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Budget 2005. Revenue trends and tax proposals – Chapter 4 & Annexure C of Budget Review National Treasury Presentation to Parliament Wednesday, 2 March 2005. Overview of the 2005 Budget. Programme of Action: cares for its people, socially just choices, and committed to service delivery

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Budget 2005

Budget 2005

Revenue trends and

tax proposals –

Chapter 4 & Annexure C of Budget Review

National Treasury

Presentation to Parliament Wednesday, 2 March 2005


Overview of the 2005 budget
Overview of the 2005 Budget

Programme of Action: cares for its people, socially just choices, and committed to service delivery

  • Supporting economic growth and opportunities

  • Strong increases in non-interest expenditure within a framework that is sustainable

  • Tax relief to encourage economic opportunities


Major socio economic challenges
Major socio-economic challenges

  • Reducing poverty through social wage

  • Dependence giving way to self-reliance

  • Halving unemployment rate by 2014

    • particularly among youth

  • Countering vulnerability

  • Narrowing inequalities

  • Developing skills

  • HIV and Aids

  • Bridging ‘two economies’ divide


Budget for a season of hope
Budget for a season of hope

  • Sustaining higher growth

  • Economy growing faster…

  • …but to sustain this higher growth, we need…

  • Rising infrastructure investment

  • Lowering the cost of doing business, especially for small business

  • Producing more skilled people

  • Improving the quality of public services, especially to the poor.

  • Advancing social development

  • Higher growth to invest in people…

  • Means-tested social grants

  • Clean water and electricity

  • Quality education, health and municipal services

  • Community housing

  • Reduce crime and insecurity

  • Equity and redistribution

  • To bridge the divide between rich and poor…

  • Pro-poor budget reflects spending shift towards the poor

  • Extension of social wage to poor households

  • Broad-based black economic empowerment

  • Transport linkages between cities and townships, rural and urban

  • Renewed investment in small, emerging farmers


Fiscal policy
Fiscal policy

  • 2004/05 deficit estimate 2,3% of GDP

  • Expansionary stance from 2001 continues

  • Strong real growth in non-interest spending, averaging 5,5% a year

  • Stable tax burden around 24,1% of GDP

  • Debt service costs decline from 3,5% of GDP in 2004/05 to 3,2% in 2007/08

  • Deficit of 3,1% in 2005/06 declining to 2,7% by 2007/08

  • Significant surpluses in social security funds




Tax policy overview since 1995
Tax Policy Overview – since 1995

  • Since 1995 tax policy emphasis on:

    • Efficiency enhancement of tax system

    • Tax base broadening – limited use of tax incentives

    • Thereby affording rate reductions

  • Highlights of tax base broadening reform agenda:

    • Introduction of capital gains tax

    • Converting to the residence-based income tax system

    • Introduction of enhanced anti-avoidance & administrative measures that resulted in narrower compliance gap

    • Enabling Government to grant tax relief of R78 bn by 2004/05


Tax base broadening
Tax base broadening

  • Tax base broadening has allowed reduction of tax rates

    • Reduction in corporate income tax rates

    • Total PIT relief close to R66 billion

    • Accelerated depreciation allowances in lieu of special capital allowances

    • Introduction of learnership deductions

    • Reduction of taxes on property

    • Reduction in consumption taxes

    • Scrapping/reduction of financial transaction taxes (stamp duties)


Overview forward looking
Overview – forward looking

  • Maintaining stable & predictable revenue mix – sound budgeting & confident business planning

  • Principal reliance on the taxation of:

    • employment income

    • business income

    • capital income

    • moderate reliance on consumption taxes

  • Gradual elimination/reduction of financial transaction taxes

  • Contributing to broader participation, economic growth & small business development

  • Reducing complexity & compliance costs




Tax policy preference for limited use of tax incentives
Tax policy preference for limited use of tax incentives

  • Contrary to expectations, sectors with existing attractive tax privileges evidence long-term declining contribution to GDP







Progress on implementation of tax reform initiatives
Progress on implementation of tax reform initiatives

  • Exchange Control Amnesty:

    • More than 42 000 amnesty applications received by 29 February 2004 - total assets disclosed currently at R65b

    • It is estimated that Amnesty Unit will collect at least R2,4 billion in amnesty levies

  • Retirement Fund Tax Reform:

    • At the end of 2004 National Treasury released retirement fund reform discussion paper outlining regulatory policy objectives

    • Careful synchronisation of tax reform needed to fully take account of wider retirement fund reform priorities that seek to enhance & facilitate adequate retirement savings


Progress on implementation of tax reform initiatives1
Progress on implementation of tax reform initiatives

  • Redrafting of Mineral and Petroleum Royalty Bill to be available for comment during first half of 2005

  • Holistic review of mining income tax system ongoing – including evaluation of appropriateness of current tax allowance schemes that result in tax deferral benefit with full recognition of high capital requirements & risks attaching to mining investment

  • Accelerated tax depreciation for urban development zones - demarcations for qualifying inner city areas have been approved and gazetted for 9 Municipalities

  • Tax legislation to accommodate FIFA world cup commitments





2005 main tax proposals tax relief
2005 main tax proposals -tax relief

  • Total tax relief for individuals & companies: R10,9 billion

  • Personal income tax reduced by R6,8 billion

  • Interest exemption raised to R15 000 for taxpayers under 65 and to R22 000 for tax payers 65 & over

  • Abolishment of stamp duties on all banking debit entries & installment credit agreements


2005 main tax proposals tax relief1
2005 main tax proposals -tax relief

  • Total corporate & small business corporation tax relief – R3,8 billion

  • Exemption from Skills Development Levy (SDL) for small busineses with payroll bill of R500 000 & drop requirement that businesses must account for the SDL if at least one their employees is registered for PAYE

  • Exemption from tax for the first R35 000 of taxable income for small businesses

  • Imposition of a simplified tax depreciation regime of 50:30:20 for all assets (excl. manufacturing)


2005 main tax proposals tax relief2
2005 main tax proposals -tax relief

  • Introduction of a tonnage tax regime for the shipping industry – effective 2006

  • Increasing of property transfer duty thresholds

  • Abolishing excise duties on sun protection products & professional digital cameras


2005 main tax proposals tax increases
2005 main tax proposals -tax increases

  • Adjustment of the deemed business cost against car allowance

  • Taxes on tobacco are raised to maintain a tax incidence level of 52 %

  • Taxes on alcoholic beverages are increased between 9,4 & 20 %

  • General fuel levy increased by 5 c/l on petrol & diesel

  • Road Accident Fund levy is increased by 3c/l



Distribution of pit relief
Distribution of PIT relief

  • Tax threshold up to R60 000 – 12%

  • R60 000 to R150 000 – 32,3%

  • R150 000 to R250 000 – 22,4%

  • R250 000 and above – 33,4%

  • Proposed relief for taxpayers over 65:

    • Together with further increase in interest exemption level constitutes major tax burden relief for retired persons

    • Retired couple with income only from interest-bearing deposits can invest almost R2 million tax free (8% interest assumption)

    • Maximum tax-free income of couple taking full advantage of interest income exemption rises from R132 000 to R164 000



Pit relief s redistributive stimulatory in nature
PIT relief’s redistributive & stimulatory in nature

  • Tax reduction in respect of employment income does not only benefit wage earners but also individual entrepreneurs (constituting almost 20% of all PIT taxpayers) – e.g., Irish tax reform targeted sharp rate reductions for PIT, thereby giving huge boost to sole proprietorships & economic growth

  • BUT consider PIT relief distribution together with higher tax burden for taxpayers benefiting from motor vehicle allowance:

    • Income cohort R300 000 and up: annual tax reduction of R4 570

    • Assume use of vehicle valued at R120 000: new travel allowance deemed costs translates into additional tax of R4 110: hence, still net tax relief of R460

    • Assume use of vehicle valued at R360 000: new travel allowance deemed costs translates into additional tax of R11 224: hence, overall increase in tax burden of annual R6 654




Medical aid reform
Medical aid reform

  • Reform of tax treatment of medical aid cover to achieve more equitable coverage

  • Monetary cap to replace 2/3rds scheme deductions

  • Details of the reform will be released this year – implementation commences in March 2006


Tax policy objectives
Tax policy objectives

  • Extending effective medical aid coverage to all economically active individuals & their dependents

  • Making medical aid coverage more affordable to low income families.

  • Eliminating tax implications of a specific medical aid package & employer provided medical treatment.

  • Providing more tax relief for the average South African family.

