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Carbon Tax Bill Released for Public Comment

The following article is an excerpt from our February 2018 newsletter:

The National Treasury has published the Second Draft Carbon Tax Bill for introduction in Parliament, as well as public comment and convening of public hearings by Parliament, which is expected to be early in 2018. Following that process, a revised Bill will be formally tabled in Parliament, which is expected to be by mid-2018.

The actual date of implementation of the carbon tax will be determined through a separate and later process by the Minister of Finance through an announcement during 2018, or at the 2019 Budget, taking into account the state of the economy. This announcement on the implementation date of the carbon tax will be complemented by a package of tax incentives and revenue recycling measures to minimise the impact in the first phase of the policy (up to 2022) on the price of electricity and energy intensive sectors such as mining, iron and steel.

Due date for comments Treasury has invited stakeholders to submit written comments on the draft Carbon Tax Bill by close of business on 9 March 2018 to carbontaxbillcomments@treasury.gov.za. Kindly email any queries to Sharlin Hemraj (sharlin.hemraj@treasury.gov.za) or Dr Memory Machingambi (memory.machingambi@treasury.gov.za).

The Draft Carbon Tax Bill together with the following annexures is available on the National Treasury website: www.treasury.gov.za

  • Annexure 1: Explanatory Memorandum
  • Annexure 2: Socio economic Impact Assessment Report
  • Annexure 3: First Draft Carbon Tax Bill 2015: Response Document

We will keep you informed on any developments in this regard.

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SARS Crackdown on Religious Sector

The following article is an excerpt from our February 2018 newsletter:

The South African Revenue Service (SARS) will engage religious institutions with the intention to investigate possible tax non-compliance in this sector. The decision follows SARS’ own preliminary investigation, its meeting with the CRL Rights Commission and general reports suggesting that certain religious organisations and leaders are not in compliance with tax laws and may be enriching themselves at the expense of tax compliance and their altruistic and philanthropic purpose.

SARS also acknowledges that a number of religious organisations are indeed complying with their tax obligations. Religious institutions may apply to SARS to be exempted from the payment of Income Tax and certain other taxes in terms certain sections of the Income Tax Act. Once such tax exemption status is granted, there are a number of specific criteria that have to be complied with, including but not limited to:

  1. Conducting activities in a non-profit manner with an altruistic or philanthropic intent;
  2. No such activity is intended to directly or indirectly promote economic self-interest of any person other than by way of reasonable remuneration paid for services rendered;
  3. Religious institutions are prohibited from directly or indirectly distributing funds to any person other than in performing their religious activity

SARS is also concerned that proper taxes on trading activities that are unrelated to religious activities as well as Pay As You Earn (PAYE) on remuneration and other benefits are not being paid in terms of legislation. Over and above, SARS has further found a number of religious institutions issuing tax deductible receipts in terms of section 18A of the Income Tax Act, 1962, for donations towards religious activities. This is not permitted in terms of the Income Tax Act, 1962.

These entities are encouraged to use the SARS Voluntary Disclosure Programme to regulate their taxes. SARS will be reaching out to the CRL Rights Commission and faith community to raise awareness about the relevant tax obligations of religious institutions where applicable.

Should you require advice in this regard please do not hesitate to contact us for professional advice.

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Budget Preview

The following article is an excerpt from our February 2018 newsletter:

Minister Gigaba will present his first full budget speech on the 21st February 2018. This has to be one of the most important budget speeches announced post-democracy – one that could make or break our fragile economy.

The scale of funding the budget deficit alone is daunting, set against a backdrop rebuilding investor confidence in “brand South Africa”. The starting point, according to the medium term budget speech, is the funding of a budget deficit in excess of R50 billion. Then Zuma’s bombshell announcement of free education has really set the cat amongst the pigeons. According to the Davis Tax Committee we would need at least an additional R60 Billion per annum to fund this. Treasury has bandied about figures of between R12 Billion and R20 Billion. We won’t even start discussing what additional funding our State Owned Enterprises may require. The departure of Michael Sachs, a key player in the formulation of our budget, says it all! Treasury is going to be hard pressed to come up with a workable solution, balancing the funding needs while at the same time stimulating an underperforming economy.

Some Potential Tax Implications:

  • Probable increase in Vat by 1% to 2 %
  • In order to soften the “political blow” of a VAT increase some form of wealth tax or increase in the maximum marginal rate of tax
  • Increasing the tax net
    • See our article on the Religious sector
  • Improving liquidity by enforcing compliance with submissions and payment of taxes
    • See our article on Tax Deadlines

Whatever the “solution”, it is going to a hard and bitter pill to swallow. We will keep you informed of
developments around the much anticipated budget speech.

