Budget 2001 Tax Proposals: hearings

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Finance Standing Committee

26 February 2001
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

27 February 2001

Chairperson: Ms B Hogan

Relevant Submissions:
National Treasury (email info@pmg.org.za for Power Point presentation if it takes too long to download)
South African Revenue Service (See Appendix 1)
Ernst and Young Associates submission (See Appendix 2)
Gobodo Chartered Accountants submission (See Appendix 3)

Presentations and submissions were made on the tax proposals in the 2001/2 Budget by the National Treasury, the South African Revenue Service, Ernst and Young Associates and Gobodo Accountants. The National Treasury remarked on the effects of the increased disposable income and methods to encourage investment. The South African Revenue Service focused on the importance of checking tax evasion. Ernst and Young Associates asked that "tax evasion" and "tax fraud" be distinguished. Gobodo said the budget is good for low-income earners but does little for the very poor. It applauded the encouragement of small enterprises.

National Treasury
Mr Martin Grote highlighted the fact that personal income tax has been reduced by a total amount of R8,3 billion and that value-added tax (VAT) has not gone up, thereby increasing the average consumer's disposable income.

The tax package is structured in such a way that it creates further scope for the National Treasury to be involved in economic growth activities. A chief characteristic of the tax proposals was their aim of inducing saving. The decrease in personal income tax would lead to a greater demand for goods and would also allow consumers to reduce household debt, which has grown tremendously.

One of the key focus areas of the National Treasury in the coming fiscal year will be the co-ordination of economic activities within the SADC region so as to position the region favourably towards investment. The point was also made that South Africa is very competitive internationally in terms of its tax as a percentage of the GDP.

SARS noted its revenue target of R37 billion. It also mapped its strategy for clamping down on those individuals who are evading tax. It also emerged that SARS was planning on strengthening its centres in Kwazulu Natal. (See Appendix 1 for presentation).

Ernst and Young Associates
Mr Clegg, Tax Partner at Ernst and Young Associates, congratulated the Minister on the postponement of the Capital Gains Tax implementation date. He had hoped for a decrease in corporate income tax. He suggested to the National Treasury that the term "tax evasion" be substituted for the word "tax fraud" since "fraud" indicates a very serious criminal offence, which "evasion" is not. He also stated that he held a different view to that of the Minister regarding the tax morality of larger corporate taxpayers. He was of the view that by and large these taxpayers were abiding the law.

Gobodo Chartered Accountants
Mr Kajie said this was a very good budget for low-income earners. However it would do very little for the very poor. He commended the National Treasury for the focus on Small, Medium and Micro Enterpresis (SMMEs) in this year's budget and hoped that this would boost entrepreneurship and create jobs.

Mr Andrew (DP) commended the current tax to GDP ratio as reflected in the budget and asked if the National Treasury had any forecast of this ratio for the foreseeable future.

Ms Maria Ramos of the National Treasury answered that in the next three years the tax to GDP ratio was estimated to stabilise at around 23,6 percent.

Mr Rabie (NNP) noted that the excise duty on beer had risen by 6 percent, wine is up by 10 percent while there has been a decline on cosmetics tax. He asked for the rationale behind the increase in wine given the fact that the Western Cape wine industry is experiencing cash flow problems.

Mr Grote replied that the increase in beer tax is in line with international benchmarking standards. He said the increase in spirits tax is due to the negative effects caused by the consumption of alcohol. He added that the wine industry has reported that it is doing quite well with regard to exports. The decrease in cosmetics tax is due to pressure from the Department of Health because of the protective nature of most cosmetics.

Prof Turok (ANC) asked about the resources at SARS's disposal for it to execute its duties efficiently.

Commissioner Gordhan answered that they were currently in negotiation with the National Treasury with a view to strengthening their resource base.

Mr Andrew (DP) asked if Mr Clegg of Ernst and Young had any views on what South Africa could do to influence investment spending given the propensity of its citizens not to save.

Mr Clegg answered that peoples' propensity to save is driven by excitement about the future, and if the future is made to look bright the propensity to save will increase

The Chairperson asked what the impact of the decrease in personal income tax would be on consumer behaviour.

