Budget 2003 – Tax Proposals

Presentation to the Portfolio Committee on Finance

by the National Treasury

4 March 2003

Contents

• Tax Policy since 1995 to 2003/04• Tax Structure – SA vis-à-vis rest of the world• 2003/04 tax relief proposals• Direct tax:

– Personal income tax rate & bracket adjustments– Income tax payable by individuals below age 65– Income tax payable by individuals age 65 and over– Interest & dividend exemption– Transfer duty relief– Tax on Retirement Funds– Small business tax stimulus measures

• Enhanced start-up expenses (double deduction)

• Enlargement of small business corporation category

Contents continued

– General business tax stimulus measures:

• Accelerated depreciation for designated urban areas

• Converting accelerated depreciation window period for

manufacturing assets into permanent feature

• Comprehensive business asset reinvestment relief

• Losses on sale of depreciable business assets

• Accelerated depreciation for R&D

• Accelerated depreciation for biodiesel plant & machinery

– Facilitating govt. grants to organs of state/PBOs

• Exempting govt grants from income tax

• Extending list of PBOs eligible for deductible donations

Contents continued

– Encouraging capital inflows & discouraging outflows• Repealing tax on certain foreign dividend repatriations• Removal of designated country exception• [Increased exchange of information & reporting]• [Departure charges for shifting tax residence offshore]

– Improving SA’s international position as financial service centre:

• No financial transaction taxes on securities on-lending• Removal of stamp duties on fixed deposits and insurance• Collateral tax changes to Collective Investment Schemes

– Removal of outdated tax expenditures (ASA, IHQC)

– Targeted anti-avoidance measures

– Effective date rule – date of promulgation of TaxLaw

Contents continued

• Indirect tax:– Excise duties on alcoholic beverages with new

definition of clear sorghum beer– Excise duties on tobacco products– Fuel taxes– Reducing ad valorem excise duties on new cars– Repealing ad valorem excises on IT equipment– Fiscal measures in support of environment– Increases in Air Passenger Departure Tax– Increased VAT threshold for commercial

accommodation– Measures to enhance tax administration &

collections

Tax policy ’95 – ’02

• PIT relief – R49 billion since 1995– 1995 - R2 billion– 1996 - R2 billion– 1997 - R2,8 billion– 1998 - R3,7 billion – 1999 - R4,9 billion– 2000 - R9,9 billion– 2001 - R8,4 billion– 2002 – R15,2 billion

• Supporting economic activity– 1999: Corporate rate reduced to 30%– 2000: Split rate for SMMEs– 2001 to 2002:

• Strategic investment programme• Immediate expensing of investment by SMMEs

– Diesel fuel rebates: primary sector– Temporary accelerated depreciation for manufacturing

Evolution of tax rates since 1980

Year Company STC Max PIT Sales tax VAT Fuel levy % % % % % c/l

1980

40 -

55

4

-

-

1981 40 - 50 4 - - 1982 40 - 50 5 - - 1983 42 - 50 6 - - 1984 42 - 50 10 - - 1985 50 - 50 10 - - 1986 50 - 50 12 - - 1987 50 - 50 12 - 23,5 1988 50 - 45 12 - 22,9 1989 50 - 45 13 - 31,9 1990 50 - 45 13 - 31,9 1991 50 - 44 13 - 46,9 1992 48 - 43 - 10 54,9 1993 48 15 43 - 14 60,9 1994 40 15 43 - 14 60,9 1995 35 25 43 - 14 62,9 1996 35 12,5 45 - 14 71,6 1997 35 12,5 45 - 14 76,6 1998 35 12,5 45 - 14 86,6 1999 30 12,5 45 - 14 90,6 2000 30 12,5 42 - 14 95,6 2001 30 12,5 40 - 14 98,0

2002 30 12,5 40 - 14 98,0

Cross- country analysis of highest income tax rates in 2002

COUNTRY PERSONAL INCOME % CORPORATE INCOME %

Australia 48.5 36

Austria 50 34

Belgium 65.6 40.2

Canada 48.6 43.4

Czech Republic 40.5 31

Denmark 63.3 32

France 62.9 41.7

Germany 53.8 54

Mexico 40 35

New Zealand 39 33

Slovak Republic 42 15

Spain 48 35.8

Sweden 53.3 28

Turkey 48.4 44.1

United Kingdom 40 30

United States 45.6 39.5

EU average (16 member states) 53.5 35.4

OECD average (30 countries) 49.4 31.9

Tax Relief Measures

DIRECT & INDIRECT TAXESRobust revenue performance & sound tax policy reforms

allow for R15,1 billion of tax relief for individuals plus targeted tax measures in support of enterprise development and job

creation.