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Financing a National Health Insurance (NHI) for South Africa

The following article is an excerpt from our December 2017 newsletter:

The large degree of uncertainty and lack of common understanding of how the NHI will be implemented and operate is of concern, given the magnitude of the proposed reform. At this stage a few pertinent observations can be made based on the draft NHI White Paper as well as the potential impact on taxes.

  1. There is currently substantial uncertainty about both the costs (R256 billion pa) and funding shortfall (R72 billion pa) of the NHI.
  2. A combination of tax instruments with as broad a base as possible would be preferable.
  3. Given that the NHI introduces a universal benefit, it is appropriate that its financing base be as broad as possible, in the interests of social solidarity.
  4. Excise taxes on alcohol, tobacco or sugar-based beverages are levied primarily to change behaviors, but high increases tend to lead to illicit trade, resulting in reduced collections, and are unlikely to fund a significant proportion of the NHI funding requirement.
  5. Given the considerable size of projected funding shortfalls, substantial increases in VAT or Personal Income tax and/or the introduction of a new social security tax would be required to fund the NHI.
  6. The magnitudes of the proposed NHI fiscal requirement are so large that they might require trade-offs with other laudable NDP programmes such as expansion of access to post school education or social security reform
  7. The proposed NHI, in its current format, is unlikely to be sustainable unless there is sustained economic growth.

Clearly the proposed implementation of the NHI will have severe repercussions for the fiscus and accordingly requires a substantial review before implementation can be considered.!

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Funding of Tertiary Education

The following article is an excerpt from our December 2017 newsletter:

In principle, the DTC has confirmed that a blanket free higher education (including the wealthy) is not economically financially possible. The following key issues were noted:

  • 1 in 8 children get to university, 1 in 17 graduate
  • The wealthy are considerably more likely to get to university
  • The richest 10% of households received 48% of governments subsidy in 2011
  • Graduate unemployment is 6%
  • Approximately R60 Billion extra per year would be needed for no fee higher income

Best way to eliminate or decrease financial exclusion from higher education 

There are a number of models to fund higher education. The one with the largest leverage potential is a system of government-backed student loans. Given that 10% of the population own “at least 90-95% of assets”, the vast majority of South African households do not have sufficient assets or income to stand surety for their children. Thus, the financial markets play almost no role in funding higher education for the poorest 80% of students. In this context, a government-backed income-contingent loan could be a way to ensure that more/all students are not excluded on financial grounds. The key features of such a system would be:

  • Leveraging existing financial infrastructure to facilitate the administration.
  • Loans would be repayable once students graduate and/or find employment (bear in mind there is only 6% unemployment amongst graduates)
    • The DTC does not deal comprehensively with the fact that only 50% of all students graduate. Clearly those who do not graduate will still have to repay their loans, but in all probability there will be a high level of default from these students.
  • Financial Leveraging. Using the traditional bank lending model of roughly R1 deposits for approximately R4 of loans, a student “lending fund” of around R40 billion could be created by a deposit of R10 billion.

Conclusion, Recommendations & Tax Implications

The DTC recommends that a system of free education for the poorest students combined with a sliding scale of income-contingent government-backed loans for the missing-middle and full-fees for the wealthy is the best workable solution. It is estimated that R15 billion would be required per annum to be sourced as follows:

  •  Raising the top marginal rate of personal income tax by 1.5% would yield R5,1 Billion
  • Increasing the Capital Gains Tax Inclusion rate for corporates from 80% to 100% will yield R1.4 Billion
  • Increasing the Skills Development Levy would yield and additional R8.8 billion.

The budget in February 2018 promises to be very interesting indeed with all the current demands on the fiscus!

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Davis Tax Committee (DTC) Publishes Final Repo< strong>rts

The following article is an excerpt from our December 2017 newsletter:

The Davis Tax Committee was established in 2013 to review what role the tax system can play in addressing the following key issues amongst others:

  • Economic growth
  • Unemployment, poverty and inequality
  • Small business growth
  • Corporate tax base erosion and profit shifting

In this context the following six final reports have been published:

  • Funding of tertiary education in South Africa
  • Financing a National Health Insurance (NHI) for South Africa
  • Second and final report on base erosion and profit shifting
  • Second and final report on hard-rock mining
  • Oil and gas report coupled with an IMF report on the same topic for the DTC
  • Tax Administration

Given the importance (and potential impact) of these issues, we will summarise the key findings of three of the reports in this newsletter.

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The following article is an excerpt from our November 2017 newsletter:

At the time of the Medium-Term Budget Statement minister Gigaba also signed the Taxation Laws Amendments Bill 2017, which gives effect to various bits of legislation, one of which is the issue surrounding interest free or low interest loan accounts to trusts. Many commentators have stated that the wording is incorrect and could give rise to unintended consequences. We will keep you informed of developments in this regard. Should you have any queries in this regard please do not hesitate to contact us.

