Budget 2023 gives relief to hard pressed South African taxpayers

The proposals in South Africa’s 2023 National Budget include welcome moves on boosting energy generation, relief for consumers and businesses, and improving the efficiency of tax collection.

The National Budget delivered today by South Africa’s Minister of Finance, Enoch Godongwana, showed that government is making some significant financial commitments to restore Eskom to viability and maintain social grants. However, with GDP growth projected at 1.4% on average from 2023 to 2025, and a potential tapering-off of the commodities boom over the medium term, how will government fund these commitments?

Below we analyse some of the key proposals on energy and other relief, as well as steps to protect the tax base, foster economic growth and ensure efficient tax collection.

Energy

We were pleased that government is taking steps to address the current electricity crisis, which the minister described as “the biggest economic constraint”:

• Government will provide R254 million in debt relief for Eskom (60% of Eskom’s total debt of R422 billion), in line with the promise made by the Finance Minister in the October 2022 Medium-Term Budget Policy Statement to take on between one and two thirds of the entity’s debt. ​ This relief, which comes with conditions, will enable Eskom to in​vest in transmission and distribution infrastructure and conduct maintenance;
• From 1 March 2023, businesses will be able to reduce their taxable income by 125% of the cost of an investment in renewables, with no thresholds on generation capacity for qualifying projects. This incentive will be available for two years. Individuals who install rooftop solar panels from 1 March 2023 to 28 February 2024 will be able to claim a rebate of 25% of the cost of the panels up to a maximum of ZAR15 000. This can reduce their tax liability in 2023/24, and will only be available for one year. Changes to the Bounce Back Loan Guarantee Scheme are also proposed, to incentivize renewable energy for SMEs. Government will guarantee solar-related loans to SMEs on a 20% first-loss basis; and
• With some municipalities (such as Cape Town) starting to allow feed-in tariffs, SARS will review what changes need to be made to the Income Tax Act to cater for the extra income from electricity sales. The City of Cape Town has said it will be able to pay cash for power fed into the local electricity grid from June 2023.

Other measures to provide much needed relief

• A 4.9% inflationary adjustment is being made to all personal income tax brackets and there is a corresponding increase in the medical tax credits and normal tax rebates;​
• The tax brackets for transfer duties, retirement fund lump sum benefits and withdrawals will be adjusted upwards by 10% to compensate for inflation;
• On the proposed two-pot retirement system, government will publish revised draft legislation, including details on the amount immediately available when the system is implemented on 1 March 2024;
• The social relief of distress grant continues until 31 March 2024, but there was no mention of extending it beyond that date or replacing it with the Basic Income Grant; 
• There was no increase in the general fuel levy or the Road Accident Fund levy, which was the case in the 2022 Budget as well; and
• The refund on the RAF levy for diesel, which currently applies to farming, forestry, fishing and mining, is extended to manufacturing of foodstuffs from 1 April 2023, for two years.

Steps to boost economic growth, protect the tax base and collect taxes more efficiently

• There was no mention of a further reduction in corporate tax, although the ultimate goal is 25%. The corporate income tax rate was reduced from 28% to 27% for years of assessment ending on or after 31 March 2023;
• However, the minimum royalty rate on oil and gas will be increased from 0.5% to 2%, while the maximum remains at 5%;
• Research and Development (“R&D”) incentives are being extended from 1 January 2024 for another 10 years and will be refined to be simpler and more effective. The “end-result approach” will be removed and R&D on internal business processes will no longer be excluded.
• Sin taxes increased by 4.9%;
• The Urban Development Zone incentive is being extended for another two years as further analysis and public consultation is needed;
• The health promotion levy will not be increased for two years, which is positive, but government will soon issue proposals to extend it to fruit juices and lower the 4g of sugar content per 100ml threshold;
• Later this year, SARS will review workplace and travel allowances in line with the greater trend of working from home; and
• Under SARS’ Vision 2024, all employer and third party data will be submitted on a monthly basis and SARS will include automated feedback of effective tax rates which are issued to employers to withhold PAYE on a real time basis. SARS proposes to have a final Business Requirements Specifications (BRS) document on monthly PAYE reporting issued in early March 2023, and for the new PAYE reporting system to be in operation from 1 March 2024 onwards. Key to this initiative is the SARS objective to collect income taxes due monthly, and not only every six months, from provisional taxes.

Other important steps in the Budget include:

• The proposal to withdraw Practice Notes 31 and 37 will be postponed to align the effective date with legislation;
• Various amendments are being proposed to section 23M, including to clarify the definition of “adjusted taxable income”, “creditor” and interest paid to non-residents and to extend the exemption to apply to South African lending institutions;
• The policy on the foreign business establishment exemption for controlled foreign companies (CFC) will be clarified to provide that all important functions for which a CFC is compensated must be performed by the CFC in that country or another company with facilities and taxation in the same country, and also form part of the same group as the CFC;
• National Treasury is proposing to align the distribution of income to non-resident beneficiaries of trusts with the distributions of capital gains specified in paragraph 80. Capital gains to non-resident beneficiaries distributed by trusts will be taxed in the trusts and National Treasury is proposing the same be done for income distributions;
• National Treasury is proposing to narrow the participation exemption for the sale of shares in foreign companies that form part of the same group as the seller, or where the shareholders are substantially the same;
• The participation exemption for the foreign return of capital from a CFC will also be amended to require an 18 month holding;
• VAT changes: National Treasury will clarify the VAT treatment of prepaid vouchers in the telecommunications industry, and of specific supplies in the short-term insurance industry; and
• National Treasury will also clarify the meaning of “adjusted cost” relating to the temporary letting of residential property.