2010 BUDGET HIGHLIGHTS

In a budget which generally lacked surprises, a major surprise was that the Minister did not raise taxes, but in fact gave R6.5 bn tax relief to individuals. 

This he did by adjusting the tax bracket thresholds upwards.  The first R57 000 is now free of income tax  (because the primary rebate was hiked to R10 260).  If one adds exempt interest of R22 300, it means that, one may earn up to R79 300 without paying any tax. For those aged 65 and over, the first R88 528 is free of tax (because the rebates are now R15 935). If one adds exempt interest of R32 000, the total tax-free income is now R120 528.

It was pleasing that the cap on medical scheme contributions was upped to R670 for each of the scheme member and first dependent,  and  R410 for each additional dependent.  For a family of 4 this amounts to a saving of tax (at one’s personal tax rate) on R25 920.

Most significant is that the SITE system of withholding tax will be abolished w.e.f. 1.3.2011.  This is because the tax threshold for those under age 65 is creeping up towards the SITE threshold of R60 000. PAYE withholding tax will still apply.

In these times of retrenchments, the exemption from tax of an amount up to R30 000 (thirty thousand) paid on retrenchment will be merged into the retirement fund lump sum benefit system.  Thus, an employer may pay up to R300 000 (three hundred thousand) to a retrenched employee tax free. However, any amount so paid will be added to the employee’s retirement fund lump sum, when he receives it in the future, thus increasing the tax he will have to pay at that future time.   As such it represents a deferral of tax, rather than a genuine exemption.  If the employee elects to take a monthly pension annuity, rather than a lump sum, there will be no tax on the lump sum, but rather a monthly withholding tax on the pension income, which is preferable.

On the downside, 80% of a monthly travel allowance paid by an employer will now suffer PAYE tax each month, leaving the recipient short of money to pay genuine expenses such as vehicle HP payments, insurance, maintenance and fuel.  The shortfall will have to come from the balance of his salary.  At the end of the tax year, he can claim a deduction from his travel allowance income (and per kilometer reimbursements)  of all his business-related travel expenses, and if a high percentage of his travel comprises business travel,  he will get a refund of tax back from SARS. SARS’s approach to travel allowances prejudices the genuine business traveler. It should rather ensure that only those whose job description requires travel are entitled to a travel allowance, and that the allowance is proportional to the value of the vehicle and its intended use. 

Adding to an employee’s woes was the increase in the fringe benefit value of the use of a company car. This is now 2.5% per month of the value of the vehicle.  The employee will pay tax (at a 40% tax rate) equal to 60% of the cost of the vehicle,  but will have nothing to show for it at the end of the 5 year period.

The Minister hinted that consideration would be given to abolishing estate duty. It was complex to administer, the costs of collection made it an unprofitable source of revenue CGT was the preferred tax.  

SARS is a bad loser.  After the High Court ordered last year that it could not collect outstanding fringe benefits tax from an employer, SARS proposes that this rule be changed.  Employers will be expected to read SARS’ mind as to whether any item of value (even if it is customarily regarded as non-taxable) given to an employee will constitute a benefit for fringe benefits tax and needs to be included in the PAYE regime.

Many commentators are happy with the Budget.  The fact that SARS is still short of some R80 bn means that it will continue to take a tough approach to tax collection.

Clive Hill | Financial Services Manager