Budget Speech

• Personal income tax brackets, rebates or medical tax credits.
• CGT rates and exclusions.
• The general fuel levy, customs and excise levy and the road accident fund levy.

• Two consecutive 50bps VAT rate increases.
• Transfer duty brackets each to increase by 10%.
• Above inflationary increase in sin taxes.

Amending the definition of “remuneration proxy”

The term “remuneration proxy” as defined in the Income Tax Act (1962) is often equated with “remuneration” as defined in the Fourth Schedule to the Income Tax Act. This equivalence is particularly relevant when the “remuneration proxy” serves as a surrogate to calculate remuneration for the current year of assessment. However, an unintended benefit arises for certain employees who, in the previous year of assessment, qualified for and claimed an exemption for foreign employment income.

For example, these employees may have a reduced remuneration amount in the current year when determining the value of a domestic residential accommodation taxable benefit. In this context, variable “A” in the formula relies on the definition of “remuneration proxy” in section 1 of the Act. It is proposed that the definition of “remuneration proxy” be amended to include amounts exempted under section 10(1)(o)(ii) of the Act.

Clarifying the inclusion of an amount assigned to a non-retirement fund member spouse under religious tenets

In 2024, the Pension Funds Act (1956) was amended to recognise court orders pertaining to the division of marital assets in accordance with religious tenets. However, the Income Tax Act requires a consequential amendment to paragraph 2(1)(b)(iA) of the Second Schedule to the Act to include amounts assigned to a non-member spouse in compliance with the tenets of a religion.

Closing loopholes in the ring-fencing of assessed losses

The current application of section 20A of the Income Tax Act enables taxpayers below the maximum marginal rate threshold to exploit the tax system by continuously offsetting losses from certain trades against other sources of income. This creates a loophole that leads to substantial revenue losses for the fiscus, as taxpayers receive full refunds of their employees’ tax when those losses are allowed. It is proposed that the threshold at which ring-fencing rules apply be reviewed and amended.

Reinstating the exemption for child maintenance payments funded from after-tax income

Child maintenance payments, which are not sourced from retirement funds, are made using after-tax income and paid to the parent or guardian living with the child. The paying party receives no tax deduction or relief for these payments, while the recipient is taxed on the maintenance received. Since these payments are intended to fulfil the fundamental obligation of supporting a child, taxing them in the hands of the recipient requires reconsideration to better align with the government’s social policy objectives. It is proposed that amendments be made to exclude child maintenance payments from the recipient’s taxable income to restore the original policy intent.

Clarifying the interest limitation rules

In 2021, the Income Tax Act was amended to strengthen rules that govern the limitation of interest deductions. These rules limit interest deductions in two instances. The first is when a South African debtor incurs interest and there is a direct or indirect controlling relationship between the debtor and creditor, plus the interest income is not taxed in the hands of the creditor (per section 23M of the Income Tax Act). The second is in respect of reorganisation and acquisition transactions (per section 23N of the Income Tax Act). It has come to the government’s attention that these measures require further clarification in the following areas.

Refining and clarifying the definition of “interest” to enhance certainty

The government acknowledges the complexity surrounding the definition of “interest” in section 23M of the Act and its use in the calculation of “adjusted taxable income”. It is proposed that this definition of “interest” only pertains to interest deductions that are tested for limitation. As a result, taxpayers should rely on the definition of “interest” contained in section 24J of the Income Tax Act to calculate “adjusted taxable income”.

Reviewing the carve-out for the interest limitation rules

The interest limitation rules do not apply to interest on debt in instances where the ultimate lending institution has no controlling relationship with the debtor and if the interest charged does not exceed the official rate of interest plus 100 basis points. It is proposed that back-to-back lending arrangements where there is no controlling relationship between the ultimate lending institution and the debtor also be eligible for a carve-out from these rules.

