2010 Budget and Tax Update 1 2010

2010 Budget and Tax Update 1

2010 BUDGET 2

Main Tax Proposals • Personal income tax relief of R 6. 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 3

Tax Tables - Individuals 2010/2011 Taxable Income (R) 2009/2010 Rates of Taxable Income (R) Rates of Tax 0 - 140, 000 18% 0 - 132, 000 18% 140, 001 - 221, 000 R 25, 200 + 25% 132, 001 - 210, 000 R 23, 760 + 25% 221, 001 - 305, 000 R 45, 450 + 30% 210, 001 - 290, 000 R 43, 260 + 30% 305, 001 - 431, 000 R 70, 650 + 35% 290, 001 - 410, 000 R 67, 260 + 35% 431, 001 - 552, 000 R 114, 750 + 38% 410, 001 - 525, 000 R 109, 260 + 38% 552, 001 and above R 160, 730 + 40% 525, 001 and above R 152, 960 + 40% 4

Rebates Primary Rebate Under 65 Over 65 2011 R 10 260 5 675 2010 R 9 756 5 400 5

Tax Thresholds Primary Rebate Under 65 Over 65 2011 R 57 000 88 528 2010 R 54 200 84 200 6

Interest and Taxable Dividend Exemption Under 65 Over 65 Foreign 2011 R 22 300 32 000 3 700 2010 R 21 000 30 000 3 500 7

Capital Gains Tax Exemptions 2011 R 2010 R Annual Exclusion 17 500 Primary Residence Exclusion - disregard gains & losses if proceeds do not exceed 1, 5 m 2 m 8

Company Tax Rates Years of assessment ending between 1/4/10 and 31/3/11 2010 Non-mining companies 28% Close corporations 28% Personal service provider companies 33% Non-resident companies 33% STC: 10% on net amount of dividends declared 9

Small Business Corporations (Years of assessment ending between 1/4/10 and 31/3/11) Taxable income R 0 - Rate of tax 57 000 0% 57 000 - 300 000 10% of the amount over R 57 000 300 000 R 24 580 + 28% of the amount over R 300 000 10

Turnover Tax For Micro Businesses (year of assessment ending 28/2/10 and 28/2/11) Turnover (R) 0 - Rate of tax 100 0% 100 001 - 300 000 1% of the amount over R 100 000 300 001 - 500 000 R 2 000 + 3% of the amount over R 300 000 500 001 - 750 000 R 8 000 + 5% of the amount over R 500 000 750 001 - R 20 500 + 7% of the amount over R 750 000 11

Individuals • R 6, 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 12

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 13

Medical Aid Contributions • Monthly caps to increase Ø from R 625 to R 670 (7. 2%) for each of the first two beneficiaries and Ø from R 380 to R 410 (7. 9%) for each additional beneficiary • Proposed conversion to a tax credit system deferred until 2012/13 14

Lump Sum Gratuities • R 30 000* exemption to be merged into the retirement fund lump sum benefit system - aggregation principle will apply. * Last adjusted in 1984 15

Subsistence Allowances • Travel in the Republic Ø meals and incidental costs: R 276 (was R 260) per day Ø incidental costs only: R 85 (was R 80) per day • Travel outside the Republic Ø daily amount per country 16

Estate Duty • Double tax on death: CGT and Estate Duty – Estate duty to be reviewed 17

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” 18

Voluntary Disclosure Programme • 1 Nov 2010 – 30 Oct 2011 • Some relief for Ø Penalties Ø Exchange control Ø Criminal prosecution 19

VAT • Possible relief Ø for claw-back on temporary rentals by developers Ø renting of furnished residential accommodation • 12 -month claw-back rule to be relaxed on deregistration (to avoid double-tax) 20

Youth Employment Grant • Two-year cash grant Ø For tax-compliant businesses, non-governmental organisations and municipalities 21

Urban Development Zone (UDZ) Allowance • New buildings: 20%(first year); 8% p. a. (next 10 yrs) • Low cost housing in UDZ Ø Ø 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 22

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? ) 23

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 24

Headquarter Companies • Exchange control and tax relief to be considered for various types of headquarter companies located in South Africa 25

Fuel Levies • To be increased by 25, 5 c/l on 7 April 2010 Ø General fuel levy on petrol and diesel increases by 10 c/l Ø Additional 7. 5 c/l for the funding of the new petroleum pipeline between Durban and Gauteng Ø Road Accident Fund levy on petrol and diesel increases by 8 c/l cents per litre • Total = 243. 5 c/l on petrol; 228. 51 c/l on diesel 26

Green Taxes • Carbon emissions tax to be introduced on new passenger vehicles from 1 September 2010 • Congestion, pollution and landfill taxes to be considered 27

Sin Taxes • Tax on Ø Cigarettes increases from R 7. 70 per pack of 20 cigarettes to R 8. 94 Ø Beer increases from 79 c to 85 c on a 340 ml can Ø Wine increases from R 1. 98 to R 2. 14 a litre • Expected revenue: R 2. 3 bn 2010/11 28

