budget 2005

Budget 2005

Revenue trends and

tax proposals –

Chapter 4 & Annexure C of Budget Review

National Treasury

Presentation to Parliament Wednesday, 2 March 2005

Overview of the 2005 Budget

Programme of Action: cares for its people, socially just choices, and committed to service delivery

• Supporting economic growth and opportunities

• Strong increases in non-interest expenditure within a framework that is sustainable

• Tax relief to encourage economic opportunities

Major socio-economic challenges

• Reducing poverty through social wage• Dependence giving way to self-reliance• Halving unemployment rate by 2014

– particularly among youth• Countering vulnerability• Narrowing inequalities• Developing skills• HIV and Aids• Bridging ‘two economies’ divide

Budget for a season of hope

Sustaining higher growth

Economy growing faster…

…but to sustain this higher growth, we need…

Rising infrastructure investment

Lowering the cost of doing business, especially for small business

Producing more skilled people

Improving the quality of public services, especially to the poor.

Advancing social development

Higher growth to invest in people…

Means-tested social grants

Clean water and electricity

Quality education, health and municipal services

Community housing

Reduce crime and insecurity

Equity and redistribution

To bridge the divide between rich and poor…

Pro-poor budget reflects spending shift towards the poor

Extension of social wage to poor households

Broad-based black economic empowerment

Transport linkages between cities and townships, rural and urban

Renewed investment in small, emerging farmers

Fiscal policy

• 2004/05 deficit estimate 2,3% of GDP

• Expansionary stance from 2001 continues

• Strong real growth in non-interest spending,

averaging 5,5% a year

• Stable tax burden around 24,1% of GDP

• Debt service costs decline from 3,5% of GDP in

2004/05 to 3,2% in 2007/08

• Deficit of 3,1% in 2005/06 declining to 2,7% by

2007/08

• Significant surpluses in social security funds

Debt service costs as per cent of GDP

Debt service costs

5.6%

5.3%

4.9%

4.5%

3.9%

3.2%3.4%

3.5%3.5%3.6%

4.7%4.9%

5.2%

5.5%

3%

4%

5%

6%

As %

of G

DP

Fiscal framework

2003/04 2004/05 2005/06 2006/07 2007/08

R million / per cent

Revenue 299 431 337 960 369 869 405 427 444 643

per cent GDP 23.4% 24.1% 24.2% 24.2% 24.1%

Expenditure 328 662 370 113 417 819 456 393 494 894

per cent GDP 25.7% 26.4% 27.3% 27.3% 26.8%

Non-interest expenditure 282 349 321 212 364 694 399 790 435 513

per cent GDP 22.1% 22.9% 23.9% 23.9% 23.6%

per cent real growth 9.3% 9.2% 9.0% 4.1% 3.4%

Deficit 29 231 32 152 47 950 50 966 50 251

2.3% 2.3% 3.1% 3.0% 2.7%

2003/04 2004/05 2005/06 2006/07 2007/08

R million / per cent

Expenditure 328 662 370 113 417 819 456 393 494 894

Debt service costs 46 313 48 901 53 125 56 603 59 381

per cent GDP 3.6% 3.5% 3.5% 3.4% 3.2%

contingency reserve 0 0 2 000 4 000 8 000

Allocated expenditure 282 349 321 212 362 694 395 790 427 513

Tax Policy Overview – since 1995• Since 1995 tax policy emphasis on:

– Efficiency enhancement of tax system– Tax base broadening – limited use of tax incentives– Thereby affording rate reductions

• Highlights of tax base broadening reform agenda:– Introduction of capital gains tax– Converting to the residence-based income tax system– Introduction of enhanced anti-avoidance &

administrative measures that resulted in narrower compliance gap

– Enabling Government to grant tax relief of R78 bn by 2004/05

Tax base broadening

• Tax base broadening has allowed reduction of tax rates– Reduction in corporate income tax rates – Total PIT relief close to R66 billion– Accelerated depreciation allowances in lieu of

special capital allowances– Introduction of learnership deductions – Reduction of taxes on property – Reduction in consumption taxes– Scrapping/reduction of financial transaction

taxes (stamp duties)

Overview – forward looking

• Maintaining stable & predictable revenue mix – sound budgeting & confident business planning

• Principal reliance on the taxation of:– employment income– business income– capital income– moderate reliance on consumption taxes

• Gradual elimination/reduction of financial transaction taxes

• Contributing to broader participation, economic growth & small business development

• Reducing complexity & compliance costs

SA tax mix as % of GDP

As a % of GDP

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

1985

/86

1986

/87

1987

/88

1988

/89

1989

/90

1990

/91

1991

/92

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

PIT CIT VAT Specific excise Fuel levy Customs

SA tax mix as % of total tax revenue

As a % of gross tax revenue

0%

10%

20%

30%

40%

1985

/86

1986

/87

1987

/88

1988

/89

1989

/90

1990

/91

1991

/92

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

PIT CIT VAT Specific excise Fuel levy Customs

Tax policy preference for limited use of tax incentives

• Contrary to expectations, sectors with existing attractive tax privileges evidence long-term declining contribution to GDP

2005 Budget: GDP by sector

Transport, storage and communication

Financial intermediation, insurance, real estate and business services

Community, social and personal services

Agriculture, forestry and fishing

Mining and quarrying Manufacturing

Electricity, gas and water

Construction (contractors)

