Budget briefing

Thursday, 01 May 2014
Harry Joffe highlights some of the more interesting announcements in South Africa’s 2014 Budget.

South Africa’s Finance Minister delivered the 2014 Budget on 26 February. Changes to tax bands, tax-preferred savings accounts and insurance policies were announced, but perhaps the most important aspect of the Budget was what it left unchanged.

Tax changes

All the bands on the tax tables were increased, with the bottom rate of 18 per cent extended to ZAR174,550 per annum, and the marginal rate of tax remaining at 40 per cent and kicking in at ZAR673,101 per annum.

The Finance Minister confirmed that tax-preferred savings accounts, first mooted in the 2012 Budget as a measure to encourage household savings, will proceed. The proposal is that these accounts will have an initial annual contribution limit of ZAR30,000, to be increased regularly in line with inflation, and a lifetime contribution limit of ZAR500,000. The account will allow investments in bank deposits, collective investment schemes, exchange-traded funds and retail savings bonds, but not in shares directly.

The Budget increased the tax-free amounts that can be drawn from a pension, provident or retirement annuity fund on retirement to ZAR500,000, and the overall amount to ZAR1,050,000, which can be drawn at a concessionary rate of only 27 per cent. This concession is only available once over a person’s lifetime. Moreover, from 1 March 2015, there will be changes to how deductibility of contributions to a retirement fund will work, being limited to the lesser of 27.5 per cent of taxable income or ZAR350,000 per annum, which for most taxpayers will be very beneficial. The result is that South African retirement annuities have become very attractive investments, for both tax and estate-planning reasons.1

South Africa has a turnover tax regime that is targeted at businesses with an annual turnover of up to ZAR1 million. The Budget proposed that the requirements should be simplified, and thresholds and tax rates adjusted; turnover up to ZAR335,000 should not be taxed (a zero tax rate) and the maximum tax rate should be reduced from the current 6 per cent to 5 per cent. This will assist smaller businesses. The Budget also proposed amendments to small business tax relief, to make it more widely accessible.

Insurance policies

The Budget confirmed that personal insurance policies to cover loss of income will no longer be tax-deductible from 1 March 2015, and that s11w of the Income Tax Act will be amended to make it clear that contingent liability policies – to cover an employer against any debt to be repaid on the death of an employee – will also not be tax-deductible. Additionally, the Budget attempted to amend the ‘4 fund’ tax system, relating to how insurance policies are taxed, by proposing that profits from the risk business of an insurer will be taxed in the corporate fund, similar to the manner in which short-term insurers are taxed. This will ensure that the corporate fund, rather than one of the policyholder funds, will be taxed on the risk policy business and profits.

Reform: retirement and national health insurance

Cross-border retirement saving was discussed. Given the complexity of the issues involved, it was proposed that the retirement review take place over two years, with extensive consultation. Reform on national health insurance is still underway with the aim of making quality health care affordable to all South Africans. A white paper and financing paper will be tabled in Cabinet shortly, although the funding model for national health insurance is still not known.

No change

Many people have commented that the most important aspect of the Budget was what it did not change: the donations tax exemption is still ZAR100,000 per person per year, with the estate duty rebate remaining at ZAR3.5 million per person (or ZAR7 million if not used by the first dying spouse). However, given that this is an election year, it was gratifying to see that the Finance Minister resisted the populist urge to raise taxes on the wealthy by raising the marginal tax rate. The marginal rate remained at 40 per cent, and the band at which it kicks in was raised to ZAR673,101 per year. In addition, after all the fuss from last year’s Budget, nothing was mentioned this year about amending the way trusts are taxed. Hopefully, sleeping dogs will be left to lie.

Africa rising

The ‘Africa rising’ narrative that has found its way into popular media publications over the past few years also extends to STEP’s presence in Africa.

In fact, the growth in the number of registered STEP members on the continent has been astonishing. Over the two years to February 2014, the Cape Town Branch experienced stellar growth in membership of almost 80 per cent, making it the fastest-growing STEP branch worldwide over that period. STEP Johannesburg can be equally proud. Over the same period, its membership increased by a cumulative 33 per cent, placing it eighth overall in terms of growth.

Tanya Cohen TEP, Chair of STEP Cape Town, is delighted with the success that the local branch committee has achieved over the past two years: ‘South African trust and estate practitioners advise in an increasingly complex environment, both from a legal and tax perspective, and because the relaxation of exchange controls has enabled more and more of our clients’ affairs to extend across international borders. In this environment, the increase in membership reflects the unmatched training and networking opportunities offered by STEP.’

Special mention should also go to the STEP Chapters of Belize, Wyoming, San Diego and Boston, all of which experienced growth in excess of 200 per cent over the past two years.

  • 1A South African retirement annuity is exempt from estate duty
Author block
Harry Joffe

Harry Joffe TEP is Head of Legal Services at Discovery Life.

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