Highlights from the recent Budget in South Africa, provided by TAXtalk, South Africa's leading tax magazine.

Manuel says we have to weather the storm and invest in growth

Considered by many analysts as the most important budget speech in five years, Minister of Finance, Trevor Manuel delivered South Africa`s fiscal outlook for 2008/009 in parliament in Cape Town on Wednesday afternoon, 20 February.

Throughout his speech rang the refrain: “We are in this together”. He based the theme for Budget 2008 on the fact that there is a worldwide economic downturn at present and that locally, economic times are tough. Since the beginning of the year for example, R24 billion in foreign holdings of rand-denominated bonds and equities has been sold. Inflation and the country`s lack of savings increase South Africa`s vulnerability to financial turbulence.

Manuel, however, said that we should focus not on the storm, but the period after the storm.

Spending highlights

• R12 billion more for social grants;
• R7.6 billion more for public transport, roads and railway infrastructure;
• An extra R8.7 billion for housing, water and general built environment;
• R2 billion more for 2010 World Cup Stadiums and related infrastructure;
• An additional R6.7 billion for HIV and Aids, hospitals and tertiary services, TB- MDR and XDR;
• R2.5 billion for industrial development and SMMEs;
• R2.6 billion more for agriculture and land reform;
• R2.7 billion extra for forensic laboratories and additional police personnel;
• R2 billion more for correctional facilities; and
• R1.4 billion more for higher education, research and knowledge development.

An overview of tax proposals in Budget 2008

Manuel based his tax proposals on an envisaged growth of 4% and announced a total tax relief for individuals of R7.2 billion and most significantly, reduced the corporate income tax rate from 29% to 28%. Other tax proposals include:

Business

• Regarding the conversion of Secondary Tax on Companies (STC) to a tax on shareholders, announced last year, the following is applicable: The rate will remain 10% and the tax will not apply to tax-exempt entities such as retirement funds and public benefit organisations and all STC credits will expire when this change is implemented in 2009.
• A simplified tax regime for small businesses;
• A tax-free fringe benefit threshold for bursaries granted to an employee`s dependants increases from R3,000 to R10,000 a year, for employees earning up to R100,000 a year;
• R5 billion in tax subsidies set aside over the next five years to support investments in labour-intensive industries and to support government`s industrial policy;
• When it comes to VAT: Introduction of a presumptive turnover tax as an alternative to income tax and VAT for businesses with a turnover less than R1 million a year. The threshold for farmers and businesses who submit VAT returns every six months or four months, respectively, will be raised from R1.2 million to R1.5 million. The VAT registration threshold will be raised from an annual turnover of R300,000 to R1 million. These measures will significantly reduce paperwork for small businesses, while encouraging regular bookkeeping in preparation for migration to the normal income tax system.

Individuals

• Fuel (petrol and diesel) taxes will increase, as from 2 April 2008, by 11 cents per litre;
• When it comes to so-called sin taxes: A packet of 20 cigarettes will cost 66 cents more, a litre of wine will cost 12 cents more, a 340 ml can of beer will cost 7.2 cents more; and a 750 ml bottle of liquor (spirits) will cost R2.17 more.

Other highlights

Supporting Eskom in the current power crisis

R60 billion will be provided to support the financing of Eskom`s investment programme, on terms structured to assist meeting cashflow requirements. This is not a grant and the return on an investment in power generation is very long term and the repayment of debt will be similarly deferred. The Treasury will also be setting aside R2 billion over the next three years to support programmes aimed at encouraging more efficient use of electricity, generation from renewable sources, installation of electricity-saving devices and co-generation projects.

Exchange control reform

Manuel announced further steps in exchange control reform this year. He stressed the importance of a sound framework for financial stability, underscored by the present turbulence in financial markets. Exchange control reform will focus on replacing unnecessary administrative controls with improved surveillance and prudential limits on foreign exposure risks, as commonly applied internationally.

Exchange controls on institutional investors will be removed and replaced with a system of prudential regulation, involving quarterly reporting and monitoring of foreign exposures by the Reserve Bank.

The foreign exposure limits for institutional investors will be raised and banks will be permitted to undertake foreign investment within an appropriate macro-prudential limit. Participation in the rand futures market on the JSE Securities Exchange will be opened up. Remaining administrative procedures will be streamlined and simplified.

This entails a substantial shift of functions and responsibilities of the Reserve Bank`s Exchange Control division, which will be renamed the Financial Surveillance Department, in line with its new mandate.

Article Added Saturday, 15 March 2008 | 1315 Hits

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