budget 2007 tax proposals national treasury and sars 28 february 2007

Budget 2007Tax proposalsNational Treasury and SARS

28 February 2007

2

The broad underpinnings of the 2007 tax proposals are:

• Supporting economic growth, investment, job creation, business development and confidence

• Promoting financial security of households and reducing their vulnerability through retirement reforms that encourage savings

• Supporting macroeconomic policy, including monetary policy, objectives.

3

Tax Revenue Table 4.2 Main budget estimates and revenue outcome, 2005/06 and 2006/07

2005/06 2006/07 2005/06–

R million

Budget estimate

Outcome Deviation Budget estimate

Revised estimate

Deviation 2006/07 % change

Taxes on income and profits 200 855 230 804 29 949 245 816 274 300 28 485 18,8%

Personal income tax 116 890 125 645 8 755 132 475 139 000 6 525 10,6%

Company tax 68 715 86 161 17 446 95 201 114 771 19 571 33,2%

Secondary tax on companies 8 700 12 278 3 578 13 850 15 700 1 850 27,9%

Tax on retirement funds 4 900 4 783 -117 2 400 2 750 350 -42,5%

Other 1 650 1 937 287 1 890 2 079 189 7,3%

Taxes on payroll and workforce

4 908 4 872 -36 5 600 5 850 250 20,1%

Taxes on property 9 820 11 138 1 318 8 922 10 345 1 423 -7,1%

Domestic taxes on goods and services

143 091 151 362 8 271 171 885 174 667 2 783 15,4%

Value-added tax 105 975 114 352 8 377 131 200 134 562 3 362 17,7%

Specific excise duties 14 509 14 547 37 16 616 16 100 -516 10,7%

Levies on fuel 20 650 20 507 -143 21 800 21 750 -50 6,1%

Other 1 957 1 957 0 2 269 2 255 -14 15,2%

Taxes on international trade and transactions

13 200 18 202 5 002 23 600 23 900 300 31,3%

Stamp duties and fees 900 793 -107 964 600 -364 -24,3%

State miscellaneous

revenue1

– 164 164 – – – -100,0%

Total tax revenue 372 774 417 334 44 560 456 786 489 662 32 876 17,3%

Departmental revenue2 8 502 7 642 -860 8 585 9 532 947 24,7%

Transactions in assets and liabilities

646 917 271 735 1 813 1 078 97,8%

Less: SACU payments -12 053 -14 145 -2 092 -19 744 -25 172 -5 428 78,0%

Main budget revenue 369 869 411 748 41 878 446 362 475 836 29 474 15,6%

1. Revenue received by SARS in respect of taxation which could not be allocated to a specific tax instrument.2. The budget estimate for 2005/06 includes an amount for the proceeds of foreign exchange amnesty but the actual outcome excludes it. See note 6 Annex B Table 3

4

Revised tax revenue estimates for 2006/07

• PIT is expected to reach R139 billion, which is R6,5 billion above the original estimate, mainly as a result of rising employment and real salary increases.

• In the first four months of 2006/07, the number of registered individual taxpayers increased by 176 000, taking the total number to 4,9 million.

• The revised estimate for CIT is R114,8 billion, which is R19,6 billion or 20,6 per cent higher than originally budgeted due to higher-than-expected company profits and improved compliance.

• VAT receipts are expected to total R134,6 billion, about

R3,3 billion above the 2006 Budget estimate.

