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Proposals announced by South African Finance Minister Trevor Manuel in his 2007 budget address will provide for moderate personal income tax relief, abolish the retirement fund tax and introduce reforms to dividend taxes.

Manuel told parliament that R12.4 billion worth of tax relief measures would help to maintain business confidence while supporting economic growth. Chief among them are proposals to reform the 12.5% secondary tax on companies and replace it with a 10% tax on shareholders’ dividends withheld by companies over the next two years. This will apply to all distributions regardless of profits and the base of taxable dividends will broaden beyond the current narrow interpretation of profits.

Long-term equity investment tax reforms will see all shares disposed of after three years triggering a capital gains tax event. Currently, gains realised on the sale of shares can be taxed either as ordinary income or capital gains, depending on facts and circumstances, but the government says that this 'facts and circumstances' test has become "problematic" and results in some large institutions receiving capital gains tax treatment on the sale of shares, and many other individuals paying ordinary income tax.

The 2007 budget will also lead to the introduction of a depreciation allowance for commercial buildings, adjustments to the depreciation regime for rail and port infrastructure, and changes in the tax treatment of the disposal of shares.

In a bid to encourage long-term savings, including higher levels of domestic savings and provision for retirement, Manuel has proposed to abolish the tax on retirement funds and increase certain monetary thresholds with respect to retirement funds and estate duties. Retirement Fund Tax (RFT) on interest and rental income will be abolished with effect from 1 March 2007.

The government also intends to simplify tax rules permitting lump sum withdrawals upon retirement which have become overly complex. To streamline the tax administration process, withholding taxes on lump sum retirement fund payments to persons with taxable income of less than R43,000 per year (the revised income tax threshold) will be abolished. In addition, the tax regulatory regime surrounding retirement funds will reduce the indirect costs incurred by retirement fund members. As a first step, regulatory requirements contained in the Income Tax Act and related regulatory notes will effectively be moved to the Pension Funds Act. This will result in reduced regulatory costs without sacrificing oversight, Manuel said.

Changes to the taxation of foreign collective investment schemes will alleviate the higher tax and compliance burden on such schemes in the hands of long-term insurers, which are currently subject to a higher level of tax than schemes held directly by beneficiaries.

The introduction of a wage subsidy is to be considered towards the end of the medium-term expenditure framework (MTEF) period as part of a package of social security reforms and to reduce the direct cost of employment.

Personal income tax relief for individuals is intended to compensate for fiscal drag (individuals moving into higher tax brackets due to inflation) and for the impact of tax base broadening, although, in real terms, the personal income tax relief is lower than in the recent past.