National Budget Day, 22nd February 2017

The Treasury recently confirmed that Finance Minister Pravin Gordhan will present South Africa’s National Budget to Parliament on Wednesday, 22nd February 2017.

South Africa’s slower economy last year resulted in tax revenues falling well short of expectations, and this shortfall must now be dealt with.  To ‘balance the books’, government spending will have to be cut even more, and taxes will have to be raised.

In October 2016, it was proposed in the medium-term budget policy statement (MTBPS) that a further R26-billion in reductions to the public expenditure ceiling would have to be implemented over the next two years.  New tax measures amounting to R13-billion in the 2017-2018 financial year were proposed. Combined with the higher taxes announced in the 2016 budget, the MTBPS specified that total revenue increases would amount to R43-billion over the next two years.

Last year, the demand for free higher education and the resulting chaos at campuses across the country placed the funding of higher education under tremendous pressure.  In his MTBPS, Finance Minister Gordhan said that an extra R17.6bn would be needed over the medium-term to fund South Africa’s higher education system.  Gordhan made it clear that allocations to post-school education and training will be the fastest growing element of the upcoming national budget.

Against this background, South Africans can expect to pay more tax. Higher taxes that were outlined during the MTBPS include:

  • higher excise duties
  • an increase in the fuel levy and other environmental taxes
  • adjustments to capital gains tax and transfer duty
  • shifting higher income earners into a higher tax bracket

Perhaps there are some ‘green shoots’ in sight for the economy –  Treasury appears to be optimistic that an economic recovery is emerging.  There has been a slight rebound in commodity prices, drought conditions have eased, and electricity problems are apparently less of an issue.  Thankfully, all three rating agencies (S&P, Moody’s and Fitch) decided at the end of last year to retain South Africa in an investment grade.

Given the events of 2016, and the huge challenges facing our country, the upcoming National Budget promises to be an interesting event.

How the New Tax Legislation May Affect You

On January 11 2017, President Jacob Zuma signed several Bills into law.

The following pieces of legislation give effect to the tax proposals of the 2016-17 budget and the budgetary adjustments announced in the medium-term budget policy statement in October:

  • Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2016
  • Tax Administration Laws Amendment Act, 2016
  • Taxation Laws Amendment Act, 2016

Some ways in which this new legislation may affect you:

  • The ability of taxpayers to transfer wealth to their trusts without being subject to tax has been limited by the introduction of a new section (7C), which relates to interest-free or low-interest loans to trusts. As from 1 March 2017, the difference between official rate of interest, and the amount of interest charged on the loan to the trust, will be deemed to be a continuing donation made by the trust and will thus be subject to donations tax.
  • Employees will now be taxed on the dividend proceeds received from the disposal or redemption of the underlying equity shares in Company Share Incentive Schemes.
  • The expiry date for Employment Tax Incentive (ETI) has been extended until 28 February 2019 (effective date 01 October 2016), thus encouraging employers to hire young people by reducing the cost of employment to the employer.
  • The period for Learnership Allowances has been extended to 31 March 2022. (Effective 1 October 2016 and applicable to Learnership Agreements entered into on or after that date).
  • Car tyres will cost more with the introduction of a new tyre levy at a rate of R2.30/kg.
  • Loss of privacy on bank accounts – From September 2017, a new international Common Reporting Standard (CRS) will allow governments to obtain detailed account information from financial institutions, enabling an annual automatic exchange of information with other jurisdictions.
  • Overseas assets must be disclosed –  the Special Voluntary Disclosure Programme (SVDP) provides a “grace period” during which previously undisclosed overseas assets can be declared (assets held between 1 March 2010 and 28 February 2015). The original term of the SVDP has been extended to 31 August 2017.

Should you have any concerns regarding how these changes in tax legislation may affect you, please contact us for assistance.

The Unemployment Insurance Amendment Act, 2016

Over the years, the Unemployment Insurance Fund in South Africa has accumulated a huge surplus in financial reserves because revenue and investment returns have exceeded the benefits paid.

Some of the surplus is currently used to fund poverty-alleviation schemes and socially responsible investments like housing, hospitals and student accommodation, as well as other investments that result in job-preservation and job-creation.

On 11 January 2017, President Zuma signed into law the long-awaited amendments to the Unemployment Insurance Act which are aimed at increasing the rate at which the Unemployment Insurance Fund (UIF) pays out benefits. The Unemployment Insurance Amendment Act also widens the categories of those who qualify for benefits.

Here are some of the changes included in The Unemployment Insurance Amendment Act, 2016:

  • The period over which unemployment benefits are paid has been increased from 238 to 365 days
  • UIF benefits have been extended to people in learnership training as well as to civil servants (under the old legislation, provincial and national public servants, including the police, were not entitled to UIF benefits)
  • UIF benefits for pregnant women have been increased to 66% of their basic salary
  • Employees may apply for maternity leave benefits eight weeks before delivery and up to 12 months after birth
  • Payment of maternity benefits will no longer be deducted from the mother’s unemployment insurance benefit
  • Women who have suffered miscarriages during the third trimester or a still born birth may claim benefits
  • Families and/or nominated beneficiaries of a deceased claimant will be allowed to receive
  • the deceased’s benefits within 18 months of the death of the contributor
  • Employees who have lost working hours due to reduced time at their work places, will be entitled to benefits
  • The new legislation prohibits the charging of fees by any party to an Unemployment Insurance Fund (UIF) claimant

These changes to the Unemployment Insurance Act have been a long time in the making, but the new legislation will not only benefit thousands of unemployed workers, but also women on maternity leave.

Taxation of Rental Income

Many people are making money via online platforms which allow them to list and earn rental income from rooms, apartments and other forms of dwellings.  In particular, Airbnb has blossomed globally, and an increasing number of South Africans are earning extra income by renting out their homes in this way.

Just as any other rental income is taxable, rental income earned through these online platforms is regarded as taxable income.

According to SARS, the rental of residential accommodation includes:

  • holiday homes
  • bed-and-breakfast establishments
  • guesthouses
  • sub-renting part of your house e.g. a room or a garden flat
  • dwelling houses and
  • other similar residential dwellings

Rental income should be added to any other taxable income that you may have.  In addition to the regular monthly rental income, any other amount paid to you is also subject to income tax. These additional amounts or lease premiums are usually paid in the form of lump sums at the start of the lease and the full amount is then subject to tax in the year that it is received.

A refundable deposit paid by a tenant is not taxable as long as it is held separately in a trust account.

Rental income may be reduced by the expenses incurred during the period in which the property was let.  These expenses must relate directly to the production of the rental income.

Expenses that may be deducted from taxable income include:

  • rates and taxes
  • bond interest
  • advertising
  • agency fees of estate agents
  • insurance
  • garden services
  • repairs in respect of the area let
  • security and property levies

It is important not to confuse the cost of repairs and maintenance with improvement costs (capital expenditure).  Capital and/or private expenses are not allowable as a deduction.

Airbnb is legally obliged to supply details of the earnings of Airbnb hosts to the tax authorities, so it is important that you keep sufficient records to demonstrate that you have declared all income received and to substantiate expenditure claimed.