2013 Budget Speech – A Quick Review:

Contrary to expectations, there was not a great deal impacting directly on VAT, corporate tax or personal tax in the 2013 Budget speech. Pre-budget speech predictions anticipated a possible increase in VAT, corporate tax, and that the maximum personal income tax rate could nudge up to 42%.

None of these predictions came about – VAT is still levied at the standard rate of 14%, and the rate of tax for companies remains at 28%, and the maximum personal income tax rate remained unchanged at 40%.

Some of the highlights from this year’s speech are as follows:

• The introduction of an employment tax incentive targeted to support young workers and those employed in special economic zones
• Individuals whose taxable income is from one employer, and which is below R250,000 a year are not required to submit income tax returns
• Levies on fuel increase by 23c per litre from 3 April 2013
• From March 2014 an employer’s contribution to retirement funds on behalf of an employee will be treated as a taxable fringe benefit in the hands of the employee. Individuals will from that date be allowed to deduct up to 27.5 per cent of the higher of taxable income or employment income for contributions to pension, provident and retirement annuity funds with a maximum annual deduction of R350,000. Contributions above the cap are carried forward to future tax years
• Several measures are proposed to limit the deduction of interest on specific types of debt to protect the tax base
• An automated tax clearance system will be implemented this year
• A Policy paper on carbon emissions tax to be published in 2013 with the view of introducing a carbon tax from 2015
• Further tax relief for small businesses, including an increase in the monetary tax thresholds applicable for small business corporations, and a proposal that the R14 million turnover threshold for small business corporations be increased to R20 million
• Interest rate exemptions- interest from a South African source earned by any natural person under 65 years of age, up to R23,800 per annum, and persons 65 and older, up to R34,500 per annum, are exempt from taxation.

Note that these are proposals as per the budget speech, many of which are yet to be implemented. We will keep you posted on further developments. Feel free to contact our offices with any queries.

Reforming The Taxation Of Trusts:

While on the face of it, the budget announcements appear to have been easy on the pocket a more in depth analysis of the proposed reformation of the taxation of trusts indicates otherwise. Trusts have long been used as vehicles for structuring ones tax affairs in the most tax efficient manner. The following extract from the budget, highlights an intention to curb the use of trusts as an estate planning and tax avoidance vehicle.

“To curtail tax avoidance associated with trusts, government is proposing several legislative measures during 2013/14. Certain aspects of local and offshore trusts have long been a problem for global tax enforcement due to their flexibility and flow-through nature. Also of concern is the use of trusts to avoid estate duty, which will be reviewed.

The proposals will not apply to trusts established to attend to the legitimate needs of minor children and people with disabilities”.

The tax implications for discretionary trusts in particular could be substantial. Once a clearer understanding of governments intentions in this regard are understood we will update you accordingly. Should you have any concerns in this regard please feel free to contact us.

Employee Tax Incentives – 2013 Budget Speech:

Minister of Finance, Pravin Gordhan has announced in this year’s budget speech that one of the main tax proposals for 2013 is to introduce a revised youth employment incentive, together with a proposed employment incentive for special economic zones. Careful consideration will be given to input from various stakeholders on the proposals, after which they will be tabled for consideration by Parliament.

Minister Gordhan stated that with a million young people leaving school every year….”we need a package of reforms that will improve education, training and work opportunities for young people”. The number of youths without jobs remains very high, with more than 40% of those under the age of 30 unemployed.

He stated that one of South Africa’s most pressing development challenges is to expand work opportunities for young people, and that there has been extensive debate on how this should be done. He stated in his speech that the answer is that a wide range of measures are needed, including further education, training, public employment opportunities and support for job creation in the private sector.

The tax incentive, which is aimed at sharing the costs of employing young work–seekers, is intended to complement existing programmes. It will help young people enter the labour market to gain valuable experience and access career opportunities, while at the same time encourage firms to employ young work seekers. A similar incentive is proposed for eligible workers of all ages within special economic zones. Both these proposals will be tabled for consideration by Parliament.

Shareholders’ Agreements:

Does your company have a shareholders’ agreement?

If so, and you have revised or replaced your Memorandum and Articles with a new Memorandum of Incorporation (MOI), has the revision taken the provisions of your shareholders agreement into account?

The 2008 Act expressly states that shareholders’ agreements are allowed, and can be used to regulate matters specific to shareholders, or to expand on issues dealt with in the company’s MOI.

As from 1 May 2013, the Act takes precedence over a company’s MOI, the MOI takes precedence over a shareholders’ agreement, and a shareholders’ agreement will be void to the effect that it is in conflict with a company’s MOI or the Act. This is a departure from the previous 1973 Act, which gave priority to the agreement where it was not consistent with the MOI. It is therefore best to make any changes to the shareholders’ agreement at the same time that your new MOI is finalised.

Some aspects to bear in mind regarding the interplay between the MOI and the shareholders’ agreement:

1. Shareholders agreements are private documents. CIPC have indicated that the MOI should not cross-refer to a shareholders’ agreement, as this would mean that the agreement would need to be filed and reviewed by CIPC
2. The MOI of the Company is binding between or among the shareholders of the company
3. There is scope to have a shareholders’ agreement which regulates matters which the shareholders wish to keep private, however many provisions concerning the governance of the company may be adequately dealt with in the MOI and the rules of the company, (if any)
4. If the shareholders agreement and the MOI contain provisions which overlap, any changes to the provisions in one document must be effected in the other, in order to maintain consistency
5. The Act contemplates that any variations to its provisions must be effected within the MOI of a company. Therefore any provision in a shareholders agreement which alters an alterable provision in the Act, or adds to the requirements set out in an unalterable provision, must be replicated in the MOI.

Sincerely,