Clarifying the treatment of foreign exchange differences when there is no accrual for the creditor

The interest limitation rules acknowledge foreign exchange differences on foreign exchange instruments under section 23M(7) of the Act. However, it is unclear how foreign exchange differences should be treated when foreign exchange gains do not accrue to creditors. It is proposed to make it clear that the objective is to first test whether the underlying debt should be limited. Where this is the case, the foreign exchange difference thereon will also be limited.

Limiting interest deductions for reorganisation and acquisition transactions

In 2024, amendments were made to align the definition of “adjustable taxable income” and the formula applied to limit an interest deduction in section 23N of the Act with the definition of “adjustable taxable income” and the formula applied in section 23M of the Act. The effective date for the amendments is 1 January 2027 to give the National Treasury and affected stakeholders time to consider the impact of the proposed amendments. It is proposed that the government review the impact of the 2024 amendments during the 2025 legislative cycle with the potential for a proposal in the 2026 Budget.

Clarifying the rollover relief for listed shares in an asset-for-share transaction

The Income Tax Act contains rollover rules for asset-for-share reorganisation transactions. The provisions generally prescribe that the tax cost for assets acquired by a company in exchange for the issue of shares in that company to the seller be equal to the same tax cost of that seller.

In 2010, a unified special rollover regime for asset-for-share reorganisations was introduced to address the tax cost tracing problem where the relevant assets are listed shares, as the acquiring company could not be realistically expected to know the tax cost of the target shares held by each shareholder disposing of the listed shares (disposing shareholders). At issue is that the government’s policy intent was to specifically limit the special rollover regime relief to disposing shareholders holding less than 20% of the listed shares in the target company before the transaction.

It is proposed that the legislation be amended to align with the original policy intent and that the special rollover regime for listed shares be limited to shareholders holding less than 20 per cent of the equity shares in the target company before the transaction.

Reviewing asset-for-share and amalgamation transactions involving collective investment schemes

According to the discussion document on the tax treatment of collective investment schemes (CISs) published on 13 December 2024, transferring shares to a CIS without tax implications has allowed for unintended tax avoidance during changes of shareholdings in listed companies, as the realised gains in the shares are not taxed on transfer. The realised gains are also not taxed when the CIS disposes of the shares as part of a corporate restructuring. It is proposed that these provisions relating to asset-for-share transactions and amalgamation transactions be reviewed.

Debit and credit notes relating to a going concern as per section 8(25) of the Value-Added Tax (VAT) Act (1991)

The VAT Act only allows the vendor who acquired an enterprise as a going concern under section 11(1)(e) to issue debit and credit notes for the return of goods or services that were supplied by the selling vendor. It is proposed that section 21(1)(d)(ii) of the VAT Act be expanded to include the return of goods or services that were supplied by the transferor of a business as a going concern under section 42 or 45 of the Income Tax Act, where the goods or services are returned to the transferee.

Reviewing the scope of the intermediary provisions

Intermediaries may account for VAT on supplies made on behalf of foreign suppliers of “electronic services” as if these supplies were made by the intermediary. This, however, does not extend to supplies made on behalf of local suppliers. This results in the intermediary not being able to issue a single consolidated tax invoice for these supplies to the customer. It is proposed that widening the intermediary provisions be considered to include supplies facilitated on behalf of local suppliers.

Updating a portion of the Export Regulations

The wording of regulation 8(2)(e)(ii) of the “Regulations issued in terms of section 74(1) read with paragraph (d) of the definition of ‘exported’ in section 1(1) of the VAT Act” (the Export Regulations) seems to be causing practical difficulties in application. It is proposed that the wording of regulation 8(2)(e)(ii) be revised for ease of administration.

