Other budget proposals: part one

2008-02-27 00:00

It was a mere week ago when Finance Minister Trevor Manuel presented the 2008/2009 Budget in Parliament. There were numerous proposals mentioned, but as a result of an economy, that has decreased in growth there were no major surprises, with the exception of the decrease in the company tax rate and the increase in the VAT turnover threshold.

The Secondary Tax on Companies (STC) regime has once again come under scrutiny.

The proposal is that the 10% rate will remain, that no dividend withholding tax be applied to dividends — which have been declared to income tax exempt entities — and that all STC credits will expire once the proposed regime is in place. The major change in the withholding tax regime is that the tax burden shifts from the company to the shareholder, albeit that the company will withhold and pay the tax at the time of paying the dividend.

The proposed withholding tax will not apply to income tax exempt entities (retirement funds and public benefit organisations). It has also been proposed that there be cascading relief in terms of the withholding tax. This means that the dividends will be taxed when profits are distributed to individuals or non domestic company shareholders.

Once again, small businesses have been singled out for special attention. The 2008 Budget proposes an elective presumptive turnover based tax regime for qualifying companies and has indicated that the VAT turnover threshold will increase to R 1 million.

One of the requirements of the elective tax system is that the qualifying businesses must remain in system for a minimum period of three years (bearing in the mind the monetary threshold). However, once the business has opted out of the system, it may not re-enter within 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 proposed presumptive tax regime is as follows:

o R0 to R100 000 — no tax

o R100 001 to R300 000 — two percent of each R1 above R100 000

o R300 001 to R500 000 — R4 000 plus four percent of each R1 above R300 000

o R500 001 to R750 000 — R12 000 plus 5,5% of each R 1 above R500 000

o R750 001 to R1 000 000 — R25 750 plus 7,5% of each R1 above R750 000

In terms of current legislation, where an employee works for a "broken" period, Standard Income Tax on Employees (Site) is generally not refundable. It is proposed that, in certain circumstances, Site payments should become refundable.

The Finance minister also reaffirmed major reforms in terms of social security and retirement savings. The taxation of lump sum payments was simplified during 2007.

It is now proposed that the taxation of other withdrawals from retirement funds also be simplified. In a new development, divorce settlement payments made by retirement funds will become taxable in the hands of the non-member spouse. It is proposed that the employer and employee contributions together with the various tax relief related thresholds may be taken into account in the determination of a retirement saving vehicle.

nolan.daniels@kpmg.co.za.

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