Budget 2005

1
Budget 2005

• Revenue trends and
• tax proposals
• Chapter 4 Annexure C of Budget Review
• National Treasury
• Presentation to Parliament Wednesday, 2 March
  2005

2
Overview of the 2005 Budget

• Programme of Action cares for its people,
  socially just choices, and committed to service
  delivery
• Supporting economic growth and opportunities
• Strong increases in non-interest expenditure
  within a framework that is sustainable
• Tax relief to encourage economic opportunities

3
Major socio-economic challenges

• Reducing poverty through social wage
• Dependence giving way to self-reliance
• Halving unemployment rate by 2014
• particularly among youth
• Countering vulnerability
• Narrowing inequalities
• Developing skills
• HIV and Aids
• Bridging two economies divide

4
Budget for a season of hope

• Sustaining higher growth
• Economy growing faster
• but to sustain this higher growth, we need
• Rising infrastructure investment
• Lowering the cost of doing business, especially
  for small business
• Producing more skilled people
• Improving the quality of public services,
  especially to the poor.

• Advancing social development
• Higher growth to invest in people
• Means-tested social grants
• Clean water and electricity
• Quality education, health and municipal services
• Community housing
• Reduce crime and insecurity

• Equity and redistribution
• To bridge the divide between rich and poor
• Pro-poor budget reflects spending shift towards
  the poor
• Extension of social wage to poor households
• Broad-based black economic empowerment
• Transport linkages between cities and townships,
  rural and urban
• Renewed investment in small, emerging farmers

5
Fiscal policy

• 2004/05 deficit estimate 2,3 of GDP
• Expansionary stance from 2001 continues
• Strong real growth in non-interest spending,
  averaging 5,5 a year
• Stable tax burden around 24,1 of GDP
• Debt service costs decline from 3,5 of GDP in
  2004/05 to 3,2 in 2007/08
• Deficit of 3,1 in 2005/06 declining to 2,7 by
  2007/08
• Significant surpluses in social security funds

6
Debt service costs as per cent of GDP
7
Fiscal framework
8
Tax Policy Overview since 1995

• Since 1995 tax policy emphasis on
• Efficiency enhancement of tax system
• Tax base broadening limited use of tax
  incentives
• Thereby affording rate reductions
• Highlights of tax base broadening reform agenda
• Introduction of capital gains tax
• Converting to the residence-based income tax
  system
• Introduction of enhanced anti-avoidance
  administrative measures that resulted in narrower
  compliance gap
• Enabling Government to grant tax relief of R78 bn
  by 2004/05

9
Tax base broadening

• Tax base broadening has allowed reduction of tax
  rates
• Reduction in corporate income tax rates
• Total PIT relief close to R66 billion
• Accelerated depreciation allowances in lieu of
  special capital allowances
• Introduction of learnership deductions
• Reduction of taxes on property
• Reduction in consumption taxes
• Scrapping/reduction of financial transaction
  taxes (stamp duties)

10
Overview forward looking

• Maintaining stable predictable revenue mix
  sound budgeting confident business planning
• Principal reliance on the taxation of
• employment income
• business income
• capital income
• moderate reliance on consumption taxes
• Gradual elimination/reduction of financial
  transaction taxes
• Contributing to broader participation, economic
  growth small business development
• Reducing complexity compliance costs

11
SA tax mix as of GDP
12
SA tax mix as of total tax revenue
13
Tax policy preference for limited use of tax
incentives

• Contrary to expectations, sectors with existing
  attractive tax privileges evidence long-term
  declining contribution to GDP

14
2005 Budget GDP by sector
15
2005 Budget GDP by sector
16
2005 Budget GDP by sector
17
Tax revenue as a percentage of GDP
18
Implementation of 2003 2004 budget tax proposals
19
Progress on implementation of tax reform
initiatives

• Exchange Control Amnesty
• More than 42 000 amnesty applications received by
  29 February 2004 - total assets disclosed
  currently at R65b
• It is estimated that Amnesty Unit will collect at
  least R2,4 billion in amnesty levies
• Retirement Fund Tax Reform
• At the end of 2004 National Treasury released
  retirement fund reform discussion paper outlining
  regulatory policy objectives
• Careful synchronisation of tax reform needed to
  fully take account of wider retirement fund
  reform priorities that seek to enhance
  facilitate adequate retirement savings

20
Progress on implementation of tax reform
initiatives

• Redrafting of Mineral and Petroleum Royalty Bill
  to be available for comment during first half of
  2005
• Holistic review of mining income tax system
  ongoing including evaluation of appropriateness
  of current tax allowance schemes that result in
  tax deferral benefit with full recognition of
  high capital requirements risks attaching to
  mining investment
• Accelerated tax depreciation for urban
  development zones - demarcations for qualifying
  inner city areas have been approved and gazetted
  for 9 Municipalities
• Tax legislation to accommodate FIFA world cup
  commitments

