On 22 February 2023, Finance Minister Enoch Godongwana delivered his budget speech.
Set out below, for general information purposes, is the economic and fiscal backdrop to the such budget speech, and tax policy proposals follow thereafter.
- ????????Global economic growth is projected to slow in 2023 t0 2.9% (1.2% in advanced economies, 4% in emerging economies (mainly China and India) and 3.8% in Sub-Saharan Africa)
- ????????A slowdown in global demand and a broad-based easing of commodity prices is anticipated
- ????????Global inflation is expected to slow from 8.8% in 2022 to 6.6% in 2023 and to 4.3% in 2024
- ????????0,9% real economic growth in 2023 is projected for South Africa (projected at 1.5% for 2024 and 1.8% for 2025)
- ????????A consolidated budget deficit of 4.2% of GDP for 2022/2023 is expected (4% for 2023/2024, 3.8% in 2024/2025 and 3.2% in 2025/2026)
- ????????Tax revenue is projected at ZAR1?692.2 billion for fiscal 2022/2023 (ZAR 93.7 billion higher than the 2022 Budget estimate and ZAR 10 billion more than the 2022 MTBPS projection), ZAR 1787.5 billion for 2023/2024, ZAR1907.7 billion for 2024/2025 and ZAR2043.5 billion for 2025/2026 (no tax proposals to increase tax revenue are included in these projections)
- ????????A main budget primary surplus is projected to be achieved in 2022/2023
- ????????Gross debt is projected to stabilise by 2025/2026 at ZAR5.84 trillion (73.6% of GDP) from ZAR4.73 trillion (71.1% of GDP) in 2022/2023 (these projections are worse than at the time of the 2022 MTBPS in November 2022)
- ????????Debt service costs will increase from ZAR307.2 billion (18% of revenue) in 2022/2023 to ZAR 397.1 billion in 2025/2026 (19.8% of revenue)
- ????????Government spending is to increase at an annual average rate of 4.5%, from ZAR 2.17 trillion in 2022/2023 to ZAR2.48 trillion in 2025/2026 (consolidated spending of ZAR 7.08 trillion is projected over the medium-term expenditure framework period)
- ????????A current account deficit of 0.4% of GDP for 2022 was projected (averaging 2% of GDP over the 2023 to 2025 periods)
- ????????Eskom's debt stands at ZAR423 billion (ZAR350 billion of which the government has guaranteed)
- ????????Eskom has received ZAR263.4 billion in government bailouts since 2008/2009
- ????????Government proposes to provide debt relief to Eskom in an amount of ZAR254 billion (ZAR168 billion in capital and ZAR86 billion in interest) over the next three years by way of loans as follows:
o??ZAR 78 billion in 2023/2024
o??ZAR 66 billion in 2024/2025
o??ZAR 40 billion in 2025/2026
The government will borrow ZAR118 billion and ZAR66 billion will be provided as per the MTBPS baseline provision. The government will also assume ZAR70 billion of Eskom’s loan portfolio in 2025/2026
- ????????Loan funding to Eskom (as contemplated above) will be converted into Eskom equity at the end of the relief period (subject to conditions)
- ????????Electricity generation projects have grown to 100 (with more than 9000 megawatts of anticipated capacity - approximately 6500 MW of which can come online within the next 24 months). This will be supported by the Energy Security Bill to clear regulatory obstacles. A wheeling framework and grid capacity rules is expected to provide certainty to investors
- ????????Reforms will be implemented to improve freight rail performance by establishing a regulator through the Economic Regulation of Transport Bill, operational improvements, and resolving legal challenges associated with locomotive procurement
- ????????Tax revenue for 2022/2023 has exceeded the 2022 Budget estimates as a result of higher corporate income tax (mining, finance and manufacturing profits), personal income tax, dividends tax, import taxes, and mineral and petroleum royalties. Improved tax administration and compliance has also played a role
- ????????Public spending on buildings and fixed structures will increase from ZAR 62 billion in 2022/2023 to ZAR104.2 billion in 2025/2026 (ZAR3.7 billion for municipal water infrastructure will be spent in 2023/2024)
- ????????Public sector infrastructure spending over the medium term expenditure framework period is estimated at ZAR 903 billion (on power generation capacity, the transport network, sanitation and water services, health and education sectors, and housing)
?General policy direction
- ????????The government intends continuing its policy stance of protecting the tax base and improving tax administration
- ????????No major tax increases were announced
- ????????No general fuel levy or road accident fund levy increases
- ????????Excise duties on alcohol and tobacco will be increased in line with expected inflation of 4.9 per cent
- ????????The alcohol review paper will be released soon after the budget
- ????????The tobacco review paper will be released later in the year
- ????????Consultations on the excise policy of these products will take place after the release of these papers