Reviewing the VAT treatment of testing services supplied to non-residents who are outside South Africa at the time of the supply, where services are supplied directly in connection with movable property situated in South Africa

Testing services supplied to non-residents, such as testing of medication or devices on patients (generally during clinical trials) or samples in South Africa, raises a problem because, for example, the patient also derives a benefit and section 11(2)(l)(iii) of the VAT Act will apply irrespective of the fact that the supply is being made to a non-resident. In certain cases, the testing services may be performed directly in respect of movable property, which is not subsequently exported, resulting in section 11(2)(l)(ii) of the VAT Act applying despite such movable property having no commercial value.

Although it may be argued that the results of the clinical trials are consumed offshore by nonresidents, the current wording of section 11(2)(l) of the VAT Act prohibits the application of the zero-rating on testing services. It is proposed that changes be made to the VAT Act to address this.

Reviewing the definition of “insurance”

In light of the decision in the Constitutional Court matter of Capitec Bank Limited v Commissioner for the South African Revenue Service (CCT 209/22) [2024] ZACC 1, it is proposed that the definition of “insurance” be revised.

Clarifying the VAT treatment of temporary letting of residential properties

For ease of administration, it is proposed that the VAT treatment of the temporary letting of residential properties under section 18D of the VAT Act and consequential sections of this Act be reviewed and updated.

Reviewing the VAT treatment of airtime vouchers supplied in South Africa for exclusive use in an export country

The supply of airtime vouchers in South Africa through the distribution chain for a foreign telecommunications supplier comprises two components, namely telecommunication services to be provided outside of South Africa and distribution services of the airtime vouchers in the country. Distributors that sell airtime vouchers that can only be used in a foreign country are charging such supplies at the standard rate. As these vouchers are typically supplied to distributors in South Africa or to foreign residents located in the country for the consumption of telecommunication services by such foreign residents’ family members in a foreign country, it is proposed that the VAT Act be amended in this regard.

Refining the definition of “equity shares” to cater for transfers by foreign companies

The terms “dividends” and “return of capital” are defined in section 1 of the Income Tax Act. Both definitions refer to amounts transferred by residents. There are separate definitions for “foreign dividends” and “foreign return of capital”. Based on the current wording of the “equity share” definition, it seems that shares in a foreign company are not considered and cannot be classified as equity shares. It is proposed that the definition of “equity share” be updated.

Interaction between sections 6quat and 23(m) of the Income Tax Act

Section 6quat(1C) of the Income Tax Act allows for the sum of any taxes paid or proved to be payable to any sphere of the government of any country other than South Africa to be deducted against income when determining that person’s taxable income. Section 23(m) of the Income Tax Act, subject to certain exclusions, prohibits deductions concerning any remuneration received from employment.

At issue is that the list of exclusions to the application of section 23(m) does not include a reference to the deduction contemplated in section 6quat. It is proposed that the list of exclusions contemplated in section 23(m) be extended to include any deductions contemplated in section 6quat(1C).

Interaction of controlled foreign company rules in section 9D with section 9H

Section 9H of the Income Tax Act, also known as the exit charge, provides that when a foreign company ceases to be a controlled foreign company (CFC), it is deemed to have disposed of all its worldwide assets on the date immediately before the date it ceases to be a CFC. Section 9D(2A) of the Act requires that the “net income” of a CFC be calculated as if the CFC were a taxpayer and tax resident. It has come to the government’s attention that some arrangements between South African holding companies and their foreign subsidiaries, which are CFCs, involve the CFCs acquiring all shares in the South African holding companies without triggering an exit charge. It is proposed that the Act be amended to ensure that the exit charge is triggered in this case.

CFC rules and comparable tax exemption

South Africa has a comparable tax exemption that applies to CFCs. This exemption allows the net income of CFCs not to be imputed under CFC rules if the tax they pay to foreign countries is at least 67.5% of what they would have paid in South Africa had they been a South African tax resident. However, the comparable tax exemption does not consider tax systems of countries that allow a refund to certain shareholders of a foreign company for tax paid by the company declaring the dividend. It is proposed that a tax refund to a shareholder should also be taken into account in applying the comparable tax exemption.