2009 AMENDMENTS 29

Primary Residence Exclusion (Para 45 (1) (b) of the Eighth Schedule) • Capital gains & losses on proceeds up to R 2 million disregarded Ø Applies only where. . . (see Para 45(4)) Ø Effective for years of assessment commencing on or after 1 March 2009 Ø NB: Primary residence exclusion remains at R 1, 5 m 30

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 31

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) 32

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 33

Controlled Foreign Companies (S 9 D) “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 34

Controlled Foreign Companies (S 9 D) “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 35

Depreciation on Improvements (ss 11 D, 12 B, 12 C, 12 D(2), 12 F, 12 I and 37 B) • 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. 36

Depreciation on Improvements (ss 11 D, 12 B, 12 C, 12 D(2), 12 F, 12 I and 37 B) • Effective for expenditure incurred in respect of years of assessment ending on or after 1 January 2010 37

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)(c. A) and section 10(1)(t)); and 38

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. • Effective for improvements brought into use on or after 1 January 2009 39

Pre-Trade Expenses (s 11 A) • S 24 J expenditure now included • Effective for years of assessment ending on or after 1 January 2005 (backdated) 40

Small Business Corporations (S 12 E(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 R 5 000 • Effective for years of assessment ending on or after 1 January 2010 41

Learnership Allowance (S 12 H) Type of learner Commencement allowance Completion allowance Basic R 30 000 p. a. R 30 000 x no. of completed 12 -month periods Learner with disability R 50 000 p. a. R 50 000 x no. of completed 12 -month periods 42

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. 43

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 R 15 000 (1/2 of R 30000), and Employer Y is entitled to a commencement allowance of R 15 000 (1/2 of R 30 000). • Employer Y is also entitled to claim the completion allowance of R 30000 (i. e. the full amount). 44

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. 45

Example Result: 2010: Employer X may claim the full R 30 000 commencement allowance. 2011: Employer X may claim R 15 000 of the commencement allowance and Employer Y claims the remaining R 15 000. 2012: Employer Y claims the final R 30 000 allowance as well as a R 90000 completion allowance (R 30 000 x 3) Source: Explanatory Memorandum 46

Venture Capital Companies (VCCs) (s 12 J) 100% Deduction VCC (FAIS Compliant) Investor: Indiv/Listed Individual – R 750 000 pa deduction limit Listed – No limit; subject to 40% shareholding limit in the VCC Qualifying SME 80% - R 10 m gross assets 47

VCC Allowance (Section 12 J) • 100% upfront deduction for investments in VCC ordinary shares – Capped at R 750 000 p. a. for individuals (with a (R 2. 25 m life-time limit) – No limit for listed companies (but 40% holding) – Unlisted corporations are excluded 48

VCCs: Excluded Activities (s 12 J) • 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 49

VCCs: Excluded Activities (s 12 J) • Manufacturing, buying or selling liquor, tobacco products or arms • Franchisees • Businesses conducted mainly outside SA • Investment income exceeds 20% of gross income 50

Exemption of Certified Emission Reductions (S 12 K) • 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 51

Energy Efficiency Allowance (S 12 L) • Annual notional allowance for energy savings achieved in the production of income – South African National Energy Development Institute (SANEDI) energy savings certificate required 52

Energy Efficiency Allowance (S 12 L) • Basic formula - Energy efficiency Savings in k. Wh (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) 53

Employer-Provided Post. Retirement Medical Aid (S 12 M) • 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 54

Medical Aid Contributions (S 18 & para 12 A(1) of the Seventh Schedule) • Increase in monthly monetary caps from 1 March 2009: – From R 570 to R 625 for first 2 beneficiaries, and – From R 345 to R 380 for each additional beneficiary 55

Medical Aid Contributions (S 18 & para 12 A(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 56

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 R 80 000: to increase to R 120 000 • Effective for years of assessment ending on or after 1 January 2010 57

Provisional Tax (para 19 of Fourth Schedule) 1. Second provisional payment – Rules for calculating estimated taxable income differ • Tier 1 • Tier 2 2. 1 st and 2 nd provisional tax payments – Basic amount increases by 8% a year if last assessed more than a year previously 58

Tier One - Smaller Taxpayers (to up to R 1 million ) • 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 59

Tier One - Smaller Taxpayers (to up to R 1 million ) • 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’’ 60

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)” 61

Residential Accommodation Fringe Benefit (para 9 of the Seventh Schedule) • “B” in the formula increases from R 46 000 to R 54 200 – Effective for years of assessment ending on or after 1 January 2010 62

Transfer of Properties Out of Companies and Trusts (S 9(20) of the Transfer Duty Act, para 51 of the Eighth Schedule, s 64 B(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 63

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) 64

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 65

Thank-you Fasset Call Centre 086 101 0001 www. fasset. org. za 66