Mr Clegg noted that immigrant societies tend to have a higher propensity to save as their disposable income increases. On the other hand, with more disposable income at hand, people have more access to credit facilities and this tends to have the unfortunate effect of causing people to live beyond their means.

Dr Rabie (NNP) asked Mr Kajie for his comments on the taxation of retirement funds.

Mr Kajie answered that this form of taxation has to be looked at very carefully if government is trying to induce saving.

Mr Andrew (DP) recalled that there had been extensive debate over the taxation of retirement funds and that there was a forum that had been established to look into this. He asked about the progress of the forum.

Ms Ramos replied that the forum had last met in 1998 and that the National Treasury was hoping to deal with this issue within the next two years.

Ms Taljaard (DP) asked Mr Kajie for his view on the current VAT system.

Mr Kajie said that the VAT system needed to be revisited and a VAT increase on luxury items needed to be explored.

The meeting was adjourned.

Appendix 1:
Attainment of Revenue Target
-Targets for 2001/2
- Achievements past 3 years
- Revenue Trends
- Revenue Opportunities
- Revenue Risks

· Tax Administration & 2001/2 Budget
- Tax proposals with most significant impact
- Administrative Implications


REVENUE TARGET 2001/2 = R 37 billion


Source of Revenue

Revised Estimate

Estimate 2001/02

Additional Collections













Secondary Tax on Companies




Tax on Retirement Fund








Other Taxes








Fuel levy












Percentage of GDP





Revenue Achievements of the Past Three Years





SARS Total












Above target




Efficiencies build into target




Total additional collections








Total additional gains




Personal Income Tax
R350 million - Additional debt collection measures, including implementation of automated call centre.
Company Income Tax
R900 million - Additional compliance measures based on improved risk profiling.
Value Added Tax
R1 750 million - Additional compliance measures based on improved risk profiling.

Persons and individuals
- refunds higher than estimated due to clearance of backlogs

· Companies
- higher than expected provisional tax receipts
- refunds also lower than indicated

Above mainly due to improved compliance measures

· VAT and Customs Duties
- Higher than expected collections mainly due to higher value of imports and improved compliance measures

· Revenue Opportunities
- Debt Recoveries
- Improved Audits

Legal Position
- In a position to restructure packages
- Split income through the use of legal entities

· Illegal Position
- Hide assets acquired through non-declared income
- Reconstruct financials to reduce tax liability
- Personal cost through hidden bank accounts

Lifestyles do not support the tax profile

· SARS will use data matching to identify these taxpayers and income not declared

· Teams will be formed to focus specifically on these areas in 2001/2

· SARS project to earn R600 million (directly from this initiative)


- New Tax proposals
- SARS curb tax evasion and fraud
- Root out internal corruption
- SIYAKHA - KwaZulu Natal - October 2001:
Processing Centre
Compliance Centre
Service Centres
- Electronic Submission - Certain Tax returns.
- Out-bound call centre.
- SARS budget supplemented next three years

Personal Income Tax
Ad Valorem reforms
Capital gains tax
Wage incentive
Strategic Investment allowance
Diesel fuel refund
VAT zero-rating on illuminated paraffin
Review tax on banks

Personal Income Tax Relief - R8,3 Billion
Increase in SDL rate
Increase in interest / dividend exemption
Reduction in Estate duty / Donations tax rates
Raising provisional tax thresholds
Investment incentives for small business corporations.
Depreciation of airport structures
Re-look at unbundling provisions
Repeal of certain stamp duties

Section 24C
Contingency reserves of short term insurers
Taxation of intangibles
PAYE on Private Company directors

Limiting the delay in filing tax returns
Streamlining interest charges
Streamlining provisional tax penalties
Review opportunity for taxpayers to reopen assessments
Appointment of expert outside counsel
Capacity for advance rulings and charging of user fees

New legislation
Operational and Procedural changes
Additional staff required
Training will be necessary
IT system changes
Tax returns will have to be changed
Additional cost to implement proposals
Risk of avoidance
Additional controls / policing

[Ed: Table not available]


