal of equity shares in a foreign company. This makes sense and is a welcome amendment.
- Clarifying the section 6quat rebate in respect of taxable capital gains
Section 6quat of the Income Tax Act allows a foreign tax credit to be claimed in South Africa against any South African tax payable on foreign income which was subject to tax in the foreign jurisdiction. In respect of foreign dividends, the tax-exempt portion of foreign dividends is not taken into account when determining the allowable section 6quat credit. National Treasury has proposed to align the rules regarding foreign tax credits on foreign capital gains to align with that of foreign dividends. In other words, exempt foreign capital gains/losses will be excluded from the calculation when determining the foreign tax credits allowed. So your 6quat calcs will get even more complex! - Preference shares to be included in the definition of “exchange item”
Currently, foreign exchange gains on preference shares are not taken into account for tax purposes. To remedy a purported tax leakage on similar instruments, National Treasury proposes to extend the definition of an “exchange item” to include shares that are disclosed as financial assets for purposes of IFRS. This may then result in unrealised foreign exchange gains on preference shares being subject to tax in South Africa. This is part of an overall trend in the legislation to treat preference shares with certain features as debt instrument and not equity instruments. - Consideration of ring-fencing foreign exchange losses
To cater for situations where an entity is no longer trading and therefore cannot carry forward any foreign exchange losses against exchange gains from the same exchange item in future years, National Treasury is considering ring-fencing all foreign exchange losses on exchange items from a future year of assessment. This is a welcome proposal if, as we expect, it will result in foreign exchange losses carried forward still being available for use even if the company has ceased to trade in the intervening period. - Reviewing the prohibition against transfers of assets to non‐taxable transferees in terms of an “amalgamation transaction”
National Treasury proposes to review and clarify the interaction between the definition of “amalgamation transaction” and rules regarding assets transferred to companies partially or wholly exempt from South African tax. This review aims to address potential misalignment and unclear references to “amalgamated company” and resultant foreign companies without a place of effective management in South Africa. - Reviewing the ambit of the de‐grouping charge in intra‐group transactions
It is proposed to narrow the scope of the de-grouping charge within the intra-group corporate reorganisation rules. Currently, this charge applies when transferred assets are de-grouped within six years of the intra-group transaction. However, proposed changes aim to prevent triggering the de-grouping charge in cases where there’s a change in shareholding affecting a group of companies while the original intra-group transaction companies remain part of another group. This makes sense and is a welcome amendment. - Extending the definition of “enforcement right” to a connected person”
The current definition of a “third-party backed share” in section 8EA of the ITA lacks clarity on whether both the shareholder and connected persons can hold this right. The proposal aims to extend the definition to resolve this issue. This proposal is concerning and will broaden the ambit of the anti-avoidance rules that, in particular, apply to preference share arrangements where the holder is given some form of guarantee. - Extending exclusions to the ownership requirement under section 8EA
Amendments were previously introduced to clarify the qualifying purpose test to own equity shares in an operating company when dividends are received or accrued. Certain exceptions were specified, such as the exemption from the ownership requirement if an equity share, initially listed, is exchanged for another listed share via a corporate action on a South African regulated stock exchange. There is a proposal to broaden these exceptions to cover corporate actions involving listed share substitutions on recognised exchanges outside South Africa.
Furthermore, if equity shares in the operating company are sold and the proceeds are used to redeem preference shares within 90 days, exceptions to the ownership requirement apply. However, there’s a need for clarity regarding whether settling dividends, foreign dividends, or accrued interest from the redeemed preference shares falls within this exemption. The proposed amendments aim to specifically include the settlement of any dividends, foreign dividends, or accrued interest in the redemption of a preference share within the ITA.
- Effect on legitimate transactions due to “contributed tax capital” anti‐avoidance measures
Section 8G of the Income Tax Act functions as an anti-avoidance provision which limits the “contributed tax capital” of a resident company involved in a share-for-share transaction with a non-resident group company. The tax implications of this measure may impact legitimate corporate finance practices and potentially reduce South Africa’s appeal as an investment destination. National Treasury is considering further refinements to minimize any unintended tax consequences. - Translating “contributed tax capital” from foreign currency to rands
Amendments were proposed in the draft Taxation Laws Amendment Bill of 2023 to clarify the conversion of “contributed tax capital” from a foreign currency to ZAR. Initially scheduled for 1 January 2024, implementation was postponed to 1 January 2025, after considering stakeholder feedback. This postponement allows National Treasury and stakeholders more time to evaluate potential impacts. A review of the 2023 amendments is planned for the 2024 legislative cycle. - Incentivising local electric vehicle production
In order to promote the manufacturing of electric vehicles within South Africa, National Treasury proposes to introduce an investment allowance for new investments starting from 1 March 2026. Manufacturers will have the opportunity to claim 150% of eligible investment expenditures for expanding production capacity for electric and hydrogen-powered vehicles in the initial year of investment. The projected tax expenditure for 2026/27 is estimated at R500 million. - Learnership tax incentive extension
The purpose of the section 12H learnership tax incentive is to bolster workplace education, skills development, and employment. To ensure thorough evaluation of the incentive before determining its future, the sunset date will be extended by three years to 31 March 2027. We note that this incentive has been a rare tax policy success in recent times and its continued extension is to be welcomed. - Tax treatment of certain infrastructure projects.
At present, assets for embedded solar photovoltaic energy production with a capacity not exceeding 1 megawatt are depreciated within a single year, in line with the private electricity generation threshold. With the recent removal of this threshold amidst the electricity crisis, National Treasury will re-assess both the generation threshold and leasing restrictions outlined in section 12B. Any proposed changes are expected to take effect from 1 March 2025. - Implementing the “Global Minimum Tax” in South Africa
As part of National Treasury’s efforts to limit the negative effects of tax competition and in line with Budget Speech announcements in recent years, the Minister of Finance has announced that South Africa will, over the next few years, implement a Global Minimum Tax of 15% on Multinational Corporations (“MNCs”) with an annual revenue exceeding €750 million. The Global Minimum Tax will be a top-up tax and will broadly work according to two mechanisms as follows: - The income inclusion rule will enable South Africa to apply a top-up tax on profits earned by South African MNCs operating in countries with effective tax rates below 15%; and
- The domestic minimum top-up tax will enable SARS to collect a top-up tax for MNCs paying an effective tax rate of less than 15 % in South Africa.
National Treasury expects that this proposed reform will generate an additional R8 billion in corporate income tax revenue in 2026/27.
- Prescription period for input tax claims
To ease the administrative burden on both taxpayers and SARS, it is proposed that the VAT Act be amended in relation to the tax period in which past unclaimed input tax credits may be claimed. To ensure ease of audit functions and clarity of returns in this regard, it is also proposed that the Act be amended to clarify that such deductions be made in the original period in which the entitlement to that deduction arose.
So there you have it, lots of small-ish changes announced, some of which are helpful tidy-ups and some of which may have big-ish impacts on taxpayers. Lots to follow here, we’ll keep an eye on it all and keep you posted.
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