Wholesale and retail trade, catering and accommodation

1980 7.2% 14.5% 19.8% 3.5% 11.2% 20.3% 1.9% 4.2% 12.7%1981 7.2% 14.5% 19.4% 3.5% 10.6% 21.1% 2.0% 4.2% 13.2%1982 7.1% 15.0% 20.3% 3.3% 10.7% 20.1% 2.1% 4.1% 13.3%1983 6.8% 15.8% 21.8% 2.6% 11.0% 20.2% 2.1% 3.9% 14.1%1984 7.0% 15.6% 21.6% 2.7% 10.8% 20.5% 2.2% 3.8% 14.6%1985 7.1% 15.9% 21.8% 3.3% 10.9% 19.9% 2.3% 3.6% 14.0%1986 7.0% 16.3% 22.5% 3.5% 10.5% 19.8% 2.4% 3.3% 13.5%1987 6.9% 16.6% 23.1% 3.5% 9.9% 19.9% 2.4% 3.1% 13.7%1988 7.0% 16.3% 23.0% 3.5% 9.7% 20.5% 2.5% 3.1% 13.8%1989 7.1% 16.3% 23.0% 3.9% 9.3% 20.3% 2.5% 3.2% 13.5%1990 7.2% 16.4% 23.5% 3.7% 9.3% 20.0% 2.6% 3.3% 13.7%1991 7.1% 16.9% 24.2% 3.9% 9.2% 19.3% 2.6% 3.2% 13.6%1992 7.4% 17.3% 25.0% 2.9% 9.6% 19.1% 2.7% 3.0% 13.6%1993 7.4% 17.2% 24.8% 3.5% 9.7% 18.8% 2.8% 2.8% 13.5%1994 7.6% 17.3% 24.5% 3.7% 9.5% 18.8% 2.9% 2.8% 13.4%1995 8.1% 17.4% 24.3% 2.9% 8.9% 19.4% 2.8% 2.8% 13.8%1996 8.3% 17.8% 23.8% 3.4% 8.5% 18.9% 3.0% 2.8% 13.7%1997 8.7% 18.1% 23.3% 3.4% 8.4% 18.9% 3.1% 2.8% 13.4%1998 9.1% 18.4% 23.4% 3.2% 8.3% 18.7% 2.8% 2.6% 13.5%1999 9.3% 18.9% 22.9% 3.3% 8.0% 18.3% 2.8% 2.5% 14.1%2000 9.6% 18.6% 22.0% 3.3% 7.6% 19.0% 2.7% 2.5% 14.6%2001 9.9% 19.6% 21.4% 3.1% 7.3% 19.0% 2.5% 2.6% 14.5%2002 10.5% 20.1% 20.9% 3.2% 7.2% 18.9% 2.5% 2.6% 14.3%2003 10.7% 20.3% 20.7% 2.9% 7.3% 18.2% 2.4% 2.7% 14.8%2004 10.9% 20.4% 20.4% 2.8% 7.0% 18.0% 2.4% 2.8% 15.3%


Year Primary

Agriculture,

forestry

and fishing

Mining and

quarry ing Secondary Manufacturing

Electricity ,

gas and w ater

Construction

(contractors) Tertiary

Wholesale and

retail trade,

catering and

accommodation

Transport,

storage and

communication

Financial

intermediation,

insurance, real

estate and

business

serv ices

Community ,

social and

personal

serv ices

1980 14.7% 3.5% 11.2% 26.3% 20.3% 1.9% 4.2% 54.1% 12.7% 7.2% 14.5% 19.8%

1985 14.2% 3.3% 10.9% 25.8% 19.9% 2.3% 3.6% 58.9% 14.0% 7.1% 15.9% 21.8%

1990 13.0% 3.7% 9.3% 25.9% 20.0% 2.6% 3.3% 60.7% 13.7% 7.2% 16.4% 23.5%

1995 11.8% 2.9% 8.9% 25.1% 19.4% 2.8% 2.8% 63.5% 13.8% 8.1% 17.4% 24.3%

2000 10.8% 3.3% 7.6% 24.2% 19.0% 2.7% 2.5% 64.9% 14.6% 9.6% 18.6% 22.0%

2004 9.9% 2.8% 7.0% 23.2% 18.0% 2.4% 2.8% 67.0% 15.3% 10.9% 20.4% 20.4%


0%

10%

20%

30%

40%

50%

60%

70%

1980 1985 1990 1995 2000 2004

Primary Secondary Tertiary

Tax revenue as a percentage of GDP

15.0%

17.0%

19.0%

21.0%

23.0%

25.0%

27.0%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Ending March

Implementation of 2003 & 2004 budget tax proposals

Progress on implementation of tax reform initiatives

• Exchange Control Amnesty:– More than 42 000 amnesty applications received

by 29 February 2004 - total assets disclosed currently at R65b

– It is estimated that Amnesty Unit will collect at least R2,4 billion in amnesty levies

• Retirement Fund Tax Reform:– At the end of 2004 National Treasury released

retirement fund reform discussion paper outlining regulatory policy objectives

– Careful synchronisation of tax reform needed to fully take account of wider retirement fund reform priorities that seek to enhance & facilitate adequate retirement savings

Progress on implementation of tax reform initiatives

• Redrafting of Mineral and Petroleum Royalty Bill to be available for comment during first half of 2005

• Holistic review of mining income tax system ongoing – including evaluation of appropriateness of current tax allowance schemes that result in tax deferral benefit with full recognition of high capital requirements & risks attaching to mining investment

• Accelerated tax depreciation for urban development zones - demarcations for qualifying inner city areas have been approved and gazetted for 9 Municipalities

