Medium Term Budget Policy Statement (MTBPS) – Pravin Gordhan- A Review

Most local economists and consultants have applauded Minister of Finance, Mr Pravin Gordhan’s first policy statement delivered on 27th October 2009, stating that its “realistic”, and “balanced” – taking a “pragmatic view” on growing the economy.

Minister Gordhan referred to President Mandela’s words at his inaugural speech in 1994 when the latter said, “The task at hand on will not be easy. But you have mandated us to change South Africa from a country in which the majority lived with little hope, to one in which they can live and work with dignity, with a sense of self-esteem and confidence in the future.”

He re-iterated that this would remain the task and the challenge – to balance the task of social spending that is required, against growing an economy battered by global crisis and recession.

He listed the medium term priorities for spending as:

• Creating jobs
• Enhancing the quality of education
• Improving health outcomes
• Rural development
• Fighting crime and corruption.

With this need for spending in the above-mentioned 5 areas, and the recession, it has meant that substantial changes to fiscal projections and plans were necessary.

The recession’s effect on the economy has been, inter alia, that

• Income tax paid by companies will be R21 billion less than anticipated in the February budget, because of lower earnings
• VAT receipts will be R31 billion lower, because of reduced consumption
• Customs and excise duties will be R9 billion lower, due to the decline in imports.

In total, tax revenue is expected to be some R70 billion less than the February budget projection.

2009/10 expenditure and the borrowing requirement

Minister Gordhan stated that “Consolidated government expenditure, on the other hand, will rise from R715 billion last year to an estimated R841 billion this year, or some 35 percent of GDP.

In comparison with last year, expenditure is projected to increase by R127 billion, while revenue declines by R34 billion.

The net result is a widening borrowing requirement.

The consolidated budget deficit will amount to R184 billion in 2009/10, or 7.6 percent of GDP.

Taken together with the financing requirements of Eskom, other state-owned enterprises and municipalities, the overall public sector borrowing requirement this fiscal year will amount to R285 billion. Last year, by comparison, the public sector borrowing requirement was just R89 billion”.

The next few years will see a balancing act between spending in 5 priority areas vs need to recover revenue from cash strapped South Africans and reducing the country’s debt.

Improving the fiscal position

In an interview relating to his speech – (with Alec Hogg on Moneyweb Radio), Minister Gordhan said that….” You borrow when you have to and you pay back when you have to. You pay for surplus if you have a capacity to actually do so. So there's no (rule)... here that we necessarily have to abide by, apart from a very positive and pragmatic approach..”

In his speech he referred to the fact that as the economy recovers over the next few years, Government will act to reduce borrowing gradually. He has made it clear that he does not wish to burden future generations with debt, inflation and interest rates.

In addition the aim is to support spending on priorities by vigorously conducting a campaign to reduce waste. National departments have identified savings of R14.5 billion over the next 3 years, and an estimated R12.6 billion will be re-priortised from redundant activities in provincial departments to finance core education, health and infrastructure requirements – such as extending the child support grant up to the age of 18.

As economic growth picks up, tax revenues will rise, however this will also be supplemented by …” broadening the tax base through policy measures, and continuous improvements in the law…relying on the hard work in the revenue administration, and …. the honesty and integrity of taxpayers…”

He stated that through its compliance model and increasingly as a benefit of its modernisation programme, SARS has the tools to narrow the tax gap, pursue non-compliance, and ensure that everyone pays what is due. To this end, SARS has recently:

• announced the implementation of sterner administrative penalties for those with outstanding tax returns. This will begin on 23 November this year with those who repeatedly have failed to submit returns.
• Other forms of non-compliance will also come under the SARS spotlight in coming months, including complicated tax structures and the use of offshore tax havens designed with the sole purpose of avoiding tax, under the false guise of “limiting liability”.

Due to the deficit being unsustainable at current levels, the introduction of new taxes – such as environmental levies has also been discussed.

Minister Gordhan stated that the goals and objectives outlined in his speech translate into many programmes and policies and countless institutional plans and activities. Many a policy reform will be implemented- one of which would be a sweeping relaxation of exchange controls. Alec Hogg in his interview asked Minister Gordhan the reason for increasing the exchange control allowance for individuals up to R4million, to which he replied:

“Again, if you like, it's about modernising our approach and taking a more pragmatic view and, instead of forcing people to do illegal things, give them a legal channel to do it through. Much more importantly, some of the other provisions are to remove red tape to enable businesses to invest both in and out of South Africa more easily, and overall to modernise our regime so that we become consistent with what the Financial Stability Board and the G20 are beginning to put on the table. And we've been happy to hear we are already a few streets ahead of them, and we need to more assertively modernise that particular area and understand our risk in a different kind of way, but also put the right machinery in place to manage it.”

Minister Gordhan has stated that he is confident that the economy will come out of recession next year – showing a 1.5% growth, and then doubling it in 2011, and that …”there are people even more confident than myself in the Treasury. I am very happy to hear there is that kind of optimism around in South Africa. So that's our good news story - that the graph is actually pointing upwards, and the only debate we have is how far upwards. And that's great.”

