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Taxation
Thursday, March 1, 2012
Notable points

Besides the usual annual expected increases in the so called "sin taxes", the two notable points from a tax raising perspective, notes RMB, are the levying of the withholding dividend tax (see Box), and the increase in the Capital Gains Tax (CGT) inclusion rates from 25% to 33,3% for individuals and 50% to 66,6% for other entities. It means that the playing field between the taxation of income and capital gains is narrowing.


“This will particularly affect high net worth individuals with large discretionary savings,” notes Browne.
Notes Des Kruger, director: tax at Webber Wentzel, “The effective tax rate payable by an individual (at top marginal rates) will increase from 10% to 13.32% (an increase of 33.2%), while the effective CGT rate for companies and trusts will increase from 14% to 18.65% (a 33% increase).
“Foreigners owning property in SA will be adversely affected by the increase because non-residents are required to pay CGT on the disposal of any immovable property owned by them in SA.
“The rate increase is due to come in on 1st March 2012.”


At least the rebates that were announced will give consumers much needed financial relief. Exemptions on CGT for Primary Residence will go from R1.5m up to R2m; on Death from R200 000 to R300 00 and the Annual General Exclusion will go up to R30 000 (R20 000).
Adds Kruger, “This announcement was an obvious means of generating additional revenue, notwithstanding the stated reason being to reduce tax arbitrage and broaden the tax base. While a few foreign countries tax capital gains on the same basis as ordinary income, most either provide for inflation indexation or reduced inclusion rates (like SA).
Comments Leonard Brehm, national chairman of Grant Thornton SA, “The Minister said the government is committed to an environment that will encourage business investment. Why then did he put the CGT rate up by one third and the dividend tax rate by 50%? This simply punishes investors.”

Retirement provision

Says Mike Browne of Seed Investments, “As savers in recognised retirement products (pension, provident, retirement funds) get relief from dividend tax and capital gains, the Treasury is, in essence, trying to make these regulated savings mechanisms more attractive. Naturally you do pay income tax rates when they mature, so each individual would need to look at their own specific situation.” There is also consideration being given to savings products that would provide tax exempt growth for the short to medium term – with limits being imposed to avoid high net worth investors getting any undue benefit.
The Minister seemed to confirm government’s commitment to progressing retirement reforms, with a green paper due to be released for comment in April. This is good news as it should give greater clarity to members and funds about what impact the intended reforms will have on them,” says Craig Aitchison, MD of OMAC Actuaries & Consultants.
He says the government seeks to encourage higher savings, better retirement provision and reform the social security system. He says key reform proposals seem unchanged and include:
• A national social security fund which provides a range of social benefits, including retirement and risk benefits;
• Compulsory preservation and portability of retirement savings. The 30% limit on lump sum benefits at retirement for pension funds and retirement annuity funds is noted and could form the basis for a similar arrangement on withdrawal;
• Consolidation of social security arrangements and institutions;
• Encouragement for high income earners to contribute to approved supplementary and insurance plans, over and above their national social security fund contributions.

According to Aitchison, “There will be some flexibility on claiming deductions to allow for contributions on fluctuating incomes. The complexities of implementing this system with defined benefit funds still need to be addressed,” he says.
The targeted date for implementation is 1st March 2014.

Medical expenses

“One of the most interesting changes to taxation legislation to be implemented in the 2012/2013 tax year is the change in treatment of medical scheme contributions,” comments Johan Lombard, Actuarial specialist at Momentum Health.
Up to now, taxpayers qualified for a set monthly deduction on their taxable income, based on their family composition. It was contended that these monthly deductions were more rewarding to wealthier taxpayers. As an example, if you pay tax at a rate of 40%, your medical tax benefit is 40% of the set deduction (R720 x 40% = R288), whereas a taxpayer with a tax rate of 18%, only receives (R720 x 18%= R129).
The new system ensures the same monetary benefit to everyone in the form of tax credits. The conversion of medical deductions to medical tax credits comes into effect on 1st March 2012, notes Alexander Forbes Health. “These reforms are aimed at improving the fairness of the personal income tax system. The system of medical tax credits is a more equitable form of tax relief as it reduces a tax payer’s tax liability, whereas medical deductions reduce a tax payer’s taxable income.”
The monthly tax credits to be applied from 1st March to taxpayers below 65 years are:
• R230 for the first two beneficiaries;
• R154 for each additional beneficiary.

Where medical scheme contributions in excess of four times the total allowable tax credits combined with out-of-pocket medical expenses exceed 7.5% of taxable income, they can be claimed as a deduction against taxable income. With effect from 1st March 2014, these additional medical deductions will be converted into tax credits at a rate of 25% for taxpayers aged below 65 years.
From 1st March 2014, employer contributions to medical schemes on behalf of ex-employees will be deemed a taxable fringe benefit and such ex-employees will be able to claim the appropriate tax credits.
Tax payers over 65 and those with disabilities or with disabled dependants, will be converted to the tax credit system as from 1st March 2014. Currently these tax payers can claim all medical scheme contributions and out-of-pocket medical expenses as a deduction against their taxable income, and it would appear that this would continue for the 2012/2013 tax year.

Personal income tax

There was the usual bracket creep for income tax rates. The accompanying graph shows the monthly tax payable and average tax rate for the new (2013) tax year for tax payers under 65. It also shows the tax saving made at various income levels – you will notice that there are bigger percentage savings for the lower income levels.
See BudgeGraph1 – also Budget1.jpg
Trusts

Whilst commenting on the recent second edition of the exchange control and tax amnesty (the Voluntary Disclosure Program), the Minister commented on the lessons learnt by SARS. One quote stood out: "Poor tax compliance is also apparent in respect of trusts, and the role of tax practitioners and other intermediaries will come under scrutiny". For a long time RMB has been advocating that for trusts to be an effective long term structure for the protection of family wealth, a higher degree of attention needs to be given to the role of trustees and other professional advisors servicing the trust. Recent court cases have emphasised the fact that a trust must not just be the "alter ego" of the main settler, and now SARS have indicated that they are also going to be giving trusts closer inspection. We are still of the view that trusts are a vital and essential structure that can be of benefit to wealthy families, but that due diligence must be given to how they are managed and operated. The scope and role of an independent trustee who actively fulfils his function, is of critical importance in making the trust "bullet proof" from attack.

Estate Duty

It is often true, that what is not said is just as important as what is said. The 2012 budget speech was no exception. Last year it was implied that inheritance tax/estate duty was under review, this year there was no mention of any review or any changes to the existing dispensation, RMB points out. By implication it can be assumed that this has slipped off the Minister's radar screen. Estate duty remains at 20% with the rebate staying at R3,5m.

Copyright © Insurance Times and Investments® Vol:25.3 1st March, 2012
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