• Tax legislation to accommodate FIFA world cup commitments

Tax Relief Measures in 2005/06

Main budget revenue2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

Revised Medium-term estimates

R million estimate

147,310 164,566 171,963 189,900 200,855 226,250 247,500

2,717 3,352 3,896 4,600 4,908 5,600 6,000

Taxes on property 4,628 5,085 6,707 8,928 9,820 11,252 12,286

86,888 97,582 110,174 129,033 143,091 155,232 170,500

8,680 9,620 8,414 11,650 13,200 14,470 15,940

Stamp duties and fees 1,767 1,572 1,360 1,150 900 1,350 1,500

307 433 -7 – – – –

Total tax revenue 252,298 282,210 302,508 345,261 372,774 414,154 453,726

Departmental revenue 4,088 4,192 5,931 5,493 8,502 6,167 6,378

Transactions in assets and liabilities

81 366 715 533 646 679 690

Less: SACU payments -8,205 -8,259 -9,723 -13,328 -12,053 -15,573 -16,151

Main budget revenue 248,262 278,508 299,431 337,960 369,869 405,427 444,643

Percentage of GDP 23.7% 23.3% 23.4% 24.1% 24.2% 24.2% 24.1%

Gross domestic product 1,047,992 1,193,771 1,277,029 1,403,851 1,528,633 1,674,016 1,847,290

1. Revenue received by SARS in respect of taxation which could not be allocated to a specific tax instrument.

Taxes on international trade

State miscellaneous revenue1

Actual

Taxes on income and profits

Taxes on payroll and w orkforce

Domestic taxes on goods and services

Summary of tax proposalsEffect of tax

R million proposals

Tax revenue 382,155

Non-tax revenue 9,148

Less: SACU payments -12,053

Main budget revenue, before tax proposals 379,250

Budget 2004/05 proposals: -9,381

- Taxes on individuals and companies -10,862

Personal income tax: -7,110

Adjust personal income tax rate structure for inf lation -6,800

Increase in interest and dividend exemption under 65 years -170

Increase in interest and dividend exemption 65 years and over -140

Corporate income tax -2,000

Reduction in corporate tax rate -2,000

Small business incentives -1,752

Introduce VAT payments from every 2 months to every 4 months -275

Exemption from Skills Development Levy -92

Graduated rate structure -900

Accelerated depreciation for all assets -485

- Financial transaction taxes: -800

Adjust table for transfer duties -450

Elimination of stamp duties on debit entries -350

- Taxes on goods and services 2,281

Increase in duties on alcohol 690

Increase in duties on tobacco products (52% incidence) 620

Abolish ad valorem excise duties on sun protection products -10

Abolish duty on base oils for lubricating -1

Increase in Air Passenger Departure Tax 32

Increase in fuel levy 950

Main budget revenue (after tax proposals) 369,869

2005 main tax proposals -tax relief

• Total tax relief for individuals & companies: R10,9 billion

• Personal income tax reduced by R6,8 billion

• Interest exemption raised to R15 000 for taxpayers under 65 and to R22 000 for tax payers 65 & over

• Abolishment of stamp duties on all banking debit entries & installment credit agreements


• Total corporate & small business corporation tax relief – R3,8 billion

• Exemption from Skills Development Levy (SDL) for small busineses with payroll bill of R500 000 & drop requirement that businesses must account for the SDL if at least one their employees is registered for PAYE

• Exemption from tax for the first R35 000 of taxable income for small businesses

• Imposition of a simplified tax depreciation regime of 50:30:20 for all assets (excl. manufacturing)


• Introduction of a tonnage tax regime for the shipping industry – effective 2006

• Increasing of property transfer duty thresholds

• Abolishing excise duties on sun protection

products & professional digital cameras

2005 main tax proposals -tax increases

• Adjustment of the deemed business cost against car allowance

• Taxes on tobacco are raised to maintain a tax incidence level of 52 %

• Taxes on alcoholic beverages are increased between 9,4 & 20 %

• General fuel levy increased by 5 c/l on petrol & diesel

• Road Accident Fund levy is increased by 3c/l

Personal income tax rate & bracket adjustments

Taxable income (R) Rates of tax Taxable income (R) Rates of tax

0 – 74 000 18% of each R1 0 – 80 000 18% of each R1

74 001 – 115 000 R13 320 + 25% of the amount 80 001 – 130 000 R14 400 + 25% of the amount

above R74 000 above R80 000







270 001 and above R78 070 + 40% of the amount 300 001 and above R86 000 + 40% of the amount


Rebates Rebates

Primary R5 800 Primary R6 300

Secondary R3 200 Secondary R4 500

Tax threshold Tax threshold

Below age 65 R32 222 Below age 65 R35 000

Age 65 and over R50 000 Age 65 and over R60 000

2004/05 2005/06

Distribution of PIT relief

• Tax threshold up to R60 000 – 12%• R60 000 to R150 000 – 32,3%• R150 000 to R250 000 – 22,4%• R250 000 and above – 33,4%• Proposed relief for taxpayers over 65:

– Together with further increase in interest exemption level constitutes major tax burden relief for retired persons

– Retired couple with income only from interest-bearing deposits can invest almost R2 million tax free (8% interest assumption)

– Maximum tax-free income of couple taking full advantage of interest income exemption rises from R132 000 to R164 000

Comparison of annual tax payableTable C.2 Income tax payable, 2005/06 (taxpayers younger than 65)

Taxable incom e (R) 2004 rates (R) Proposed rates (R) Tax reductions (R) % change

