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Mei 2017
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Tax changes from a
farming perspective
E
very businessman knows that tax planning plays an inte-
gral part in the successful management of the business,
whether it is a big corporation or a medium-sized family
farming operation.
During the Budget Speech that was delivered on 22 February this
year, numerous tax changes were introduced that led to a bit of
uncertainty as to whether or not these changes will have a drastic
impact on a business.
Income tax changes
The most prominent change was the introduction of a new tax
bracket, taxing all taxable income of a natural person or special
trust exceeding R1 500 000 at 45%. This will have a substantial im-
pact on producers trading as sole traders, considering that all tax-
able income exceeding this amount will lead to an additional 4% tax
that will have to be paid in comparison to previous years where the
maximum marginal tax rate was 41% or lower.
Another drastic tax change was the increase in the taxation of trusts.
Trusts were previously quite heavily taxed at 40%, but this has now
been increased to an even heavier tax rate of 45%. This has a lot of
producers (using a trust as their business mechanism) worried about
the sustainability of a farm being run in the form of a trust.
Although the tax rates of companies remained unchanged at 28%,
the dividends tax was also increased from 15% to 20%, implying
that investors will now have to pay an additional 5% on their returns.
Capital gains tax
Capital gains tax effectively forms part of a person’s income tax li-
ability, but the changes in the income tax rate will now also influ-
ence the effective tax rate of capital gains in South Africa. From the
2017 year of assessment, 40% of a natural person’s capital gains is
included as taxable income, meaning that the highest effective tax
rate for a natural person was 16,4% (40% inclusion rate x 41% high-
est marginal tax rate).
With the increase of the income tax rate to 45%, the highest effective
tax rate payable on capital gains has now increased to 18% (40%
inclusion rate x 45% highest marginal tax rate). For companies, 80%
of capital gains have to be included as taxable income and with no
change in the tax rate of companies, the effective tax rate on capital
gains for companies remains at 22,4% (80% inclusion rate x 28%
income tax rate).
VAT
An increase in the VAT rate of South Africa was expected, but to no
avail. No drastic changes were announced with regards to VAT, but
there has been speculation over the past few years that some agri-
cultural items will be removed from the zero-rated items list, which
could also lead to a drastic change in the cash flow of a farm produc-
ing zero-rated items (such as maize or fresh fruit and vegetables).
This means that in future there might be an output tax of 14% pay-
able on the sale of the zero-rated items. What is also worth noting
is that a lot of registered VAT vendors have difficulty claiming their
refunds, especially with regards to the diesel rebates.
The diesel rebate is completed together with all other VAT-related
supplies on the same VAT return. If the VAT return is filed, it clearly
indicates the amount of VAT owing as well as the diesel rebate re-
fundable to the producer. Most producers then just pay the differ-
ence, which is the logical thing to do, but as seen over the last few
years, the full amount of VAT owing (before taking the rebate into
account) should be paid to SARS after which the diesel rebate will
be refunded.
The diesel rebates have also become increasingly difficult to claim,
with SARS now auditing numerous returns filed for diesel rebates.
Accurate records must be kept clearly showing the litres of diesel
consumed by each vehicle or tractor as well as when it was used and
the location where it was used. This measure is to ensure that no
phantom diesel rebates are claimed.
A producer under the compulsory threshold of R1 million has to
consider whether the benefit from being a VAT vendor exceeds
the administration and compliance costs that are associated with
VAT. Any person making more than R50 000 taxable supplies in a
twelve-month period can register voluntarily for VAT, but again with
the possibility of some agricultural products not being zero-rated
anymore the benefit of registering has to be considered carefully.
Tax-free investments
A person can invest up to R500 000 per lifetime in a tax-free invest-
ment. All income generated by this investment will then be tax-free,
irrespective of whether the income generated is in the form of inter-
est, dividends or capital gains.
This R500 000 limit is a per person limit and all tax-free investments
will be added together to determine if the threshold is exceeded.
A person will also be limited to invest no more than R33 000 per
year (previously R30 000). If the annual or lifetime limit is exceeded,
40% tax is payable to SARS on the amount whereby the contribution
exceeds the respective limits.
Trusts or companies?
Trusts are one of the most popular entities used in estate planning
in order to limit the amount of estate duty payable upon death, but
with the introduction of the new anti-avoidance measures (sec-
tion 7C of the Income Tax Act), one has to wonder whether SARS’s
focus on trusts will decrease or if it is something to expect for a lot
of years coming.
Although many jump to the conclusion that the better option to con-
sider is a company (only taxed at 28%), the tax rate alone cannot
be the only consideration when choosing the best entity to use for
either business purposes or estate planning.
The Companies Act can lead to very time-consuming aspects for a
business, not to mention the strict responsibilities placed upon its
shareholders. The dividends tax of 20% must also be considered,
especially if there will be a limited number of shareholders.
Conclusion
With the ever-changing tax legislation, it is important to stay on top
of all changes happening and plan your business’s tax accordingly
so as to ensure the sustainability thereof in the long term.
FOCUS
Money matters and financial services
Special
MARESE LOMBARD,
Faculty: Economic and Management Sciences, University of the Free State