5

Composition of budget revenue

Tax revenue by instrument as a % of National Budget Revenue

1985/86 1994/95 1999/00 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

Individuals 29.0% 40.0% 43.3% 36.4% 34.0% 32.9% 31.9% 30.5% 29.2%

GST / VAT 26.1% 26.1% 24.4% 24.6% 25.3% 26.9% 28.2% 27.8% 28.3%

Companies 25.2% 12.1% 10.6% 17.1% 20.1% 20.3% 20.3% 20.9% 24.1%

Fuel levy 1.1% 7.4% 7.2% 6.0% 5.5% 5.6% 5.5% 5.0% 4.6%

Specific excise 5.6% 4.8% 4.5% 3.9% 3.8% 3.8% 3.8% 3.5% 3.4%

Customs duties 3.8% 3.8% 3.3% 3.5% 3.4% 2.8% 3.7% 4.4% 4.9%

Sub Total 90.7% 94.2% 93.3% 91.5% 92.0% 92.4% 93.4% 92.1% 94.5%

6

PIT, VAT and CIT as a % of total budget revenue

Tax revenue % contibution

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%1983/8

4

1984/8

5

1985/8

6

1986/8

7

1987/8

8

1988/8

9

1989/9

0

1990/9

1

1991/9

2

1992/9

3

1993/9

4

1994/9

5

1995/9

6

1996/9

7

1997/9

8

1998/9

9

1999/0

0

2000/0

1

2001/0

2

2002/0

3

2003/0

4

2004/0

5

2005/0

6

2006/0

7

YEAR

%

Individuals CompaniesGST / VAT

7

STC and RFT as a % of total budget revenue

STC and RFT as a % of Budget Revenue

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

YEAR

%

STC

Rertirement funds

8

Tax revenues as a % of GDP

Tax revenue by instrument as a % of GDP

1985/86 1994/95 1999/00 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

Individuals 6.9% 8.5% 10.3% 8.6% 7.9% 7.6% 7.8% 8.0% 7.9%

GST / VAT 6.2% 5.9% 5.8% 5.8% 5.9% 6.3% 6.9% 7.2% 7.7%

Companies 6.0% 2.7% 2.5% 4.0% 4.7% 4.7% 4.9% 5.5% 6.5%

Fuel levy 0.3% 1.7% 1.7% 1.4% 1.3% 1.3% 1.3% 1.3% 1.2%

Specific excise 1.3% 1.1% 1.1% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%

Customs duties 0.9% 0.9% 0.8% 0.8% 0.8% 0.7% 0.9% 1.2% 1.3%

Sub Total 21.5% 20.8% 22.1% 21.6% 21.3% 21.5% 22.7% 24.0% 25.6%

Tax / GDP 23.1% 22.8% 24.0% 24.0% 23.5% 23.5% 24.8% 26.4% 27.9%

Budget Rev / GDP 23.7% 22.6% 23.7% 23.6% 23.2% 23.2% 24.3% 26.1% 27.1%

9

Forecasting tax revenueNominal Gross Tax Revenue vs GDP: buoyancy / elasticity

1.56

1.76

0.68

0.84

1.421.45

0.760.67

0.54

1.01

1.36

0.89

1.241.22

1.47

0.800.71

1.39

0.84

0.97

1.58

1.68

1.56

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.001984/8

5

1985/8

6

1986/8

7

1987/8

8

1988/8

9

1989/9

0

1990/9

1

1991/9

2

1992/9

3

1993/9

4

1994/9

5

1995/9

6

1996/9

7

1997/9

8

1998/9

9

1999/0

0

2000/0

1

2001/0

2

2002/0

3

2003/0

4

2004/0

5

2005/0

6

2006/0

7

YEAR

Bouyancy

10

Tax revenue buoyancy / estimation

• The graph above shows the “average” responsiveness of gross tax revenue to changes in nominal GDP

• It averages 1.06. Meaning that on “average” a 10% increase in nominal GDP results in slightly more than a 10% increase in nominal tax revenues.

• Higher commodity prices, higher levels of employment and robust consumption expenditure has resulted in above average growth in tax revenues in recent years

• Tax policy reforms, improvements in tax administration and tax compliance also impact on tax revenue collections

• There are indications that the relatively high tax revenue buoyancy of the last three years might be slowing down

11

Summary of main tax proposals (1)

The 2007 Budget will provide net tax relief of R12,4 billion. The tax proposals include:

• 2007 - reduce the STC rate from 12,5 per cent to 10,0 per cent and broadening the base. 2008 - replace the secondary tax on companies with a dividend tax

• Abolishing the retirement fund tax • Streamlining tax and regulatory aspects of retirement funds• Increasing the tax-free interest and dividend income monetary

thresholds• Treating the sale of shares (equities) held for more than three

years as capital gains • Personal income tax relief for individuals amounting to

R8,4 billion• Increasing various monetary thresholds:

– Estate duty, CGT on death & donations tax.