21
Tax Relief Measures in 2005/06
22
Main budget revenue
23
Summary of tax proposals
24
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

25
2005 main tax proposals -tax relief

• Total corporate small business corporation tax
  relief R3,8 billion
• Exemption from Skills Development Levy (SDL) for
  small busineses 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
• Exemption from tax for the first R35 000 of
  taxable income for small businesses
• Imposition of a simplified tax depreciation
  regime of 503020 for all assets (excl.
  manufacturing)

26
2005 main tax proposals -tax relief

• Introduction of a tonnage tax regime for the
  shipping industry effective 2006
• Increasing of property transfer duty thresholds
• Abolishing excise duties on sun protection
  products professional digital cameras

27
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

28
Personal income tax rate bracket adjustments
29
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

30
Comparison of annual tax payable
31
PIT reliefs redistributive stimulatory in
nature

• Tax reduction in respect of employment income
  does not only benefit wage earners but also
  individual entrepreneurs (constituting almost 20
  of all PIT taxpayers) e.g., Irish tax reform
  targeted sharp rate reductions for PIT, thereby
  giving huge boost to sole proprietorships
  economic growth
• BUT consider PIT relief distribution together
  with higher tax burden for taxpayers 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 hence, still 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 hence, overall
  increase in tax burden of annual R6 654

32
Transfer duty
33
Tax policy design agenda 2005/06
34
Medical aid reform

• Reform of tax treatment of medical aid cover to
  achieve more equitable coverage
• Monetary cap to replace 2/3rds scheme deductions
• Details of the reform will be released this year
  implementation commences in March 2006

35
Tax policy objectives

• Extending effective medical aid coverage to all
  economically active individuals their
  dependents
• Making medical aid coverage more affordable to
  low income families.
• Eliminating tax implications of a specific
  medical aid package employer provided medical
  treatment.
• Providing more tax relief for the average South
  African family.
• Driving down seemingly excessive costs and fees
  charged by the medical aid industry.
• Extending beneficial tax treatment to self
  employed persons, i.e incentivising small
  businesses.

36
Current tax treatment of medical aid
contributions ineffective

• Affordability - The current regime does not go
  far enough in lowering cost of medical aid
  membership for low-income earners, i.e. low
  income earners cannot afford the tax on one-third
  of employer provided medical aid coverage.
• Inequality It provides a bigger benefit for
  high income earners, i.e. tax subsidy for low
  income earners is 18 and 40 for high income
  earners.
• No downward pressure on high cost medical aid
  packages In terms of the current regime, the
  higher the contribution, the bigger the tax
  saving.
• Discrimination - No tax incentive for
• Self employed persons
• Employed persons where the employer does not
  provide medical aid coverage but the employee
  pays his own medical aid contributions
• Employer provided medical treatment for
  low-income employees.

37
Which income groups need assistance?

• In the Council for Medical Schemes Annual Report
  2003/04 the number of principal members of
  medical aid schemes during 2003 were 2,8 million.
• National Treasury calculated the coverage rate
  per income group (based on data from SARS and
  SARB).

38
Which income groups need assistance?
39
How the new tax regime will benefit taxpayers

• Persons earning below income tax threshold (R35
  000 pa) but attracting possible tax charge if
  employer provides medical cover approx. 1,2
  million individuals
• No fringe benefit tax on employer provided
  medical aid coverage for employee and dependents.
• Tax incentives for low cost/high benefit
  packages.
• No fringe benefit tax on employer provided
  medical treatment for employee dependents.
• Beneficial tax treatment for families.
• Extend beneficial tax treatment for medical aid
  coverage to self-employed persons.

40
How the new tax regime will benefit taxpayers

• Persons earning between R35 000 R200 000
  pa approx. 3 million individuals
• No fringe benefit tax on employer provided
  medical aid coverage for employee and dependents.
• Tax incentives for low cost/high benefit
  packages.
• Reduced tax incentive for high cost luxury
  packages.
• Beneficial tax treatment for families.
• Extend beneficial tax treatment for medical aid
  coverage to self-employed persons.