  • Driving down seemingly excessive costs and fees charged by the medical aid industry.

  • Extending beneficial tax treatment to self employed persons, i.e incentivising small businesses.


Current tax treatment of medical aid contributions ineffective
Current tax treatment of medical aid contributions ineffective

  • Affordability - The current regime does not go far enough in lowering cost of medical aid membership for low-income earners, i.e. low income earners cannot afford the tax on one-third of employer provided medical aid coverage.

  • Inequality – It provides a bigger benefit for high income earners, i.e. tax subsidy for low income earners is 18% and 40% for high income earners.

  • No downward pressure on high cost medical aid packages – In terms of the current regime, the higher the contribution, the bigger the tax saving.

  • Discrimination - No tax incentive for:

    • Self employed persons

    • Employed persons where the employer does not provide medical aid coverage but the employee pays his own medical aid contributions

    • Employer provided medical treatment for low-income employees.


Which income groups need assistance
Which income groups need assistance? ineffective

  • In the Council for Medical Schemes Annual Report 2003/04 the number of principal members of medical aid schemes during 2003 were 2,8 million.

  • National Treasury calculated the coverage rate per income group (based on data from SARS and SARB).



How the new tax regime will benefit taxpayers
How the new tax regime will benefit taxpayers ineffective

  • Persons earning below income tax threshold (R35 000 pa) but attracting possible tax charge if employer provides medical cover – approx. 1,2 million individuals:

    • No fringe benefit tax on employer provided medical aid coverage for employee and dependents.

    • Tax incentives for low cost/high benefit packages.

    • No fringe benefit tax on employer provided medical treatment for employee & dependents.

    • Beneficial tax treatment for families.

    • Extend beneficial tax treatment for medical aid coverage to self-employed persons.


How the new tax regime will benefit taxpayers1
How the new tax regime will benefit taxpayers ineffective

  • Persons earning between R35 000 & R200 000 pa – approx. 3 million individuals:

    • No fringe benefit tax on employer provided medical aid coverage for employee and dependents.

    • Tax incentives for low cost/high benefit packages.

    • Reduced tax incentive for high cost luxury packages.

    • Beneficial tax treatment for families.

    • Extend beneficial tax treatment for medical aid coverage to self-employed persons.


Other income tax adjustments
Other income tax adjustments ineffective

  • Curtailing subsistence allowances by structuring subsistence allowances into salary packages:

    • Introducing more stringent control measures to arrest excessive claims for travel expenses

    • Subsistence allowance only permitted where fixed date of travel in immediate future has been identified

  • Withholding tax on visiting entertainers and sportspeople – following international practice

    • Introduction of a 5 (from Africa) & 15% (from rest of the world) final withholding tax

  • Promoting visiting skilled expatriates

    • Alleviating the capital gains tax burden for visiting skilled expatriates as foreign assets appreciate in value

    • Changing tax resident definition to allow for extended visitation of expatriates with scarce skills




Net cost of tax relief
Net cost of tax relief ineffective

  • In terms of macroeconomic policy objectives tax relief is aimed at increasing economic growth, employment & equity

  • Tax relief packaged to stimulate demand side of economy (primarily PIT) & supply side of economy (CIT & small business tax adjustments)

  • Supply side theory of tax policy states that economy should grow from tax cut, thereby increasing once again tax bases, translating into future rise in tax collections

  • Hence, R1 of tax relief would lead to less than R1 revenue loss over long run

  • NT estimated economic effect of 2005/06 tax relief package within adopted macroeconomic framework as follows (based on macro econometric modeling):

    • Will probably not experience stated total revenue loss

    • Elasticity of tax collections iro tax relief not equal to one – only 0,85

    • PIT collection elasticity is 0,75 implying that given PIT relief package tax loss will only be 0,75%, while corp tax collection elasticity is 0,80

    • Less than unity elasticity comes from increased economic activity

    • Nominal & real GDP growth increase by 1,9% and 0,4% respectively


Reduction in corporate tax rates
Reduction in corporate tax rates ineffective

  • Corporate income tax rate to be reduced from 30% to 29%

  • Tax rate for SA branches or agencies of foreign companies to be reduced from 35% to 34%

  • Rates for company policyholder funds & corporate funds to be reduced from 30% to 29%

  • New formula for gold mining income

  • Tax rate for an employment company to be reduced from 35% to 34%


International cit rates taxation of company profits
International CIT rates & taxation of company profits ineffective