New PAYE tax tables (electronic and hard copy)
Taxcalc on website to be adjusted
Tax calculation programs in NITS to be adjusted (parameters)
No implication
Legislative changes to the Income Tax Act
Procedural and administrative
Procedures to be compiled and distributed to offices
Feedback loop incorporated from business
Information brochure to be adjusted

REVIEW OF TAX ON BANKS [Effective date?]
Effective Tax Rates
Effective tax rates in the banking sector are low. The extent of this issue is not readily apparent from the annual financial statements as banks account for deferred tax as a tax liability. This deferred tax can be "rolled" from year to year.
Intensified Audit and Enforcement
Additional audit capacity will be allocated to the review of the banking sector's affairs. The feasibility of engaging senior counsel to assist in these reviews is also being explored.
Legislative Amendments
The need for legislative amendments will depend largely on the results of the reviews performed.

Depends on the form of the incentive
Changes to forms
Legislative changes to the Income Tax Act
Procedural and administrative
Depends on the form of the incentive
Procedures to be compiled and distributed to offices
Additional audit functions
Information brochure to be adjusted
Media releases


No implications
Minor adjustment
Legislative changes to the Income Tax Act
Procedural and administrative
Co-operation with Department of Trade and Industry
Adjudication and informational materials primarily handled by DTI
SARS may be represented on committee evaluating applications
Additional aspects to be verified on audit
Information brochure to be updated

Bulk data capture and online capturing adjustments to be finalised
NITS calculation program adjustment to be finalised
Return adjustment. Company and valuation returns in late draft stage.
Legislative changes to the the Income Tax Act introducing Eighth Schedule on Capital Gains. Final draft for comment to be released by 2 March 2001
Procedural and administrative
Payments by non-registered persons and implication for register
Procedures to be compiled and distributed to offices
Information brochure to be compiled, press campaign has commenced and hotline operational from 26 February 2001
Feedback loop incorporated from business

Simplify and restructure ad valorem excise duty system
Changes to program to do calculations on new basis
Changes existing forms (DA75)
Legislative changes to the Customs and Excise Act
Procedural and administrative
Procedures to be compiled and distributed to offices and industries
Organise workshops with the relevant industries

DIESEL REFUND [04/07/01]
VAT system to be adjusted
Bulk data capturing and online capturing functions to be adjusted
VAT application form and return (VAT 201) to be adjusted
Legislative changes to the Customs and Excise Act.
Procedural and administrative
Initial applications from 70 000 possible claimants
Procedures to be compiled and distributed to offices
Legal training required
Feedback loop incorporated from affected industries
Information brochure to be issued


No implication
No implication
Legislative changes to the Value Added Tax Act.
Procedural and administrative
Increased compliance due to zero rating
Procedures to be compiled and distributed to offices
Communicate through VATNEWS

Tariff register (master file) to be updated (done)
Update the web page (Done)
No implication
Publication in government gazette
Procedural and administrative
Distribution to offices and agents of tariff adjustments
Stocktake of items in warehouses (excise) on day of announcement
Procedures to be compiled and distributed to offices
Feedback from business in loop

Appendix 2:
Presentation by Mr DJM Clegg - Tax Partner, Ernst and Young Associates 26 February 2001

The numbers
The Minister of Finance has succeeded in delivering his fifth solid budget performance. Budget 2001/2 is unexciting but sound and, at a time which anything exciting about South Africa (whether good or bad) is inclined to move markets negatively, this is probably just as well! Had the budget been more strongly stimulatory or interventionist, the probability is that someone somewhere would have decided this was the first sign of impending populism and economic indiscipline. So our congratulations go once again to the Minister and his team for judging things nicely.

So where to now?
It must be supremely exasperating for the Minister and his team at the Department of Finance to see that the solid foundation which has been laid over the past six years - and all the pain That discipline and globalisation has entailed - has not yet had obvious results. In part, of course this can be attributed to the volatility and unpredictable nature of global economic events which have kept South Africa continually off balance since the first heady year or so of foreign investment and optimism. But it must also be said that the worldwide trend towards "jobless growth", is extremely worrying. As is the experience of New Zealand (which took the economic medicine some ten years before us) and has still to reap the hoped for rewards, despite its lack of the other socio-political problems facing this country!