41
Other income tax adjustments

• Curtailing subsistence allowances by structuring
  subsistence allowances into salary packages
• Introducing more stringent control measures to
  arrest excessive claims for travel expenses
• Subsistence allowance only permitted where fixed
  date of travel in immediate future has been
  identified
• Withholding tax on visiting entertainers and
  sportspeople following international practice
• Introduction of a 5 (from Africa) 15 (from
  rest of the world) final withholding tax
• Promoting visiting skilled expatriates
• Alleviating the capital gains tax burden for
  visiting skilled expatriates as foreign assets
  appreciate in value
• Changing tax resident definition to allow for
  extended visitation of expatriates with scarce
  skills

42
Relief measures favouring business income
43
Evolution of tax rates since 1980
44
Net cost of tax relief

• In terms of macroeconomic policy objectives tax
  relief is aimed at increasing economic growth,
  employment equity
• Tax relief packaged to stimulate demand side of
  economy (primarily PIT) supply side of economy
  (CIT small business tax adjustments)
• Supply side theory of tax policy states that
  economy should grow from tax cut, thereby
  increasing once again tax bases, translating into
  future rise in tax collections
• Hence, R1 of tax relief would lead to less than
  R1 revenue loss over long run
• NT estimated economic effect of 2005/06 tax
  relief package within adopted macroeconomic
  framework as follows (based on macro econometric
  modeling)
• Will probably not experience stated total revenue
  loss
• Elasticity of tax collections iro tax relief not
  equal to one only 0,85
• PIT collection elasticity is 0,75 implying that
  given PIT relief package tax loss will only be
  0,75, while corp tax collection elasticity is
  0,80
• Less than unity elasticity comes from increased
  economic activity
• Nominal real GDP growth increase by 1,9 and
  0,4 respectively

45
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
• Tax rate for an employment company to be reduced
  from 35 to 34

46
International CIT rates taxation of company
profits

• Combined effective company profit tax rate in
  OECD countries, including 15 European countries
  (2003)
• Top marginal tax rate (CIT PIT) on distribution
  of domestic source profits to resident individual
  shareholders
• OECD average in 2000 (50,1) down to 46,4 in
  2003
• EU average in 2000 (51,7) down to 47,9 in 2003
• SA with 1/3 profit distribution and new CIT rate
  current STC rate would be 33 to 34
• That is from economic theory the correct
  comparison

47
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
• Public benefit organisations engaged in business
  activities
• Accelerate depreciation allowance (503020 per
  cent over 3 years) for renewable energy
  investments.

48
Tax relief measures for small businesses
49
Graduated tax rate structure accelerated
depreciation

• 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

50
Graduated tax rate structure accelerated
depreciation

• 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 at a 503020 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

51
Administrative measures in support of small
businesses SARS intervention

• Tax compliance burden for small business to be
  reviewed
• Proposed filing of VAT returns every 4 months to
  ease compliance
• Threshold for skills levy obligations to be
  raised to R500 000
• Abolish RSC levy on 30 June 2006
• Relaxation of registration tax compliance rules
  for small PBOs
• Numerous administrative measures seeking to
  mitigate compliance burden

52
TONNAGE TAX
53
Tonnage Tax Regimes

• A Tonnage Tax regime, aims to tax shipping
  activities at fixed rates (presumptive income tax
  or notional income tax) according to size of the
  ship not a companys business results (taxable
  income).
• A notional profit is therefore computed on number
  of and size of ships contracted and operated,
  which is then applied to the countrys corporate
  tax rate.
• Translates into lower effective tax rate
• Is notional income tax benefits from tax credit
  provisions ito DTAs
• Differs significantly from taxes paid in Flags of
  Convenience where a very low flat rate tax is
  normally applied ( business license fee), which
  are not creditable charges for DTA purposes.

54
Example (Ireland)

• Example taken from Irish tonnage tax regime, of a
  ship weighing 188,000 tons
• Step 1
• Determining what the fixed profit per day is.
• This is done by refering to the table below,
  showing at which amount of tonnage the fixed
  profit-per-day rate applies.

Fixed Profit Rates
Proposed scale of charges based on vessels net tonnage in Euros Fixed profit per day in Euros
For each 100 tons up to 1,000 net tons For each 100 tons between 1,000 and 10,000 net tons For each 100 tons between 10,000 and 25,000 net tons For each 100 tons above 25,000 tons 1.00 Euro 0.75 Euro 0.50 Euro 0.25 Euro
55
Example

• Step 2
• Take the tonnage of the vessel and apply the
  formula provided.

Net tons Per 100 tons Formula calculation Taxable tonnage
0 1,000 1,000 10,000 10,000 25,000 Tons gt 25,000 1,000/100 10 9,000/100 90 15,000/100 150 163,000/100 1,630 101.00365 days 900.75365 days 1500.50365 days 1,6300.25365 days 3,650.00 24,637.50 27,375.00 148,737.50
Notional profit taxable 204,400.00
56
Example

• Step 3
• Irelands corporate tax rate of 12.5 is then
  applied to the Notional profit calculated in step
  2.
• Therefore, the annual tonnage tax paid by a
  shipping company for a vessel weighing 188 888
  net tons, will be 25,550.00.
• It can be seen to ensure a lower effective tax
  rate then the corporate tax rate, a key component
  must be to ensure that the fixed profit rates,
  which determine the notional profit are set at
  internationally competitive levels vis-à-vis
  existing tonnage tax jurisdictions.

