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2010 Budget and Tax Update. 2010 BUDGET. Main Tax Proposals. Personal income tax relief of R6.5 billion Fuel taxes to increase by 25.5 c per litre Voluntary disclosure programme Curbing of avoidance schemes Increased sin taxes Cash grant for hiring unskilled youth.

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2010

Budget and Tax Update



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Main Tax Proposals

  • Personal income tax relief of R6.5 billion

  • Fuel taxes to increase by 25.5 c per litre

  • Voluntary disclosure programme

  • Curbing of avoidance schemes

  • Increased sin taxes

  • Cash grant for hiring unskilled youth







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Company Tax RatesYears of assessment ending between 1/4/10 and 31/3/11


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Small Business Corporations(Years of assessment ending between 1/4/10 and 31/3/11)


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Turnover Tax ForMicro Businesses (year of assessment ending 28/2/10 and 28/2/11)


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Individuals

  • R6,5 billion relief: revised tax tables, rebates and exemptions

  • Focus on tax avoidance and tax structuring

  • SITE to be abolished from 1 March 2011

  • Gambling winnings to be taxed


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Fringe Benefits

  • Company car and other fringe benefit rules to be revised

  • Employer deductions to be fully reflected in employee’s gross income

  • Employee insurance packages to be taxed on a monthly basis


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Medical Aid Contributions

  • Monthly caps to increase

    • from R625 to R670 (7.2%) for each of the first two beneficiaries and

    • from R380 to R410 (7.9%) for each additional beneficiary

  • Proposed conversion to a tax credit system deferred until 2012/13


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Lump Sum Gratuities

  • R30 000* exemption to be merged into the retirement fund lump sum benefit system - aggregation principle will apply.

    * Last adjusted in 1984


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Subsistence Allowances

  • Travel in the Republic

  • meals and incidental costs: R276 (was R260) per day

  • incidental costs only: R85 (was R80) per day

  • Travel outside the Republic

  • daily amount per country


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Estate Duty

  • Double tax on death: CGT and Estate Duty

    • Estate duty to be reviewed


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Tax Administration

  • Increased focus on enforcement and collections

  • Level of tax compliance has "deteriorated”

  • Third party information and "targeted lifestyle audits"

  • Enhanced focus on "large taxpayers and high-net worth individuals”


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Voluntary Disclosure Programme

  • 1 Nov 2010 – 30 Oct 2011

  • Some relief for

    • Penalties

    • Exchange control

    • Criminal prosecution


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VAT

  • Possible relief

    • for claw-back on temporary rentals by developers

    • renting of furnished residential accommodation

  • 12-month claw-back rule to be relaxed on deregistration (to avoid double-tax)


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Youth Employment Grant

  • Two-year cash grant

    • For tax-compliant businesses, non-governmental organisations and municipalities


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Urban Development Zone (UDZ) Allowance

  • New buildings: 20%(first year); 8% p.a. (next 10 yrs)

  • Low cost housing in UDZ

    • New buildings: 25% (first year); 13% (next 5 yrs); 10% (year 7)

    • Improvements to existing buildings: 25% p.a.

  • Enhanced allowances to be considered for private developers who improve another party's land


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Dividends Tax

  • Definition of “dividend” to be refined

  • New definition of “foreign dividend”

  • Transitional issues

  • Practical problems relating to in specie dividends

  • Further refinements to the withholding system where companies would pay dividend tax on a shareholder’s behalf

  • Implementation 2011 (/2012?)


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Corporate Tax

  • Attack on sophisticated tax avoidance schemes

  • Interest cost allocation for financial institutions

  • Offshore protected cell companies

  • Schemes channeling deductible amounts to residents

  • Restricting the interest exemption for non-residents investing in financial instruments other than South African bonds, unit trusts or publicly available interest bearing instruments


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Headquarter Companies

  • Exchange control and tax relief to be considered for various types of headquarter companies located in South Africa


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Fuel Levies

  • To be increased by 25,5c/l on 7 April 2010

    • General fuel levy on petrol and diesel increases by 10c/l

    • Additional 7.5c/l for the funding of the new petroleum pipeline between Durban and Gauteng

    • Road Accident Fund levy on petrol and diesel increases by 8c/l cents per litre

  • Total = 243.5 c/l on petrol; 228.51c/l on diesel


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Green Taxes

  • Carbon emissions tax to be introduced on new passenger vehicles from 1 September 2010

  • Congestion, pollution and landfill taxes to be considered


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Sin Taxes

  • Tax on -

    • Cigarettes increases from R7.70 per pack of 20 cigarettes to R8.94

    • Beer increases from 79c to 85c on a 340ml can

    • Wine increases from R1.98 to R2.14 a litre

  • Expected revenue: R2.3bn 2010/11



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Primary Residence Exclusion(Para 45 (1) (b) of the Eighth Schedule)

  • Capital gains & losses on proceeds up to R2million disregarded

    • Applies only where... (see Para 45(4))