12

Summary of main tax proposals (2)

• Further relief for Public Benefits Organisations• Stamp duties on short term leases abolished• Improved depreciation allowances for rail transport, introduce

depreciation allowances for new commercial buildings and certain environmental capital expenses

• Protecting South Africa’s intellectual property rights tax base• Increasing excise duties on tobacco products and alcoholic

beverages• Increasing the general fuel levy and the Road Accident Fund (RAF)

levy.• Consider introduction of a tax on the windfall gains of synthetic fuel

producers and a progressive incentive mechanism for new investments in synthetic and biofuel plants

13

Tax Proposals 2007/08

Summary of effects of tax proposals 2007/08R million R million

Tax revenue before tax proposals 568,962Non-tax revenue 11,093Less: SACU payments -23,053Main budget revenue, before tax proposals 557,002Budget 2007/08 proposals: -12,400Taxes on individuals and companies -14,655Personal income tax -8,870Adjust personal income tax rate structure -8,400Adjustment in monetary thresholds (estate duty, savings, etc.) -470

Abolish retirement fund tax -3,000

Business Taxes -2,785Reform of secondary tax on companies -2,000Depreciation: commercial buildings, environment, rail, etc -600Adjustment of threshold: Public Benefit Organisations -185Indirect taxes 2,255Increase in General Fuel Levy 950Increase in alcohol taxes 795Increase in tobacco taxes 685Abolish stamp duties on short term leases -90Abolish ad valorem duties on certain products -85Main budget revenue (after tax proposals) 544,602

Retirement reform and social security

15

Retirement reform and social security (1)

• The proposed reforms to retirement saving is part of the broader social security reforms, are aimed at providing an efficient and equitable framework for individuals to provide for their retirement.

• The tax treatment of retirement savings to complement regulatory and institutional reforms.

• Reforms to the tax system seek to maintain sufficient incentive to provide adequately for retirement, while addressing inequities and complexity in the current system.

• A uniform and more equitable tax treatment of contributions to pension, provident and retirement annuity funds to be phased in over time. Favourable tax treatment of a basic savings element, some tax encouragement of a supplementary component, and no special tax treatment above a specified ceiling.

16

Retirement reform and social security (2)

• Retirement Fund Tax (RFT) will be abolished with effect from 1 March 2007. The RFT rate was reduced form 18% to 9% last year. Consistent with the shift to an EET model for taxation of retirement savings. Will result in improved returns for retirement fund members and should be seen as a part of the reforms proposed to limit the tax deductibility of retirement fund contributions by high income individuals.

• Introduction of a wage subsidy by 2010. The objectives of such a subsidy are: – (i) to reduce the direct costs of employment to help alleviate the

high rate of joblessness; and – (ii) to facilitate the proposed social security reform process.

17

RFT Rate and % share of budget revenue

RFT Rates (RFT-R) (lhs) and RFT as a % of budget revnenue ( RFT - %) (lhs)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

YEAR

%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

RFT- R

RFT - %

18

Savings & Retirement reform

• Retirement thresholds– The amount that may be withdrawn in to form of a lump sum is

limited to 1/3 of the fund value or the full amount if it will not produce a cost effective annuity

– This cost effective annuity is currently set at R1 800 per annum but research have shown that this amount should be higher. The revised amount will be proposed later this year.

– Tax free portion of the 1/3 lump sum on retirement to be increased and the formulas to calculate this amount will be simplified

• Streamlining retirement fund regulation– This Income Tax Act and SARS interpretation notes contain a

number of regulatory requirements applicable to retirement funds

– These regulatory requirements will be streamlined and effectively moved to the Pension Funds Act

19

Long-term insurers and foreign collective investment schemes

• Long-term insurers make investments on behalf of policy holders

• In many cases the policy holders choose where these funds should be invested and these selections determine the percentage “shareholding” in foreign companies

• Because the long-term insurer does not have full control over decisions of where funds should be invested, policy holders may move the foreign company into and out of the CFC regime

• This creates a huge administrative burden for domestic insurers

• It is proposed that this administrative and tax burden be alleviated by disregarding investment choices of policy holders from being deemed to be shareholding by the long-term insurer