Tax rate 12.5 204,400 12.5 Tax 25,550.00
57
Benefits from tonnage tax regimes

• Simple low effective tax rate
• Increases levels of certainty for companies
• Greater international competitiveness
• Creates employment opportunities at primary and
  secondary level (employment opportunities for
  local cadets successful placing on domestically
  registered vessels)
• Levels the playing fields between domestic and
  international counterparts
• Minimal compliance burden Cost savings on time
  effort required in completing tax returns

58
Cross country comparison

• Mainly favored by European countries so far
• Most European shipping countries have introduced
  such a regime
• In 2004, India and Ireland introduced tonnage tax
  regimes
• USA passed legislation within 6 months to arrest
  deregistration trend of their commercial fleet
• Most of the worlds top 35 maritime nations have
  introduced some sort of tax incentives in their
  shipping industry
• Tonnage tax regime is becoming increasingly the
  incentive of choice
• Through introducing a tonnage tax regime, SA
  could easily break into the top 35 Maritime
  Nations
• Should SA be on par with Chile?

59
Top-ranked maritime nations their shipping
industry tax deductions
60
Taxes on goods and services
61
Excise duties on alcoholic beverages tobacco
products
62
General fuel levy

• 5 cents/litre general fuel levy increase for
  petrol diesel
• Diesel rebate for primary producers increased by
  3,14 c/litre
• Revenue cost in 2004/05 R700 million
• Estimated to increase in 2005/06 to R820 million
• New rules w.r.t sub-contractors making use of the
  diesel refund system
• Liquid petroleum gas will not attract general
  fuel levy

63
Combined fuel levy on leaded diesel, 2003/04
05/061 March petrol/diesel price increases (42
33 c/l respectively) reduce tax burden to 32.8
32.5)
64
Other

• Road Accident Fund levy
• Levy on petrol and diesel to be increased by 5
  cents/litre
• Base oils for lubricating
• Excise duty to be abolished
• Air departure tax
• To be increased from R55 to R60 (departing within
  SACU)
• To be increased from R110 to R120 (international
  departures outside SACU)

65
Other

• Taxes on international trade transactions
• Elimination of ad-valorem excise duties on sun
  protection and certain digital cameras
• 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

66
Measures to enhance tax customs administration
67
2005 Budget reforms to tax administration

• Single registration for all tax products per
  taxpayer
• e-filing to be extended to new tax instruments
• Single national call centre access number
• Relationship managers at Large Business Centre
• Single administrative document for all customs
  declarations
• Implement trans-national electronic corridors on
  NEPAD
• One-stop border posts
• Linkage with foreign customs administrations
• Increasing the number of people in the tax system
• Voluntary disclosure dispensation
• X-ray scanners at ports of entry
• Voluntary approaches to resolve oustanding cases
• Countering abuse of incentive schemes
• Establishing Tax Practitioners Board
• Introduction of Tax Administration Bill

68
Anti-avoidance measures

• Overhaul of the General Anti-avoidance Rule
• Release of discussion document for revised GAAR
  procedure
• Offshore banking centres
• residence-based income tax system to arrest undue
  tax deferral arrest tax haven practices that
  are designed to poach SA tax base
• Bribes, penalties and other illegal activities
• Tax treatment of bribes, fines and penalties to
  reinforce anti-corruption measures

69
Reducing compliance costs enhancing services

• Single registration for all tax products per
  taxpayer
• E-filling to be extended to new tax instruments
• Full view of account for taxpayers tax
  practitioners
• Single national call centre access number for tax
  customs
• Taxpayer relationship managers at the Large
  Business Centre

70
Trade facilitation economic security

• Implementation of trans-national electronic
  corridors on NEPAD corridors
• Increased customs cooperation between Namibia,
  Botswana SA
• Introduction of single multi-purpose customs
  declaration
• Joint customs control instituted at major
  commercial ports of entry
• Single document registration facility for
  importers exporters

71
Motor vehicle allowance
72
Motor vehicle allowance

• Current formula creates bias in the structuring
  of salary packages
• Method for calculating fixed business travel cost
  to be adjusted by introducing a residual value
  and by capping value of the car at R360 000
• Deemed private kilometers to be increased from 14
  000 to 16 000 and to 18 000 in 2006
• Taxable value of company car to be increased from
  1,8 to 2,5 per cent

73
Trade in prices of cars below R100 000
74
Trade in prices of cars between R100 000 to R200
000
75
Trade in prices of cars between R200 000 to R300
000
76
Trade in prices of cars more than R300 000
77
Schedule
78
Additional tax Based on 30 000 km travelled,
16 000 km deemed private