    • Effective for years of assessment commencing on or after 1 March 2009

    • NB: Primary residence exclusion remains at R1,5m


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Travel Allowance: Repeal of Deemed Kilometer Method(S 8 (1)(b)(ii) & Para. 1 of the Fourth Schedule)

  • The deemed kilometre method (first 18 000 km traveled per year deemed to be private travel) to be repealed from 1 March 2010

  • Amount included in “remuneration” increased from 60% to 80%

    • from 1 March 2010

  • Can still claim business travel expenses for actual kilometers recorded in a log book


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Conversion of the STC to Dividend Withholding Tax

  • 10% tax on dividends will fall on the shareholders

  • A number of exemptions (e.g. pension funds; company-to-company)

  • Treaty reductions (5% on re-negotiated DTAs)


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Conversion of the STC to Dividend Withholding Tax

  • Withholding obligation on the company payer (or a regulated intermediary)

  • New definition of “dividend” and “contributed tax capital”

  • Anti-avoidance rules will become effective on implementation


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Controlled Foreign Companies (S 9D)

“Foreign Business Establishment” definition

  • Fixed place

  • Located outside South Africa

  • Conducted continuously and regularly

  • Takes into account certain activities of CFC group members if located in the same foreign country


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Controlled Foreign Companies (S 9D)

“Foreign Business Establishment” definition

  • Establishment located in foreign country solely or mainly for non-tax avoidance reasons

    High tax jurisdictions

  • CFCs will be exempt from tax in SA if subject to high foreign country taxes


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Depreciation on Improvements (ss 11D, 12B, 12C, 12D(2), 12F, 12I and 37B)

  • Amendments clarify that the depreciation allowance applies equally to improvements associated with underlying assets. Depreciation of improvements should be determined as if the improvement were a stand-alone asset.


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Depreciation on Improvements (ss 11D, 12B, 12C, 12D(2), 12F, 12I and 37B)

  • Effectivefor expenditure incurred in respect of years of assessment ending on or after 1 January 2010


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Lease Improvements Allowance (s 11(g))

  • The prohibition against deducting improvements where the lessor is tax-exempt will no longer apply if:

    • (i) the lessee is leasing land or buildings owned directly by government (national, provincial or municipal) or indirectly by government (through institutions exempt in terms of section 10(1)(cA) and section 10(1)(t)); and


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Lease Improvements Allowance (s 11(g))

  • The prohibition against deducting improvements where the lessor is tax-exempt will no longer apply if:

    • (ii) the lease is of a duration of 20 years or more.

  • Effectivefor improvements brought into use on or after 1 January 2009


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Pre-Trade Expenses(s 11A)

  • S 24J expenditure now included

  • Effective for years of assessment ending on or after 1 January 2005 (backdated)


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Small Business Corporations (S 12E(4)(a)(ii)(hh); para 3(f)(iii) of the Sixth Schedule)

  • Inactive or dormant shelf companies added to the list of permitted investments

    • A shelf company is inactive or dormant until the company trades or holds assets exceeding R5 000

  • Effective for years of assessment ending on or after 1 January 2010



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Example

Facts:

  • Employer X enters into a learnership contract with a learner.

  • At the end of month 6, the learner leaves Employer X and moves to Employer Y.

  • The learner subsequently completes the learnership with Employer Y.

  • The learner has no disabilities and the learnership spans a single year of assessment for both Employer X and Employer Y.


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Example

Result:

  • The commencement allowance is divided pro rata between Employer X and Employer Y (each based on a 6/12 ratio).

  • Employer X is entitled to a commencement allowance of R15 000 (1/2 of R30000), and Employer Y is entitled to a commencement allowance of R15 000 (1/2 of R30 000).

  • Employer Y is also entitled to claim the completion allowance of R30000 (i.e. the full amount).


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Example

Facts:

  • Employer X (Dec year-end) concludes a 3-year learnership with a learner at the beginning of January 2010.

  • The learner changes employment to Employer Y (Dec year-end) at the end of June 2011.

  • The learner subsequently completes the learnership with Employer Y.

  • Assume the learner does not have any disabilities.


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Example

Result:

2010: Employer X may claim the full R30 000 commencement allowance.

2011: Employer X may claim R15 000 of the

commencement allowance and Employer Y claims the remaining R15 000.

2012: Employer Y claims the final R30 000

allowance as well as a R90000 completion

allowance (R30 000 x 3)

Source: Explanatory Memorandum


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Venture Capital Companies (VCCs) (s 12J)

VCC

(FAIS Compliant)

100% Deduction

Investor: Indiv/Listed

Qualifying SME

Individual – R750 000 pa deduction limit

Listed – No limit; subject to 40% shareholding limit in the VCC

80% - R10m gross assets


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VCC Allowance(Section 12J)

  • 100% upfront deduction for investments in VCC ordinary shares

    • Capped at R750 000 p.a. for individuals (with a (R2.25 m life-time limit)

    • No limit for listed companies (but 40% holding)

    • Unlisted corporations are excluded


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VCCs: Excluded Activities (s 12J)

  • Dealing in or renting land (excluding hotel keepers)

