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

Summary of tax proposalsEffect of tax

R million proposals

Tax revenue 382,155

Non-tax revenue 9,148

Less: SACU payments -12,053

Main budget revenue, before tax proposals 379,250

Budget 2004/05 proposals: -9,381

- Taxes on individuals and companies -10,862

Personal income tax: -7,110

Adjust personal income tax rate structure for inf lation -6,800

Increase in interest and dividend exemption under 65 years -170

Increase in interest and dividend exemption 65 years and over -140

Corporate income tax -2,000

Reduction in corporate tax rate -2,000

Small business incentives -1,752

Introduce VAT payments from every 2 months to every 4 months -275

Exemption from Skills Development Levy -92

Graduated rate structure -900

Accelerated depreciation for all assets -485

- Financial transaction taxes: -800

Adjust table for transfer duties -450

Elimination of stamp duties on debit entries -350

- Taxes on goods and services 2,281

Increase in duties on alcohol 690

Increase in duties on tobacco products (52% incidence) 620

Abolish ad valorem excise duties on sun protection products -10

Abolish duty on base oils for lubricating -1

Increase in Air Passenger Departure Tax 32

Increase in fuel levy 950

Main budget revenue (after tax proposals) 369,869

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.

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.

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.

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

Property value Rates of tax

R0 – R190 000 0%

R190 001 – R330 000 5% on the value above R190 000

R330 001 and above R7 000 plus 8% on the value above R330 000

Property value

R180,000 R1,500 0.8% R0 –

R250,000 R5,000 2.0% R3,000 1.2%

R320,000 R8,500 2.7% R6,500 2.0%

R350,000 R10,900 3.1% R8,600 2.5%

R500,000 R22,900 4.6% R20,600 4.1%

R750,000 R42,900 5.7% R40,600 5.4%

R1,000,000 R62,900 6.3% R60,600 6.1%

Current duty

% of value

Proposed duty

% of value

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

Taxable income (R) Rates of tax Taxable income (R) Rates of tax

0 – 74 000 18% of each R1 0 – 80 000 18% of each R1

74 001 – 115 000 R13 320 + 25% of the amount 80 001 – 130 000 R14 400 + 25% of the amount

above R74 000 above R80 000

115 001 – 155 000 R23 570 + 30% of the amount 130 001 – 180 000 R26 900 + 30% of the amount

above R115 000 above R130 000

155 001 – 195 000 R35 570 + 35% of the amount 180 001 – 230 000 R41 900 + 35% of the amount

above R155 000 above R180 000

195 001 – 270 000 R49 570 + 38% of the amount 230 001 – 300 000 R59 400 + 38% of the amount

above R195 000 above R230 000

270 001 and above R78 070 + 40% of the amount 300 001 and above R86 000 + 40% of the amount

above R270 000 above R300 000

Rebates Rebates

Primary R5 800 Primary R6 300

Secondary R3 200 Secondary R4 500

Tax threshold Tax threshold

Below age 65 R32 222 Below age 65 R35 000

Age 65 and over R50 000 Age 65 and over R60 000

2004/05 2005/06

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

Comparison of annual tax payableTable C.2 Income tax payable, 2005/06 (taxpayers younger than 65)

Taxable incom e (R) 2004 rates (R) Proposed rates (R) Tax reductions (R) % change