A solution to this dilemma is critical but it must be remembered that jobless growth is essentially a first world phenomenon, affecting high tech manufacturing and service industries where productivity gains through the use of technology replace new hirings. Sweatshop industry - which still accounts for huge volumes of world production - is not so badly affected and provided this Government can find a politically and economically sensible way of taking the sweat out of the shop it should be possible to achieve employment growth. But two things must happen:

· There must be an encouragement of and explosion in small entrepreneurial businesses which become micro-employers - and the education system must aim to encourage a belief in self-employment in addition to skilling for jobs, and

· Low tech labour needs to be used for infrastructural projects where possible. Although the origins are different, the scale of our unemployment crisis and the state of infrastructural development of the nation is not very different to that of the United States in the early 30s. A New Deal is called for and there is at last some sign of movement in that direction in Government thinking.

The Revenue side of the budget / fiscal measures
Compared to last year, this budget was massively unexciting! Had the Minister actually realised what last year's budget was asking of SARS, he may not have been so dogmatic on the date of introduction of CGT. To our mind, a lack of understanding of the complexity of legislative change is the Ministers one failing. But having said that, the Minister has now made the right decision to delay introduction of CGT until October 2001 and we presume -although that is not completely clear from the announcement - that 1 October will also be the valuation date from which gains must be brought to account.

As to existing taxes, we had hoped and had believed from some remarks made by Treasury during the Parliamentary hearings on CGT that a reduction in corporate tax rates - and specifically STC - might be possible. But the Minister made it plain in his speech that two issues militated against such a reduction:

· The undesirability of increasing the existing gap between corporate and individual top rates

· The low effective rate of tax actually paid by South African corporates in any event - a rate which suggests to the Minister that corporate South Africa's tax morality is lacking.

The gap between corporate and individual rates
As to the first point, we have little quarrel. Equity suggests that tax rates should play no part in the decision process of choosing the administrative form business takes - sole proprietorship, company. close corporation trust or what have you. But the Minister was a little disingenuous when comparing the 42% rate of personal tax to the 30% base corporate tax rate. The more appropriate comparative rate would be the corporate rate on distributed dividends which is currently 37,8%, a marginal rate of tax which is reached by individuals earning between R80 000 and R100 000 a year - and which is not much below the 42% top marginal rate which is now triggered at R215 000. The Minister's response to that may well be that a company which chooses not to distribute dividends can reinvest at 30% and at the same time 'convert" revenue into capital, through the eventual sale of the company on presumably) capital account. This. incidentally. is one of the famed abuses which CGT is meant to counter, or at least capture). But that, with respect, is less than half the story - the whole purpose of STC was to encourage companies to reinvest (usually in further productive capacity rather than in sterile financial investments, holiday homes for the CEO or what have you). What is more, any person buying a company which holds investments funded out of post-tax income, is buying himself an STC liability for the future - and not just on the original earnings, since capital profits distributed as dividends (otherwise than on liquidation) are also treated as taxable dividends! So while it is true that portion of the overall 37,8% can be deferred, that is as a result of the clearly stated intentions of Government itself and to describe this as an abuse or avoidance of tax or the conversion of income into capital is nonsense.

It would be interesting to establish what the cost would be in revenue collections of dropping the top marginal rate to 40% above, say, R500 000 combined with a reduction of STC to 8% (giving rise to tax on distributed corporate profits of 35,2%. Maybe this is something for next \ear when revenues from the CGT start to flow.

Tax morality
As to the Minister's concern on tax morality, we beg to differ. Large corporate taxpayers in South Africa by and large do their utmost to ensure that they comply with the law. There is unquestionably tax evasion by both individuals and smaller companies (and remember companies are directed by individuals!) but we do not think that tax evasion is a proper reason for considering the correct level of corporate taxes. And while on that topic, it would be useful it, in the debate on tax morality, tax avoidance and tax evasion. we could give 'evasion" a more appropriate label - fraud - thereby positioning it more accurately in the public psyche. Evasion is cheating pure and simple. It is a fraud both on Government and on one's fellow taxpayers. k is not clever (although sometimes it is ingenious) and it should be no more acceptable than any other form of crime. The trouble with the word "evasion" is that linguistically it is too close to "avoidance" and even leads to such portmanteau hybrid terms as "avoision", thereby blurring a distinction which should really be quite clear.

