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South African Budget Leaves Corporate Tax Rate On Hold

by Robert Lee,, London

17 February 2006

As expected, South African Finance Minister Trevor Manuel tweaked various tax thresholds to deliver several billion rand in personal income tax cuts in the government's 2006/7 budget, but businesses were disappointed to learn that Manuel decided against cutting corporate tax.

Despite corporate and personal income tax revenues running well ahead of government targets thanks to a growing economy and more efficient tax collection methods, Manuel resisted the temptation to loosen the fiscal reins, leaving most major tax rates on hold, including the 29% corporate tax rate and the unpopular secondary tax (STC) on companies, a 12.5% charge on dividends.

The more visible measures affecting business included:

  • Adjustments to tax brackets for qualifying small businesses with turnover less than R14 million, up from R6 million.
  • A 150% deduction for R&D expenditure
  • A tax amnesty for small businesses (turnover not exceeding R5 million) in which taxes due for years ending up to 31 March 2004 will be waived. A 10% non-disclosure penalty will be payable in 2005.
  • A reduction in the transfer duty for companies and trusts from 10% to 8% with effect from 1 March 2006.
  • Proposal for an anti-avoidance rule in relation to the purchase of a company’s shares by its subsidiary.

Among the major personal taxation measures:

  • Retirement funds tax will be reduced from 18% to 9% from 1 March 2006 and a discussion paper on proposed regulatory and tax reforms is to be released.
  • Tax brackets will be adjusted to provide relief across the board, with the highest marginal rate being triggered at R400,001 (formerly R300,001) and tax on R400,001 being R117,000. (The top marginal rate remains unchanged at 40%).
  • Annual donations tax exemption will be increased from R30,000 to R50,000.
  • Estate duty exemption will be increased from R1.5 million to R2.5 million.
  • Transfer duty thresholds for individuals adjusted
  • Capital gains tax annual exclusion will be increased from R10,000 to R12,500.
  • Primary residence exclusion will be increased from R1 million to R1.5 million.
  • Municipal property rates to be zero rated, with effect from 1 July 2006.
  • Trust tax rate to remain at 40%.

Manuel also announced a relaxation in exchange controls by increasing the offshore individual allowance from R750 000 to R2 million. In addition, the requirement of a 50% shareholding by South African corporate and parastatals investing in Africa has been reduced to 25%.

Manuel also revealed that double taxation avoidance agreements have been signed with a number of countries and await ratification, including with the Democratic Republic of Congo, Gabon, Ghana, Nigeria, the Netherlands, Rwanda and Tanzania.

He added that tax agreements with Brazil, Turkey, Malaysia and Kuwait have now been signed and ratified.

The budget will also bring about changes to the CFC rules which could include clarification of: country of residence, taxation of multiple businesses operating in a single economic market, and the treatment of royalty income.

The full text of the 2006-07 South African Budget Speech can be found in the Tax News Resources section.

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