- ????????There will be no increase in the health promotion levy for 2023/2024 and 2024/2025 (to enable stakeholders to restructure - given regional competition, floods and public violence)
- ????????A discussion paper on the health promotion levy, for consultation on proposals to extend the levy to pure fruit juices and lower the 4 gram threshold, will be published
Individuals and employment
- ????????Adjustments of 4.9% have been proposed to personal income tax brackets (partially compensating for inflation);
- ????????Tax rebates have been adjusted as follows:
o??Primary rebate: ZAR 17?235 from ZAR 16?425
o??Secondary rebate: ZAR 9?444 from ZAR?9000
o??Tertiary rebate: ZAR3?145 from ZAR 2?997
- ????????The income tax-free threshold for a person under 65 will increase to ZAR95 750
- ????????Medical tax credits have increased to ZAR 364 per month for the first two members (from ZAR 347 previously), and to ZAR 246 per month for additional members (from ZAR 234 previously)
- ????????Individuals will be entitled to a 25% tax rebate of the cost of new and unused solar PV panels (purchased, and installed at a private residence, and a certificate of compliance has been issued from 1 March 2023 to 29 February 2024). The maximum rebate amount is capped at ZAR15?000 per individual
- ????????Adjustments to retirement fund lump sum benefits, retirement fund lump sum withdrawal benefits, and transfer duty brackets (of 10 per cent) will be made to compensate for inflation. Applicable tax rates remain unchanged. Adjustments will be effective from 1 March 2023
- ????????The two-pot retirement system will enable pre-retirement access to a portion of one’s retirement assets while preserving the other portion for retirement. Withdrawals from funds accrued before 1 March 2024 will be taxed according to the lump sum tables. Going forward, withdrawals from the savings pot will be taxed at marginal tax rates and amounts remaining therein, on retirement, will be taxed in terms of the lump sum table. Draft legislation will address the following matters (as part of this retirement reform process):
o??a mechanism to include defined benefit funds in an equitable manner
o??legacy retirement annuity funds
The issue of taxation of withdrawals from the retirement pot, if one is retrenched and has no alternative source of income, will also be addressed in a second phase.
- ????????The government is engaging in a multi-year review of allowances (home office and travel allowances). A discussion paper will be released this year to outline workplace practices and policies, changes in the current environment, and how workplaces are affected by home office and travel allowance policies.
- ????????The commencement of feed-in tariffs, in some municipalities, may require income tax adjustments to cater for revenue from electricity sales. Changes required will be investigated.
- ????????Government proposes to apportion the tax-free investment contribution and retirement fund contribution limits when a person ceases to be a South African tax resident during a tax year
- ????????Anti-avoidance exclusion rules, relating to trusts/companies funded by low-interest or interest-free loans, will be clarified in respect of:
o??what constitutes a primary residence
o??when and how foreign currency-denominated loans are translated into South African rand
- ????????It is proposed that the Income Tax Act be amended to require the cash equivalent of the taxable benefit of employer retirement fund contributions to be included in an employee’s income (before a tax deduction is allowed) to align with the policy rationale
- ????????Members of pension or provident funds who have reached normal retirement age (as stipulated in the rules of the fund) but have not yet opted to retire should, as part of the involuntary transfer, be allowed to have their retirement interest transferred from a less restrictive to a more restrictive retirement fund without incurring a tax liability. The value of the retirement interest, including any growth thereon, will remain ring-fenced and preserved in the receiving pension or provident fund until the member elects to retire from that fund. Such members will not be entitled to the payment of a withdrawal benefit in respect of the amount transferred.
- ????????The government will consider the impact of the proposed withdrawal of Practice Note 31 of 1994 (Interest paid on money borrowed) and Practice Note 37 (Deduction of fees paid to accountants, bookkeepers and tax consultants for the completion of income tax returns) for tax years commencing on or after 1 March 2023. The government will also consider whether legislative amendments can be effected to accommodate legitimate transactions affected by the proposed withdrawal of such notes and to align the timing of the withdrawal with the introduction of amending legislation
- ????????Third-party backed share anti-avoidance rules will be clarified to deal with the situation where an issuer applies the proceeds to acquire equity shares in an operating company and thereafter no longer holds equity shares in the operating company.
