In his country’s budget speech, Finance Minister Pravin Gordhan says South Africa’s new story is about building a vibrant economy.
In giving an overview of the 2012 Budget, he says they remain steadfast in addressing the challenges of creating jobs, reducing poverty, building infrastructure and expanding the economy.
Gordhan says this is not only the responsibility of government, business or unions, but all South African citizens.
In giving an overview of the 2012 Budget, he says they remain steadfast in addressing the challenges of creating jobs, reducing poverty, building infrastructure and expanding the economy.
Capital Gains Tax
With regards to tax, Gordhan says Capital Gains Tax (CGT) inclusion rate for individuals and special trusts will be increased from 1 March 2012 from 25 percent to 33.3 percent.
Companies and other trusts from 50 percent to 66.6 percent and to mitigate the impact on middle-income earners, various exclusion thresholds will be increased.
To limit the impact of capital gains taxation on middle-income households, the exemption thresholds for individual capital gains and for primary residences will be adjusted significantly.
The following exemptions for individual capital gains are increased from 1 March 2012:
- The annual exclusion from R20 000 to R30 000
- The exclusion amount on death from R200 000 to R300 000
- The primary residence from R1.5 million to R2 million
- The exclusion amount on the disposal of a small business when a person is over 55 years old from R900 000 to R1.8 million
- The maximum market value of assets allowed for a small business disposal for business owners over 55 years increases from R5 million to R10 million
He points out that there will be further tax relief for small businesses and micro-enterprises.
The tax-free threshold for small business corporations is increased to R63 556, the 10 percent rate is reduced to 7 percent and the threshold up to which this rate applies is increased to R350 000.
For taxable income above R350 000, the normal 28 percent corporate rate applies.
With effect from 1 April, qualifying micro-businesses (within the R1 million turnover limit) will be able to pay turnover tax, VAT and employees’ tax twice a year.
This means the number of returns and payments a year will be reduced from about 18 to two in 2013.
The build-up of tax liability will require such taxpayers to ensure that funds are available when payment is due.
2012 Tax proposals
With regards to the property market, he says the governance and tax treatment of property loan stock entities will be aligned with the present treatment of regulated property unit trusts.
The governance of property loan stock entities will be placed on par with property unit trusts and rental income from these entities will fall under the pass-through regime that applies to property unit trusts.
Property Unit Trusts and Property Loan Stock companies typically provide a commitment to distribute a minimum of 90 percent of their rental income to investors.
The distribution of rental income is effectively tax-neutral in the hands of the property unit trust and Property Loan stock companies appear to achieve roughly the same result but without official sanction, according to the South African Revenue Services (Sars) Tax Proposals.
They issue investors a dual-linked unit that consists of a debenture and a share with the distribution in the form of interest.
With the proposed tax, this dual-linked structure needs to be eliminated so that other entities do not undertake the same structure to avoid tax by relying on excessive debt.
The governance of property loan stock entities will be placed on par with property unit trusts and rental income from these entities will fall under the pass-through regime that applies to property unit trusts.
Affordable housing
There is also tax proposed for housing developers and employers who provide housing priced below R300 000 a unit.
The tax proposal document notes that South Africa has insufficient affordable housing stock for middle-income households above the income thresholds for RDP type housing, but who cannot afford high mortgage finance.
To qualify for this tax, options include either a tax credit or a deduction at either a fixed rand amount per unit or as a percentage of the value of the dwelling.
This proposal will be refined after public consultation and policy alignment with existing housing incentives and attempts to unblock regulatory bottlenecks will also be considered.
Carbon emissions tax
A carbon tax will contribute to the global response to mitigate climate change.
It will begin to price carbon dioxide emissions so that the external costs resulting from such emissions start to be incorporated into production costs and consumer prices.
This will also create incentives for changes in behaviour and encourage the uptake of cleaner-energy technologies, energy-efficiency measures, and research and development of low-carbon options.
Following public consultation, government has revised its concept design for a carbon tax and a draft policy paper will be published for comment in 2012.
The proposed design features include:
- percentage-based rather than absolute emissions thresholds below which the tax will not be payable.
- a higher tax-free threshold for process emission with consideration given to the limitations of the cement, iron and steel, aluminium and glass sectors to mitigate emissions over the near term.
- additional relief for trade-exposed sectors.
- the use of offsets by companies to reduce their carbon tax liability.
