Effects of the 2017/2018 Budget on Individuals

Background

The Minister of Finance, Pravin Gordhan, presented the National Budget for the 2017/2018 financial year on Wednesday, 22 February 2017. The Budget brought about both burden and relief in the form of adjustments to various tax tables for individuals. For example, the Budget increased the minimum taxable bracket for individuals earning from R0 to R188 000 to R0 ‒ R189 880. This means that an individual earning a taxable income not exceeding R189 880 per year will be taxed at the minimum rate of 18%.

The maximum taxable bracket for individuals in the 2016/2017 year was 41% for those earning R701 301 and above. In the 2017/2018 year, this now becomes the second-highest bracket for those earning between R708 311 and R1 500 000, who will be taxed at 41%. A new maximum supertax bracket for taxable income of R1 500 001 and above was introduced and people earning above this amount will now be taxed at 45%. The introduction of a supertax is expected to contribute in excess of R4,5 billion in revenue.

Tax Thresholds

The tax thresholds for individuals were also increased, albeit at relatively low rates to accommodate lower income groups. As a result, individuals are in real terms worse off than previously. The tax threshold is the maximum amount of taxable income that will not attract a tax liability. For individuals younger than 65, the tax threshold has been increased from R75  000 to R75 750 (a mere 1% increase and therefore resulting in bracket creep).

In turn, the primary rebate increased from R13 500 to R13 635.

For individuals aged 65 years and older but younger than 75, the tax threshold has increased from R116 150 to R117 300. This means that an individual in this age group earning a taxable income of up to R117 300 per annum is not subject to income tax. In turn, the secondary rebate has increased from R7 407 to R7 479 per year. Taxpayers in this age group will be entitled to both the primary rebate of R13 635 and the secondary rebate of R7 479 per year, totalling R21 114.

For individuals aged 75 years and older, the tax threshold has increased from R129 850 to R131 150 per year, also a mere 1% increase and therefore not keeping up with inflation. The tertiary rebate increased from R2 466 to R2 493. Taxpayers in this age group will be entitled to claim the primary, secondary and tertiary rebates combined totalling R23 607.

It is worth noting that special trusts are taxed in the same way as natural persons. However, special trusts are not granted tax rebates and therefore effectively pay higher rates than individuals.

Provisional Tax

An individual (regardless of age) will be exempt from paying provisional tax if that individual does not carry on any business and the individual’s taxable income does not exceed the tax threshold for the tax year, or if his or her taxable income from interest, foreign dividends and rental or remuneration from an unregistered employer, such as a foreign employer, will be R30 000 or less for the tax year.

Provisional taxpayers are required to provide estimations of taxable income. The significance of this is that underestimation penalties may be imposed on any underestimation and provisional taxpayers must ensure that estimates are seriously calculated to avoid a possible penalty exposure.

Exempt Portion of Interest Income

The exempt portion of interest income from a South African source remains unchanged at R23 800 for natural person taxpayers under the age of 65 years and at R34 500 for taxpayers aged 65 years and older. This means that there is no adjustment for inflation. Non-residents may be subject to tax on the interest earned in South Africa. The interest may, however, be exempt from tax in the hands of a non-resident natural person who is physically absent from South Africa for at least 183 days during the twelve-month period before the interest accrues or is received, and who was not carrying on business through a fixed place of business in South Africa during that period of twelve months.

A withholding tax at the rate of 15% applies to interest payable to non-residents from 1 March 2015. This excludes interest earned from any sphere of government, a bank or where a debt is listed on the recognised exchange. The relevant double taxation agreements may provide some relief from withholding tax by way of foreign tax credits in the foreign jurisdiction.

Interest derived by a resident from a foreign source is included in the gross income of such resident without exemption, but a foreign tax credit may be available and claimed in terms of section 6quat of the Act.

Foreign Dividends Exemption

The exemption on foreign dividends is granted in full to the extent that at least 10% is held in a foreign company and granted in part where the holding is less than 10% and subject to the criteria laid down in section 10B of the Act.

Medical Aid Contributions

Effective 1 March 2014, all members of medical aid schemes (including members who are 65 years and older) are granted a tax credit in respect of their contributions to medical aid schemes. The credit is granted against the tax payable by the member.

Retirement Funds

Effective 1 March 2016, contributions made to a provident fund, pension fund and retirement annuity fund are treated in a uniform manner. Contributions made by the employer for the benefit of employees are treated as taxable fringe benefits. Individual taxpayers are granted a deduction on the contribution to these funds of 27,5% of the greater of remuneration for PAYE purposes and the taxable income (excluding taxable capital gains) and before the deduction on donations to qualifying public benefit organisations.

Illustrative Example

An illustrative example should help to explain the tax amendments between the 2018 and 2017 years of assessments:
 
Terence’s annual cost to company remained unchanged in the 28 February 2017 and the 28 February 2018 years of assessment. Terence has registered himself (as a principal member) and his wife and two children as dependants on his medical scheme.

