Companies to pay R5bn less tax

The reduction of corporate tax from 29% to 28% is a welcome relief for companies entering a far more difficult economic environment.

The tax burden on corporates has been increasing since 2000, despite the nominal tax rate dropping from 30% to 29% over the same period. The effective tax rate paid by SA Inc rose from 10% to 23% as revenue grew and tax-collection measures improved.

This provided National Treasury with room to reduce the corporate tax rate and put R5-billion back into corporate profits. The aim is to reduce the cost of capital, increase private-sector investment and stimulate the supply side of the economy.

Putting money back into the pockets of individuals has an inflationary impact, whereas tax relief for corporates has a more positive effect on investment and development.

But this measure has widened the tax rates between top-income earners paying 40% tax and companies paying 28%.

To prevent individuals moving their passive investments into company structures to avail themselves of the lower tax rate, the Treasury has proposed that passive companies (those not actively trading) be subject to a 40% tax rate.

Last year, the government reduced the secondary tax on companies (STC) from 12,5% to 10% with the proposal that STC would move to a dividend tax in line with the majority of the world’s tax regimes. The budget clarified this proposal and shareholders will now be subject to a new tax at 10%.

The dividend tax will be a separate withholding tax and will not form part of the shareholders’ income and will therefore not be taxed at the marginal tax rate.

Organisations that are exempt from income tax will also be exempt from the new dividend tax, such as pension funds and the government.

A date will be set for when this change will take place and several proposals have been set out on how exactly the status of the true economic owner will be confirmed.

In terms of job creation, there is a proposal for a wage subsidy to contribute to employment creation. Companies will also be encouraged to provide education and training for dependants of staff members.

Currently an employer can pay up to R3 000 a year for the education of a staff member’s family, tax free, if he or she earns less than R60 000. This benefit has been increased to R10 000 a year tax free for employees earning up to R100 000.