35,000 500 – 500 100.0

40,000 1,400 900 500 35.7

45,000 2,300 1,800 500 21.7

50,000 3,200 2,700 500 15.6

55,000 4,100 3,600 500 12.2

60,000 5,000 4,500 500 10.0

65,000 5,900 5,400 500 8.5

70,000 6,800 6,300 500 7.4

75,000 7,770 7,200 570 7.3

80,000 9,020 8,100 920 10.2

85,000 10,270 9,350 920 9.0

90,000 11,520 10,600 920 8.0

100,000 14,020 13,100 920 6.6

120,000 19,270 18,100 1,170 6.1

150,000 28,270 26,600 1,670 5.9

200,000 45,670 42,600 3,070 6.7

250,000 64,670 60,700 3,970 6.1

300,000 84,270 79,700 4,570 5.4

400,000 124,270 119,700 4,570 3.7

500,000 164,270 159,700 4,570 2.8

1,000,000 364,270 359,700 4,570 1.3

PIT relief’s redistributive & stimulatory in nature

• Tax reduction in respect of employment income does not only benefit wage earners but also individual entrepreneurs (constituting almost 20% of all PIT taxpayers) – e.g., Irish tax reform targeted sharp rate reductions for PIT, thereby giving huge boost to sole proprietorships & economic growth

• BUT consider PIT relief distribution together with higher tax burden for taxpayers benefiting from motor vehicle allowance:– Income cohort R300 000 and up: annual tax reduction of R4 570– Assume use of vehicle valued at R120 000: new travel

allowance deemed costs translates into additional tax of R4 110: hence, still net tax relief of R460

– Assume use of vehicle valued at R360 000: new travel allowance deemed costs translates into additional tax of R11 224: hence, overall increase in tax burden of annual R6 654

Transfer duty

Property value Rates of tax

R0 – R190 000 0%

R190 001 – R330 000 5% on the value above R190 000

R330 001 and above R7 000 plus 8% on the value above R330 000

Property value

R180,000 R1,500 0.8% R0 –

R250,000 R5,000 2.0% R3,000 1.2%

R320,000 R8,500 2.7% R6,500 2.0%

R350,000 R10,900 3.1% R8,600 2.5%

R500,000 R22,900 4.6% R20,600 4.1%

R750,000 R42,900 5.7% R40,600 5.4%

R1,000,000 R62,900 6.3% R60,600 6.1%

Current duty

% of value

Proposed duty

% of value

Tax policy design agenda –2005/06

Medical aid reform

• Reform of tax treatment of medical aid cover to achieve more equitable coverage

• Monetary cap to replace 2/3rds scheme deductions

• Details of the reform will be released this year – implementation commences in March 2006

Tax policy objectives

• Extending effective medical aid coverage to all economically active individuals & their dependents

• Making medical aid coverage more affordable to low income families.

• Eliminating tax implications of a specific medical aid package & employer provided medical treatment.

• Providing more tax relief for the average South African family.

• Driving down seemingly excessive costs and fees charged by the medical aid industry.

• Extending beneficial tax treatment to self employed persons, i.e incentivising small businesses.

Current tax treatment of medical aid contributions ineffective

• Affordability - The current regime does not go far enough in lowering cost of medical aid membership for low-income earners, i.e. low income earners cannot afford the tax on one-third of employer provided medical aid coverage.

• Inequality – It provides a bigger benefit for high income earners, i.e. tax subsidy for low income earners is 18% and 40% for high income earners.

• No downward pressure on high cost medical aid packages – In terms of the current regime, the higher the contribution, the bigger the tax saving.

• Discrimination - No tax incentive for:– Self employed persons– Employed persons where the employer does not provide medical aid

coverage but the employee pays his own medical aid contributions

– Employer provided medical treatment for low-income employees.

Which income groups need assistance?

• In the Council for Medical Schemes Annual Report 2003/04 the number of principal members of medical aid schemes during 2003 were 2,8 million.

• National Treasury calculated the coverage rate per income group (based on data from SARS and SARB).

Which income groups need assistance?

Medical Aid Coverage Rate per Income Group

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

Income group

% o

f tax

paye

rs c

over

ed

Coverage rate

How the new tax regime will benefit taxpayers

• Persons earning below income tax threshold (R35 000 pa) but attracting possible tax charge if employer provides medical cover – approx. 1,2 million individuals:– No fringe benefit tax on employer provided

medical aid coverage for employee and dependents.

– Tax incentives for low cost/high benefit packages.

– No fringe benefit tax on employer provided medical treatment for employee & dependents.

– Beneficial tax treatment for families.– Extend beneficial tax treatment for medical aid

coverage to self-employed persons.

How the new tax regime will benefit taxpayers

• Persons earning between R35 000 & R200 000 pa – approx. 3 million individuals:– No fringe benefit tax on employer provided

medical aid coverage for employee and dependents.

– Tax incentives for low cost/high benefit packages.– Reduced tax incentive for high cost luxury

packages.– Beneficial tax treatment for families.– Extend beneficial tax treatment for medical aid

coverage to self-employed persons.