Example: Assuming salary remains the same

Description 2017 2018 Movement
Basic salary

Travel allowance

R55 283,34

R9 583,33

R55 283,34

R9 583,33

R0,00

R0,00

Provident fund R5 750,00 R5 750,00 R0,00
Medical aid R5 250,00 R5 250,00 R0,00
Group schemes R800,00 R800,00 R0,00
Monthly remuneration R76 666,67 R76 666,67 R0,00
Less: Medical deduction (R0,00) (R0,00) R0,00
Less: Group schemes (R0,00) (0,00) R0,00
Less: 20% Deemed Business Travel (80% is subject to PAYE) (R1 916,67) (R1 916,67) R0,00
Net remuneration before RF
Less RF deduction*
R74 750,00
(R5 750,00)*
R74 750,00
(R5 750,00)*
R0,00
R0,00
Net remuneration after RF
Annual equivalent (*12)
R69 000,00
R828 000,00
R69 000,00
R828 000,00
R0,00
R0,00
Basic tax (per tax tables) R206 964,00 R209 032,00 R2 068,00
Marginal rate tax [(41% of R126 700) (41% of R119 690)] R51 947,00 R49 072,90 R2 874,10
Total tax liability R258 911,00 R258 104,90 (R806,10)
Less primary rebate (R13 500,00) (R13 635,00) R135,00
Tax payable R245 411,00 R244 469,90 R941,10
Tax credits: Section 6A Medical
Less: Terence and wife (R286*2*12) (R303*2*12) (R6 864,00) (R7 272,00) R408,00
Less: Two children (R192*2*12) (R204*2*12) (R4 608,00) (R4 896,00) R288,00
Net tax payable R233 939,00 R232 301,90 (R1 637,00)
Monthly tax payable (PAYE) R19 494,92 R19 358,49 (R136,43)
Net pay/Bank R45 371,75 R45 508,18 R136,43



*RF deduction applies to provident funds, pension funds and retirement annuity funds. The deduction equals 27,5% of remuneration subject to PAYE, limited to R350 000 per annum. The provident fund and pension fund contributions by the employer are no longer exempt (but taxable) fringe benefits from 1 March 2017.

Terence will have a tax saving on his monthly tax payment of R136,43 (R19 494,92 less R19 358,49) in the 2018 year of assessment.

The excess of the total contributions over four times the tax credit will be added to other qualifying medical expenses, for example non-refundable expenses by the medical scheme (among others), and compared to 7,5% of taxable income, excluding retirement fund lump sums and severance packages, to see if they qualify for deduction through a tax return.

For example, Terence’s total annual tax credits = R7 272 + R4 896 = R12 168. Terence’s total annual contribution to his medical scheme = R5 250 per month x 12 = R63 000 (see the monthly contribution per the above schedule). The excess of R63 000 (actual expenditure) is over four times the total annual tax credits of R48 672 (R12 168 x 4) = R14 328.

The out-of-pocket medical expenses, together with any other medical expenses that may have been incurred outside the country, together with the R14 328, are the total expenses for which only 25% will be granted as a secondary medical scheme fees credit, provided the sum exceeds 7,5% of taxable income (excluding retirement lump sum and severance benefit).

Terence has a taxable income of R828 000 and 7,5% of this is R62 100. Since the above excess amount of R14 328 does not exceed R62 100 (7,5% of taxable income of R828 000 (R69 000 x 12)), no secondary credit will be granted in respect of the medical scheme contributions. If Terence, his spouse or one of his children were disabled, the excess of the annual contribution over three times the annual credit limits and the sum of the non-recoverable expenses, expenses incurred outside the Republic, and any expenses that will have been incurred in consequence of physical disability will be granted as secondary credit up to 33,3% without applying the limitation of 7,5% taxable income. These are clearly complex calculations for which specialist advice should be sought to ensure clarity.

If Terence were 65 years and/or older, his medical contribution and medical expenses tax treatment will be similar to those of persons with a disability.

Subsistence Allowances

A subsistence allowance is paid to employees to enable them to cover daily meals and/or incidental expenses. The daily amount deemed acceptable to be spent on meals and related costs in the event where an employee spends at least one night away from his usual place of residence in the Republic has increased from R372,00 to R397,00 per day from 1 March 2017. Any amount paid over and above this will result in the PAYE being withheld.

Incidental expenses normally include cost of writing pads, pens, and any such out-of-pocket expenditure that the employee may need to incur to carry out their daily duties. The tax-free portion of an incidental cost has increased from R115,00 to R122,00 per day from 1 March 2017. Any excess paid over this tax-free limit will result in PAYE being withheld.

The PAYE on both the meals and incidental costs on one hand and the PAYE on the incidental expenses on the other will be withheld only on the excess paid over the amount deemed expended daily. Allowances for travels outside the Republic can be obtained from the SARS website under Legal and Policy/Secondary Legislation/Tax Notices/2017.

Capital Gains Tax (CGT)

The annual exclusion on any taxable capital gains made by an individual taxpayer from disposals remains unchanged at R40 000 per year. The exclusion in the event of death remains unchanged at R300 000. The exclusion on the gain made from the disposal of a primary residence also remains unchanged at R2 000 000, which means that no inflationary allowance is made.

The inclusion rate for CGT remains unchanged at 40% for any disposals made on or after 1 March 2016. With the introduction of the new maximum bracket of R1 500 001 and above at a maximum rate of 45%, the effective CGT rate for individuals in the highest taxable income bracket increases from 16,4% (old maximum rate of 41% x CGT inclusion rate of 40%) to 18% (new maximum rate of 45% x CGT inclusion rate of 40%).

Author: Joseph Komape CA(SA) MTP(SA) is a tax practitioner

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