TRANSFER OF A RESIDENCE OUT OF A COMPANY, CC OR TRUST

TAX WINDOW WIDENED BY SARS – 11 FEBRUARY 2009-31 DECEMBER 2011

1. A brief overview of CGT and your property

Currently the law relating to Capital Gains Tax (CGT) and your property is as follows;

1. Should your property be sold for an amount in excess of its original purchase price - then this gain will be subject to CGT (but only if this gain has been realised after October 1, 2001)*[see below for brief description on how gain/loss is calculated]

There is an exclusion – known as the” primary residence exclusion”- whereby the first  R1.5 million of the gain made on the disposal of your property is exempt from CGT, provided the following criteria are met:

1. You are a natural person or a special trust** and
2. The property is your primary residence,

1. Companies, CC’s and ordinary trusts

Generally, the exemption does not apply in the case of an ordinary trust, close corporation (CC) or company owning property (even if it’s a primary residence),  and the entire profit made on the property when it is disposed of is taxed as CGT.
SARS however introduced a “tax window” when CGT was first implemented, allowing persons whose residential home was owned by a CC, company or ordinary trust, to transfer the residence into his or her personal name without incurring adverse tax consequences,(as long as this was done within a certain time period).

1. Tax Window now widened by SARS

SARS recently announced another 2 year “tax window” period, which has now been brought forward from January 2010 and will retrospectively apply to disposals from 11 February 2009 up until 31 December 2011. This is currently incorporated in a Draft Bill – which is still to be enacted.
Once the Bill has been enacted, people who still hold their primary residences in CC’s, private companies or ordinary trusts, can transfer their properties into their individual name without incurring CGT, during these specified time periods.
This relief was originally only allowed if the primary residence was used ONLY and solely for domestic purposes. Thus if you operated a home office from your residence, you could not take advantage of this opportunity. However, SARS has passed some amendments, and now as long as the property is used mainly for domestic purposes, the relief is available. In addition, in the case of a company, the property need not be its sole asset. The company also need not be liquidated after the transfer out to the individual.
This relief is still not available if:

1. The residential property is held in a company, and the shareholder is a family trust
2. If the residential property is held in an ordinary trust and the acquisition of such property was financed by the trust obtaining a mortgage bond in its name, and it (the trust) services the bond out of its own means

In summary, the relief is available in the following circumstances:

1. If held in a CC, company, ordinary trust, the natural person alone or together with his or her spouse, must directly hold all the equity share capital in that company/CC/ordinary trust
2. Where held in trust, the natural person disposed of that residence to the trust by way of donation, settlement or other disposition or made all the funds available that enabled the trust to acquire the residence
3. The natural person alone or together with his/her spouse ordinarily resided in that residence and used it mainly for domestic purposes as his or her ordinary residence

Notes:

*a capital gain or loss is determined by calculating the difference between the proceeds i.e the amount accruing to the seller, and the base cost of the disposed asset. Base Cost relates to the costs directly incurred in acquiring or improving the asset.

** a trust set up for a mentally ill or disabled person or in terms of a Will for the benefit of beneficiaries who are relatives of the testator and are minors,

Please feel to contact our offices for further advice in regard to any aspect dealt with in this article.

SARS to apply strict new penalties for outstanding tax returns – Key Points

The South African Revenue Service (SARS) will introduce a system of strict new administrative penalties against non-compliant taxpayers from 23 November 2009.

• In effect, taxpayers have until 20 November 2009 this year – the final deadline of the 2009 Tax Season - to submit any outstanding returns in order to avoid being penalized under the new penalty regime.
• The Administrative penalty regulations legally came into effect on 1 January 2009 and provide for the imposition of penalties for a range of non-compliance, including failure to register as a taxpayer, failure to inform SARS of a change of address and other personal particulars, and failure to submit tax returns and other documents to SARS.
• SARS delayed the effective implementation of the new penalties to allow sufficient time for taxpayers to rectify any non-compliance and for SARS to develop its own systems to automatically detect non-compliant taxpayers, calculate applicable penalties and issue penalty notices to such taxpayers.
• The new Administrative penalties will be phased-in over a period of time, beginning on 23 November 2009 for taxpayers with outstanding income tax returns.
• In the interest of fairness SARS will first impose the new penalties against repeat offenders – those taxpayers who have failed to submit returns for multiple years.
• SARS believes that it is only fair on the majority of compliant taxpayers, who meet their tax obligations and willingly contribute their fare share to our country’s development, that tougher action against non-compliant taxpayers is needed.
• The new penalty system, applicable in terms of Section 75B of the Income Tax Act (No. 58 of 1962, as amended), provide for recurring monthly penalties for each month that an income tax return remains outstanding.
• The penalty amounts, for the first time, will be determined according to the taxpayer’s taxable income (see table below). These amounts range from R250 a month for taxpayers with an annual taxable income of up to R250 000, to R16 000 a month for taxpayers with taxable income over R50 million.
• Taxpayers with multiple outstanding returns after 20 November 2009 will receive a penalty assessment notice in writing or electronically (for registered eFilers) of the imposition of a penalty in respect of each outstanding return.
• Should they fail to submit these outstanding returns within 30 days, a second penalty – increasing by the same amount - will be applied. The new regulations allow for penalties to be applied each month or part thereof for up to 35 months.
• Where a taxpayer fails to pay penalties by the due date, the penalty will be collected without further notice. As part of the collection process SARS will approach employers, or other parties in control of their funds, to act as agents in terms of Section 99 of the Income Tax Act. Such employers or third parties will be required to debit the outstanding amount from the defaulting taxpayer’s salary or other funds and pay it over to SARS. Failure by an agent to pay the amount to SARS constitutes is a criminal offence.
• Taxpayers penalised under the new regulations may apply for relief from the penalties by completing a Remission Request form if there were reasonable or exceptional circumstances responsible for their non-compliance. Such applications will only be considered where the taxpayer has submitted the outstanding return/s. Taxpayers can object to the imposition of penalties by completing a Remission Request form and by providing any supporting documents as proof as to why penalties must not be imposed.
  

Illustrative monthly penalties

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