Other income tax adjustments

• Curtailing subsistence allowances by structuring subsistence allowances into salary packages: – Introducing more stringent control measures to arrest excessive

claims for travel expenses– Subsistence allowance only permitted where fixed date of travel

in immediate future has been identified

• Withholding tax on visiting entertainers and sportspeople – following international practice– Introduction of a 5 (from Africa) & 15% (from rest of the world)

final withholding tax • Promoting visiting skilled expatriates

– Alleviating the capital gains tax burden for visiting skilled expatriates as foreign assets appreciate in value

– Changing tax resident definition to allow for extended visitation of expatriates with scarce skills

Relief measures favouring business income

Evolution of tax rates since 1980Year Company STC Max PIT Sales tax VAT Fuel levy

% % % % % c/l 1980 40 - 55 4 - - 1981 40 - 50 4 - - 1982 40 - 50 5 - - 1983 42 - 50 6 - - 1984 42 - 50 10 - - 1985 50 - 50 10 - - 1986 50 - 50 12 - - 1987 50 - 50 12 - 23,5 1988 50 - 45 12 - 22,9 1989 50 - 45 13 - 31,9 1990 50 - 45 13 - 31,9 1991 50 - 44 13 - 46,9 1992 48 - 43 - 10 54,9 1993 48 15 43 - 14 60,9 1994 40 15 43 - 14 60,9 1995 35 25 43 - 14 62,9 1996 35 12,5 45 - 14 71,6 1997 35 12,5 45 - 14 76,6 1998 35 12,5 45 - 14 86,6 1999 30 12,5 45 - 14 90,6 2000 30 12,5 42 - 14 95,6 2001 30 12,5 42 - 14 98,0

2002 30 12,5 40 - 14 98,0

2003 30 12,5 40 - 14 101,0

2004 30 12,5 40 - 14 111,0

2005 29 12,5 40 - 14 116,0

Net cost of tax relief• In terms of macroeconomic policy objectives tax relief is aimed

at increasing economic growth, employment & equity• Tax relief packaged to stimulate demand side of economy

(primarily PIT) & supply side of economy (CIT & small business tax adjustments)

• Supply side theory of tax policy states that economy should grow from tax cut, thereby increasing once again tax bases, translating into future rise in tax collections

• Hence, R1 of tax relief would lead to less than R1 revenue loss over long run

• NT estimated economic effect of 2005/06 tax relief package within adopted macroeconomic framework as follows (based on macro econometric modeling):– Will probably not experience stated total revenue loss– Elasticity of tax collections iro tax relief not equal to one – only 0,85– PIT collection elasticity is 0,75 implying that given PIT relief package tax

loss will only be 0,75%, while corp tax collection elasticity is 0,80– Less than unity elasticity comes from increased economic activity– Nominal & real GDP growth increase by 1,9% and 0,4% respectively

Reduction in corporate tax rates

• Corporate income tax rate to be reduced from 30% to 29%

• Tax rate for SA branches or agencies of foreign companies to be reduced from 35% to 34%

• Rates for company policyholder funds & corporate funds to be reduced from 30% to 29%

• New formula for gold mining income • Tax rate for an employment company to

be reduced from 35% to 34%

International CIT rates & taxation of company profits

• Combined effective company profit tax rate in OECD countries, including 15 European countries (2003):– Top marginal tax rate (CIT & PIT) on distribution

of domestic source profits to resident individual shareholders

– OECD average in 2000 (=50,1%) down to 46,4% in 2003

– EU average in 2000 (=51,7%) down to 47,9% in 2003

– SA with 1/3 profit distribution and new CIT rate & current STC rate would be 33 to 34%

– That is from economic theory the correct comparison

Other business income related relief measures

• Facilitating company restructurings• Introduction of tonnage tax regime• Refining film incentives• Government grants and income tax exemptions• Financial transaction tax for issue of new shares• Removal of financial transaction taxes (stamp duty)

on all banking debit entries & installment credit sales

• Public benefit organisations engaged in business activities

• Accelerate depreciation allowance (50:30:20 per cent over 3 years) for renewable energy investments.

Tax relief measures for small businesses

Graduated tax rate structure & accelerated depreciation

• Under the new regime, qualifying small businesses will be subject to the following rate structure

– R0 to R35 000 of taxable income - 0%– R35 001 to R250 000 of taxable income -

10%– R250 001+ of taxable income - 29%

Graduated tax rate structure & accelerated depreciation

• Small business tax relief extended to personal services as long these businesses maintain at least 4 full-time employees

• Turnover limit for eligible companies to be increased from R5 million to R6 million

• Small businesses to be eligible for a depreciation write-off at a 50:30:20 per cent over a 3 year period

• 100% expensing provision for manufacturing assets remains

• Current R20 000 double deduction for expenditure and losses incurred in first year of trading (start-ups) will be removed

Administrative measures in support of small businesses – SARS intervention

• Tax compliance burden for small business to be reviewed

• Proposed filing of VAT returns every 4 months to ease compliance

• Threshold for skills levy obligations to be raised to R500 000

• Abolish RSC levy on 30 June 2006• Relaxation of registration & tax compliance

rules for small PBOs• Numerous administrative measures seeking

to mitigate compliance burden

TONNAGE TAX

Tonnage Tax Regimes

• A Tonnage Tax regime, aims to tax shipping activities at fixed rates (presumptive income tax or notional income tax) according to size of the ship & not a company’s business results (taxable income).

• A notional profit is therefore computed on number of and size of ships contracted and operated, which is then applied to the country’s corporate tax rate.– Translates into lower effective tax rate– Is notional income tax & benefits from tax credit provisions

ito DTAs

• Differs significantly from taxes paid in Flags of Convenience where a very low flat rate tax is normally applied (= business license fee), which are not creditable charges for DTA purposes.

