Government aims to make tax on income from investments equitable, whether it be income from dividends, capital gains or interest. As part of this move Finance Minister Pravin Gordhan announced a higher than expected dividend withholding tax and big increases in capital gains tax, while providing higher tax-exemption thresholds.
On April 1, secondary tax on companies (STC) will be converted to a dividend withholding tax that places the tax burden on investors. STC is currently levied at 10%, but a dividend withholding tax at a rate of 15% has been introduced, much to the surprise of the market.
The treasury attributed the increase as a means to offset the estimated loss to the fiscus because retirement funds are exempt from dividend tax, as are many foreign investors from countries that have tax treaties with South Africa. In spite of the tax increase, the treasury estimates the losses due to the change will be in the region of R1.9-billion.
Des Kruger of Webber Wentzel said: “This has come as a shock, given that all previous announcements and the law as it stands at present indicates a 10% rate. The proposed 50% increase in the dividends tax rate to 15% so late in the day will no doubt put a considerable administration burden on those companies and regulated intermediaries that have to account for the tax.” He said the tax rate was part of a law that could be changed only by an Act of Parliament. “One hopes that this too will be possible before the implementation date. In essence, given that domestic companies are exempt from the withholding tax on dividends, it is only individuals and non-residents who will be affected.”
Kruger said that, given the fact that most double-taxation agreements entered into between South Africa and foreign jurisdictions reduced the rate, usually to 5%, non-residents should not be unduly affected.
Significant increase in capital gains tax
The minister also announced significant increases in capital gains tax. The maximum effective capital gains tax rate for individuals and special trusts increases from 10% to 13.3% (a 33% increase) and companies will pay capital gains tax of 18.6% and other trusts 26.7%.
“This announcement was an obvious means of generating additional revenue, notwithstanding the stated reason being to reduce tax arbitrage and broaden the tax base.
“Foreigners owning property in South Africa will be adversely affected because non-residents are required to pay capital gains tax on the disposal of any immovable property owned in South Africa.”
To limit the impact on middle-income earners, the exemption threshold on capital gains has been lifted. The amount of profit before paying tax has risen from R20 000 to R30 000 and the exclusion amount on death has increased from R200 000 to R300 000. The capital gains tax exclusion for a primary residence has risen from R1.5-million to R2-million.
Tax concessions for savings
Although the treasury has increased tax on investment proceeds, it has mooted tax relief on income from investment in specific savings products.
Government proposes to introduce tax-preferred savings and investment vehicles by 2014. The proposal is that individuals should be permitted to save up to R30 000 a year in registered savings or investment products that would be free of tax on interest, dividends or capital gains. This would represent a R2 500 a month in savings, but a R500 000 lifetime limit has been proposed, which means an individual saving R30 000 a year would reach that cap within 16 years. But the treasury says this cap will be reviewed and may be increased over time.
Savings in retirement funds are exempt from tax
Currently only savings in designated retirement funds are exempt from capital gains tax, dividend tax and interest income, which has made them attractive investment options. The collective investment schemes industry (unit trusts) has long called for a level playing field in which all savings receive equal tax benefits.
There has been concern that this special dispensation for the retirement industry has allowed costs and fees to escalate because of a lack of competition. During his press conference, Gordhan said that the treasury would investigate a lack of transparency in costs and fees in the financial services industry and a lack of investment products relevant to the lower income earner.
Benefits for retirement savings
In the 2011/2012 budget, changes to the tax deductibility of retirement savings were proposed.
These have been reviewed and from March 1 2014 individual taxpayers will be able to contribute 22.5% of their total income into a retirement product up to a maximum of R250 000 a year.
Taxpayers over the age of 45 will be allowed to contribute 27.5% of their salary to a maximum of R300 000 in recognition that many need to accelerate their retirement savings if they have under-saved in previous years.
All South Africans will be allowed to contribute R20 000 a year tax-free to retirement funds to allow low-income earners to contribute in excess of the prescribed thresholds. How exactly low-income earners would have the means to save in excess of 22.5% of their salary remains unclear.