Wealth tax: how
does it affect you?
Finance Minister Pravin Gordhan’s Budget 2017 was clearly focused on an ‘earn more, pay more’ principle to balance Government’s books. Here is a summary of the most important tax increases.
By: Anton Maskowitz and Marteen Michau
A new super tax rate of 45% for taxpayers with a taxable income of R1 500 000 or more a year has been introduced. No real provision has been made for fiscal drag (adjustments for inflation), which means all taxpayers, even lower-income earners, are contributing more to the fiscus.
Although the inclusion rates remain unchanged, the increase in the top marginal rate means the maximum effective rate for individuals has increased to 18% from 16.4%. No adjustment has been made to the annual capital gains exclusion amount, which remains at R40 000.
This too has been increased from 15% to 20%, with the new rate becoming effective on the day of the Budget Speech. This move was clearly aimed at preventing any tax arbitrage from taking place. The 20% dividends tax rate will apply to all local dividends and all dividends from foreign companies listed on the JSE.
The maximum effective rate for foreign dividends will also be adjusted to 20%, but this only applies to dividends paid after 1 March 2017. Given that this rate is now almost half of the highest income tax rate, this may become highly punitive, especially as no deduction, even if in the production of income, is allowed against foreign dividends in terms of section 23(q) of the Income Tax Act.
In line with Treasury’s views that trusts (excluding special trusts) are widely being used as tax and estate duty avoidance mechanisms, from 1 March, trusts will be taxed at a flat rate of 45%. This also results in the trust-effective CGT rate increasing from 32.8% to 36%.
This comes in addition to the newly introduced section 7C of the Income Tax Act, which will result in the interest component (measured against the SARS official rate of interest) of interest-free loans or low-interest loans being subject to donations tax in the hands of the lender.
The Budget Speech also specifically referred to certain schemes being used to prevent section 7C from applying (such as transferring or making loans to companies owned by the trust) that will be targeted by legislation.
Taxation of companies has remained largely unaffected and the company tax rate remains at 28% with the effective CGT remaining at 22.4%.
The transfer duty threshold has been increased from R750 000 to R900 000 to assist first-time home buyers. A slight upward adjustment has also been made to the rates between properties valued between R900 000 and R10 000 000 – the higher threshold is now R937 500 (previously R933 000). Properties above R10 000 000 will therefore now attract transfer duties of R937 500 plus 13% of the amount above R10 000 000.
The much-anticipated recommendations by the Davis Tax Committee on estate duty weren’t implemented and no changes have been proposed for either estate duty or donations tax. The committee’s report on estate duty is expected to receive attention in Budget 2018.
The taxation of offshore wrappers, taxable in terms of section 29A of the Income Tax Act, has also escaped any negative changes. Where individuals invest in these policies, the effective tax rate seems set to remain at 12% for CGT purposes and at 30% for income tax purposes.
Offshore wrappers could therefore become attractive for investors who fall within the new 45% tax bracket, both from an income tax and CGT perspective. Furthermore, the increase in the effective tax rate on foreign dividends to 20% will also reduce the negative effects of foreign dividends not qualifying for relief from double taxation within the offshore wrapper.
The formation and registration of trusts, and the provision of independent trusteeships – both local and offshore.
The creation of BEE, charitable, special and Shariah trusts compliant with regulatory and legislative requirements.
The administration of deceased estates in South Africa and abroad.
Advice on complex structures, asset restructuring and bequests in foreign jurisdictions.
Advice on emigration and immigration, foreign earnings and the application of any double taxation agreements.
Updating trust deeds to ensure they’re in line with the latest changes in the trust environment.
Updating and/or drafting of wills dealing with South African and/or foreign assets.
Advice on the establishment and management of charitable organisations, their tax status and tax deductible donations.
Advice on the potential tax consequences and reporting obligations if you hold a US passport or green card, or if you have children living in the US.
Guidance on the financial implications of life-changing events, such as getting married, divorce or the birth of a child.