Example (Ireland)• Example taken from Irish tonnage tax regime, of a ship

weighing 188,000 tons

• Step 1:

– Determining what the “fixed profit per day is.”– This is done by refering to the table below, showing at

which amount of tonnage the fixed profit-per-day rate applies.

Fixed Profit Rates

Proposed scale of charges based on vessels net tonnage in Euro’s

Fixed profit per day in Euro’s

• For each 100 tons up to 1,000 net tons• For each 100 tons between 1,000 and 10,000 net tons• For each 100 tons between 10,000 and 25,000 net tons• For each 100 tons above 25,000 tons

1.00 Euro

0.75 Euro

0.50 Euro

0.25 Euro

Example•Step 2:

– Take the tonnage of the vessel and apply the formula provided.

Net tons Per 100 tons Formula calculation Taxable tonnage

0 – 1,000

1,000 – 10,000

10,000 – 25,000

Tons > 25,000

1,000/100 = 10

9,000/100 = 90

15,000/100 = 150

163,000/100 = 1,630

10*€1.00*365 days

90*€0.75*365 days

150*€0.50*365 days

1,630*€0.25*365 days

€ 3,650.00

€ 24,637.50

€ 27,375.00

€ 148,737.50

Notional profit taxable

€ 204,400.00

Example

• Step 3:– Irelands corporate tax rate of 12.5% is then applied to the

Notional profit calculated in step 2.

Therefore, the annual tonnage tax paid by a shipping company for a vessel weighing 188 888 net tons, will be € 25,550.00.

It can be seen to ensure a lower effective tax rate then the corporate tax rate, a key component must be to ensure that the fixed profit rates, which determine the notional profit are set at internationally competitive levels vis-à-vis existing tonnage tax jurisdictions.

Tax rate = 12.5% € 204,400 * 12.5% Tax = € 25,550.00

Benefits from tonnage tax regimes

• Simple low effective tax rate• Increases levels of certainty for companies• Greater international competitiveness• Creates employment opportunities at primary and

secondary level (employment opportunities for local cadets & successful placing on domestically registered vessels)

• Levels the playing fields between domestic and international counterparts

• Minimal compliance burden: Cost savings on time & effort required in completing tax returns

Cross country comparison• Mainly favored by European countries so far• Most European shipping countries have introduced

such a regime• In 2004, India and Ireland introduced tonnage tax

regimes• USA passed legislation within 6 months to arrest

deregistration trend of their commercial fleet• Most of the world’s top 35 maritime nations have

introduced some sort of tax incentives in their shipping industry

• Tonnage tax regime is becoming increasingly the incentive of choice

• Through introducing a tonnage tax regime, SA could easily break into the top 35 Maritime Nations

• Should SA be on par with Chile?

Top-ranked maritime nations & their shipping industry tax deductions

World

Ranking Country Tax Regime

National

flagged

ships

Foreign

flagged

ships Total

% of foreign

flag

1 Greece Tonnage Tax 758 2345 3103 76%2 Japan 747 2163 2910 74%3 Norway Tonnage Tax 872 819 1691 48%4 China 1617 704 2321 30%

5 United States Tonnage Tax 583 870 1453 60%

6 Germany Tonnage Tax 377 1925 2302 84%

10 Singapore Shipping activ ities exempt 457 257 714 36%11 United KingdomTonnage Tax 396 383 779 49%12 Denmark Tonnage Tax 349 333 682 49%14 Italy Tonnage Tax 519 119 638 19%16 India Tonnage Tax 344 41 385 11%18 Netherlands Tonnage Tax 576 208 784 27%21 Sweden General Tax 162 162 324 50%24 Belgium Tonnage Tax 25 128 153 84%25 France Tonnage Tax 168 101 269 38%26 Canada Exempt from tax on 217 110 327 34%27 Philippines Exempt from Income tax 305 31 336 9%28 Indonesia CIT based on estimated 519 91 610 15%29 Spain Tonnage Tax 67 263 330 80%

31 Monaco CIT burden is reduced 0 103 103 100%32 Australia General Tax 47 40 87 46%33 Cyprus Exempt from profitd and 30 38 68 56%

Taxes on goods and services

Excise duties on alcoholic beverages & tobacco products

Current excise Proposed Estimated

duty rate excise duty additional Nominal Real

rate revenue

Product R million

Malt beer 390.0 9.5% 5.3%

Traditional African beer 7,82c / litre 7,82c / litre – 0.0% -4.2%

34,7c / kg 34,70c / kg – 0.0% -4.2%

Unfortif ied w ine 117,1c / litre 140,52c / litre 65.5 20.0% 15.8%

Fortif ied w ine 232,87c / litre 263,14c/ litre 10.4 13.0% 8.8%

Sparkling w ine 323,32c / litre 387,99c / litre 5.1 20.0% 15.8%

29.0 9.4% 5.2%

Spirits 190.0 10.0% 5.8%

Cigarettes 577.6 11.5% 7.3%

Cigarette tobacco 695,17c / 50g 747,30c / 50g 0.2 7.5% 3.3%

Pipe tobacco 170,79c / 25g 190,60c / 25g 41.3 11.6% 7.4%

Cigars R28,36 / 23g R32,59/ 23g 0.9 14.9% 10.7%

Change in excise duty

R30,73c / litre of absolute alcohol

(52,24c / average 340ml can)

R33,65 / litre of absolute alcohol

(57,20c / average 340ml can)

Traditional African beer pow der

452,8c / 20 cigarettes

504,87c / 20 cigarettes

Ciders and alcoholic fruit beverages

153,74c / litre (52,27c / average

340 ml can)

