Tax Proposals in the 2020 Budget

• South Africa

• Tax planning and consultancy

28-02-2020

In a difficult economic climate, Minister Tito Mboweni delivered a budget speech, which on the face of it appears to provide a number of positive outcomes, including the provision of personal income tax relief through an above inflation increase in the tax brackets and rebates.  Further, there is a proposal that the corporate income tax rate will be reduced in an effort to promote investment in South Africa, by aligning corporate income tax rates with international rates.

There are, however, a number of tax changes that have been proposed, which will significantly affect individuals and businesses.  These are in addition to the expected increase in the “sin” taxes, fuel levy, and other environmental taxes, which inevitably increase each year.

Significantly for corporates, there will be changes made to the ability to claim interest deductions and offset assessed losses.  A detailed discussion document was released simultaneously with the budget speech, where a comparative analysis has been performed to assess the position of South Africa relative to international standards.  In summary, there will likely be changes made, to not only the definition of what qualifies as interest, but also the application of the relevant provisions to include multinational group companies.  Comments are to be provided by April 2020 and it should be expected that there will be legislative changes enacted in the future.

Of interest for corporate taxpayers will be the limitations placed on the use of any assessed loss.  It is suggested that there will be a restriction on the offset of the assessed loss carried forward to 80% of the taxable income for years of assessment commencing 1 January 2021.  This could potentially have a significant impact on businesses where the assessed loss is used as a tax shield.

A further development, which may affect business is the review of certain tax incentives and the extent to which the sunset clauses will apply.  This could affect the more recently popular use of venture capital companies.

There are additional anti-avoidance measures, which are going to be introduced, which will include amendments to the current provisions regulating low or non-interest bearing loans to trusts, the acquisition of assets in exchange for debts, dividend deductions, receipt of foreign dividends, and capital gains.

Changes are proposed to the group rollover relief provisions as well as the VAT treatment relating to the transfer of assets.  This is an interesting development as it often arises in practice that the requirements of meeting the going concern are not satisfied from a VAT perspective, although the transaction falls within the scope of the rollover relief provisions.

From an administrative perspective, there are a number of positive proposals in that it is indicated that there are to be some changes within SARS and its administration and the ease with which taxpayers are able to account for PAYE.  There is also a proposal that start-up businesses will benefit and that there will be an easier mechanism for registering as a taxpayer. 

In summary, it can be expected that there will be a number of legislative changes that will be introduced when the amendment bills are published for comments and whilst there are some important positive changes suggested in the budget, it is likely that businesses will face additional compliance and tax obligations through the introduction of more stringent requirements.