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The following article is an excerpt from our November 2017 newsletter:

To offset revenue shortfalls and reduce borrowing, government has had to reduce its reserves. This leaves government with little room to maneuvre should risks to the expenditure ceiling materialise. Moreover, further reductions in the ceiling may be required to stabilise national debt. Various risks and pressures need to be taken into account over the medium term:

  • Additional spending commitments may emerge from policy processes underway. Government is evaluating the implications of providing fee-free higher education and training to poor and middle-income students. Other policy commitments include NHI, proposals in the Defence Review, improved early childhood development, accelerated land reform and several large infrastructure project proposals.
  • The inflation outlook has been revised down compared with the 2017 Budget, relieving pressure on inflation-linked expenditure such as the wage bill. However, public-sector remuneration budgets pose a large and imminent risk, with the possibility that some national and provincial departments will exceed compensation ceilings.
  • A new civil service wage agreement in which salary increases exceed CPI inflation, and without headcount reductions, would render the current expenditure limits difficult to achieve.
  • Several state-owned companies persistently demonstrate operational inefficiencies, poor procurement practices, weak corporate governance and failures to abide by fiduciary obligations.

Debt-service costs

At a time when revenue is under pressure, an increasing share of tax collection will be diverted to settle interest payments. As gross debt expands, debt service will remain the fastest-growing category of spending over the next three years. Relative to the 2017 Budget projections, debt-service costs will be R1 billion higher in 2017/18, R2.4 billion higher in 2018/19 and R6 billion higher in 2019/20. By 2020/21, government projects that nearly 15 per cent of main budget revenue will go toward servicing debt. This crowds out the space to fund social and economic priorities.

Interest payments as a share of main budget revenue

Source: National Treasury

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The following article is an excerpt from our November 2017 newsletter:

To anchor a sustainable budget, structural increases in expenditure must be matched by structural increases in revenue. As stated in the 2015 MTBPS, the expenditure ceiling can be adjusted to accommodate new spending priorities when a permanent source of revenue is found to offset increased spending. For example, government is considering proposals to finance national health insurance (NHI) through adjustments to the medical tax credit as discussed  below.

In 2012, government moved from a system of deductions for medical aid contributions and qualifying expenses to a system of tax credits independent of taxable income. In 2014/15, 3 million taxpayers claimed the credit on behalf of 8 million medical scheme members, resulting in a tax expenditure of R18.5 billion. The incidence of these credits is spread across the income distribution: 56 per cent of the total credits claimed accrued to 1.9 million taxpayers who had a taxable income of less than R300 000. This includes many workers who belong to medical aid schemes.

Medical Tax Credit per income group

Source: National Treasury calculations, 2014/15

Medical tax credit as percentage of taxable income of taxpayers*

*Sample only includes taxpayers that claimed medical tax credits (Source: National Treasury calculations, 2014/15)

The 2017 Budget Speech stated that “consideration is being given to possible reductions in this subsidy in future, as part of the financing framework for national health insurance(NHI)”. The National Treasury is considering changes to the design, targeting and value of the medical tax credit as part of the policy development process for the 2018 Budget.

Tax data, however, indicates that the program is well-targeted to lower and middle-income taxpayers. The National Treasury will seek input from the Davis Tax Committee on the feasibility of proposals to adjust the medical tax credit to fund NHI. We should get further clarification in next year’s budget speech and will keep you informed of any updates in this regard.

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The following article is an excerpt from our November 2017 newsletter:


There was not much good news, with revenue shortfalls projected in 2017/18 to be R50 billion, R69 billion in 2018/19 and R89 billion in 2019/20. So, a collective shortfall over the next three years of over R200 billion, with limited detail on how to fund it. There is mention of the sale of state assets to fund the SAA bailouts etc. There appears to be no concrete plan of action besides the possible sale of some Telkom shares.

We appear to be stuck in a low growth trap, with limited vision for a way forward. There is immense political pressure to act in accordance with the wishes of key political figures and it appears that only a radical change in government leadership will result in the required growth and confidence in the economy that will enable radical economic transformation.

Tax measures

Carbon tax is firmly back on the agenda. In minister Gigaba’s speech he comments as follows:

“I am also happy to announce that Cabinet has approved the release of the carbon tax bill to Parliament for formal consideration and adoption.”

A revised draft bill will be published for public comment shortly. This probably will be early in 2018 with a view to implement 2nd half 2018.

Funding the current shortfalls in revenue is going to be in part via increased taxes.  For instance, the issue of funding the National Health Insurance via adjustments to the existing medical tax credits is still being mooted. The Davis Tax Committee is being consulted on this issue to assess the viability of such changes.  “Sugar Tax”  is under consideration in Parliament with a proposed implementation date of 1 April 2018.

There is no doubt that a lot hinges on the outcome of Decembers political deliberations. The budget in February 2018 promises to be extremely interesting!

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