BUDGET SPEECH | and TAX Implications of Section 7C for Trusts?
Most of the 2017 budget speech speculations were around whether Finance Minister Pravin Gordhan would increase VAT, introduce a new ‘supertax’ on wealthy individuals or be ‘braaied’ himself.
Although VAT wasn’t increased, Gordhan surprised many by enforcing the ‘supertax’ bracket. The new personal income tax of 45% for individuals with an annual income above R1.5m may be killing the goose that laid the golden egg. If you earn R150 000 per month you will have to pay an additional R921 per month or R11 052 per year over to SARS.
Fuel and Road Accident Fund levy
Another substantial tax increase is the fuel and Road Accident Fund levy of 39c/L combined. Let’s assume you drive 600km per week and your average fuel consumption is 10km per litre – the additional tax accumulates to approximately R1 170 per year.
SARS will audit more South African taxpayers and companies in order to ensure that government maximises revenue collection. The question still remains for how long Pravin Gordhan will remain the Finance Minister and who will succeed him?
DIVIDEND TAX | HOW TO RESTRUCTURE
To avoid unnecessary taxes due to the rise of dividend tax (15% to 20%), restructuring will be required. The effective rate of tax linked to a dividend increases from 38.8% to 42.4%. Salary structures can be adjusted to minimize the tax implications. For example, taxpayers would be better off to draw an annual salary of up to R1.5 million instead of earning dividends. A dividend will be deemed by SARS on all debit loans that carry interest at a rate below the official interest rate. We advise that low or interest free debit loans should be cleared via a dividend by the end of Feb 2017 as it will become more expensive to do this in the future and companies may also wish to clear reserves now at the current lower rate. It is vital to finalize this before your company’s financial year end.
TRUSTS | IMPLICATIONS OF INCOME TAX ACT 7C
Income Tax Act, Section 7C will affect trusts extensively. Interest-free loans advanced to a trust will result in a deemed donation at a rate equal to the SARS official rate of interest – currently at 8%. Taxpayers will be liable for donations tax of 20%. We advise that interest-free loans arising from historic distributions to beneficiaries will be excluded from the provisions of Section 7C. However, separate disclosures of loans arising from distributions are essential.
Example of additional taxes for trusts:
A trust with a loan account of R10 million charging interest lower than the official rate (for example an interest rate of 3%) will result in a deemed donation of R500 000 ((R10 million x (8%-3%)). With donations tax of 20%, additional taxes of R100 000 per annum can be expected.
Tax planning meetings will be required to address individual tax restructuring.