35,000 500 – 500 100.0

40,000 1,400 900 500 35.7

45,000 2,300 1,800 500 21.7

50,000 3,200 2,700 500 15.6

55,000 4,100 3,600 500 12.2

60,000 5,000 4,500 500 10.0

65,000 5,900 5,400 500 8.5

70,000 6,800 6,300 500 7.4

75,000 7,770 7,200 570 7.3

80,000 9,020 8,100 920 10.2

85,000 10,270 9,350 920 9.0

90,000 11,520 10,600 920 8.0

100,000 14,020 13,100 920 6.6

120,000 19,270 18,100 1,170 6.1

150,000 28,270 26,600 1,670 5.9

200,000 45,670 42,600 3,070 6.7

250,000 64,670 60,700 3,970 6.1

300,000 84,270 79,700 4,570 5.4

400,000 124,270 119,700 4,570 3.7

500,000 164,270 159,700 4,570 2.8

1,000,000 364,270 359,700 4,570 1.3

Motor vehicle allowance

Clause 4

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

Schedule

Fixed cost Fuel cost Maintenance

cost R c c

14,489 34.5 21.819,869 36.2 22.425,068 36.2 22.430,893 40.7 27.835,578 40.7 27.840,732 40.7 27.846,157 45.0 37.751,930 45.0 37.757,332 51.1 41.663,287 51.1 41.668,697 51.1 41.674,287 51.1 41.678,992 53.9 49.883,744 53.9 49.888,854 53.9 49.894,322 53.9 49.899,240 59.8 65.599,240 59.8 65.5

exceeds R160 000 but does not exceed R180 000

exceeds R80 000 but does not exceed R100 000exceeds R100 000 but does not exceed R120 000exceeds R120 000 but does not exceed R140 000exceeds R140 000 but does not exceed R160 000

Where the value of the vehicle

does not exceed R40 000exceeds R40 000 but does not exceed R60 000exceeds R60 000 but does not exceed R80 000

exceeds R180 000 but does not exceed R200 000exceeds R200 000 but does not exceed R220 000exceeds R220 000 but does not exceed R240 000exceeds R240 000 but does not exceed R260 000

exceeds R340 000 but does not exceed R360 000exceeds R360 000

exceeds R260 000 but does not exceed R280 000exceeds R280 000 but does not exceed R300 000exceeds R300 000 but does not exceed R320 000exceeds R320 000 but does not exceed R340 000

Additional tax

Based on 30 000 km traveled, 16 000 km deemed private

Value of carAdditonal

tax pa

30,000 323 35,000 797 40,000 854 45,000 925 55,000 1,946 70,000 2,735 90,000 3,076

120,000 4,110 140,000 5,477 170,000 5,410 210,000 6,776 270,000 7,777 360,000 11,224

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.

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)).

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)

Tax relief measures for small businesses

Clauses 2 (b) & 32

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

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).

Taxes on goods and services

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

Current excise Proposed Estim ated

duty rate excise duty additional Nom inal Real

rate revenue

Product R m illion

Malt beer 390.0 9.5% 5.3%

Traditional African beer 7,82c / litre 7,82c / litre – 0.0% -4.2%

34,7c / kg 34,70c / kg – 0.0% -4.2%

Unfortif ied w ine 117,1c / litre 140,52c / litre 65.5 20.0% 15.8%

Fortif ied w ine 232,87c / litre 263,14c/ litre 10.4 13.0% 8.8%

Sparkling w ine 323,32c / litre 387,99c / litre 5.1 20.0% 15.8%

29.0 9.4% 5.2%

Spirits 190.0 10.0% 5.8%

Cigarettes 577.6 11.5% 7.3%

Cigarette tobacco 695,17c / 50g 747,30c / 50g 0.2 7.5% 3.3%

Pipe tobacco 170,79c / 25g 190,60c / 25g 41.3 11.6% 7.4%

Cigars R28,36 / 23g R32,59/ 23g 0.9 14.9% 10.7%

Change in excise duty

R30,73c / litre of absolute alcohol

(52,24c / average 340ml can)

R33,65 / litre of absolute alcohol

(57,20c / average 340ml can)

Traditional African beer pow der

452,8c / 20 cigarettes

504,44c / 20 cigarettes

Ciders and alcoholic f ruit beverages

153,74c / litre (52,27c / average

340 ml can)

168,24c / litre (57,20c / average

340 ml can)

R45,84c / litre of absolute alcohol

(R14,78 / average 750 ml bottle)

R50,42 / litre of absolute alcohol

(R16,26 / 750 ml bottle)

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.

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.

Measures to enhance tax & customs administration

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.