Investment, economic growth, job creation, business development and

business confidence

21

Headline CIT rate vs. Effective Corporate tax rate

Effective Corporate Tax Burden vs Headline CIT rate

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

YEAR

%

CIT as a % of GOS: Corporations

CIT Rate

22

Total CIT CIT CIT CIT

Fiscal Tax Revenue Revenue as % of Total as % of GOS as % of GOS CIT Rate

Year R million R million Tax Revenue Total Corporations

1983/84 19,135 5,168 27.0% 13.6% 22.3% 42

1984/85 24,120 5,742 23.8% 13.2% 21.7% 42

1985/86 30,499 7,886 25.9% 15.4% 25.2% 50

1986/87 34,325 8,666 25.2% 13.8% 22.7% 50

1987/88 39,112 8,907 22.8% 12.4% 20.4% 50

1988/89 50,518 11,244 22.3% 12.9% 21.1% 50

1989/90 64,737 13,821 21.3% 13.6% 22.3% 50

1990/91 71,756 14,761 20.6% 12.8% 21.0% 50

1991/92 78,964 14,063 17.8% 10.5% 17.2% 50

1992/93 83,545 13,123 15.7% 8.9% 14.6% 48

1993/94 97,214 11,490 11.8% 6.6% 10.8% 48

1994/95 113,509 13,591 12.0% 6.9% 11.3% 40

1995/96 126,995 15,667 12.3% 7.0% 11.4% 35

1996/97 147,077 18,834 12.8% 7.3% 12.0% 35

1997/98 165,256 21,378 12.9% 7.6% 12.5% 35

1998/99 185,027 22,604 12.2% 7.7% 12.7% 35

1999/00 200,662 20,972 10.5% 6.3% 10.3% 30

2000/01 220,260 29,492 13.4% 7.5% 11.9% 30

2001/02 251,990 42,355 16.8% 9.3% 14.5% 30

2002/03 281,777 55,745 19.8% 10.4% 15.7% 30

2003/04 302,508 60,881 20.1% 11.0% 16.7% 30

2004/05 354,981 70,782 19.9% 11.5% 17.6% 30

2005/06 417,334 86,161 20.6% 12.7% 19.4% 29

2006/07 489,662 114,771 23.4% 14.9% 22.9% 29

23

STC reform and dividend tax at shareholder level (1)

• Government proposes to phase out the secondary tax on companies and replace it with a dividend tax.

• Phase one: reduce the rate and broaden the base. The dividend tax will apply at a rate of 10 per cent, down from the current 12,5 per cent rate on the secondary tax on companies. The base of taxable dividends will broaden beyond the current narrow interpretation of profits.

• Phase one will become effective from 1 October 2007, except for certain immediate anti-avoidance measures taking effect as of 21 February 2007.

• Phase two, commencing in 2008, will entail conversion to a dividend tax on shareholders, with administrative enforcement through a withholding tax at company level. The implementation of this phase will depend on the renegotiation of several international tax treaties.

24

STC reform and dividend tax at shareholder level (2)

• Anti avoidance measure: The STC exemption amalgamation transaction contained in section 44(9) of the Income Tax Act, 1962, is withdrawn. This exemption has resulted in a permanent loss of STC revenues, rather than a deferral, which is the intent of the amalgamation provisions. A more targeted exemption for amalgamation transactions will be considered.

• Broadened tax base: To cover all distributions by companies and not just those from profits, since the determination of what constitutes profits available for distribution can be a complex and uncertain area of law.

• It is envisaged that the withholding tax will be a final withholding tax and that companies paying dividends will have to determine whether a reduced withholding tax rate applies as a result of the application of a double tax treaty.

