Personal Income Tax
- Individuals will enjoy Personal Income Tax relief amounting to R7 billion by way of adjustments to the Personal Income Tax brackets, tax rebates and medical fees tax credit (see tax tables in Deloitte Quick Tax Guide - 2013/14)
- Tax-preferred savings and investment vehicles are to be introduced by 2015, to encourage greater savings
- It is proposed that these accounts co-exist with the current tax-free interest income regime, although it appears that going forward, the thresholds under the current regime will no longer be adjusted for inflation
- It is also proposed that returns accrued and any withdrawals will be exempt from tax
- There will be an initial annual contributions limit of R30 000, with an overall limit of R500 000 over the taxpayer’s lifetime. These thresholds will be increased regularly in line with inflation
For the first time in many years the changes in tax rates have failed to fully compensate for fiscal drag and all taxpayers will bear a higher tax burden on increases even to compensate for inflation. As it appears that the current tax-free interest amounts will no longer be adjusted for inflation, we believe that this proposal could have a serious impact upon retired persons who are reliant on interest income to make ends meet.
Retirement savings reforms
- Previous proposals relating to retirement fund reforms, as adjusted, are likely to come into effect on or after 2015
- The current proposal is that deductible contributions will be limited to 27.5% of the greater of remuneration or taxable income (excluding amounts relating to retirement annuities or lump sum income), subject to a cap of R350 000 per year. Contributions in excess of the annual capped amounts may be rolled forward to future tax years. Any contributions not claimed at retirement may be set-off against lump sum or annuity income
- It is further proposed that provident fund contributions are allowed as part of the 27.5% tax deduction, in an effort to align the tax treatment of provident fund contributions with that of contributions made to retirement annuity and pension funds
- As part of the reform, employer contributions to retirement funds will constitute a taxable fringe benefit, which will qualify for the 27.5% tax deduction
- In a further effort to harmonise the retirement fund regime, it is proposed that provident funds are subject to the same annuitisation rules as pension and retirement annuity funds.
The increase in the proposed threshold is welcomed. There may still be negative tax implications for individuals, particularly higher income earners.
The annuitisation may impact retirement planning and lead taxpayers to seek alternative investment vehicles which allow the withdrawal of the full amount.
Low cost employer housing
Proposed tax relief is to be provided to lower income earners where employers transfer houses to such employees at less than market value.
The proposed change is welcomed. However, similar relief should be considered for other income earners.
Employee share schemes
Special rules are proposed to ensure uniform tax treatment of share schemes which apply to high-income earners and low-income earners.
Bursaries provided to relatives
It is proposed that the relevant monetary threshold for bursaries given to relatives of employees be increased.
The provision of a bursary to a relative of an employee will be exempt from income tax where the employee earns remuneration of R200 000 or less (previously R100 000). The exemption will apply to the extent of R30 000 in relation to bursaries for higher education and R10 000 in relation to bursaries for basic education (previously limited to R10 000 for all bursaries).
The proposed change is in line with government’s focus on education.
Multiple sources of income
Government will be addressing the issue of too little PAYE being deducted where there are multiple income streams.
Included in the proposed steps to rectify this issue, SARS may hold employers and employees responsible for withholding PAYE at a higher tax rate.
It would be easier to amend the definition of a “provisional taxpayer” (e.g. to include individuals earning remuneration from multiple employers within the definition of a provisional taxpayer) so as to ensure that income earned from multiple sources will be subject to tax during the tax year (and to avoid the higher-than-expected tax liability on assessment).
Income protection and disability policies
It is proposed that non-retirement fund income protection and disability policies be aligned with the tax treatment of other non-retirement fund policies. Contributions made under income protection and disability policies will not be deductible for tax purposes. However, the pay-outs from such policies will be exempt.
The proposal will clarify the position going forward.
Consideration is being given to extending the worldwide tax regime of South African tax residents rendering services offshore, especially where a South African employer is involved. Although it is unclear, it appears that they are considering taxing the remuneration earned from foreign services, limiting the exemptions which may currently be applicable and instead allowing an appropriate tax credit for foreign taxes paid on that income.
Limiting the exemption and providing a tax credit may result in potential cash flow issues for the employee. It will also create an administrative burden which may discourage the international mobility of employees.
Cross-border retirement savings
As part of the retirement reform, cross-border pensions will also be fully reconsidered with the main focus being on the source of the pension.