To recap. the "avoidance" of tax encompasses the principle that no one is obliged to pay more than the law demands and if there are different commercial methods of arriving at essentially the same commercial end result, for example lease or suspensive sale) one should be entitled

to choose the methodology which carries the least tax charge. If that principle leads sometimes to contrived methodologies then the anti-avoidance provisions of the law - which by and large attack commercially abnormal methodologies - are properly invoked. But this does not make such practices evasion or fraud and that point needs to be clearly understood by everyone in the debate. It must also be understood that tax law is not simple and if it is ever to deal properly and comprehensively with the complexities of modern commerce, it cannot be made simple. Our tax system is now approaching the complexity of those of the G7 countries (and this is probably as it should be) and those complexities often throw up consequences which Government might not have foreseen. When taxpayers apply the law as it is written, it is intellectually dishonest, confrontational and grossly unfair to describe it as evasion or the closing down of such practices as the closing of loopholes.

But enough of this - it will always be, as we have said above, that politicians and tax planners are at odds on the detail where we should be on the same side is roundly condemning tax fraud.

The tax changes
Personal tax rates and exemptions
As is now widely known, the greatest personal tax relief takes place in the tax brackets between about R40 000 and R90 000 and above R100 000 the tax savings are a fairly standard R3000 to R3400. Last year there was something for everyone... it would have been good to see some giveaway at higher income tax brackets this year as well, but presumably the Minister is also worried about avoidance and evasion by high income earners too.

The exemption for interest and foreign dividend accruals in the hands of an individual has been increased to R4 000 per annum (R5 000 for those over 65 years on the last day of the tax year). At current domestic interest rates, this means that an investment of approximately R40 000 will be sheltered from tax and will undoubtedly be of great value to pensioners and others. An increase in this exemption has been pleaded for on a number of occasions over the past several years by a number of bodies but it may be difficult to establish to what extent it will actually change investment behaviour and add to South Africa's propensity to save. Its benefit is possibly more in the boosting of morale than in any serious numbers

Taxation of Pty company directors
For many years (with a short interregnum in the early 1990s) the fees and remuneration of private company directors has been exempt from PAYE (while their counterparts in public companies had been subject to PAYE).

The traditional reason for this concession is that private company directors' remuneration is frequently determined only at year end so that payments to them during the course of a financial year are more akin to provisional drawings than they are to salary as such. Accordingly, where a company's fortunes are in decline, a payment of PAYE on these drawings could well result in taxation of amounts which were no more than loans.

The interregnum that we refer to above was aimed at doing precisely what is now proposed but ran into severe practical difficulties. It is not clear precisely how the Revenue proposes to deal with these problems now.

Capital Gains Tax, Estate Duty and Donations Tax
The rate of estate duty and donations tax has been dropped to 20% (the Treasury's original proposal was 21%) and this is likely to neutralise the imposition of CGT on donations and death in the case of a great many estates. Governments concession is welcomed.

Corporate and business proposals
Investment allowances
Strategic investments (to be defined) are to receive an investment allowance of an additional 50% to 100%. Although the details are not clear, our guess is that this will constitute an additional percentage on the allowance for machinery and plant used directly in a process of manufacture (or similar process) under section 12C(1)(a) of the Act and will apparently fall away if not actually absorbed by net taxable income from the project concerned within three tax years after the date of bringing into use. If history repeats itself, this additional deduction will not be subject to income tax if recouped on disposal of the asset concerned (it would, undoubtedly, be subject to CGT!). This concession is welcomed but it leaves the bulk of manufacturers who cannot qualify their expansion plans as strategic at something of a disadvantage. Much will depend upon the parameters of the concession and it is to be hoped that the net is spread as broadly as possible

Small businesses with gross income of R1 million or less (and a variety of other qualifying features) will be entitled to deduct the cost of manufacturing assets in the year of expense. This will undoubtedly assist these organisations' cash flows in the year of investment but it is our belief that the existing definition of small business (which was introduced in order to provide for lower rates of tax) is too restrictive for this to have significant and meaningful effect in kick-starting small manufacturing in this country. This concession should be extended upwards. possibly to organisations with turnover of up to R2M.

