The Budget offers generous tax savings for middle-income earners with taxable incomes up to R80 000 a year. Above this level, the savings are less exciting:
Tax implications of the 2001 Budget for earners with taxable incomes over R80000 a year:Taxable income
Tax saving
Saving
R100,000R3,08012.00%R300,000R3,3803.10%R500,000R3,3801.70%R1,000,000R3,3800.80%
Taking inflation (estimated by Finance Minister Trevor Manuel to have been 8.2 percent for the year to October last year) and "bracket creep" into account, those at the higher end are clearly worse off than they were in the previous year.
It was widely hoped that the top marginal rate would be reduced to 40 percent from its present level of 42 percent. This reduction would have brought the rate more in line with the effective corporate tax rate of 37.8 percent and would thus have reduced the opportunity for arbitrage. The fiscus, however, could not find the necessary funds to provide tax relief at the top of the scale.
The bad news does not end there: in the detailed Budget Review it was noted that investigations were taking place into closing a number of "tax loopholes". These include:
* "The possibility of bringing all company directors into the Pay-As-You-Earn (PAYE) income tax system";
* "Streamlining the penalty provisions with respect to provisional tax payments and making these payments correlate more closely with the amounts ultimately owed"; and
* "Reviewing the opportunity for taxpayers to re-open income tax assessments."
PAYE on directors
Currently, any amount paid to a director of a private company in respect of services rendered to that company is excluded from the definition of "remuneration" and consequently is not subject to PAYE unless the South African Revenue Service (SARS) directs otherwise. Directors of public companies do not enjoy the same concession.
The cash flow advantages, in terms of only paying tax on a provisional basis, are substantial.
Subjecting directors of private companies to PAYE is not a new idea - with effect from March 1 1991 advances paid to directors in respect of services rendered or to be rendered were included in the PAYE net.
A year later, however, the legislation was amended to its current wording on the basis that it was "impractical" to subject such advances to PAYE.
The practical difficulties arose as a result of directors of closely held close corporations or companies taking drawings or advances during the year and only determining the final results of the company some time later - this frequently resulted in the advances being in excess of the total net income of the company.
If SARS is re-looking at this issue, then presumably it has some ideas on how to avoid the practical difficulties previously experienced.
Provisional payments
Provisional taxpayers have the option of using the "basic amount" on which to base their first and second provisional tax payments.
The basic amount is the taxable income as assessed in the last assessment raised on them - this could frequently be in respect of a tax return of several years ago which reflects a taxable income substantially below the anticipated current level.
Taxpayers can thus use the basic amount for their first and second payments, with no risk of penalties on under-estimation irrespective of their current level of taxable income. Should the taxpayer wish to avoid interest or under-payment of his or her liability as finally determined, he or she can make a "top up" in September following the year end.
The cash flow advantages of doing so are again substantial, particularly where the "basic amount" is nil or is very low.
SARS has, however, always had the power to call upon the taxpayer to justify any estimate made, or to furnish particulars of his or her income and expenditure; if SARS is not satisfied with the taxpayer's estimate, it may increase the estimate to an amount it considers reasonable.
As this provision has not been consistently applied by SARS in the past, a misconception has arisen that SARS cannot question the taxpayer's estimate. In a Circular Minute issued in October 1998, SARS indicated that it is not administratively practical to apply the provision to every case and the application was thus being limited to situations where the estimate submitted by the taxpayer is based on a basic amount that is more than two years old.
In this situation, a revised taxable income will be determined by SARS. If the revised taxable income exceeds the submitted estimate by R1.5 million in the case of an individual, the taxpayer will be informed and, in the absence of a satisfactory explanation from the taxpayer, the revised estimate must be used in making the provisional payment.
SARS clearly has intentions of extending the scope of the above and to reducing the R1.5 million limit to a much lower amount.
Re-opening tax assessments
Taxpayers can apply to have assessments re-opened for a period of up to three years from the date of the assessment. The period of three years also coincides with the three-year prescription period in terms of which SARS can re-open an assessment. Any attempts by SARS to limit the three-year period available to taxpayers while retaining the three-year prescription period, would clearly be prejudicial to taxpayers.
If the above proposals are implemented, the impact on affected taxpayers will be significant. The bulk of these taxpayers are also likely to be in the upper-income brackets.