  • Combined effective company profit tax rate in OECD countries, including 15 European countries (2003):

    • Top marginal tax rate (CIT & PIT) on distribution of domestic source profits to resident individual shareholders

    • OECD average in 2000 (=50,1%) down to 46,4% in 2003

    • EU average in 2000 (=51,7%) down to 47,9% in 2003

    • SA with 1/3 profit distribution and new CIT rate & current STC rate would be 33 to 34%

    • That is from economic theory the correct comparison


Other business income related relief measures
Other business income related relief measures ineffective

  • Facilitating company restructurings

  • Introduction of tonnage tax regime

  • Refining film incentives

  • Government grants and income tax exemptions

  • Financial transaction tax for issue of new shares

  • Removal of financial transaction taxes (stamp duty) on all banking debit entries & installment credit sales

  • Public benefit organisations engaged in business activities

  • Accelerate depreciation allowance (50:30:20 per cent over 3 years) for renewable energy investments.



Graduated tax rate structure accelerated depreciation
Graduated tax rate structure & accelerated depreciation ineffective

  • Under the new regime, qualifying small businesses will be subject to the following rate structure

    • R0 to R35 000 of taxable income - 0%

    • R35 001 to R250 000 of taxable income - 10%

    • R250 001+ of taxable income - 29%


Graduated tax rate structure accelerated depreciation1
Graduated tax rate structure & accelerated depreciation ineffective

  • Small business tax relief extended to personal services as long these businesses maintain at least 4 full-time employees

  • Turnover limit for eligible companies to be increased from R5 million to R6 million

  • Small businesses to be eligible for a depreciation write-off at a 50:30:20 per cent over a 3 year period

  • 100% expensing provision for manufacturing assets remains

  • Current R20 000 double deduction for expenditure and losses incurred in first year of trading (start-ups) will be removed


Administrative measures in support of small businesses sars intervention
Administrative measures in support of small businesses – SARS intervention

  • Tax compliance burden for small business to be reviewed

  • Proposed filing of VAT returns every 4 months to ease compliance

  • Threshold for skills levy obligations to be raised to R500 000

  • Abolish RSC levy on 30 June 2006

  • Relaxation of registration & tax compliance rules for small PBOs

  • Numerous administrative measures seeking to mitigate compliance burden


Tonnage tax

TONNAGE TAX SARS intervention


Tonnage tax regimes
Tonnage Tax Regimes SARS intervention

  • A Tonnage Tax regime, aims to tax shipping activities at fixed rates (presumptive income tax or notional income tax) according to size of the ship & not a company’s business results (taxable income).

  • A notional profit is therefore computed on number of and size of ships contracted and operated, which is then applied to the country’s corporate tax rate.

    • Translates into lower effective tax rate

    • Is notional income tax & benefits from tax credit provisions ito DTAs

  • Differs significantly from taxes paid in Flags of Convenience where a very low flat rate tax is normally applied (= business license fee), which are not creditable charges for DTA purposes.


Example ireland
Example (Ireland) SARS intervention

  • Example taken from Irish tonnage tax regime, of a ship weighing 188,000 tons

  • Step 1:

    • Determining what the “fixed profit per day is.”

    • This is done by refering to the table below, showing at which amount of tonnage the fixed profit-per-day rate applies.


Example

Example SARS intervention

Step 2:

Take the tonnage of the vessel and apply the formula provided.


Example1
Example SARS intervention

  • Step 3:

    • Irelands corporate tax rate of 12.5% is then applied to the Notional profit calculated in step 2.

      Therefore, the annual tonnage tax paid by a shipping company for a vessel weighing 188 888 net tons, will be € 25,550.00.

      It can be seen to ensure a lower effective tax rate then the corporate tax rate, a key component must be to ensure that the fixed profit rates, which determine the notional profit are set at internationally competitive levels vis-à-vis existing tonnage tax jurisdictions.