25

STC Rate and % share of budget revenue

STC Rate (STC-R) (lhs) and % share of budget revenue (STC - %) (rhs)

0%

5%

10%

15%

20%

25%

30%

1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

YEAR

%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

STC- R

STC - %

26

Depreciation: Commercial buildings

• Purpose:Reduce the cost of doing business

• Rates and conditions: – 5% (20 years) for commercial and retail buildings– 5% (20 years) for improvements, renewals and

upgrades – Depreciation only applies to new and unused

buildings– No depreciation for property dealers on their trading

stock

27

Depreciation - rail & ports

• Purpose:– support initiatives to upgrade rail transport infrastructure – alleviate the transportation congestion and bottlenecks at our

ports

• Depreciation rates:– 20% (5 years) for rail rolling stock (locomotives and wagons)– 5% (20 years) for port infrastructure

28

Depreciation: Environmental expenses

• Currently, capital expenditures incurred by businesses to meet environmental obligations do not qualify for tax depreciation allowances

• These environmental related expenses include dams, septic tank installations, etc. to treat and contain waste

• In the interest of consistency and to encourage prudent environmental practices environmental capital expenditures will henceforth qualify for tax depreciation allowances

• We are in the process of acquiring information as to what these capital assets are in order to determine the appropriate tax depreciation rates

29

Tax treatment of gains on sale of shares

• Gains (profits) on sale shares are either taxed as capital gains or ordinary income

• The test is a subjective one and is dependent on the intent of the buyer. This results in uncertainty for the taxpayer and SARS

• It is proposed that capital gains tax applies to the sale of shares held for longer than 3 years (10% and 14.5%)

• The facts and circumstances test will still apply to shares held for less than 3years

• Anti-avoidance measure – does not apply where taxpayers move newly acquired assets into a company held for three years (e.g. shelf company)

Individuals and unincorporated businesses

31

PIT rates and thresholds2006/7 2007/08

Taxable income (R) Rates of tax Taxable income (R) Rates of tax

0 – 100 000 18% of each R1 0 – 112 500 18% of each R1

100 001 – 160 000 R18 000 + 25% of the amount 112 501 – 180 000 R20 250 + 25% of the amount

above R100 000 above R112 500







400 001 and above R117 000 + 40% of the amount 450 001 and above R131 125 + 40% of the amount


Rebates Rebates

Primary R7 200 Primary R7 740

Secondary R4 500 Secondary R4 680

Tax threshold Tax threshold

Below age 65 R40 000 Below age 65 R43 000

Age 65 and over R65 000 Age 65 and over R69 000

32

Personal income tax relief

• Total PIT relief for individuals total R8.4 billion. Relatively moderate in comparison to last year. Take account of fiscal drag and tax base broadening

• Primary and secondary rebates increased to R7 740 and R4 680 respectively

• All income tax brackets increased • Income tax threshold increased from :

– R40 000 to R43 000 for persons less than 65 years; and

– R65 000 to R69 000 for persons 65 years and older

• Monetary caps for tax free medical aid contributions increased from R500 to R530 for each of the first two beneficiaries and from R300 to R320 for each additional beneficiary

33

Monetary thresholds

• Tax free interest income – younger than 65 years from R16 000 to R18 000– aged 65 years and above from R24 500 to R26 000

• CGT– annual exclusion from R12 500 to R15 000

• CGT– threshold below which no CGT is paid on death– from R60 000 to R120 000

• Estate duty, exempt threshold– from R2.5 million to R3.5 million

• Donation tax – threshold below which not donation tax is paid– from R50 000 to R100 000 per annum

• Tax-free lump sum for employment related deaths– Certain payments to employees as a result of death whilst on duty are exempt

from tax but other similar payments are taxable– It is proposed that payments of less than R300 000 paid as a direct result of

death of an employee whilst on duty be exempt from tax

34

Stamp duty - leases• Stamp duties on short-term lease (for a period

of less than five years) to be abolished• Long-term leases: where the total aggregate of

the lease period exceeds five years remain subject to stamp duties

• The cap on the stamp duty payable on long-term leases is aligned to the maximum rate of duty payable in terms of the Transfer Duty Act, i.e. is 8% of the value of the lease

• The proposed amendments will apply to leases or agreement of leases executed as from 1 March 2007

35

Stamp duties and UST imposed on shares

• Stamp duties on unlisted shares and UST on listed shares to be merged into one Act

• All secondary trade in shares (listed and otherwise) will be subject to a single securities tax

• The general objective is to, over time, eliminate the Stamp Duty Act and also to eliminate any distinctions between the nature of security taxes on listed and unlisted shares

• Exemptions that currently exist will be simplified

36

Corporate reorganisations and BEE transactions (1)

• Corporate reorganisations and BEE transactions and funding arrangements sometimes trigger unintended

taxes (CGT and STC)

Problem areas:• Broad-based share incentive schemes

In 2004, government introduced a tax incentive to facilitate broad-based share employee ownership. As a result, employees can now receive up to R9 000 worth of shares tax-free over a three year period (with companies eligible for up to R3 000 of deductions per annum). This incentive was partly driven by the need to have more broad-based schemes that would include rank-and-file employees. Unfortunately, usage of the incentive appears to be minimal. This incentive will accordingly be reviewed for possible change.