Taxation of trusts and their beneficiaries

In 2023, amendments were made to the rules relating to the taxation of trusts and their beneficiaries by limiting the flow-through principle to resident beneficiaries. It has come to the government’s attention that the interaction between sections 7 and 25B of the Income Tax Act and the tax treatment of income and assets vested in beneficiaries of trusts could have unintended consequences where non-residents are involved. It is proposed that these aspects be reviewed.

Refining deferral of exchange difference rules on debt between related companies

Section 24I of the Income Tax Act deals with the tax treatment of gains and losses on foreign exchange transactions. However, rules apply for postponing the taxation of exchange differences until the debt is realised. It is proposed that the policy be reconsidered so that deferred exchange differences are triggered on the portion of an exchange item realised during the year of assessment.

In addition, it is proposed to clarify the classification of debt that is not recognised in the financial statements for financial reporting purposes.

Customs voluntary disclosure programme

The Tax Administration Act (2011) provides for a voluntary disclosure programme but excludes customs and excise. It is proposed that the Customs and Excise Act be amended to provide for a customs and excise voluntary disclosure programme.

Timing of adjustment of bill of entry

Timing of adjustment of bill of entry It is proposed that section 40 of the Customs and Excise Act be amended in relation to the timing of the adjustment of the bill of entry to create flexibility in respect of adjustments made in a manner prescribed by the Commissioner. The required flexibility can be achieved by providing for the Commissioner to also prescribe the timing for such adjustments. The Commissioner may by rule determine a different manner to adjust a bill of entry – for example, by allowing a single consolidated document to be submitted to adjust various affected bills of entry. This could happen in instances of transfer pricing adjustments or where invoices for bulk export shipments are amended. In these instances, the mandatory adjustment of the affected bills of entry cannot happen “without delay” as currently required by section 40. SARS is also reviewing how a single document could be used to adjust various bills of entry in such instances.

Clarifying the meaning of audit certificate to be issued by public benefit organisations

Section 18A of the Income Tax Act provides that a claim for a deduction for a donation made to an organisation as specified in that section is not allowed unless supported by a receipt issued by the organisation containing the information as prescribed in that section. The section further prescribes that the organisation conducting mixed section 18A and non-section 18A activities must obtain and retain an audit certificate confirming that all donations received or accrued in the year for which receipts were issued were used solely to undertake activities covered by section 18A of the Act.

Some uncertainty exists about how the term “audit certificate” must be interpreted and whether it should bear reference to terminology contained in the Auditing Profession Act (2005). It is proposed that the term be clarified in the context of this section.

Clarifying “bona fide inadvertent error” for purposes of understatement penalties

The concept and scope of a “bona fide inadvertent error” has proven to be contentious. This concept is not explicitly used in similar understatement penalty frameworks, because these do not mix purely factual tests such as “substantial understatement” with taxpayer behaviours in a single provision. To clarify the scope of “bona fide inadvertent error”, it is proposed that “bona fide inadvertent error” be explicitly linked with “substantial understatement”.

• Dividends withholding tax at 20%;
• CGT inclusion rates;
• Interest and royalty withholding tax rates at 15%;
• Corporate income tax rate at 27% remains the same; and
• The fuel levy and road accident fund.

Personal tax brackets for individuals for 2026 remain unchanged from 2025, with the tax threshold for individuals below age 65 remaining at R95 750 (R148 217 for individuals aged 65 to below 75, and R165 689 for individuals aged 75 and above).

• VAT will increase to 15,5% from 1 May 2025;
• An additional 0,5% increase to VAT from 1 April 2026, totalling the VAT rate at 16%;
• Increase of 6.75% in excise duties on alcoholic beverages;
• Increase of 6.75% in excise duties on cigars and pipe tobacco and 4.75% on cigarettes and other tobacco products;
• No ad valorem excise duty on lower-value smartphones;
• Transfer duty is adjusted for the effect of inflation.