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Budget 2007 Looking For Breaks ?

01 May 2007   (0 Comments)
Posted by: TaxFind™
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Budget 2007 Looking For Breaks?

Despite the additional tax on tobacco products and alcoholic beverages, the outlook is not bleak at all for tax paying companies and individuals.The focus of this year’s tax proposals was to accelerate sustainable growth,Investment and job creation.  

The proposals also aimed to reinforce South Africa’s attractiveness as an investment destination, lower the cost of doing business and initiate social security and retirement reforms so as to increase savings and reduce household vulnerability.The 2007 budget will provide net tax relief of R12,4 billion and include:

•Replacing the secondary tax on companies with a dividend tax, reducing the rate from 12,5% to 10% and broadening the base;

•Personal income tax relief for individuals amounting to R8,4 billion;

•Abolishing retirement fund tax; 

•Treating the sale of shares (equities) held for more than three years as capital gains;

•Increasing the tax-free interest and dividend income monetary thresholds;

•Streamlining tax and regulatory aspects of retirement funds ;

•Protecting South Africa’s intellectual property rights tax base;

•Increasing excise duties on tobacco products and alcoholic beverages; and

•Increasing the general fuel levy and the Road Accident Fund levy.

Dividend Tax Replaces Secondary Tax on Companies

Secondary tax on companies (STC) that has been a thorn in the flesh of corporate South Africa for many years has now been replaced by a dividend tax.In his speech, Manuel said:"Most countries have a dividend tax at the shareholder level.We have a secondary tax on companies collected directly from a few thousand companies as opposed to millions of shareholders.To further improve the transparency and equity of the tax system, we are proposing that it be phased out and replaced with a dividend tax at shareholder level.This reform would consist of two phases. 

We propose reducing the rate from 12,5 per cent to 10 percent and that the base be redefined to apply to all distributions.”The secondary tax on dividends declared by companies was introduced in the early 1990s to curb inflation in a highly volatile political situation in the country and was aimed at encouraging the retention and reinvestment of profits by companies. 

Although taxing of dividends is common practice overseas, the South African system was different insofar as the formal liability for the tax has be en at company rather than shareholder level.Dividends received by shareholders from local companies were then exempt from tax.

According to an article in Business Day after the budget speech, it was stated that the new reforms were designed to clear up misperceptions about South Africa’s tax system, encourage foreign direct investment and improve returns for investors."International investors tend to be more familiar with a dividend tax at shareholder level and of ten enjoy double tax treat y limitations on a dividend tax at this level.In other words, double tax treaties may limit the tax imposed at the shareholder level but do not do so at the company level.”

The reform will take place in two phases.Phase 1 will see the reduction of the tax rate and the broadening of the tax base.The dividend tax will apply at a rate of 10%, from the current 12,5% secondary tax on companies rate.Phase 2, starting in 2008, will see the conversion to a dividend tax on shareholders, being enforced by withholding tax at company level.The implementation of this phase will transparency and equity of the tax system, we are proposing that it be phased out and replaced with a dividend tax at shareholder level.This reform would consist of two phases. 

We propose reducing the rate from 12,5 per cent to 10 per cent and that the base be redefined to apply to all distributions.”The secondary tax on dividends declared by companies was introduced in the early 1990s to curb inflation in a highly volatile political situation in the country and was aimed at encouraging the retention and reinvestment of profits by companies. 

Although taxing of dividends is common practice overseas, the South African system was different in so far as the formal liability for the tax has be en at company rather than shareholder level.Dividends received by shareholders from local companies were then exempt from tax.

According to an article in Business Day after the budget speech,it was stated that the new reforms were designed to clear up misperceptions about South Africa’s tax system, encourage foreign direct investment and improve returns for investors. "International investors tend to be more familiar with a dividend tax at shareholder level and of ten enjoy double tax treat y limitations on a dividend tax at this level.In other words, double tax treaties may limit the tax imposed at the shareholder level but do not do so at the company level.”

The reform will take place in two phases.Phase 1 will see the reduction of the tax rate and the broadening of the tax base.The dividend tax will apply at a rate of 10%, from the current 12,5% secondary tax on companies rate.Phase 2, starting in 2008, will see the conversion to a dividend tax on shareholders, being enforced by withholding tax at company level.The implementation of this phase will depend on the renegotiation of several international tax treaties.

According to the general manager of legislative policy at SARS, Franz Tomasek, the change from a secondary tax on companies to a dividend tax system was motivated by lack of understanding by international investors of the country’s system of tax.

Abolishing Retirement Fund Tax 

Retirement fund tax on interest and rental income has been abolished from 1 March 2007. This will result in improved returns for retirement fund members.In his speech, Manuel said:"In order to promote saving for retirement, we propose to this house the abolition of the retirement fund tax from 1 March 2007.We call on trustees to ensure that the benefits of this reform accrue to the contributors and beneficiaries of retirement funds.The proposal will cost R3 billion a year and is part of a number of related measures aimed at encouraging household savings.”

And finally beware : High-risk non-compliance areas identified

The 2007 Budget Review published by the National Treasury, states that SARS has identified three cross-industry areas as focal points in 2007/08.These are:

•Trusts, because of their continued use to avoid tax: Initiatives will include greater co-operation with the Master’s office to register trusts and identify risk cases and the allocation of more specially trained auditors.

•The under-evaluation and under statement of stock : this will involve additional audit activity and verification.

•Employees’ tax : Dedicated audit teams have been established and trained to counter abuses in the area.

 Source: By TaxTALK


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