Benefits from tonnage tax regimes
Benefits from tonnage tax regimes SARS intervention

  • Simple low effective tax rate

  • Increases levels of certainty for companies

  • Greater international competitiveness

  • Creates employment opportunities at primary and secondary level (employment opportunities for local cadets & successful placing on domestically registered vessels)

  • Levels the playing fields between domestic and international counterparts

  • Minimal compliance burden: Cost savings on time & effort required in completing tax returns


Cross country comparison
Cross country comparison SARS intervention

  • Mainly favored by European countries so far

  • Most European shipping countries have introduced such a regime

  • In 2004, India and Ireland introduced tonnage tax regimes

  • USA passed legislation within 6 months to arrest deregistration trend of their commercial fleet

  • Most of the world’s top 35 maritime nations have introduced some sort of tax incentives in their shipping industry

  • Tonnage tax regime is becoming increasingly the incentive of choice

  • Through introducing a tonnage tax regime, SA could easily break into the top 35 Maritime Nations

  • Should SA be on par with Chile?





General fuel levy
General fuel levy deductions

  • 5 cents/litre general fuel levy increase for petrol & diesel

  • Diesel rebate for primary producers increased by 3,14 c/litre

    • Revenue cost in 2004/05 = R700 million

    • Estimated to increase in 2005/06 to R820 million

  • New rules w.r.t sub-contractors making use of the diesel refund system

  • Liquid petroleum gas will not attract general fuel levy


Combined fuel levy on leaded & diesel, 2003/04 – 05/06: deductions1 March petrol/diesel price increases (42 & 33 c/l respectively) reduce tax burden to 32.8% &32.5%)


Other
Other deductions

  • Road Accident Fund levy

    • Levy on petrol and diesel to be increased by 5 cents/litre

  • Base oils for lubricating

    • Excise duty to be abolished

  • Air departure tax

    • To be increased from R55 to R60 (departing within SACU)

    • To be increased from R110 to R120 (international departures outside SACU)


Other1
Other deductions

  • Taxes on international trade & transactions

    • Elimination of ad-valorem excise duties on sun protection and certain digital cameras

  • RSC levies and Joint Services Council levies

    • To be abolished with effect from 30 June 2006 & replaced with alternative tax instrument or revenue-sharing arrangement



2005 budget reforms to tax administration
2005 Budget: reforms to deductionstax administration

  • Single registration for all tax products per taxpayer

  • e-filing to be extended to new tax instruments

  • Single national call centre access number

  • Relationship managers at Large Business Centre

  • Single administrative document for all customs declarations

  • Implement trans-national electronic corridors on NEPAD

  • One-stop border posts

  • Linkage with foreign customs administrations

  • Increasing the number of people in the tax system

  • Voluntary disclosure dispensation

  • X-ray scanners at ports of entry

  • Voluntary approaches to resolve oustanding cases

  • Countering abuse of incentive schemes

  • Establishing Tax Practitioners’ Board

  • Introduction of Tax Administration Bill


Anti avoidance measures
Anti-avoidance measures deductions

  • Overhaul of the General Anti-avoidance Rule

    • Release of discussion document for revised GAAR procedure

  • Offshore banking centres

    • residence-based income tax system to arrest undue tax deferral & arrest tax haven practices that are designed to poach SA tax base

  • Bribes, penalties and other illegal activities

    • Tax treatment of bribes, fines and penalties to reinforce anti-corruption measures


Reducing compliance costs enhancing services
Reducing compliance costs & enhancing services deductions

  • Single registration for all tax products per taxpayer

  • E-filling to be extended to new tax instruments

  • Full view of account for taxpayers & tax practitioners

  • Single national call centre access number for tax & customs

  • Taxpayer relationship managers at the Large Business Centre


Trade facilitation economic security
Trade facilitation & economic security deductions

  • Implementation of trans-national electronic corridors on NEPAD corridors

    • Increased customs cooperation between Namibia, Botswana & SA

  • Introduction of single multi-purpose customs declaration

  • Joint customs control instituted at major commercial ports of entry

  • Single document registration facility for importers & exporters



Motor vehicle allowance1
Motor vehicle allowance deductions

  • Current formula creates bias in the structuring of salary packages

  • Method for calculating fixed business travel cost to be adjusted by introducing a residual value and by capping value of the car at R360 000

  • Deemed private kilometers to be increased from 14 000 to 16 000 and to 18 000 in 2006

  • Taxable value of company car to be increased from 1,8 to 2,5 per cent






Schedule
Schedule deductions


Additional tax based on 30 000 km travelled 16 000 km deemed private
Additional tax deductionsBased on 30 000 km travelled, 16 000 km deemed private


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