Bank taxation
Financial institutions tend to be special case taxpayers worldwide. In South Africa special rules have applied to the life insurance industry for many years, and for some years in the recent past a "financial services levy" was imposed on financial institutions. Because banks have up to now been subject to the normal rules of taxation, it has been possible for them to take advantage of mismatching of income and expenditure in financial transactions and it is this, in all probability, which has lead to the relatively low effective tax rate. We are therefore not particularly surprised that Government now intends to engage the industry in a debate as to a more appropriate way of raising taxes. Judging from the reaction of the stock market to the Budget Speech, the general view is that this will be a BAD THING and it will, undoubtedly, be painful. But if the experience of the life assurance industry is anything to go by, it is unlikely to be a life changing experience and we will watch that space with interest.

Wage incentives
It was announced that wage incentives would be introduced into the Income Tax Act, presumably involving an additional deduction for the costs of employment of certain categories of labour. This goes hand in hand with the increase of the Skills Development Levy to 1% of payroll (from 0,5%) from 1 April 2001. Without specific details of these proposals. it is impossible to comment.

Unbundling transactions
The existing legislation dealing with the rationalisation of South African businesses enables certain organisations to restructure without suffering income tax on recoupments, stamp duty and transfer duty on the transfers of shares and fixed property and STC on the declaration of certain dividends. These provisions apply also to reorganisations directly below foreign holding companies and it has been suggested that they unfairly benefit non-resident taxpayers. We have two comments:

· Firstly. it seems to us that if a reorganisation is commercially sensible. it should make no difference whether that is to the benefit of a local or non-resident owner. In either event. it is intended to encourage the efficient carrying on of business in South Africa and ownership should be irrelevant.
· We trust that this is not intended to extend to reorganisations of foreign owned businesses at below the immediate cross-border level (i.e. within the entirely South African resident group of companies). This would clearly be uncalled for.

The closing of so called "loopholes"
Section 24C was introduced into the Income Tax Act in 1980. It was aimed primarily at alleviating the difficulties faced by the construction and similar industries which typically receive high value advance payments on contracts to enable them to finance the expenditure to be incurred in delivery. Without section 24C or some financial sleight of hand, the tax burden arising from such a payment would probably be vastly in excess of the budgeted profit! But as is the case with so many tax changes which aim at being relatively simple the provisions lent themselves to be used by a wide variety of other organisations with similar problems. In some cases, moreover, organisations changed the way they did business in order to take advantage of the allowance and create a mismatch between income and expenditure as between themselves and their clients. (This was largely closed down last year through the introduction of section 23 H). The burgeoning use of section 24C was in part encouraged by the Revenue who exercised their discretion in allowing it to be utilised in a number of surprising circumstances (although more recently they have been backing away from those practices).

The purpose behind section 24C is absolutely sound and by no means constitutes a loophole. It is to be hoped that the amendment does not throw the baby out with the bathwater.

· The taxation of short term (fire and accident) insurers is characterised by the granting of two allowances catered for by section 28(2) and elaborated upon in practice note 10. Presumably, Revenue now believes that these allowances are too generous (although as they are in the Revenue's discretion in the first instance, it is difficult to see what the fuss is all about).

· A cryptic comment notes that the taxation of intangibles is to be reviewed. We have no idea what Government has in mind and find it difficult to comment!

Advance rulings
Unlike most G7 tax jurisdictions, the South African Revenue has no statutory power to issue rulings to a specific taxpayer or to a body of taxpayers in relation to the application of the law on certain facts. Although in practice. some indication of the Revenue's attitude can be gauged through discussions with senior officials (which are occasionally reduced to writing) any view which is obtained is not strictly binding on the Revenue - although the recent acceptance of the doctrine of "legitimate expectations" into our law may well change that. Despite this, the Revenue has issued a large number of "practice notes" in recent years and these can generally be relied upon by a taxpayer. Nonetheless, the position remains unsatisfactory and a formal pre-ruling regime will be a welcome addition to the interaction between SARS and taxpayers in general.

