Background

“Hope is being able to see that there is light despite all of the darkness. He observed that sometimes we forget that just beyond the clouds the sun is shining.” Minister Tito Mboweni was referring to Archbishop Emeritus, Desmond Tutu’s words in his opening statements.

He then spoke about “fiscal prudence” and went on to say, “Getting our fiscal house in order is the biggest contribution we can make to support our Economic Reconstruction and Recovery Plan”. These words sum up the themes in the remainder of the speech, aimed at closing the main budget primary deficit, stabilising government debt, addressing corruption, touching on structural reforms under Operation Vulindlela to address the electricity crisis, digital communications, water and freight transport issues, as well as economic transformation, job creation, land, tourism and small business development initiatives due to their potential high impact on economic growth.

While efforts to improve tax collection is underway, the tax base has shrunk due to job losses during the pandemic, and although tax collection is budgeted at R1.21 trillion during 2020/21, it is about R213 billion less than the 2020 Budget expectations and the largest tax shortfall on record.

More immediately, more than R10 billion will be allocated for vaccines over the next two years, with a contingency reserve from R5 to 12 billion for further purchases.

In closing, the Minister spoke about the challenging but achievable path to recovery, with this 2021 budget framework putting South Africa on course to achieve a primary surplus and stabilise government debt at 88.9% of GDP by 2025/26.

The main proposals related to the following:

• Granting above inflation personal income tax relief of R2.2 billion by adjusting brackets and rebates
• Unemployment Insurance Fund contribution ceiling will be increased to R17 711.58 per month from 1 March 2021
• No extension of the venture capital company tax incentive after 30 June 2021
• General fuel levy increases by 15 cents per litre, and the Road Accident Fund levy increases by 11 cents per litre on 7 April 2021
• Increase of 8% in specific excise duties on tobacco and alcohol
• Plastic bag levy will be reduced to 12.5 cent per bag for bio-based plastic bags, from a date to be announced later in the year

Medical Tax Credits

An inflationary adjustment will apply to the value of medical tax credits, which will increase from R319 to R332 for the first two members, and from R215 to R224 for all subsequent members.

Applying Tax on Withdrawals of Retirement Interest When an Individual Ceases to Be a Tax Resident

When an individual ceases to be a South African tax resident, retirement funds are not always subject to withdrawal tax in terms of the Act. At issue is the tax treatment of retirement interest when an individual ceases to be a South African tax resident, but retains his/her investment in a South African retirement fund, and only withdraws from the retirement fund when he/she dies or retires from employment. Section 9(2)(i) of the Act deems such amounts to be from a South African source, thus remaining within South African tax jurisdiction despite the individual no longer being a South African tax resident.

The challenge arises when the individual ceases to be a South African tax resident before he/she retires and becomes a tax resident of another country. When that individual withdraws from the retirement fund, due to the application of the specific tax treaty between South Africa and the other country, the retirement fund interest will be subject to tax in the other country as the individual will, in terms of the tax treaty, be regarded as a tax resident in that other country.

The provisions of the specific tax treaty between South Africa and the new resident country will result in South Africa forfeiting its taxing rights. To address this anomaly, government proposes changing the legislation as set out below.

When the individual ceases to be a South African tax resident, the retirement fund interest will form part of the assets that are subject to retirement withdrawal tax. The individual will be deemed to have withdrawn from the fund on the day before he/she ceases to be a South African tax resident.

If the individual ceases to be a South African tax resident but leaves his/her investment in a South African retirement fund and only withdraws from the retirement fund when he/she dies or retires from employment, then the retirement withdrawal tax (including associated interest) payment will be deferred until payments are received from the retirement fund or as a result of retirement. When the individual eventually receives payments from the fund, the tax will be calculated based on the prevailing lump sum tables or in the form of an annuity. A tax credit will be provided for the deemed retirement withdrawal tax as calculated when the individual ceased to be a South African tax resident.

More detail in this regard is awaited in the Taxation Laws Amendment Bill for 2021 expected later this year.

Reviewing Tax Provisions for Travel and Working From Home

In light of the large‐scale migration to working at home over the past year, the National Treasury will review current travel and home office allowances to investigate their efficacy, equity in application, simplicity of use, certainty for taxpayers and compatibility with environmental objectives. In recognition of the potential effect on salary structuring, this will be a multiyear project, starting with consultations during 2021/22.