Personal income tax relief1995 – 2003

• PIT relief: • 1995 - R2 billion• 1996 - R2 billion• 1997 - R2,8 billion• 1998 - R3,7 billion • 1999 - R4,9 billion R62,2 billion• 2000 - R9,9 billion• 2001 - R8,4 billion• 2002 – R15,2 billion• 2003 – R13,3 billion

2003 Key Features - Individuals

• PIT relief of R13,3 billion.

• Interest & dividend income exemption - increased from R6 000 to R10 000 for taxpayers under age of 65 & from R10 000 to R15 000 for those over 65, costing R227 million.

• Stamp duty on fixed deposits & insurance policies repealed at cost of R200 million.

• Transfer duty – properties acquired with value of less than R140 000 are duty exempt plus further rate adjustments, costing R435 million.

Personal Income Tax Relief

• Below age 65: primary rebate raised from R4 860 to R5 400, increases tax threshold from R27 000 to R30 000 (+ 11,1%).

• Age 65 and above: 2dary rebate raised to R3 100, increasing tax threshold from R42 640 to R47 222 (+ 10,7%).

• Maintain progressivity & relief across entire income spectrum.

• 56% of R13,3 billion relief benefits income group < R150K, 23% benefits income group earning between R150K to R250K, income earners > R250K share in 21% of the relief.

• Since 2000, minimum tax treshold increases took more than 1 million of taxpayers out of income tax net.

Income tax payable by individualsyounger than 65 in 2003/04

Taxable income

2002 rates in R

Proposed rates in R

Tax reductions in R

R30 000 540 0 540

R45 000 3 590 2 700 890

R60 000 7 340 5 400 1 940

R70 000 9 840 7 200 2 640

R80 000 12 340 9 700 2 640

R100 000 18 340 14 700 3 640

R150 000 35 340 29 700 5 640

R500 000 172 940 166 700 6 240

Income tax payable by individuals65 years of age and older in 2003/04

Taxable income

2002 rates in R

Proposed rates in R

Tax reductions in R

R47 000 1090 0 1 090

R50 000 1 840 500 1 340

R60 000 4 340 2 300 2 040

R70 000 6 840 4 100 2 740

R80 000 9 340 6 600 2 740

R100 000 15 340 11 600 3 740

R150 000 32 340 26 600 5 740

R500 000 169 940 163 600 6 340

Transfer duty adjustments

Property value Transfer duty rates

R 0 to R140 000 0%

R140 001 to R320 000 5% on value above R140 001

R320 001 and above R9000 and 8% on value above

R320 001

Why no corporate tax adjustment?Capital flows in R million

YearDirect investment

Non-direct investment

Dividends inflow s

Direct investment

Non-direct investment

Dividends outf low s

1994 1853 353 2206 1839 866 27051995 2163 267 2430 1119 1424 25431996 2642 326 2968 1925 2451 43761997 2725 303 3028 2352 2004 43561998 2159 240 2399 3069 2615 56841999 3435 895 4330 5510 2584 80942000 5097 3690 8787 14246 3404 176502001 4623 6056 10679 22278 8637 30915

Income Payments

Why no corporate tax adjustment?Capital flows in R million (first 2 columns)

Year

Gross operating surplus

Net operating surplus

JSE listed Co's Non-distributable reserves in R'000

JSE listed Co's Distributable reserves in R'000

1994 190,960 126,460 445,367,320 502,457,883 1995 217,516 145,689 482,959,884 754,664,531 1996 248,448 169,631 562,674,632 959,329,947 1997 275,385 188,197 602,792,113 1,467,194,936 1998 288,206 191,624 531,116,921 1,785,952,094 1999 314,430 206,542 2,098,917,399 5,170,759,636 2000 363,094 244,453 2,654,925,229 3,847,356,526 2001 412,074 283,167 4,812,626,256 5,089,254,230

Why no corporate tax adjustment?Capital flows in R million

Reserves and Gross operating surplus

-

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

1994 1995 1996 1997 1998 1999 2000 2001

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

Non-distributable reserves Distributable reserves Gross operating surplus (Right axis)

Lower taxation of retirement savings

• Tax treatment of retirement savings currently under review with legislative reforms scheduled for 2004.

