HIGHLIGHTS OF THE 2014 BUDGET

BUDGET FRAMEWORK:

-- Budget deficit of four percent of GDP expected for 2013/14, narrowing to 2.8 percent in 2016/17;

-- Debt stock as percentage of GDP to stabilise at 44.3 percent in 2016/17;

-- Tax revenue for 2013/14 expected to be R1 billion higher than projected in 2013 budget;

-- Real growth in non-interest spending to average 1.9 percent over next three years;

-- National and provincial government expenditure on travel, catering, consultants and other administrative payments declines as a share of spending;

-- Expenditure ceiling commits government to spending limits of R1.03trn in 2014/15, R1.11trn in 2015/16 and R1.18trn in 2016/17.

SPENDING PROGRAMMES: Over the next three years, government will spend:

-- R410bn on social grants;

-- R15.2bn on the economic competitiveness and support package;

-- R8.5bn on the Community Work Programme;

-- R8.7bn on settlement of land restitution claims;

-- R7bn for subsistence and smallholder farmers;

-- R78bn on university subsidies and R19.4bn for the National Student Financial Aid Scheme;

-- R34.3bn on school infrastructure;

-- R22.9bn to upgrade commuter rail services;

-- R143.8bn to support municipal infrastructure;

-- R42bn on the HIV and Aids conditional grant.

TAX PROPOSALS:

-- Personal income tax relief of R9.3bn;

-- Adjustments to tax tables relating to retirement lump-sum payments;

-- Measures to encourage small enterprise development;

-- Clarity on valuation of company cars for fringe-benefit tax purposes;

-- Reforms to tax treatment of the risk business of long-term insurers;

-- Amending rules for VAT input tax to combat gold smuggling;

-- Measures to address acid mine drainage;

-- Adjustment of the proposed carbon tax and its alignment with desired emission-reduction outcomes identified by the environmental affairs department.

“It is time for action and implementation. It is time to move South Africa forward to the

next stage of our historic journey to more rapid growth, jobs and development – time to

leave behind poverty, joblessness and inequality!”

- Minister Pravin Gordhan, 2014 Budget speech

This circular only includes budget changes and proposals which are relevant to the

financial planning environment.

1. Personal Income Tax

The Minister proposed welcome but restrained personal income tax relief.

The table below illustrates the adjusted tax rates applicable to individual taxpayers and special trusts for the 2014/2015 tax year.

Taxable Income	Rate of tax
R0 - R174 550	18% of taxable income
R174 551 – R272 700	R31 419 + 25% of taxable income above  R174 550
R272 701 – R377 450	R55 957 + 30% of taxable income above R272 700
R377 451 – R528 000	R87 382 + 35% of taxable income above  R377 450
R528 001 – R673 100	R140 074 + 38% of taxable income above R528 000
R673 101 and above	R195 212 + 40% of taxable income above R673 100

  

Tax Rebates
	2013/2014 Tax Year	2014/2015 Tax Year
Primary Rebate	R12 080	R12 726
Secondary Rebate (applicable only to taxpayers aged 65 and over)	R6 750	R7 110
Tertiary Rebate (applicable only to taxpayers aged 75 and over)	R2 250	R2 367

Tax Thresholds	2013/2014 Tax Year	2014/2015 Tax Year
Below age 65	R67 111	R70 700
Age 65 and over	R104 611	R110 200
Age 75 and over	R117 111	R123 350

This means that a taxpayer younger than 65 and earning a taxable income of R70 700 or less per annum, or a taxpayer older than 65 but younger than 75 and earning a taxable income of R110 200 or less per annum, or a taxpayer of 75 years and older and earning a taxable income of R123 350 or less per annum, will not pay any income tax in the 2014/2015 tax year.

The examples below demonstrate the tax savings for individuals (younger than 65) in terms of the proposed changes:

2. Interest Exemption 

The interest exemption threshold has not been changed and remains as follows:

R23 800 per annum for taxpayers under the age of 65,

R34 500 per annum for taxpayers aged 65 years and older. 

Therefore, taxpayers will be able to invest in interest bearing investments, an amount up to:

 R432 727 where they are younger than 65, and

 R627 273 where they are 65 and older

 at 5.5% per annum, without attracting tax on the growth.

 3. Taxation of Small Businesses  

 This table will be effective for years of assessment ending on or after 1 April 2014 are as follows:

Tax table applicable to small business corporations
Taxable Income (R)	Rate of Tax (R)
R0 – R70 700	0% of taxable income
R70 701 – R365 000	7% of taxable income above R70 700
R365 001 – R550 000	R20 601 + 21% of taxable income above R365 000
R550 001 and above	R59 451 + 28% of the amount above R550 000

The Davis Tax Committee recommends replacing the above reduced tax-rate regime with an annual refundable, tax compliance rebate.

4. Medical Tax Credits 

With effect from 1 March 2014, the tax credit (for contributions to medical schemes) for a taxpayer younger than 65 years is R257 and for a taxpayer and his or her first dependent is R514. An additional credit of R172 is afforded to each additional dependent.

 The previous deduction that was provided for the out of pocket expenses of the taxpayer has been done away with. This has been replaced with a further credit, the amount of which differs depending on the circumstances of the taxpayer. 

For taxpayers younger than the age of 65 (who are not disabled or who have any disabled dependents) a tax credit will be given of an amount equal to 25% of the aggregate of:

the amount by which their contribution exceeds four times their tax credit (for contributions), plus their out of pocket expenses

that exceeds 7.5% of their taxable income (excluding any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit).