- ????????Government proposes legislative amendments to address schemes that seek to avoid dividends tax by changing the residence of a foreign intermediate holding company (such that dividends are paid to the resident intermediate holding company and thereafter the intermediate holding company using the stepped-up ‘market value of assets determined contributed tax capital’ to shield further distributions to the intermediate holding company’s foreign holding company)
- ????????Contributed tax capital rules will be amended to provide for contributed tax capital in rand (where a foreign company changes its residence to South Africa and where its share capital and functional currency is in a currency other than rand)
- ????????Debt relief to dormant companies is recognised in certain circumstances. Dormant company debt relief does not apply where the debt was used to fund an asset that was subsequently disposed of in terms of the corporate rules. Government proposes legislation to clarify the original policy intention with regard to the timing of the exclusion from dormant company relief (whether or not the corporate rule disposal must precede the debt reduction)
- ????????The legislation will be introduced to clarify the allowance asset position in respect of assets for share exchanges in terms of the corporate rules
- ????????Consideration will be given to whether it is appropriate to apportion tax paid by the unbundling company between the unbundling company shares and the unbundled company shares, and to situations where the unbundling company is not in a taxable position due to having capital losses or assessed losses
- ????????Government proposes to amend the definition of adjusted taxable income in section 23M(1) of the Income Tax Act to clarify that only a balance of assessed loss from the prior year be added in the adjusted taxable income calculation and to introduce a definition of creditor
- ????????Government proposes that exchange gains be taken into account as interest received or accrued for purposes of section 23M of the Income Tax Act
- ????????Section 23M(2) of the Income Tax Act contains a formula that reduces the amount of interest disallowed for deduction to the extent to which withholding tax on interest is required to be withheld. The legislation is to be clarified such that this should only apply in respect of interest paid to non-residents.
- ????????An exemption from the application of the section 23M interest limitation rules applies where the creditor provides a loan to a taxpayer with funds granted by a lending institution. The proposal is to include South African lending institutions in the exemption.
- ???????The government will review how the definition of controlling relationship in section 23M(1) interacts with section 23M(2)
- ????????Businesses will be able to claim a 125% deduction in the first year for renewable energy projects (without generation thresh holds) brought into use for the first time between 1 March 2023 and 28 February 2025. This compares to the current 50:30:20 deduction over three years or a 100% deduction over one year in respect of smaller energy projects
- ????????Food manufacturers will be able to claim a refund of the Road Accident Fund levy in respect of diesel used to run generators in food manufacturing between 1 April 2023 and 31 March 2025. Refunds will take place once the refund system has been developed (the relief is afforded to limit the impact of load-shedding on food prices).
- ????????The research & development incentive will be amended as follows:
o??it will be extended for 10 years from 1 January 2024(with a six-month grace period for projects to commence before the application is submitted to allow new and smaller applicants to gather information and potentially benefit from the incentive)
o??the definition of research and development will be refined to make it simpler to understand and easier to administer (activities aimed at resolving a scientific or technological uncertainty)
o??moving away from an end result approach (such as it being patentable) to incorporate principles of the OECD Frascati Manual (activities should be novel, uncertain, systematic and transferable and/or reproducible). Given the uncertainties and risks involved in research & development, the regime will recognise that applicants will not know how their activities will unfold when applying for the incentive. The confusing innovation requirement will also be removed;
o??the exclusion for internal business processes will be removed - regardless of whether it is intended to be sold or used granted to connected persons (subject to meeting the proposed research and development definition)
o??to improve monitoring and evaluation, the regime will allow the Commissioner for SARS to share certain information with the Minister of Higher Education, Science and Innovation.