  • Financial services e.g. banking, insurance, money lending, HP financing

  • Provision of professional services e.g. legal, tax advisory, broking, management consulting, auditing, accounting and other related activities

  • Casinos, other gambling-related activities and any other games of chance


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VCCs: Excluded Activities (s 12J)

  • Manufacturing, buying or selling liquor, tobacco products or arms

  • Franchisees

  • Businesses conducted mainly outside SA

  • Investment income exceeds 20% of gross income


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Exemption of Certified Emission Reductions (S 12K)

  • CERs represent emission reductions that are verified and certified by the Department of Energy

  • Disposals of CERs are exempt from income tax in respect of any person that carries the Clean Development Mechanism (CDM) project registration and implements that project

  • Effective from 11 February 2009 and applies in respect of disposals on or after that date


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Energy Efficiency Allowance(S 12L)

  • Annual notional allowance for energy savings achieved in the production of income

    • South African National Energy Development Institute (SANEDI) energy savings certificate required


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Energy Efficiency Allowance (S 12L)

  • Basic formula - Energy efficiency

    Savings in kWh (x) Applied rate

    2 (or a number by the Minister)

    (Comes into operation on a date determined by

    the Minister of Finance by notice in the Gazette)


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Employer-Provided Post-Retirement Medical Aid (S 12M)

  • Lump sum payment of post-retirement medical scheme contributions to retired employees (or their spouses/dependants) or to an insurer is deductible when paid

    • Applies to post-retirement medical scheme lump sums paid on or after 1 September 2009


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Medical Aid Contributions(S 18 & para 12A(1) of the Seventh Schedule)

  • Increase in monthly monetary caps from 1 March 2009:

    • From R570 to R625 for first 2 beneficiaries, and

    • From R345 to R380 for each additional beneficiary


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Medical Aid Contributions(S 18 & para 12A(1) of the Seventh Schedule)

  • Tax-free fringe benefit for medical scheme contributions paid by employer removed from 1/3/2010

    • All contributions by an employer will be taxable and the employee will get a tax deduction for contributions up to the cap

    • Neutral tax impact for both employee and employer


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Provisional Tax Exemption For Taxpayers Over 65(para. 18(1)(d) of the Fourth Schedule)

  • Exemption if

    • Not company directors and

    • Only receive employment income, interest, rental or dividends and

      • Taxable income up to R80 000: to increase to R120 000

      • Effective for years of assessment ending on or after 1 January 2010


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Provisional Tax(para 19 of Fourth Schedule)

1. Second provisional payment

  • Rules for calculating estimated taxable income differ

    • Tier 1

    • Tier 2

      2. 1st and 2nd provisional tax payments

  • Basic amount increases by 8% a year if last assessed more than a year previously


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Tier One - Smaller Taxpayers (to up to R1million )

  • Largely reverts to previous basis

  • No penalty if estimate of taxable income is at least equal to the lesser of -

    - The basic amount (adjusted) or

    • 90% of actual taxable income for the year


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Tier One - Smaller Taxpayers (to up to R1million )

  • Penalty of 20% of the shortfall if the estimated TI is below this level

  • Unless the estimate ‘‘was seriously calculated with due regard to the factors having a bearing thereon or was not deliberately or negligently understated’’


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Tier Two - Larger Taxpayers

  • Estimated taxable income must be equal to at least 80% of actual taxable income for the year

  • 20% penalty of the shortfall if the estimate does not reach this level

  • Unless the estimate was ‘‘seriously calculated…(etc)”


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Residential Accommodation Fringe Benefit (para 9 of the Seventh Schedule)

  • “B” in the formula increases from R46 000 to R54 200

    • Effective for years of assessment ending on or after 1 January 2010


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Transfer of Properties Out of Companies and Trusts(S 9(20) of the Transfer Duty Act, para 51 of the Eighth Schedule, s64B(5)(k))

  • Until 31/12/2011 a distribution of a domestic residence from a company or trust to a sole shareholder is treated as a CGT ‘roll-over event’

  • The distribution is exempt from STC and transfer duty

  • Certain requirements must be met


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Requirements to Qualify(Para 51 of the Eighth Schedule)

  • Transfer of an interest in a residence from a company or trust to an individual who:

  • Acquires that interest no later than 31/12/2011

  • Lived (alone or with his/her spouse) in that residence and used it mainly for domestic purposes from 11/2/09 until date of transfer

  • Directly held 100% of share capital or members’ interest in the company (alone or with spouse) from 11/2/09 to date of registration in his/her/spouse’s name

  • OR donated or sold that residence to the trust (or financed expenditure)


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Case Law

  • Anglovaal v SARS (411/08) [2009] ZASCA 109

    Whether shares were acquired as a capital investment or

    Trading stock

  • Fourie Beleggings v CSARS (168/08) [2009] ZASCA 37

    Payment in compensation for cancellation of a contract was

    not capital nature

  • Grundlingh v CSARS [2009] SAFSHC 88

    Whether partnership income from Lesotho was taxable in

    South Africa


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Thank-you

Fasset Call Centre

086 101 0001

www.fasset.org.za


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