BUDGET 2002 Discussion of Tax Proposals TAX POLICY CHIEF DIRECTORATE NATIONAL TREASURY PORTFOLIO AND SELECT COMMITTEES ON FINANCE: CAPE TOWN, 26 FEBRUARY 2002

Contents Tax Policy since 1995 to 2001 Tax Structure – SA vis-à-vis rest of the world 2001 outstanding tax reform measures 2002 tax proposals Direct tax Indirect tax 2001/02 outstanding technical corrections The way forward : –Retirement fund tax review –Tax framework for banking sector

Tax policy ’95 – ’01 PIT relief - R34 billion since R2 billion R2 billion R2,8 billion R3,7 billion R4,9 billion R9,9 billion R8,4 billion R15 billion Supporting economic activity –1997: Tax holiday scheme –1999: Corporate rate reduced to 30% –2000: Split rate for SMMEs –2001: Strategic investment programme Immediate expensing of investment by Small Business Corporations –Diesel fuel rebates: primary sector

Tax policy ’95 – ’01, cont. Infrastructure development –2000: Depreciation of oil and gas pipelines; electricity and telephone transmission lines, railway lines –2001: Depreciation of airport infrastructure Poverty and inequality –Distribution of PIT relief –Broadening tax base Residence-based income tax Capital gains tax –Excise duty elimination on soft drinks –VAT zero-rating of IP –Wage subsidy turned into a learnership programme, effective 1 October 2001

TAX STRUCTURE

Tax mix: 1984/ /05

Tax Mix: key features PIT, CIT and VAT account for about 80% of total tax revenue Almost 97% if fuel levy and specific excises are included PIT contributed between 29,5% (1988/89) and 42,8% (1999/00) CIT contributed between 17,1% (!983/84) and 10,5% (1994/95), 1999/00 = 13,4% Gold mining contributed 8,9% in 1983/84 and 0,1% in 1998/99.

Tax Mix: key features 2 Fuel levy: currently generate about 7% of total tax revenue (from 1% in early - mid 1980’s) Specific excise taxes: 8,7% in 1983/84 – has dropped to 4,1% in 2000/01 Trade taxes: 8,6% in 1988/89 – has dropped to 3,7% in 2000/01

SA’s Tax - GDP ratio

PRELIMINARY OUTCOME & FISCAL FRAMEWORK

2000/01 preliminary outcome Headline trends: –PIT income up by R878 million –Corp tax up by R14 billion –STC up by R2,5 billion –VAT revenue shortfall of R1,75 billion

Summary of proposals

DIRECT TAX MEASURES

2002 key features - individuals R15 billion PIT relief Interest and dividend income exemption Transfer duty – R300 million Taxation of deemed foreign income Taxation of trusts Amendment of monetary thresholds and miscellaneous PIT provisions

2002 key features - corporations Accelerated depreciation for new manufacturing assets Tax relief for small business Taxation of trusts – flat 40% rate Further tax reform: –Taxation of retirement industry –Taxation of banking sector

PIT rates and brackets

PIT relief Primary threshold up R4 000 (up 17,4%) to R Secondary threshold up by R to to R (up 8,9%) Maintain progressivity Significant cuts for all taxpayers Average rate cuts skewed toward lower/middle income groups 7%6%>R %37%R – R %57%<R PER CENT TAX REDUCTION PER CENT OF R15 BILLIONINCOME GROUP

Transfer duty relief R300 million relief Rates cut at all property values Proposed rates: R0 – R …… 0% R – R …… 5% R and above …. 8%

Other individual tax changes Domestic interest and dividend income exemption raised –R6 000 under 65 –R10 000, age 65 and over –R1 000 limit on exemption of foreign source income Monetary thresholds: –Bravery and long service awards –Donations tax up to R & estate duty up to R1,5 million –Bursaries and scholarships –Medical aid deductions

Other individual changes 2 Limit employee deductions –Business travel deduction against car allowance –Certain medical expenses –Contributions to pension and retirement annuity funds –Donations to certain public benefit organisations –Specific expenditure against allowances of holders of public office –Wear and tear allowances on equipment. Taxation of deemed foreign income Eliminate deemed accommodation costs in subsistence allowance Occasional free services – R500 fringe benefit Administrative reforms –Single year for all taxpayers –Raising provisional threshold limits –Reviewing SITE

Company tax changes 1 Accelerated depreciation – 3 years –40% of cost in year 1 –20% a year for subsequent 3 years Focus on building manufacturing base Stimulate investment and create jobs Small business tax relief: –15% tax on first R of taxable income –Limit on small business corporation turnover raised to R3 million –Reduce administrative burden Immediate expensing: –Manufacturing assets – cost  R2 000 –Intellectural property – cost  R5 000 Trusts: 40% tax rate

Ongoing tax reform Taxation of banking sector –Announced in 2001 Budget –Questionnaire highlights sources of reduced tax rates –Better enforcement and compliance – R792 million –Further review in 2002/03: Taxation of financial derivative instruments Taxation of financial leases Taxation of retirement industry –Holistic review during 2002 –Issues paper to be tabled for discussion shortly

INDIRECT TAX MEASURES

2002 key features - indirect taxes Excises duties: –Alcoholic beverages: 8 – 10% –Tobacco: 10,7% - 43,7% Air passenger tax: no change General fuel levy: no change (RAF: 2c a litre) Extend diesel fuel tax concession Fuel tax regime for environmentally friendly fuel Remove Lloyd’s tax MST/ UST on warrant repurchases Stamp duties

FUEL LEVY No increase in General Fuel Levy Intended to help limit inflationary impact of significant devaluation of Rand during December 2001 Road Accident Fund Levy to be increased by 2 cents per litre Renewable, environmentally friendly diesel fuel (e.g. Biodiesel ) to be taxed at 70% of General Fuel Levy In addition, such diesel fuels (e.g. Biodiesel) used in certain primary production processes will qualify for diesel fuel levy concession

TOBACCO PRODUCTS 50.0 per cent total tax incidence (Excise + VAT) to be maintained Average increase of 12.% ( Cigarettes at 10.7%)

Other charges and levies Remove Lloyd’s insurance premium levy MST and UST on warrants: –Warrants are retail derivative instruments –Account for 20% of JSE trades –To ensure equity, remove MST/UST on repurchase of warrants issued by market maker Stamp duties, remove: –Listed debt instruments (UST as well) –Cession of mortgage bonds –Insurance policies against accident, bodily injury, incapacity or sickness –Insurance contracts referred to in the Export Credit and Foreign Investments Reinsurance Act, 1957 –Cession of insurance policies.

TECHNICAL CORRECTIONS ON CGT & RESIDENCE-BASED INCOME TAX

Technical corrections: CGT and residence-based IT No relief for financial instrument companies Trade debts in financial instrument definition Designated country exception – review of list Foreign asset reporting – deemed inclusion Foreign currency regulations – individuals Outbound restructurings –STC technical correction on liquidation –Unbundling – 5% rule Interpretative guideline

Key Tax Proposals R15 billion PIT relief Major interest income exemption Accelerated depreciation for manufacturing SMMEs threshold adjustments Transfer duty relief of R300 million No general fuel levy increase Discounted general fuel levy on biodiesel Reduction of financial transaction taxes