HEADLINE CORPORATE INCOME TAX RATE

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Given the positive results of reforms there is a further reduction in the headline corporate income tax rate from 29 per cent to 28 per cent.

To limit tax avoidance and/or tax arbitrage, given the gap between the corporate tax rate and top marginal personal income tax rate, it is proposed that closely held (passive) companies be subject to a 40 per cent tax rate.

SECOND PHASE OF STC REFORMS

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Under the new regime, all distributions will be treated as dividends unless it is shown that the distribution represents a return of capital. It is proposed that the new rate remain at 10 per cent, that no dividend withholding tax be applied to dividends declared to income tax-exempt entities and that all STC credits will expire.

A 10 per cent final withholding rate for domestic shareholders would apply, except in cases of income tax-exempt entities. As an anti-avoidance measure, dividends paid to closely held (passive) companies used to accumulate passive income will be subject to a 10 per cent tax rate.

LEARNERSHIP ALLOWANCE FOR APPRENTICESHIPS

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It is proposed that the allowance be amended to take into account longer-term apprenticeships, focusing on those of a technical nature, such as electricians, welders, plumbers, mechanics and so on.

HOUSING FOR LOW-INCOME WORKERS

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The existing monetary threshold limits for low-cost housing allowances, such as the R6 000 deductible limit per dwelling for employer-provided housing, will be revised. 

A SIMPLIFIED TAX REGIME FOR VERY SMALL BUSINESSES

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The 2008 Budget proposes a simplified tax regime that will reduce paperwork related to income tax and VAT for small sole proprietors, partnerships and incorporated businesses.

Government proposes that a simplified, turnover-based tax system be implemented for businesses with a turnover up to R1 million per year. In addition, it is proposed to increase the compulsory VAT registration threshold to R1 million per year. This turnover-based presumptive tax system will be elective.

Businesses will be required to remain in this system for a minimum of three years (provided they remain within the monetary threshold). Once a business has elected to migrate out of the system, it will not be able to migrate back for a period of five years. To protect the personal income tax base, personal services rendered under employment-like conditions and professional services will be excluded from this tax system.

The table below is a summary of the proposed simplified (presumptive) tax regime for small businesses. The rates and technical aspects will be refined after consultation. 

PROPOSED PRESUMPTIVE TAX FOR SMALL BUSINESSES

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VENTURE CAPITAL TAX INCENTIVE

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To meet the challenge of access to venture capital for small and medium sized enterprises, government proposes tax incentives for investors in qualifying small enterprises and start-ups. In general, the targeted enterprises are high growth and high-tech companies with an annual turnover of up to R14 million or gross assets of up to R7 million.

It is proposed that general venture capital investments qualify for a 30 per cent up-front deduction, with annual deductions to be capped at R500 000 for indi- viduals, R750 000 for corporations and R7.5 million for venture capital funds.

 PERSONAL INCOME TAX RELIEF

Over the past six years substantial tax relief has been provided to individuals. This was achieved by raising the monetary values of the income tax brackets and adjusting the primary and secondary rebates. The 2008 Budget proposes direct tax relief to individual taxpayers amounting to R7.2 billion. This will compensate taxpayers for the impact of wage inflation, also known as “bracket creep”.

MEDICAL SCHEME CONTRIBUTIONS

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It is proposed that the monthly monetary caps for tax-free medical scheme contributions be increased with effect from 1 March 2008 from R530 to R570 (by 7.6 per cent) for each of the first two beneficiaries and from R320 to R345 (7.8 per cent) for each additional beneficiary.

TRAVELLING ALLOWANCES

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The deemed cost tables for travelling allowances have been updated for inflation, including higher interest rates and fuel prices.

TAX-FREE INTEREST, DIVIDEND INCOME AND CAPITAL GAINS

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Government proposes to increase the interest and dividend income tax-free threshold for individuals under 65 years from R18 000 to R19 000, and for individuals 65 years and over from R26 000 to R27 500 per year. It is similarly proposed to increase the threshold for the tax-free income of foreign dividends and interest from R3 000 to R3 200 per year. In addition, it is proposed to increase the annual exclusion threshold for capital gains or losses from  R15 000 to R16 000.

VALUE-ADDED TAX

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It is proposed to increase the thresholds, applicable to farmers who submit VAT returns every six months and businesses that submit VAT returns every four months, from R1.2 million to R1.5 million.

PUBLIC BENEFIT ORGANISATIONS

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Restrictions on PBOs

PBOs are required to conduct 85 per cent or more of their activities in South Africa. It is proposed that this restriction on PBOs be dropped.

NEWLY PROPOSED MISCELLANEOUS INCOME TAX AMENDMENTS

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Personal issues

Personal use of cellular phones and laptops: it is proposed that incidental private use of cellular phones and laptops should not give rise to fringe  benefits taxation.

SHARE INCENTIVE SCHEMES

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These schemes continue to raise issues in terms of avoidance and anomalies that may require either legislative amendment or interpretive clarification.

BUSINESS ISSUES

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Threshold for the spreading of deductions

Deductions for payments relating to goods, services and other benefits must be spread over the economic life that these items are provided. This spreading prevents artificial upfront payments. however, a R50 000 de minimis threshold exists for administrative and compliance ease. This exemption threshold, set in the year 2000, will be increased to R80 000 in line with inflation.