Budget 2005

1. Budget 2005 Revenue trends and tax proposals – Briefing on Draft Taxation Laws Amendment Bill National Treasury Presentation to Portfolio and Select Committee on Finance Friday, 27 May 2005

2. Summary of tax proposals

3. 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. • Total corporate & small business corporation tax relief – R3,8 billion. • Exemption from Skills Development Levy (SDL) for small businesses 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.

4. 2005 main tax proposals -tax relief • 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 depreciable assets– • Excluding manufacturing assets that continue to benefit from 100% expensing • Increasing of property transfer duty thresholds. • Abolishing excise duties on sun protection products & professional digital cameras.

5. 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.

6. Clause 1: New transfer duty rate structure with effect from 1 March 2005

7. Clause 2: PIT - rate & bracket adjustments Clause 3: amending rebates of normal tax

8. 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

9. Comparison of annual tax payable

10. Motor vehicle allowance Clause 4

11. Clause 4: PIT relief balanced against higher tax burden stemming from elimination of tax benefits ito motor vehicle allowance regime: • Clause 4 tax amendment: deemed method for calculating fixed business travel cost adjusted by introducing– • 30% residual value element • Tax benefits are capped at car value of R360 000 (higher value cars will no longer translate into progressively higher deductions for income tax purposes) • Deemed private km’s are increased from 14 000km to 16 000km • Depreciation of economic use value of car determined over 7 years • Taxable value of company car to be increased from 1,8 to 2,5 per cent • Consider PIT relief distribution together with higher tax burden for taxpayers currently 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; translates into 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; translates into overall increase in annual tax burden of R6 654

12. Schedule

13. Additional tax Based on 30 000 km traveled, 16 000 km deemed private

14. Clause 5: Increase in interest & dividend exemption • 2004/05, interest & dividend exemption was fixed at R11 000 for taxpayers under 65 years of age – this was increased to R15 000 with effect from 1 March 2005. • 2004/05 interest & dividend exemption was fixed at R16 000 for taxpayers age 65 and over – this was increased to R22 000 with effect from 1 March 2005. • The exemption for foreign source interest & dividend income was raised from R1 000 to R2 000.

15. Clause 2: Reduction in corporate tax rates • 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: • Y = 35-175/x, where co is not exempt from STC • Y = 45-225/x, where co is exempt from STC • Tax rate for an employment company to be reduced from 35% to 34% (clause 2(c)).

16. 2005 Budget– Other business income related relief measures • 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 (Clauses 23 & 24) • Public benefit organisations engaged in business activities • Accelerate depreciation allowance (50:30:20 per cent over 3 years) for renewable energy investments. • New graduated tax rate structure & tax depreciation system for small businesses and extending that relief to personal service companies if these create & maintain at least 4 full-time employment opportunities (Clause 9)

17. Tax relief measures for small businessesClauses 2 (b) & 32

18. Graduated tax rate structure & VAT payment period • Clause 2: 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% • Clause 32: Reducing compliance burden for small businesses & improving cash flow by allowing certain vendors (with taxable supplies not exceeding R1 million) to file VAT returns every 4 months, ending on last day of June, October and February. • Comes into effect 1 August 2005

19. Clauses 9, 32 & 36: Graduated tax rate structure & accelerated depreciation for small businesses • Amending s12E: • 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 for all depreciable assets 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. • Skills Development Levy (SDL) exemption: businesses with payroll of up to R500 000 (up from R250 000) will no longer be required to account for SDL. Similarly, SDL liability. requirement if at least one employee is registered for PAYE is dropped (clause 36).

20. Taxes on goods and services

21. Clauses 17, 71, 41: Excise duties on alcoholic beverages & tobacco products

22. Other rate adjustments • Clause 16: Customs & Excise Act, 1964 - Air departure tax • To be increased from R55 to R60 (departing within SACU) • To be increased from R110 to R120 (international departures outside SACU) • Clauses 19 to 24: Removal of stamp duties (financial transaction tax) on all debit entries & installment credit agreements with effect from 1 March 2005. • Clause 25: Consequential stamp duty change triggered by withdrawal of tax-exempt status of non-proprietary stock exchange. As current rights of exchange are converted & incorporated exchange would issue new shares it would have attracted stamp duty but accord. to 2005 tax proposals all financial transaction taxes will be scrapped on issuance of shares upon formation of a company with effect from 1 Jan ’06. • Hence, no stamp duty charge on issuance of shares by newly incorporated exchanges • Clause 40: Eliminating CGT consequence if rights are converted into shares in newly incorporated exchanges – but must occur within 18 months.

23. Other • 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 • Clauses 26 & 27:RSC levy & Joint Services Board levies (KwaZulu and Natal Joint Services Act, 1990) – limiting prescription period to 2 years for the collection of RSC levies. • This is a consequential change, following Supreme Court of Appeal decision that dividend payments to certain holding companies are also subject to RSC levies – unless there is fraud & misrepresentation.

24. Measures to enhance tax & customs administration

25. Anti-avoidance & tax administration • Clauses 6 to 8: ownership clarification for depreciable assets • Clause 10: clarification of anti-avoidance scheme in respect of circular flow of funds (incurral and accrual of interest) • Clause 11: provisional tax payment system adjustment for companies aligned with that of individuals – foreign tax credits • Clauses 12, 13, 14, 15, 18: Customs & Excise Act, 1964 administrative procedures, cross reference corrections, language clarifications, addressing inadvertent deletions • Clauses 28 to 31, 33, 34, 35: Value-Added Tax, 1991 textual changes, addressing zero-rating of SETA grants, deregistration of VAT vendors, penalty & interest provisions, addressing ongoing inconsistencies of VAT treatment of public entities & authorities • Clause 37: Amendment of s20 of Exchange Control Amnesty & Amendment of Taxation Laws Act, 2003 – different deadline adjustments in respect of Amnesty and filing tax returns • Clause 38: Commissioner to collect existing mineral lease & royalty payments, previously raised by DME.