A carbon tax will contribute to the global response to mitigate climate change. It will begin to price carbon dioxide emissions so that the external costs resulting from such emissions start to be incorporated into production costs and consumer prices.
Phased implementation
The tax will apply to carbon dioxide equivalent (CO2e) emissions calculated using agreed methods.
- A basic tax-free threshold of 60 per cent (with additional concession for process emissions and for trade-exposed sectors) and maximum offset percentages of 5 or 10 percent until 2019/20 is proposed.
- Additional relief will be considered for firms that reduce their carbon intensity during this first phase.
The reduction in carbon intensity will be measured with reference to a base year or industry benchmark.
- Tax-free thresholds will be reduced during the second phase (2020 to 2025) and may be replaced with absolute emission thresholds thereafter.
Alignment with the proposed carbon budgets as per the national climate change response white paper (2011) will be important.
A carbon tax at R120 per ton of CO2e above the suggested thresholds is proposed to take effect during 2013/14, with annual increases of 10 per cent until 2019/20.
Revenues from the tax will not be earmarked, but consideration will be given to spending to address environmental concerns.
Incentives such as the proposed energy-efficiency tax incentive and measures to assist low-income households will be supported.
Government will be publishing its second version of a draft policy paper on carbon tax outlining its revised concept.
To minimise adverse impacts on industry competitiveness and effectively manage the transition to a low-carbon economy, temporary thresholds are proposed below which an exemption from the carbon tax will be granted.
Electricity levy increase
The electricity levy generated from non-renewable sources will be increased by 1c/kWh to 3.5c/kWh.
The additional revenue will be used to fund energy-efficiency initiatives such as the solar water heater programme.
This arrangement will replace the current funding mechanism that is incorporated into Eskom’s annual tariff application.
It will enhance transparency and enable government to use alternative agencies to deliver on energy efficiency initiatives and the net impact on electricity tariffs should be neutral.
Tax Administration Bill
The bill has been approved by Parliament and it incorporates the common administrative elements of current tax law into one piece of legislation and makes further improvements in this area.
The bill has been approved by Parliament and it incorporates the common administrative elements of current tax law into one piece of legislation and makes further improvements in this area. It is expected to be promulgated and most of its provisions brought into force in 2012.
It is expected to be promulgated and most of its provisions brought into force in 2012.
High net-worth individuals
Sars will focus on these individuals with a view for improvement in the service offered to this segment and in compliance.
Tax ombud
This year, a dedicated ombud for tax matters will be established with the intention to provide taxpayers with a low-cost mechanism to address administrative difficulties that cannot be resolved by Sars.
Share block conversions to sectional title
Company liquidations are generally subject to tax to preserve the company dual-level tax system (a tax on company income plus distribution of that income).
The conversion of share block companies into sectional title schemes can create a tax problem.
In form, this conversion is a company liquidation, but in substance it is merely a change to direct interest from an indirect interest in the underlying property.
In these situations, the property owner has swapped interests in favour of a more modern approach.
It is proposed that these liquidations receive tax-free rollover treatment.
Extension of the urban development zone incentive
The incentive for buildings (new and renovated) in urban development zones is set to expire in 2014.
Government is considering extending this incentive subject to the receipt of current legislatively required municipal progress reports and a review of their effectiveness.
The cut-off date poses a problem because it is based on when buildings are brought into use rather than the date of initial construction.
It is proposed that the cut-off date be re-examined along with any other anomalies associated with the incentive.
South African investment into Africa
Over several years, South Africa has introduced several initiatives to reduce potential double-tax costs when investing into Africa.
Besides clarifying further anomalies in this area, active South African management over controlled foreign subsidiaries may trigger dual-residence tax status, even though all day-to-day operational activities are being conducted abroad. It is proposed that this dual-residence tax status be removed if the tax of the foreign country is roughly on par with otherwise applicable South African tax.
Management services have been an issue, especially the question of whether foreign withholding taxes on these services are eligible for foreign tax credits.
Besides clarifying further anomalies in this area, active South African management over controlled foreign subsidiaries may trigger dual-residence tax status, even though all day-to-day operational activities are being conducted abroad.
It is proposed that this dual-residence tax status be removed if the tax of the foreign country is roughly on par with otherwise applicable South African tax.
Alternatively, the issue can be resolved as a matter of interpretation.
Many South African loans to foreign African subsidiaries essentially operate as additional share capital contributions – their purpose is to provide for a more flexible use of capital, not to avoid South African tax.