37


• Anti-avoidance financial instrument company provisionsAnti-avoidance rules were designed to ensure that company restructuring were limited to active companies. However, calculations are often excessively burdensome. It is proposed that the financial instrument rules be deleted or be mitigated in favor of a simpler anti-avoidance mechanism.

• Intra-group transfers The company restructuring rules allow for the tax-free rollover

of assets within a single group of companies as if the group were a single entity. However, this rollover treatment comes at the price of the de-grouping charge. It is proposed that the de-grouping charge apply only if the group break-up occurs within six years after the intra-group asset transfer (in line with the system in the United Kingdom).

38


• Share buy-backs of listed sharesIn these structures, the operating company issues ordinary shares to the BEE entity. In return, the BEE entity issues preference shares (which operate as a quasi-loan) to the operating company. If the ordinary shares reach a predetermined value, the BEE entity sells a portion of the ordinary shares for cash and redeems the BEE preference shares. Rules are required to ensure that the ultimate dual dispositions do not give rise to unwarranted gain while simultaneously ensuring that the proposed structure does not trigger artificial losses.

• Connected person sales of depreciable property In situations where BEE partners obtain ownership levels nearing

50 per cent the transfer of depreciable assets to the BEE entity often becomes subject to certain anti-avoidance rules that prevent the BEE entity from depreciating newly obtained assets at currently existing market values. While the general need for these avoidance rules is accepted, it is proposed that these anti-avoidance rules accommodate situations where avoidance is unlikely to be the driver.

Public benefit activities

40

PBOs: Tax free trading income threshold and tax deductible

donations• Trading income generated by PBOs which does not

exceed 5 per cent of their total income or R50 000, whichever is the greater, is not subject to income tax

• It is proposed to increase the R50 000 threshold to R100 000, however, the 5% rule will remain

• Both individuals and companies may deduct, for income tax purposes, up to 5 per cent of their taxable income of donations made to selected public benefit activities (18(A))

• To further encourage charitable contributions, it is proposed that the threshold for tax deductible donations be increased to 10 per cent for both individuals and companies

41

Amateur and professional sports - national sporting bodies

• Amateur sporting activities are classified as public benefits activities and are exempt from income tax whilst professional sporting activities are not

• Some national sporting organisation that are responsible for both amateur and professional sporting codes did split the legal entities and administration of amateur sports from professional sporting activities in order to enjoy the tax free status for amateur sports

• However, the splitting of amateur and professional sporting activities into separate legal entities created more problems

• It is now proposed that sporting bodies may elect to retain both amateur and professional sports within he same legal entity. Such an entity will be subject to income tax. However, qualifying expenses incurred with income generated by professional sports to develop amateur sporting activities will be tax deductible

Indirect taxes

43

Fuel Taxes• Both the general fuel levy and the Road Accident Fund

(RAF) levy will increase by 5 c/l respectively from 4 April 2007 (total increase of 10 cents per litre)

• In additional to raising revenue the general fuel levy also seeks to internalise negative externalities associated with fuel use

• Raising the relative price of liquid fuels encourages more efficient fuel use and suppresses demand for transport fuels

• This indirectly reduces air pollution externalities and generates environmental benefits

• Increases in the RAF levy aims to:– address the existing backlog in claims payments; and – facilitate improvements in the claims handling capacity of the

RAF

44

Biofuels

• Cabinet has endorsed the Draft Biofuels Industrial Strategy to be finalised by May 2007 in consultation with relevant stakeholders

• This includes discussion with Treasury on matters including the:– appropriateness of the current biodiesel fuel tax

concession; and – possible extension of the concession to bioethanol

• The National Treasury will review and consider an appropriate tax regime for all biofuels during 2007