Clarifying the Timing of Disposal Rules in Respect of an Asset Acquired From a Deceased Estate

When a person dies, the Estate Duty Act (1955) provides for the assets of the person to be transferred to the estate of the deceased before the assets are distributed to their heirs. The Act also provides for the executors to administer this estate, which includes preparing and submitting the liquidation and distribution account to the Master of the High Court Office, and submitting the relevant tax returns – including payment of the estate duty – to SARS.

Legally, the liquidation and distribution account must remain open for inspection in the Master of the High Court Office for 21 business days. Once the liquidation and distribution account is finalised, the personal right of the heirs to claim delivery of the assets is triggered.

At present, there is timing uncertainty around when the heirs are regarded as having acquired an asset from the estate of the deceased. To clarify the time of disposal of this personal right, government proposes that the legislation be changed so that the disposal by the estate occurs on the date when the liquidation and distribution account becomes final.

Tax Treatment of the Cession of a Right to Receive an Asset

The Income Tax Act specifies certain amounts to be included in “gross income”, which is defined in section 1, and certain disposals that are regarded as donations in terms of section 56. Some taxpayers have devised schemes to undermine both the abovementioned provisions. These schemes entail a service provider (for example, an employee or independent contractor) ceding the right to receive or use an asset to be received from the person to whom the services are rendered or are to be rendered.

The right is generally ceded to a family trust for no consideration. In these instances, the service provider will be able to circumvent the gross income provisions as the asset would have been ceded to the trust before a value can be attached to it. In addition, the service provider will not be liable for donations tax, as it appears as though they are disposing of a worthless asset and are therefore not liable for donations tax until the services have been rendered and the employer transfers the asset to the cessionary. Moreover, the service provider will not be entitled to the asset and therefore cannot be regarded as having disposed of it.

In order to address these kinds of schemes, it is proposed that changes be made to the abovementioned tax provisions.

Clarifying the Rules Dealing With Withholding Tax Exemption Declaration

The Act contains provisions in part IV A and part IV B for withholding tax on royalties and interest respectively. According to the rules dealing with withholding tax on interest, no withholding tax on interest applies if the foreign person submits a declaration that he/she is – in terms of an agreement for the avoidance of double taxation – exempt from the tax. A similar declaration does not exist for withholding tax on royalties. To address the anomaly, it is proposed that the tax legislation be amended.

Review of Voluntary Disclosure Programme

Taxpayers may approach SARS to regularise their tax affairs to avoid criminal prosecution, understatement penalties and certain administrative non‐compliance penalties. The voluntary disclosure provisions will be reviewed in 2021 to ensure that they align with SARS’ strategic objectives and the policy objectives of the programme.

Retirement Provisions

Withdrawals From Retirement Funds

The tax table for withdrawal benefits from retirement funds remains unchanged.

Retirement From Retirement Funds

The tax table for retirement benefits from retirement funds remains unchanged.

Deductions for Retirement Fund Contributions

These remain the same at 27.5% of the greater of the amount of remuneration for PAYE purposes or taxable income (both excluding retirement fund lump sums and severance benefits). As before, the deduction is further limited to the lower of R350 000 or 27.5% of taxable income before the inclusion of a taxable capital gain.

Allowing Members to Use Retirement Interest to Acquire Annuities on Retirement

A member of a retirement fund may receive an annuity on retirement. Where the member is allowed to take, or commute, a lump sum equal to a maximum of one‐third of the retirement interest on retirement, the annuity is to be provided with the balance of the member’s retirement interest following commutation. The retirement fund can provide the annuity by paying it directly to the member, or purchasing it from a South African registered insurer in the name of the fund (a fund-owned annuity) or purchasing it in the name of the retiring member (a member-owned annuity). If a member opts to receive an annuity, the full value of their retirement interest following commutation must be used to provide either of the abovementioned annuities.

Therefore, a member is prohibited from using their retirement interest to acquire various annuities. Government proposes that retiring members be allowed to buy a member-owned and fund-owned annuity, or multiple annuities from more than one product provider.

Transfers Between Retirement Funds by Members Who Are 55 Years or Older

The Income Tax Act stipulates that any transfer by a member of a pension, provident or retirement annuity fund (who has opted to retire early) into a similar fund would be considered a taxable transfer.

The policy in this regard is not intended to tax transfers from a less to a more restrictive fund, or between similar funds. Government proposes allowing tax‐free transfers into more or similarly restrictive funds by members who have already opted to retire to address this anomaly. This is to be welcomed as currently only transfers to a retirement annuity fund and preservation fund are allowed and not to a pension or provident fund.