The formal use of a loan often gives rise to transfer pricing concerns because these loans do not generate annual interest.
It is proposed that these loans be treated as shares in line with the decision to treat certain forms of debt as shares.
Gordhan says the 2012 tax proposals support a sustainable fiscal framework, economic growth and a more competitive economy.
“Reforms will improve the fairness of the tax system, ensuring that income from capital is taxed more appropriately.”
He says investment in municipal infrastructure and human settlements will grow from R120 billion in 2012/13 to R139 billion in 2014/15.
Additional allocations of R9.9 billion over the medium term are proposed, including informal settlement upgrading, a wastewater treatment plant in Sedibeng, bulk water systems in Sekhukhune and water systems in the OR Tambo district.
Financial support for housing development is expanded over the period ahead with additional funding allocation for the finance-linked individual subsidy programme and capitalisation of the housing finance institutions is proposed.
“We have a budget that gives effect to the challenges set to accelerate growth, expand investment, support economic development and confront poverty and inequality.”
What the budget means for the property market?
The macro economic climate presented in the 2012 National Budget suggests that the South African property market will in the next year, continue to trade in an environment characterised by uncertain and subdued economic growth.
This is the view of property economist, Professor Francois Viruly from the department of construction economics and management at the University of Cape Town.
Viruly explains that the possibility of a rising inflation rate, escalation of electricity and municipal related costs continue to impact negatively on operating costs and has become the central concern for households and the South African property sector.
Viruly explains that the possibility of a rising inflation rate, escalation of electricity and municipal related costs continue to impact negatively on operating costs and has become the central concern for households and the South African property sector.
He points out that the focus of the 2012 budget on infrastructural expenditure offers opportunities for the property sector.
“Infrastructural expenditure not only underpins the performance of the built environment, but also plays a critical role in creating development and investment opportunities in cities and rural areas,” he says.
The residential property sector continues to show considerable weakness and the budget does little to promote household investment in the sector.
It is critical that government should deliver a housing policy that not only delivers to the lowest tier of the housing market, but which also starts to address the financing and development bottlenecks that exist in the middle tiers of the residential property sector, he says.
Viruly believes the housing sector should be seen as a means for households to save and create a strong asset base.
Meanwhile, the commercial property sector continues to suffer from high vacancy rates and rapidly rising operating costs.
Apart from government’s commitment to focus on the creation of Special Economic Zones, there is very little in the 2012 budget to promote the sector.
“If anything, the vigorous focus on infrastructural expenditure could result in escalation of building related costs and possibly “crowd out” development activity in the private sector.”
Lew Geffen, chairman of Sotheby's International Realty in South Africa says the budget holds out excellent prospects for the speedy improvement of the real estate market and the sustainability of that recovery.
Geffen notes that the most important macro aspects include Gordhan’s strong stance against corruption and financial mismanagement, which will undoubtedly boost investor confidence and the property sector.
He says the new housing subsidy scheme (subsidies of up to R85 000) aimed at individuals earning between R3 500 and R15 000 a month will give the lower end of the market much needed impetus.
Viruly points out that the focus of the 2012 budget on infrastructural expenditure offers opportunities for the property sector.
Dr Andrew Golding, chief executive officer of the Pam Golding Property Group has welcomed the new Cities Support Programme focused on improved spatial planning, public transport systems and management of infrastructure in eight metropolitans.
“Home buyers increasingly seek to live in areas within easy reach of transport to places of employment to avoid the increasing effects of rising fuel costs, toll roads, traffic congestion and time wastage.
Golding says they had hoped for further reduction in transfer duty payable by home buyers to help encourage home ownership, which in itself helps provide future financial security for home owners.
“The housing market remains under pressure and while interest rates remain historically low a recovery in the market is expected to remain relatively muted for the remainder of this year.”
Craig Hutchison chief executive officer of Engel & Volkers Southern Africa says the budget’s focus on job creation, education and infrastructure improvement bodes well for the property market.
Bond originator, Betterbond says the positive sentiment expressed in the Budget will further stimulate housing demand and increase the ability of home seekers to qualify for housing finance.
Rudi Botha, chief executive officer of Betterbond says infrastructure spend should bring about a revival in the residential construction industry and enable more people to enter the property market.
He adds that government’s plan to play an active role in getting individuals to save more is welcome as the many would-be home buyers cannot access home loans due to lack of required deposits.- Denise Mhlanga
Print
