PRETORIA, 26 February 2020 – The tax proposals for the 2020 Budget aim to support a recovery in economic growth, with some relief at the level of personal income tax, the Budget Review document states. They result in no overall change to tax revenue in 2020/21.
Personal income tax
The personal income tax brackets and the primary, secondary and tertiary rebates will be increased by 5.2 percent for 2020/21, which is above expected inflation of 4.4 percent. This adjustment provides R2 billion in tax relief. The change in the primary rebate increases the taxfree threshold from R79 000 to R83 100.
Medical tax credits
Government proposes an increase in the value of medical tax credits in 2020/21 from R310 to R319 per month for the first two beneficiaries, and from R209 to R215 per month for the remaining beneficiaries. This increases the value of the tax credit by 2.8 per cent. It is in line with the announcement in the 2018 Budget Review that the credit would be adjusted by less than inflation to help fund the rollout of national health insurance over the medium term.
Tax-free savings accounts
The annual limit on contributions to tax-free savings accounts will be increased from R33 000 to R36 000 from 1 March 2020.
Curtailing excessive corporate interest deductions
Government proposes to restrict net interest expense deductions to 30 percent of earnings for years of assessment commencing on or after 1 January 2021. This measure will address a typical form of base erosion and profit shifting by multinational corporations.
“This practice involves artificially inflating company debt and/or the interest rate on that debt to a related party in another jurisdiction with a lower corporate income tax rate. The resulting interest payments are deducted in South Africa, reducing the domestic tax base and effectively shifting profits to be taxed at a lower rate offshore,” the Budget Review document states. “Consultation on the design of this limitation begins today and a discussion document is available on the National Treasury’s website.”
Sunset dates for corporate tax incentives
The National Treasury proposes introducing a 28 February 2022 sunset date for tax incentives dealing with airport and port assets, rolling stock, and loans for residential units. Government will review each of these incentives before the sunset date to determine whether they should be extended.
The section 12I tax incentive relating to industrial policy projects will not be renewed beyond 31 March 2020. The urban development zone incentive will be extended for one year while a review of the incentive is completed. Government intends to insert sunset dates in additional tax incentives where they do not currently exist to avoid benefits continuing indefinitely without adequate oversight.
Given the fiscal position, government does not intend to extend the tax incentives for special economic zones beyond the six zones already approved by the Minister of Finance.
Limiting the use of assessed losses to reduce taxable income
When a company’s tax-deductible expenses exceed its income, it records an assessed loss. Often, the loss is carried forward to the next year and is offset against taxable income in that year. Over the past few years, there has been an international trend to restrict this practice. Government proposes broadening the corporate income tax base by restricting the offset of assessed losses carried forward to 80 percent of taxable income, for years of assessment commencing on or after 1 January 2021.
Export taxes are limited by trade agreements, and lead to winners and losers in the economy. Given these considerations, South Africa has generally avoided such taxes. Government is aware, however, that unfair trade practices have put some key industries under pressure. Government will consult with affected industries on the introduction of export taxes on scrap metal, which could replace the current price preference system. Proposed export taxes will apply to ferrous metals at the rate of R1 000 per tonne, aluminium at R3 000 per tonne, red metals at R8 426 per tonne, and other waste and scrap metals at R1 000 per tonne. This reform aims to improve the availability of better quality scrap metal at affordable prices for domestic foundries and mills.
The brackets to calculate transfer duties on the sale of property, last adjusted in 2017, will be adjusted for inflation from 1 March 2020. No transfer duty will be liable on the purchase of property with a value below R1 million.
Taxation of heated tobacco products
Heated tobacco products produce aerosols containing addictive substances and other chemicals that are inhaled by users. These products are not currently subject to excise duty. Government will introduce a new category or tariff subheading for heated tobacco products in the schedule of excise duties, to be taxed at a rate of 75 per cent of the cigarette excise rate with immediate effect.
Electronic cigarettes are different to heated tobacco products: they do not contain tobacco, but they do contain nicotine or other chemicals. Currently, electronic cigarettes are not taxed. Globally, policymakers are looking at regulating and taxing these products due to concerns about their health effects. Government intends to tax electronic cigarettes in 2021.
Excise duties on alcohol and tobacco
Taxes on alcohol and tobacco are determined within a policy framework that targets the excise duty burden. The excise burdens for most types of alcoholic beverages and tobacco products currently exceed the targeted level as a result of above-inflation increases and price fluctuations. Government will increase most excise duties by an amount that matches expected inflation of 4.4 percent for 2020/21, and by 6 percent in the case of sparkling wine and 7.5 percent for pipe tobacco and cigars.
The carbon tax rate will increase by 5.6 percent for the 2020 calendar year. This increase includes an annual inflation rate of 3.6 per cent plus two percentage points in line with the Carbon Tax Act (2019). Accordingly, the carbon tax rate will increase from R120 per tonne of carbon dioxide equivalent to R127 per tonne of carbon dioxide equivalent.
Purchase tax on motor vehicle emissions and incandescent globe tax
In line with global vehicle emission standards and the shift to low-carbon, fuel-efficient vehicles, government proposes to increase the vehicle emissions tax rate for passenger cars to R120 per gram of carbon dioxide emissions per kilometre (gCO2/km) and R160 gCO2/km for double cabs. The threshold will be adjusted from 120 gCO2/km to 95 gCO2/km for passenger vehicles to align with the Euro 6 emission standards. These amendments will take effect from 1 April 2020. Government proposes to increase the incandescent light bulb levy by R2 from R8 to R10, effective 1 April 2020, to encourage the uptake of more energy-efficient light bulbs.
Levies on plastic
The National Treasury will consult on extending the current levy on plastic bags to all single-use plastics used for retail consumption, including plastic straws, utensils and packaging. Changes will be implemented in 2021. Government proposes to raise the plastic bag levy from 12 to 25 cents per bag effective 1 April 2020. A review of the current levy, including a clarification of the tax treatment of compostable bags, will be undertaken.
Foreign remuneration exemption
Government will increase the cap on the exemption of foreign remuneration earned by South African tax residents to R1.25 million per year from 1 March 2020. Some advisers have recommended emigration, as recognised by the Reserve Bank, as a way to break tax residency. However, this is only one factor considered by SARS. Government wants to encourage all South Africans working abroad to maintain their ties to the country. Consequently, this concept of emigration will be phased out by 1 March 2021.