168,24c / litre (57,20c / average

340 ml can)R45,84c / litre of absolute alcohol

(R14,78 / average 750 ml bottle)

R50,42 / litre of absolute alcohol

(R16,26 / 750 ml bottle)

General fuel levy

• 5 cents/litre general fuel levy increase for petrol & diesel

• Diesel rebate for primary producers increased by 3,14 c/litre– Revenue cost in 2004/05 = R700 million– Estimated to increase in 2005/06 to R820 million

• New rules w.r.t sub-contractors making use of the diesel refund system

• Liquid petroleum gas will not attract general fuel levy

Combined fuel levy on leaded & diesel, 2003/04 – 05/06:

1 March petrol/diesel price increases (42 & 33 c/l respectively) reduce tax burden to 32.8% &32.5%)

93 Octane 93 Octane 93 Octane

petrol Diesel petrol Diesel petrol Diesel

General fuel levy 101.0 85.0 111.0 95.0 116.0 100.0

Road Accident Fund levy 21.5 21.5 26.5 26.5 31.5 31.5

Customs and Excise levy 4.0 4.0 4.0 4.0 4.0 4.0

Equalization Fund levy – – – – – –

Illuminating Paraff in marker – 0.2 – 0.2 – 0.2

Total 126.5 110.7 141.5 125.7 151.5 135.7

Pump price: Gauteng (as in February)1

392.0 355.1 408.0 347.5 420.0 384.5

Taxes as % of pump price 32.3% 31.2% 34.7% 36.2% 36.1% 35.3%

1. Diesel (0,3% sulphur) wholesale price (retail price not regulated).

2003/04 2004/05 2005/06

Other

• Road Accident Fund levy – Levy on petrol and diesel to be increased by 5

cents/litre

• Base oils for lubricating– Excise duty to be abolished

• Air departure tax – To be increased from R55 to R60 (departing

within SACU)– To be increased from R110 to R120

(international departures outside SACU)

Other

• Taxes on international trade & transactions– Elimination of ad-valorem excise duties on sun

protection and certain digital cameras

• RSC levies and Joint Services Council levies – To be abolished with effect from 30 June 2006 &

replaced with alternative tax instrument or revenue-sharing arrangement

Measures to enhance tax & customs administration

2005 Budget: reforms to tax administration

• Single registration for all tax products per taxpayer• e-filing to be extended to new tax instruments• Single national call centre access number• Relationship managers at Large Business Centre• Single administrative document for all customs declarations• Implement trans-national electronic corridors on NEPAD• One-stop border posts• Linkage with foreign customs administrations• Increasing the number of people in the tax system• Voluntary disclosure dispensation• X-ray scanners at ports of entry• Voluntary approaches to resolve oustanding cases• Countering abuse of incentive schemes• Establishing Tax Practitioners’ Board• Introduction of Tax Administration Bill

Anti-avoidance measures

• Overhaul of the General Anti-avoidance Rule– Release of discussion document for revised GAAR

procedure

• Offshore banking centres – residence-based income tax system to arrest undue

tax deferral & arrest tax haven practices that are designed to poach SA tax base

• Bribes, penalties and other illegal activities– Tax treatment of bribes, fines and penalties to

reinforce anti-corruption measures

Reducing compliance costs & enhancing services

• Single registration for all tax products per taxpayer

• E-filling to be extended to new tax instruments

• Full view of account for taxpayers & tax practitioners

• Single national call centre access number for tax & customs

• Taxpayer relationship managers at the Large Business Centre

Trade facilitation & economic security

• Implementation of trans-national electronic corridors on NEPAD corridors – Increased customs cooperation between

Namibia, Botswana & SA

• Introduction of single multi-purpose customs declaration

• Joint customs control instituted at major commercial ports of entry

• Single document registration facility for importers & exporters

Motor vehicle allowance

Motor vehicle allowance

• Current formula creates bias in the structuring of salary packages

• Method for calculating fixed business travel cost to be adjusted by introducing a residual value and by capping value of the car at R360 000

• Deemed private kilometers to be increased from 14 000 to 16 000 and to 18 000 in 2006

• Taxable value of company car to be increased from 1,8 to 2,5 per cent

Trade in prices of cars below R100 000

Model Year Price Trade-in priceFiat Uno Mia 1100 3d 2000 R 40,970 R 29,100 71%Fiat Palio 1.2 ED 3dr 2000 R 52,400 R 36,500 70%Ford Fiesta Flite 3dr 2000 R 58,340 R 40,700 70%Hyundai Accent 1.5 Rsi 2000 R 71,450 R 45,800 64%Polo Playa 1.8 2000 R 96,500 R 80,400 83%Honda Ballade 150i encore 2000 R 94,300 R 64,300 68%Nissan Sentra 140i 2000 R 75,750 R 42,200 56%Renault Clio 1.4 2000 R 71,997 R 54,900 76%Opel Corsa Lite 2002 R 53,450 R 38,300 72%Opel Corsa GSI 2002 R 82,800 R 64,100 77%Opel Corsa 1.4i 2002 R 91,180 R 64,300 71%