• Continue to work toward neutrality in tax treatment for all savings vehicles, including retirement funds.

• Public policy seeks to encourage individuals to provide adequately for retirement.

• Whilst contractual savings plans are subject to 25% Retirement Fund Tax (RFT), discretionary savings only subject to 18% AND inequality further exacerbated by increased 2003 interest income exemption level.

• As part of phased reform process, RFT is reduced from 25% to 18% at estimated cost of R1,85 billion.

Tax-driven enterprise development

Accelerated depreciation allowances for Urban Development Zones to encourage revitalisation of under-utilised CBDs & transport nodes at cost of R1,3 billion over 4 years.

Several criteria will be taken into account in delineating designated qualifying zones within selected metros/urban areas:

Areas with high population carrying capacity

Central business districts or inner city environments

Areas with developed transport infrastructure

All provinces will benefit from this tax expenditure.

Complementary proposal extends tax advantages to PBOs that provide affordable housing to low-income households.

Tax-driven enterprise development

Accelerated depreciation regime of 40/20/20/20 per cent for manufacturing assets becomes permanent.

Tax relief provided when business asset sale proceeds are reinvested within 18 months.

Accelerated 4-year write-off period for capital expenditure relating to R&D.

Double deduction for first R20 000 of start-up expenses incurred by new businesses.

Turnover limit for SMMEs qualifying for lower corp rate increased to R5 million.

Encouraging capital inflows –dividend repatriations

• RATIONALE: interaction of current income tax provisions &

exchange control rules discourages dividend repatriation.

• INCOME TAX RELIEF: dividends from foreign subsidiaries will be

exempt from tax.

• EXCHANGE CONTROL RELIEF: dividends from foreign

subsidiaries will be eligible for exchange control credit.

Exchange control credits allow SA shareholder to re-export these

dividends flows in access of normal limits upon exchange control

application.

Foreign Exchange Control Amnesty – with supporting Income Tax measures

• RATIONALE: individuals with illegally held offshore assets want

to repatriate these assets as domestic & international

enforcement has increased and because of disappointing yields

of foreign markets.

• ELIGIBILITY: individuals can apply for exchange control and/or

income tax relief from 1 May until 31 Oct 2003 as long as he/she is

not aware of being investigated by SARS or SARB.

• EXCHANGE CONTROL DISPENSATION: no civil / criminal

penalties for exchange control violations arising before 28 Feb

2002 BUT it comes at price of a one time 5% charge on asset

repatriated & at 10% charge for assets held offshore.

Foreign Exchange Control Amnesty – with supporting Income Tax measures

• INCOME TAX DISPENSATION: individuals will be spared

all tax liabilities, interest & civil / criminal penalties arising

from Income Tax violations occurring on or before 28 Feb

2002.

• Individuals must file income tax return for year closing 28

Feb 2003.

• Supporting income tax measures may include possibly

some adjustments to donations tax & estate duty.

2003 Key Features - Indirect Taxes

• Excises duties: – Alcoholic beverages: increased by 10 – 11% – Tobacco taxes raised by an average 11%– Excise tax measures will raise additionally R907 million

• Air passenger departure tax: by R5 to R55 for flights to BLNS countries & by R10 to R110 for all other international flights.

• General fuel levy: up by an average of 4,3c/litre for petrol, 4c/litre for diesel, raising R643 million

• RAF increased by 3c/litre, raising R474 million• Inflation adjustment of graduated ad valorem excise

duty formula for motor vehicles reduces excise charge & car prices - cost to fiscus R243 million.

• Ad valorem excise duty on computers repealed at cost of R572 million.