The Good: Retrenchment tax relief
This one was a good surprise. For several years there have been calls for government to review the tax-free allowance on retrenchment packages. At present, a person who is retrenched only receives the first R30000 of their retrenchment package tax free and R22 500 on the withdrawal of any retirement benefits.
In this year’s Budget Review, treasury is proposing to incorporate retrenchment tax-free benefits with the current taxation on retirement benefits. The proposal is that a person being retrenched will not pay tax on the first R300 000 of income they receive, either as part of their retrenchment package or as a withdrawal from their pension fund. But whatever tax-free portion is used will be deducted from the tax-free lump sum on retirement.
These proposals will form part of the Taxation Amendment Bill, which is expected to be finalised by November 1 2010 and should fall into the 2010/11 tax year.
Unfortunately, for the 900 000 people who were retrenched last year, these proposals will not be retrospective. Treasury says the one concern is that this could encourage tax-avoidance behaviour, with companies claiming that personnel have been retrenched when it was in fact voluntary resignation.
The benefit will still apply if people take a voluntary package as part of a wider retrenchment process.
While this is a positive move, people should be careful not to draw down more than absolutely necessary from their pension funds. Firstly, it would dramatically reduce their pension on retirement and, secondly, the tax-free withdrawal will be offset against the R300 000 tax-free lump sum on retirements.
Definitely Ugly: Future tax hikes
Although Finance Minister Pravin Gordhan backed away from increases in personal tax, he clearly left the door open for future tax hikes by stating that “we may have to raise taxes in future to fund our public spending commitments”. While treasury announced R6,5-billion in tax relief for individual taxpayers, this is simply compensation for inflation and will not increase their purchasing power.
Good/Ugly? Death taxes
There could be a lot more malignant than meets the eye. At present, there is in effect a double taxation on deceased estates, which pay estate duty as well as capital gains tax. According to the Budget Review, estate duty raises limited revenue and is cumbersome to administer, and wealthy individuals are able to create trusts to avoid estate duty. Treasury has proposed a review of taxes upon death. This could see estate duty fall away, but this could result in higher capital gains tax on death as well as a review of how trusts are used to avoid death taxes.
The Ugly: Fuel levy
The fuel levy will be increased by 25,5c so that it will cost R12,75 more to fill up a 50-litre tank. Part of this increase (7,5c) will go to fund the new multiproduct petroleum pipeline between Durban and Gauteng. Treasury says the fuel levy, apart from being a generator of revenue, is also an attempt to cut down on carbon emissions by encouraging fuel efficiency. As part of this drive, a flat-rate carbon emissions tax will become effective on September 1 2010 on all new passenger vehicles.
Bad: Car allowances
Treasury officials confirmed the strategy is to remove company car and travel allowances as a tax benefit in the hands of individuals. As was stated in the previous Budget, as from March 1, those claiming travel allowances will have to keep a log book to prove their mileage and 80% of the fringe benefit will now be taxed compared with 60%. Bottom line, those benefiting from this type of salary structuring will see their after-tax pay squeezed even further.
Good/Bad: Gambler’s winnings
While the recent winner of the R91-million Powerball has managed to dodge the tax bullet, there is a proposal to review the current tax situation where gamblers do not pay tax on winnings. This could be a great way to raise revenue or a real spoiler for those lucky enough to ever win.