Several tax announcements in the budget will have an impact on investments. Many companies will be celebrating the phased removal of secondary tax on companies that will, over the next two years, be converted to a dividend tax in the hands of the shareholder.
South Africa has been unique in its application of secondary tax, which many fund managers argue has been the main hurdle in attracting further foreign investment. Secondary tax is paid by a company when it is paying out dividends. It was initially introduced to encourage corporates not to pay out dividends but re-invest in capital expenditure. However, with R800-billion sloshing around in corporate bank accounts, the job of secondary tax is over.
Other countries apply a withholding tax on dividends in the hands of the shareholder. This means that the tax is withheld by the company when paying out dividends, and paid over to the receiver. By changing the way dividends are taxed, foreigners, particularly foreign fund managers, will be able to apply for a partial refund of the withholding tax, thereby encouraging investment in South Africa.
According to credit specialist Simon Howie of Investec Asset Management, the change to dividend taxation could have an impact on high-yielding dividend funds as dividends will become taxable. Although the full effect still needs to be understood, further clarity on the mechanism and tax rates is needed.
The budget also gave clarity as to when profits from the sale of a share (either a listed or unlisted company) will be deemed a capital gain. If the shareholder has held the share for three years they will be able to deem the profits as capital gain, which is often less than what would be paid under income tax.
However, the treasury says the sale of a share prior to three years will still be subject to a rule of intent. Depending on the facts and circumstance, if you sell a share before three years and it was bought with a long-term view, you could still argue a case for capital gains tax versus income tax. This is particularly important in the case of delistings, where the shareholder may be forced to sell after a year of purchase, even if they bought the share with a long-term view.
In terms of pension tax reform, the minister confirmed that part of the reforms ensure that South Africa will follow the international norm, which sees tax deductibility for retirement savings and no taxation on growth, while on maturity the benefits would be taxed.
To this end, he announced the abolition of the retirement fund tax, currently at 9%, so that interest income will no longer be taxed in a retirement fund. This tax tended to penalise lower-income earners, who in their own right would have paid no tax on this income while at the same time benefiting higher-income earners who were paying less tax in the retirement fund than they would in their personal capacity.
This has been a highly contentious tax, which effectively taxes income in retirement funds, although it has been reduced from its highs of 25% to 9% over the past few years. Since its introduction in 1996 as a temporary tax, it has taken R50-billion out of retirement savings and directly impacts on retired people.