- ????????The urban development zone incentive will be extended for two years to 31 March 2025 while the delayed review process is completed
- ????????The minimum royalty rate for oil and gas companies will increase to 2% from 0.5%
- ????????Government proposes that it be clarified that public benefit organisations, recreational clubs and associations have three natural unconnected persons to accept the fiduciary responsibility of the entity and that no single natural person may directly or indirectly control the decision-making powers of the entity
- ????????Government proposes clarifying the interaction between the extended compliance periods, for industrial policy projects, and skills development criteria
- ????????The tax legislation will be amended to address the tax implications of the Bank Deposit Insurance Scheme (legislation dealing with the scheme was passed in 2022)
- ????????Provisions dealing with Sharia-compliant financing arrangements are to be extended and aligned across all tax acts
- ????????Government proposes to refine the provisions dealing with the impact of IFRS insurance contracts
- ????????The round-tripping anti-avoidance provision for foreign dividends is to be amended to include foreign dividends received or accrued from shares listed on a South African stock exchange if the foreign dividends are directly or indirectly funded by amounts that were deductible in South Africa
- ????????Government proposes that foreign dividends should not be taxed at 20 per cent where a person paying expenses giving rise to such dividend is entitled to a tax deduction of such expenses at a higher rate
- ????????Tax legislation be clarified to provide that to qualify as a foreign business establishment, all important functions for which a controlled foreign company (CFC) is compensated need to be performed by the CFC or another company (if that other company is located in the same country as the CFC’s fixed place of business, the other company is subject to tax in the same country where the CFC’s fixed place of business is located, and it forms part of the same group of companies as the CFC)
- ????????Section 25B of the Income Tax Act will be amended to prevent flow through to non-resident beneficiaries (such amounts will be taxed in the trust instead)
- ????????Government proposes limiting the participation exemption if a sale of shares is to a non-resident company that formed part of the same group of companies as the company disposing of the shares, or the shareholders are substantially the same as the shareholders of any company in the group of companies disposing of the shares
- ????????An 18-month holding period requirement is to be introduced for the participation exemption to apply in respect of a foreign return of capital from a CFC
- ????????The Value-Added Tax Act will be amended to clarify the VAT treatment of specific supplies in the short-term insurance industry
- ????????Government proposes providing clarity on the VAT treatment of prepaid vouchers used to procure services of third parties where the telecommunication service provider acts as an agent of third parties
- ????????The Value-Added Tax Act will be amended to clarify whether adjusted cost includes the cost of land (in relation to the temporary letting of residential accommodation)
- ????????The Value-Added Tax Act will be amended to deal with the documentary requirements for gold exported by/through refineries
- ????????Amendments are to be effected to the regulations aimed at closing schemes to claim undue VAT refunds by operators in the value chain relating to high risk goods containing gold
- ????????Effective 1 January 2023, the carbon tax rate increased from R144 to R159 per tonne of carbon dioxide equivalent. Future adjustments are provided in the Carbon Tax Act;
- ????????The budget proposes a 1 cent a litre increase in the carbon tax in respect of 93 octanes to 10 c/litre and diesel to 11c/litre (effective from 5 April 2023)
- ????????The carbon tax cost recovery quantum for the liquid fuels refinery sector increased from 0.63c/litre to 0.66c/litre effective from 1 January 2023
- ????????The utilisation period in the Carbon Offsets Regulations will be extended, to align it with the extension of the first phase of the carbon tax, to 31 December 2025. This will take effect from 1 January 2023
- ????????The Carbon Tax Act will be amended from 1 January 2023 to align fuel emission factors with methodological guidelines and regulations of the Department of Forestry, Fisheries and the Environment
- ????????It is proposed that the formula for fugitive emission factors be adjusted (only certain emission factors will be multiplied by 1000)
- ????????The Commissioner will be empowered to prescribe conditions, under which deferment of duties will be allowed, by rules
- ????????Carriers will be allowed to submit the required advance passenger information and passenger name record to the Department of Home Affairs (which will distribute the information to other relevant government entities such as SARS). Amendments to protect personal information are also proposed.
- ????????The Customs and Excise Act is to be amended to provide for a modern traveller management system (provide for the declaration of the required information before arrival in or departure from South Africa)
- ????????Government proposes changes to enhance the liquidation of provisional payments (that serve as security in certain circumstances and are not claimed back by the trader) below a specified amount, or that remain unliquidated after a specified period and to introduce a prescription period for unclaimed amounts
- ????????The pay-as-you-earn (PAYE) and personal income tax administration reform will continue over the medium term (with a view to reducing the administrative burden for employers, payroll administrators and SARS by providing employer and employee data on a monthly basis in a fully automated fashion). The need for employer PAYE annual reconciliation should then fall away and the reform will be extended to third-party data providers.
- ????????The VAT administrative framework is to be reviewed in order to simplify and modernise it in consultation with all affected parties
- ????????A legislative framework will be introduced to allow SARS to conclude bilateral advance pricing agreements
- ????????Registration requirements for non-resident employers are to be aligned
- ????????Variations in employer withholding obligations should apply to remuneration from share options and similar schemes (due to cashflow implications for employees who can only claim a tax credit upon submission of an annual tax return)
- ????????SARS will be empowered to disclose all entities with section 18A approval (approval for tax-deductible contributions made to those entities)
- ????????SARS will be empowered to extend the time period, by public notice, to submit a tax return where taxpayers disagree with an auto assessment
- ????????Amendments are proposed to align with anti-money laundering, countering terrorism financing, and FATF requirements
- ????????various technical corrections will occur (grammatical changes, effective dates, transitional measures, and correcting challenges arising from the implementation of amendments)
Please contact us should you have any queries/questions in connection with the contents above.
Note that this document is published for general information purposes only (and is not a substitute for professional advice).
The contents hereof are not intended to constitute advice in relation to any circumstances.
Professional and specific advice should always be sought prior to one acting or omitting to act.
