What does Budget 2017 mean for my client?
- The marginal rate of tax has been increased to 45%.
- although high earners may have slightly less disposable income to invest, the opportunity for business owners to reduce their tax exposure by investing in retirement annuities (RA’s) has just become more attractive
- There is good news for property buyers in the form of a proposed relief on the rate of transfer duty payable
- Government intends to follow through with their promise to introduce a tax on sugary beverages
As media and various industry commentators all rush to decipher the detail in Minister Pravin Gordhan’s annual budget speech delivered on the 22 February 2017, there is a lot of noise and potential for confusion around. However, whilst there are many interesting things to come out of his speech, we are aware that the only thing investors really want to know from you now is "How exactly will this budget affect me?". Here, we identify a few important proposals raised that could have a direct impact on your clients.
The impact on after tax money to invest: Notably, the marginal rate of tax has been increased to 45%. This has received a lot of attention since the announcement - but what does it actually mean? Effectively, those that earn more than R1 500 000 will pay more tax than they did in the 2016/2017 tax year. This is because even though the inclusion rate for capital gains tax (CGT) remains unchanged at 40%, the increase in the marginal rate of tax to 45% means that the maximum effective rate of CGT will increase from 16.4% to 18% for individuals and special trusts; and from 32.8% to 36% for other trusts. The effective rate for companies will remain unchanged at 22.4%, and for those shareholders who would like to re-arrange their packages to reduce their income-tax exposure, Treasury has increased the dividend withholding tax (DWT) rate from 15% to 20% effective 22 February 2017. So, although high earners may have slightly less disposable income to invest, the opportunity for business owners to reduce their tax exposure by investing in retirement annuities (RA’s) has just become more attractive. Has your client maximised their opportunity to invest up to R350 000 in an RA?
The impact on tax-free Investments: Clients who are already invested in tax-free investments (and any clients interested in the tax-saving opportunities of tax-free investments) will be happy to know that Treasury delivered on their promise to review the R30 000 annual contribution cap. Proposing that the annual contribution cap be increased to R33 000 is a sure sign that government is serious about encouraging South Africans to save and we hope this be will become a trend in future budgets. We are also hopeful that Treasury will eventually decide to review the R500 000 lifetime cap which is a barrier to those investors that want to maximise the tax advantages of TFI but are reluctant to invest knowing that they may need to access the funds in the near future. Whatever decision is made around the lifetime limit in the future, it is clear that tax-free investments continue to get the nod from government.
Tax considerations for clients working abroad: Currently, if your client works in a foreign country for more than 183 days a year then the foreign income earned is (subject to certain conditions), exempt from South African tax. At the same time, if the tax payer is also exempt from tax in that foreign country, they benefit from not having to pay tax in either country. However, Treasury views this concession to be overgenerous and therefore proposes that the foreign income tax exemption should only be allowed if the taxpayer is subject to tax in the foreign country.
The impact for property buyers: There is good news for property buyers in the form of a proposed relief on the rate of transfer duty payable. The minimum threshold at which transfer duty applies has been increased from R750 000 to R 900 000. This means that in the 2016/2017 tax year, your client would not pay any transfer duty if they were purchasing a residential property below the value of R750 000. As of 1 March 2017 this amount will be increased to R900 000. To illustrate: If your client purchased a residential property in the 2016/2017 tax year for R3 000 000 they would have been liable for R167 500 in transfer duty. If they purchase a property after 1 March 2017 for the same amount they would be liable for R163 000.
No respite for clients with a sweet tooth: Following much pre-budget speculation, it emerged that Government intends to follow through with their promise to introduce a tax on sugary beverages. The proposed tax rate will be 2.1 cents/gram for sugar content in excess of 4g/100ml. While the temptation is to brush over these taxes, the fact is that their cumulative effect over time could have a very real impact in your clients’ investable income and returns and it’s a great opportunity to encourage awareness of the connection between healthy lifestyle and healthy finances. Diabetes be gone.
The impact for clients using trusts to be tax efficient: Treasury recently introduced legislation to close the loophole of using a trust to transfer wealth without incurring tax. Previously individuals would “loan” money to a trust without charging any interest or by charging a low rate of interest. In order to curb this abuse, Treasury deemed any interest not recovered by way of not charging interest or by charging a reduced rate of interest to be a donation - which would be taxed at a rate of 20%. Treasury have now indicated that some taxpayers have tried to circumvent this donations tax by making interest free or low interest loans to companies owned by trusts. To counter this abuse, Treasury proposes that the anti-avoidance measure be extended to these type of schemes so that donations tax will apply to individuals and companies.
The impacts for retirement fund members
Provident fund members: The Revenue Laws Amendment Bill 2016 confirms that the requirement for provident fund members to use two thirds of their fund value at retirement to purchase a compulsory annuity will be delayed until the 1 March 2018. This means contributions made prior to 1 March 2018 by provident fund members will not be subject to annuitisation and members will therefore be able to take all contributions and returns made prior to 1 March 2018 in cash. However, contributions made thereafter will be subject to the one third-two third rule that currently applies to pension funds and retirement annuities. This is an important distinction to explain to clients.
We do know that consultations with industry regarding this issue still needs to take place so watch this space for updates. One negative to note about the postponement is that the ability to use “non-deductible contributions” to reduce the taxable income received from a compulsory annuity will not apply to provident fund members that purchase a compulsory annuity.
By way of explanation: Sec 10C of the Income Tax Act allows an investor to use any contribution made to a retirement fund that didn’t qualify for a tax deduction against income received from a compulsory annuity. However, this concession does not apply to provident fund members who decided to use a portion of their fund value to purchase a compulsory annuity.
Preservation at Retirement: One of the recent amendments for retirement fund members is that they no longer are forced to access their retirement benefits when they elect to retire. Previously if a retirement fund member elected to retire then they would have to access their retirement benefits (cash and /or compulsory annuity). Treasury amended tax legislation to allow retiring employees to elect when to access their retirement benefits after they reached retirement age. Treasury is proposing that transfers of retirement benefits be allowed from a retirement fund to a retirement annuity even when the member has retired, subject to fund rules.
An opportunity for members who want to join umbrella fund even though they elected not to when it was set up:Treasury proposes removing the 12 month time limit in which an existing employee has to join a newly established employer umbrella fund. As with the “preservation at retirement” opportunity, this will be subject to fund rules. This proposal is in line with Treasuries commitment to encourage savings amongst South Africans and takes into account the changing mind-sets, appetite for savings and life stages of your clients.
Considerations for non-resident selling immovable property: Treasury proposes increasing withholding tax on immovable property sales by non-residents from 5% to 7.5% for individuals, 7.5% to 10% for companies and from 10% to 15% for trusts. This is aligned with the increase in the CGT effective rate discussed above. The Budget Speech and the few weeks that surround the delivery can often be a very unsettling time for investors. We believe that being able to explain and describe the important policies that will affect your clients directly will go a long way to encouraging rational and considered investment decisions.