Picture: 123RF/RAZIHUSIN
Picture: 123RF/RAZIHUSIN

In the next episode of Business Law Focus, we delve into the potential for extensive tax increases in the upcoming budget. Editor Evan Pickworth is joined by director at AJM Tax, Dr Albertus Marais, to unpack what already overburdened and overstretched taxpayers can expect.

Marais explains that close to 20% of budgeted expenditure will not be received as income, so this shortfall will need to be made up over time. However, he says extensive tax increases or a wealth tax are probably not likely. He points out that while both the supplementary budget and the medium-term budget policy statement of October 28 2020 proposed tax hikes, these were actually quite limited when compared to the rising tax gap.

Join the discussion:

In the interview, Marais also unpacks the SA Reserve Bank's Financial Surveillance Department’s first circular of the year, submitted in January, which ends the long-standing exchange control prohibition against these structures.

He says there has been a long-standing need — almost since the introduction of exchange controls to this country in 1961 — for the prohibition against these structures to be lifted.

The context

The effect of the Covid-19 pandemic led to the government’s tabling a supplementary budget on June 24 2020 to provide for an amended budget for the remaining part of the government’s 2020/2021 financial year to address how the increased budget shortfall (compared to the February budget tabled) will be funded.

While both the supplementary budget and the medium-term budget policy statement of October 28 2020 proposed tax hikes, these were actually quite limited when compared to the rising tax gap. These include an additional R5bn in tax revenue for the 2022 financial year, R10bn in each of the 2023 and 2024 financial years and R15bn in the 2025 financial year, compared to budgeted expenditure of more than R1.5-trillion annually.

A wealth tax, or extensive tax increases, are probably not on the cards as the taxpayer is already stretched and overburdened.

Meanwhile, public wages and payments towards government debt amount to a staggering 80% of the budget’s expenses in 2020. It is clear Treasury is looking at expenditure and it will be interesting to see if government can achieve cuts here.

Move to end exchange control prohibition against ‘loops’

Meanwhile, a key update on the position on so-called, “loop” structures has been provided. These would generally involve SA exchange control residents holding interests in SA assets via an offshore structure, be it through an offshore company or trust. Previously, these regimes were the subject of strict regulation and “loop structures” would only be allowed in very limited instances, such as where SA residents held shares in a foreign company which held interests of up to 40% of an investment back into SA.

The prohibition existed to address tax avoidance being perpetrated through using such structures, predominantly SA capital gains and dividend taxes. For example, if an SA individual would hold shares in an SA company through a Mauritian entity, the Mauritian entity would have been able to receive dividends and realise gains on sale of the SA shares at a much-reduced tax cost, compared to where the SA individual held those shares directly.

The recent policy decision of the Reserve Bank therefore, even though somewhat overdue, is to be applauded. This move came in January when the SA Reserve Bank’s Financial Surveillance Department published its first circular of the year, ending the long-standing exchange control prohibition against these structures.

Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.