Appendix 3:
Hassen Kajie: Tax Partner at Gobodo Chartered Accountants (Cape Town Office)

Submission to the Portfolio Committee on Finance on the 2001/2002 Budget

Personal Tax
This year's budget, as far as personal tax is concerned, will benefit the lower and middle-income earners and do very little to the very poor and the higher-income earners.

The very poor, who previously earned below R21 111 and now R23 000, will not be affected by the changes in tax rebates and tax brackets, since they fell outside of the tax net and were not subject to tax and will now also not be subject to tax. Also, persons over the age of 65 years who earn less than R39 154 (previously R36 538) will not pay tax and the changes will not affect them as well. However, the changes did increase the tax threshold ( the level of income at which tax becomes payable).

The higher-income earners will also not get much relief out of this year's budget as the top threshold (the amount at which the marginal rate of tax applies) has increased from R200 000 to only R215 000 and the rate of tax at this level has remained unchanged at 42%. The people who will benefit most from the R8,3 billion tax relief, are those people who earn below R80 000.

I would liked to have seen that the top threshold be increased to about R250 000 and the marginal tax rate to be reduced to 40% to bridge the gap between personal tax rates and corporate tax rates. Also, due to inflation, so many people earn more than R215 000 and very quickly, you see ordinary people that struggle to make ends meet on their salaries, paying marginal tax rates.

Corporate Tax
The tax rates for companies and close corporations has remained unchanged at 30% and the rate for STC has also not changed and remains at 12,5%.

I did not expect a drop in the corporate tax rate, but I think many people expected a drop in the rate of STC or even a total withdrawal of it. STC discourages companies and close corporations from distributing their profits because the company or the close corporation must pay the tax and not the shareholder of the company or member of the close corporation.

However, with a drop or abolishment of STC, there would have to be a drop in the personal tax rate, otherwise there would not be tax
equity between individuals and companies/close corporations.

It is encouraging to see the government extending further tax relief to qualifying small businesses by way of an accelerated depreciation system. Now, the full cost of manufacturing assets can be deducted in full in the year the asset has been brought into use.

However, many small businesses find it difficult to keep proper records of their business transactions on the accrual basis. Many small businesses are forced to seek the services of accountants at an unnecessary cost which sometimes they cannot afford. It would be most beneficial to small businesses to allow them to account for their taxable income from business on the cash basis of accounting. This should speed up the submission of their income tax returns as they would not require the services of an accountant. The sooner they submit their returns, the sooner they can be assessed and the sooner their taxes can be collected.

I feel that special trusts should be taxed at a lower rate than individuals, since these trusts are normally set up for specific purposes such as handicapped persons, etc.

Interest and Dividend Exemption
I am pleased to see that the interest and dividend exemption has been further increased this year. This will certainly create a culture of savings amongst the people. However, the government must consider increasing the exemption even further or even removing the limit for persons over 65 years because most of such people live off their investments in their retirement age. This will also encourage people to save for their retirement days so that the burden to look after them is taken away from the government. The government must also look at ways to reduce the tax significantly for persons over 65 years as it is becoming increasingly difficult for them to live off their pensions and other investment income and still pay significant taxes.

Value added tax
It is encouraging to note that the vat on illuminating paraffin will be exempted as from 1 April 2001. At the moment, many poor people who should not be paying tax are paying tax indirectly through vat.

I feel another good look at vat should be done in the future in order to reduce the burden on the poor. A system needs to be introduced whereby the general vat rate be reduced and a higher rate levied on certain luxury commodities such as motor cars and jewellery. The vat exemption should be further extended to certain other basic foodstuffs.

Wage Incentives
The new wage incentives to be introduced later in the year is long overdue. This incentive will encourage employers to employ more people and it will also encourage them to spend on the training on their employees.

Donations Tax and Estate Duty
It is encouraging to note that the government has considered some of the comments from the public on Capital Gains Tax. As a result of this, the rate of Donations Tax and Estate Duty will be reduced from 25% to 20% when Capital Gains Tax is introduced. However, the exemption of the first R25 000 per taxpayer for Donations Tax and the R1 million abatement for Estate Duty purposes, should be re-looked at since these amounts were determined some time ago and with inflation, the value of the individual's assets has increased substantially over the years.



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