For taxpayers 65 years of age or older, or who are disabled or who have any disabled dependents, a tax credit will be given of an amount equal to the aggregate of:

33.3% of the amount by which their contribution exceeds three times their tax credit (for contributions), plus 33.3% of their out of pocket expenses.   

 5. Retirement

Employer contributions

With effect from 1 March 2015:

Contributions by employers to defined contribution retirement funds are to be fringe benefit taxed in the hands of the employee.  A formula to calculate the fringe benefit inclusion amount in respect of employer contributions to defined benefit funds has been provided for).

The full employer contribution is deductible by the employer.

 Deductible contributions for employee

Individual member taxpayer deductions for pension, provident and retirement annuity funds are to be consolidated from 1 March 2015. The cap of such contribution deductions will be at 27.5% of the higher of remuneration or taxable income (excluding retirement lump sums and severance benefits) and with a maximum amount of R350 000.

 These contribution limits will include the risk benefit and administration cost component of the contributions. Any employer contributions that were fringed benefit taxed in the employee’s hands may be applied in calculating the employee’s deduction.  Contributions that exceed these caps are carried forward to future tax years.    

 Contributions not deducted at retirement date

Any contributions that remain unapplied as deductions, may be applied against members’ retirement benefits at retirement, firstly against the lump sum and then, as from 1 March 2014, against the annuity income.

Change to Provident Funds

Currently lump sum withdrawals upon retirement from pension and retirement annuity funds are restricted to a maximum of one-third of accumulated savings, whereas this restriction does not apply to provident funds.

With effect from 1 March 2015 the pension and retirement annuity fund compulsory annuitisation regime will be extended to provident funds. Vested rights are protected in that member balances in provident funds as at 1 March 2015 (plus the growth thereon) will continue to be subject to the old provident fund regime.  This new regime will not apply to provident fund members older than 55 years as at 1 March 2015.

As from 1 March 2014, the following table will be applicable to taxable lump sums taken upon retirement from a retirement fund vehicle:

Taxable income (R)	Rates of tax (R)
R0 – R500 000	0%
R500 001 – R700 000	18% of taxable income above R500 000
R700 001 – R1 050 000	R36 000 + 27% of taxable income above R700 000
R1 050 001 and above	R130 500 + 36% of taxable income above R1 050 000

As from 1 March 2014, the following table will be applicable to taxable lump sums taken prior to retiring from a retirement fund vehicle (i.e. withdrawals):

Taxable income (R)	Rates of tax (R)
R0 – R25 000	0%
R25 001 – R660 000	18% of the taxable income above R25 000
R660 001 – R990 000	R114 300 + 27% of the taxable income above R660 000
R990 001 and above	R203 400 + 36% of the taxable income above R990 000

 6. Sin Taxes and Fuel Levies

The following increases are proposed:

-              Tax on a packet of 20 cigarettes increases 68c

-              Tax on a 340ml can of beer increases by 9c

-              Tax on a bottle of wine increases by 13c

-              Tax on a bottle of spirits increases by R4,80

Government proposes to increase the general fuel levy and Road Accident Fund levy by 12c/l and 8c/l respectively with effect from 2 April 2014.  This results in a total increase of 20c/l.

 7. Retirement Fund Proposals 

 Retirement reform

Over the last two years there have been a number of discussion papers setting out National Treasury’s Strengthening Retirement Savings proposals. These papers set out government’s take on the state of private retirement funds and how outcomes for members might be improved. Inter alia, fund governance, simplified deduction regime, prescribed annuitisation and preservation of pension fund monies have been proposed. The budget documentation indicated that a further summary paper will be released

shortly.

Taxation of lump sums of residents with offshore service

The budget documentation indicated that it will be clarified that the concession for offshore service will also apply to lump sums.

A remaining issue is whether the concession applies to the national source of the services rendered or the national origin of the pension fund involved.  In response to the uncertainty in this area, National Treasury has undertaken to clarify the taxation regime.

8. Other Proposals

National Health Insurance (NHI)

A Green Paper describing the initiatives in broad terms, was released prior to the 2013 budget. It is intended that this initiative be phased in over a period of 14 years. A white paper and a financing paper has been completed and will be tabled in parliament shortly. Once these papers are made public, we will gain insight into how the NHI initiative is to be financed.

Tax-preferred savings accounts

To encourage greater savings, tax-preferred savings and investment accounts are proposed to be introduced to exist alongside the current tax-free interest-income caps referred to above. This will encourage the development of a new generation of savings products. All returns accrued within these accounts and any withdrawals would be exempt from tax. The account would have an initial annual contribution limit of R30 000 and a lifetime limit of R500 000, which is to be increased regularly in line with inflation.

Investments in bank deposits, collective investment schemes, exchange traded funds and retail savings bonds, will be allowed to be offered with these tax exemptions.

Conclusion

“The purpose of freedom is to create it for others…” 

– Former President Nelson Mandela

With the focus that Minister Pravin Gordhan has placed on education, infrastructure as well as providing further relief to small businesses, indications are  that the Minister is attempting to create opportunities for taxpayers to be free of unnecessary financial burdens.

It is pleasing to note that the Minister did not see it fit to introduce any changes to increase the tax burden on taxpayers and still introduced further relief on the taxation of lump sums from retirement funds. 

 PLEASE NOTE THAT THE INFORMATION PROVIDED IN THIS CIRCULAR IS BASED ON PROPOSALS MADE IN THE NATIONAL BUDGET SPEECH DELIVERED ON THE 26th OF FEBRUARY 2014 IN PARLIAMENT. UNTIL THE PROPOSALS HAVEFORMALLY BEEN PROMULGATED IN LEGISLATION IT WILL ONLY BE VIEWED AS PROPOSALS.