Trade in prices of cars between R100 000 to R200 000

Model Year Price Trade-in priceBMW 323i (E36) 1999 R 184,100 R 93,800 51%BMW 325 (E36) 1999 R 168,200 R 87,100 52%BMW 328i (E36) 1999 R 197,600 R 100,000 51%BMW 318is (E36) 1999 R 144,500 R 78,900 55%Audi A4 1.8 1999 R 133,490 R 72,200 54%Renault Megane Scenic 1.6 RXE 2000 R 128,000 R 84,100 66%Volvo S40 2.0 2000 R 154,990 R 97,900 63%Audi A3 1.8 H/B 3d 2000 R 143,080 R 102,800 72%BMW 318i (E36) 2000 R 161,000 R 117,300 73%BMW 318i A/T 2000 R 170,500 R 120,200 70%Ford Focus 2.0 Trend 2000 R 145,000 R 94,100 65%Honda Ballade Luxline 180i A/T 2000 R 150,400 R 85,700 57%Hyundai Elantra 1.6 GL S/W 2000 R 109,980 R 58,300 53%Land Rover Freelander 1.8 3d 2000 R 185,500 R 117,800 64%Mazda 626 2.0 2000 R 149,000 R 75,800 51%Mercedes Benz C 180 Classic 2000 R 168,000 R 137,800 82%Nissan Primera 160i Si 2000 R 111,950 R 57,500 51%Renault Megane 1.6 RXE 2000 R 129,500 R 82,800 64%Renault Clio 1.6 Sport 2000 R 118,965 R 80,400 68%Opel Astra 1.6 CS 2000 R 111,000 R 69,000 62%Honda Civic 150i 2001 R 128,500 R 91,600 71%Nissan Almera 1.6 Comfort 2001 R 104,000 R 66,000 63%Alfa Romeo 147 1.6i T.spark 3Dr 2001 R 146,894 R 98,700 67%Opel Corsa Comfort 2002 R 102,840 R 72,700 71%Opel Corsa Classic 2002 R 100,720 R 71,100 71%Opel Corsa Elegance 2002 R 117,110 R 83,900 72%Opel Corsa Sport 2002 R 119,560 R 85,800 72%Volkswagen Polo Classic 1.4 2000 R 79,620 R 57,400 72%

Trade in prices of cars between R200 000 to R300

000

Model Year Price Trade-in priceBMW M3 4d (E36) 1999 R 269,000 R 146,600 54%Honda CVR 2000 R 223,000 R 130,500 59%Audi Spider 2.0 TS 2000 R 244,740 R 147,900 60%BMW Z3 Roadster 2.8i A/T (E36) 2000 R 270,000 R 176,600 65%Mercedes Benz E 240 V6 Elegance A/T 2000 R 283,500 R 161,200 57%Mitsubishi Pajero 3200 TDI 3dr 2000 R 295,830 R 195,700 66%Land Rover Defence 110 2.5 TDI CSW 2000 R 234,000 R 151,600 65%Jeep Grand Cherokee 3.1 Td Laredo 2000 R 298,950 R 189,000 63%Jeep Cherokee Country 2.5 Td 2000 R 244,700 R 134,700 55%Mercedes Benz SLK 200 Kompressor 2000 R 299,500 R 211,000 70%Jeep Cherokee 2.5 CDR 2001 R 266,900 R 185,700 70%Hyundai Sante-Fe 2.7 2001 R 269,980 R 146,300 54%Land Rover Discovery XS TD5 2002 R 414,500 R 262,500 63%

Trade in prices of cars more than R300 000

Model Year Price Trade-in priceNissan Patrol 4.2d GL 2000 R 360,950 R 206,200 57%Mercedes Benz SLK 230 Kompressor 2000 R 373,000 R 236,500 63%Mercedes Benz SLK 200 2000 R 373,000 R 236,500 63%Mitsubishi Pajero 3200 TDI 2000 R 374,290 R 228,700 61%Toyota Land Cruiser 100GX D 2000 R 415,500 R 246,800 59%BMW X5 3.0 2001 R 370,000 R 300,200 81%BMW X5 3.0 A/T 2001 R 381,000 R 310,900 82%BMW X5 3.0 d 2001 R 391,000 R 313,700 80%BMW M3 (E36) 2001 R 365,000 R 325,900 89%BMW M3 SMG (E36) 2001 R 390,000 R 334,500 86%BMW M3 (ES6) 2001 R 365,000 R 325,000 89%

Schedule

Fixed cost Fuel cost Maintenance

cost R c c

14,489 34.5 21.819,869 36.2 22.425,068 36.2 22.430,893 40.7 27.835,578 40.7 27.840,732 40.7 27.846,157 45.0 37.751,930 45.0 37.757,332 51.1 41.663,287 51.1 41.668,697 51.1 41.674,287 51.1 41.678,992 53.9 49.883,744 53.9 49.888,854 53.9 49.894,322 53.9 49.899,240 59.8 65.599,240 59.8 65.5

exceeds R160 000 but does not exceed R180 000

exceeds R80 000 but does not exceed R100 000exceeds R100 000 but does not exceed R120 000exceeds R120 000 but does not exceed R140 000exceeds R140 000 but does not exceed R160 000

Where the value of the vehicle

does not exceed R40 000exceeds R40 000 but does not exceed R60 000exceeds R60 000 but does not exceed R80 000


exceeds R340 000 but does not exceed R360 000exceeds R360 000


Additional tax

Based on 30 000 km travelled, 16 000 km deemed private

Value of carAdditonal

tax pa

30,000 323 35,000 797 40,000 854 45,000 925 55,000 1,946 70,000 2,735 90,000 3,076

120,000 4,110 140,000 5,477 170,000 5,410 210,000 6,776 270,000 7,777 360,000 11,224

budget 2005

Documents

poor propoor budget

social wagedependence

poor extension of social

service costsas

budget programme of

main budget expenditure328

gdpdebt service costsout

social grants clean