South Africa has a budget deficit of 3.1 % of GDP and debt on government spending alone amounting to a staggering 48% of GDP. The main reason for this is an abnormally large and burgeoning government bureaucracy which is perceived to often be inefficient and which pushes up government spending to unacceptable levels as evidenced in the budget. This cost to government cannot easily be reduced as fast as is required to retard or properly reduce the deficit in the short term, so treasury has to look to alternative sources of revenue.
The Minister announced that there is a R 30 billion shortfall in mainly personal income tax and VAT collections due to anaemic economic growth last year of under 1% which has impacted on wages and personal earnings. As 95% of the countries wealth rests with 10% of the population, the higher income bracket is a logical target to attract taxes. As we have seen, those who now earn more than R1 500 000 pa have been targeted by the Minister of Finance and will be taxed at 45% which equates to levels seen in countries like the UK and others in Europe.
The other area of focus is the increase on dividends withholding tax from 15 % up to 20% so as to further tax non-resident shareholders of South African subsidiaries under BEPS ( Base Erosion and Profit Shifting ) initiatives previously announced by treasury. We will have to wait and see whether this increase in withholding tax falls in line with an announcement by the Minister to update the Double Taxation Treaties that South Africa has signed with other countries where there is often dividends withholding tax relief.
It is perhaps disappointing that there is also no further clarity at this stage on which recommendations made by the Davis Tax Committee are to be addressed on the numerous topics mentioned by the DTC, and that the only reference here was for the DTC to draft a governance and accountability model etc for The South African Revenue Service. We understand that the DTC will complete final reports in March 2017 after which we hope to expect clarification within the DTC model.
With the increase in personal taxation and the already punitive taxes being introduced to attempt to reduce effective estate planning opportunities for South African taxpayers across the board , now more than ever it is advisable to obtain sound advice so that proactive planning can be achieved.
The Minister of Finance also announced a further amendment to s 35A of the Income Tax Act where immovable property situated in South Africa is purchased by a non resident. If such non resident sells the property to a South African resident, the resident purchaser must withhold a portion of the purchase price for any capital gains tax liability that may arise to that non resident individual or company.
The withholding tax rates are to be increased to 7.5% for individuals, 10% for non resident companies, and 15% for non resident trusts. The use of South African companies by non residents to purchase immovable property in South Africa will not avoid the withholding tax where the majority of the South African companies assets consist of South African immovable property.
These withholding tax amendments are relevant to our clients who own South African immovable property though non resident companies or trusts, which are being brought in line with the effective capital gains tax rate. Contact your nearest Sovereign office to discuss this further.