45

Windfall gains by the synthetic liquid fuel producers

• Task Team submitted a final report to the Minister of Finance on 9th February 2007

• The report reflects the view of the Task Team and not necessarily that of the Minister of Finance or the National Treasury

• The report make recommendations with respect to both fiscal and regulatory issues

• Recommendations with respect to regulatory reforms referred to the Minister of Minerals and Energy

• The Minister of Finance will respond to the fiscal recommendations by the end of July 2007, after taking into account comments by the industry and other interested parties. The Minister will take into account the cost structure of synthetic fuel producers and the country’s long-term liquid fuel requirements

46

Windfall gains by the synthetic liquid fuel producers (2)

• Fiscal recommendations:(1) An additional tax on existing synthetic fuel volumes in

line with a permanent structural increases in oil commodity prices ( above US$45 to US$55 barrel of crude oil)

(2) A progressive incentive regime for investments in new synthetic fuel and biofuel plants.

– A subsidy / tax credit when crude oil prices are below (say) US$40 and s sliding scale tax when crude oil prices rise above (say) US$65.

– All biofuels (biodiesel and bio ethanol) to qualify for a lower general fuel levy. Currently biodiesel qualifies for a 60 discount.

• Other comments – All other comments by the Task Team are noted and remains the views of the

Task Team

47

Updating customs definition

• Definition of customs duties in Customs and Excise Duty Act (1964) is outdated

• Customs duties is incorrectly defined to include excise duties on imports

• Internationally excises on imports are classified as excise duty revenue and not customs duty revenue.

• About 10 to 20% of customs revenue is excise revenue on imports

• Reclassification will allow greater consistency in international comparisons of tax revenues

• More accurate trend analysis of customs revenues will be facilitated

• SACU Member States will be consulted to effect similar changes to their legislation

48

Alcoholic beverages

• Excise duties increased to maintain total tax burden (excise duties plus VAT) of 23% on wine products, 33% on malt beer, and 43% on spirits

• Proposed increases:– Malt beer 8.0%– Alcoholic Fruit Beverages 8.0%– Unfortified wine 8.5%– Fortified wine 10.0%– Sparkling wine 10.0%– Spirits

10.5%

49

Tobacco products

• Excise duties increased to maintain total tax burden (excise duties plus VAT) of 52% for all tobacco products

• Proposed increases:– Cigarettes 10.7%– Cigarette tobacco 5.3%– Pipe tobacco 5.8%– Cigars 10.5%

• Appropriate tax treatment of smokeless tobacco (snus) to be investigated

50

Ad valorem excise duties

• Phasing out of ad valorem duties on products that are no longer “luxury” items or generate little revenue:– Air conditioners installed in vehicles– Domestic dish washing machines– photographic cameras and related

equipment – sunglasses, binoculars, telescopes, and– various types of picture projectors and

related equipment

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Consumer financial education

• Financial literacy has been identified as an important intervention to help individuals manage their money and to encourage savings

• In order to promote consumer financial education, it is proposed that contributions made to the Financial Consumer Education Foundation established with the assistance of the Financial Services Board (FSB) should qualify for tax deductible donations

• This option is preferred to the imposition of a compulsory levy that would be tax deductible

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Medium term tax reforms – agenda for 2008

• Reduce the tax compliance burden for businesses, especially small businesses, to promote entrepreneurship and the formalisation of informal businesses. A more simplified tax regime for very small businesses to be introduced in 2008

• Investigate feasibility of introducing flow-through shares – a mechanism that could help junior mining exploration companies to raise funds for high-risk investments

• The tax treatment of collective investment schemes in property and property loan stock companies is fragmented. It is based on the legal form (i.e., trusts versus companies), rather than their common purpose. The regulatory and tax regime relating to property holding entities to be reviewed

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Annexure C

• Annexure C contains:

– Listed miscellaneous amendments to cater for minor changes, eliminate isolated avoidance loopholes or correct unintended anomalies working against taxpayers

– Technical corrections mainly to fix prior year errors

• Carryovers from last year; e.g.– Withholding tax relief or sole proprietors – Cooperatives – Mining rehabilitation provisions

budget 2007 tax proposals national treasury and sars 28 february 2007

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