The 2018 budget speech was delivered on 21 February 2018, this article will summarise the most important tax amendments.
This was a difficult budget and it was indeed tough on the taxpayer. You could argue that the VAT rate increase is extremely harsh, however in my opinion the only other option was to further burden the higher income earners with income tax or increase the corporate tax rate. Neither of which were really an option since in my opinion both the individual taxpayer and corporates are over burdened as it is.
Make no mistake, the higher earning individuals have not escaped the recoupment of the shortfall. The top 3 brackets on the individual tax table brackets were not adjusted for inflation. Meaning that if your salary increases with inflation you will possibly fall in a higher tax bracket due to your salary being adjusted for inflation but not the tax table brackets (the so called bracket creep).
Please note this article was sponsored by Fairtree Capital
The main points:
- A taxpayer can make an investment in a Section 12J company and this investment is 100% tax deductible if held for a period of 5 years or longer.
- If the taxpayer is an individual with a marginal tax rate of 45% or a trust, the taxpayer can invest R1 million and will effectively be paying R550 000 (R1 million - R450 000) for the investment since the full investment amount is tax deductible in the year of investment (provided the taxpayer has taxable income of R450 000 or more).
- A company (excluding a SBC which will be taxed at different rates) can invest R1 million and effectively be paying R720 000 (R1 million - R280 000) for the investment since the full investment amount is tax deductible in the year of investment (provided the company has taxable income of R280 000 or more).
- When the section 12J investment is realised in the future, the base for the capital gain will be 0 due to the initial benefit of 100% tax deductibility.
What is a Section 12J company?
The government has identified small and medium-sized entities (SMEs) as a major contributor to future economic growth. One factor that hampers the growth of SMEs is a lack of access to equity funding.
In order to alleviate this problem the government has added Section 12J to the South African Income Tax Act as a catalyst for equity funding for SMEs. Section 12J provides a marketing vehicle to venture capital companies (VCCs) due to the tax incentive.
Please note that the information below is an opinion and cannot be used to rely on as formal tax advice. In order to obtain formal tax advice regarding your tax situation, please contact us directly for a consultation.
For the lazy reader I start with a summary:
- It is my opinion that Bitcoin will be classified as an asset for tax purposes in the current ambit of the income tax act.
- It is my opinion that the gains made on the sale of Bitcoin will be taxed as trading income (except in the unlikely case where it was held as a long term investment where it will be taxed as capital gains).
- See the example at the end of the article.
The View of SARS
SARS has not given their interpretation for the specific tax treatment of cryptocurrency yet. There is a common misconception that this means that no tax has to be paid on cryptocurrency gains. This is not the case, as the income tax act does make provision for gains on cryptocurrency albeit not directly. According to an article published by IOL, in Personal Finance, SARS has made their current position clear “Transactions or speculation in Bitcoin is subject to the general principles of South African tax law and taxed accordingly” (https://www.iol.co.za/personal-finance/youre-liable-for-tax-on-bitcoin-gains-11508366).
We will address the following two questions we ended part 1 with:
1. The influence of our fair rate of return/discount rate ( 15% in example ) has on the valuation, or how we determine the correct rate.
2. How long we assume the company will exist (three years in the example).
All contributions to pension, retirement annuity and provident funds can be deducted from the individual's taxable income. The deduction is capped at a rate of 27.5% of the greater of remuneration and taxable income. In other words, if say your total pension fund contributions for the year was R100 000, your taxable income was R200 000, and your remuneration was R300 000, then your deductions would have been limited to 27.5% of R300 000 (since R300 000 is greater than R200 000). Thus your deductions would have been limited to R82 500.
From our example above you would notice that R17 500 (R100 000 - R82 500) were not allowed for a deduction in the relevant tax year. However, the deductions that were not allowed is carried over to the following tax year and deemed as contributions for that tax year. In other words say for the next tax year your pension contributions were R100 000, your taxable income R300 000 and your remuneration R400 000. Thus your allowed deduction would be R400 000 x 27.5% = R110 000. You only contributed R100 000, but now you can also deduct R10 000 of the R17 500 from the previous year, thus a total deduction of R110 000. The remaining R7 500 is now carried over to the following tax year.
Some technical points:
Image used: Barely Noticed Stuttgart: www.barelynoticed.de
This past year I have noticed that in the small business world there is various small business owners that have some or other trigger to make them realise they need systems and that paying taxes is indeed not a myth. This trigger is usually something like the need of a tax clearance certificate for a government tender or something in line with this. In some cases the business owner wakes up one morning with a realisation that they will need to start keeping records and complying to statutory obligations.