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South African Budget 2019/2020

Creating value. Restoring trust

February 2019

It is time for renewal and as a country working together we are capable of achieving what we need for a healthy South Africa. This, we are told, will involve some necessary pain. We have been told that we need to buckle our seatbelts because the road is bumpy and that we need to take the good with the bad.”

– Lucia Hlongwane, EY Africa Tax Leader


Budget Insights


Tax Facts


Budget insights

Our EY tax experts share their views:

Business, financial sector: Kabelo Malapela


  • Study to find solutions for the tax treatment of “capital” amounts by portfolios of collective investment schemes
  • Ongoing review of the Real Estate Investment Trust (REIT) Tax Regime
  • Alignment of Insurance and Tax Legislation
  • Updating criteria to recognise foreign stock exchanges

Tax treatment of “capital” profits in a (CIS) collective investment scheme

Generally, income of a revenue nature received by the CIS is taxed in the hands of the investor, provided the CIS distributes the amounts within 12 months from the date of accrual.  Amounts of a capital nature, in the hands of the CIS, are however, only taxed in the hands of the investor on disposal of their participatory interest.

Profits emanating from frequent trades undertaken by the CIS, that are classified as capital are also not taxable until the investor disposes of its interest in the CIS. Often these short-term trades are motivated by business reasons, for example, rebalancing the fund in line with the index that it is tracking.
Generally, profits emanating from frequent trading should be taxed on revenue account.  Following the 2018 budget tax proposals, further amendments were proposed in the 2018 Draft Taxation Laws Amendment Bill, to tax these profits in the hands of the CIS. Due to the public comments received and the significant impact this would have had on the CIS industry as a whole; a decision was made to postpone the amendments and instead conduct a study (during  2019) to explore solutions that will not have wide reaching negative implications for affected groups.

Ongoing review of the Real Estate Investment Trust (REIT) regime

A REIT is a tax efficient, listed real estate investment vehicle, which distributes returns to investors. The distributed amounts are tax deductible provided certain criteria are met.

The current REIT tax regime governs listed REITs which are regulated by the Johannesburg Stock Exchange. Due to the implementation of new legislation regulating unlisted REITs that are widely held or held by institutional investors, it is proposed that their tax treatment be considered. We expect the proposed legislation to be in line with the existing listed REIT regime.

In addition, the REIT tax provisions contain inconsistencies around the narrow definition of rental income, which ultimately determines the tax deductibility of the qualifying distribution (dividend) of a REIT. Furthermore, some of the corporate roll over relief rules that allow for tax efficient restructuring within groups, do not efficiently cater for REIT structures.  The intention is to address these inconsistencies so as to allow REITs to remain an attractive investment alternative.

Insurance proposals

The tax aspects governing taxation of insurers is primarily governed by the 4 funds approach. With the introduction of a new 5th fund in March 2016, namely the Risk Policy Fund and the new Insurance Act introduced last year on 1 July 2018, a need was identified to introduce legislation to address administrative burden created by the existing legislation. It is proposed that definitions in the Income Tax Act will be revised in line with the new Insurance Act.

Revising the Income Tax Act criteria for recognised exchanges 

The Income Tax Act defines a recognised exchange as a stock exchange licensed under the Financial Markets Act (2012) or a similar exchange in another country that has been recognised by the Minister of Finance in the Government Gazette. Since 2001, the criteria used to recognise foreign exchanges have not been revised and a review of these criteria will be considered.

Business, mining sector: Trusha Ichharam


  • No changes proposed to mining tax legislation
  • Review of oil and gas tax regime

The mining industry has had a challenging year, with strike action causing the industry significant revenue loss. The industry remains the cornerstone of the South African economy as a major creator of employment.

No changes relating to mining tax legislation are proposed in the budget documents, which is in line with expectation due to this being an election year. The Davis Tax Committee’s Mining Report, released in November 2017, remains with Government and National Treasury and the recommendations contained in this report are still under consideration. These recommendations include, inter alia:

  • The removal of ring-fencing that is aimed at preventing the set-off of capital expenditure (capex) against non-mining income;
  • That the upfront capex write-off regime be replaced by an accelerated depreciation regime of 40/20/20/20; and
  • The gold mining formula be phased out for new projects and remain optional for existing mines.

The past year also saw controversial proposed changes to the Mining Charter. In the final Charter released in June 2018, the Black Economic Empowerment (BEE) shareholding remains at 26% for existing mining right holders and 30% for new holders. The existing holders have five years to top up to the 30% shareholding.

With the introduction of the Mineral and Petroleum Resources Royalty Act on 1 March 2010, the government expects to collect R8,340 billion in mining royalties for the 2019 fiscal year. The mining royalty calculation proves to be challenging, notwithstanding that the intention was to create non-complex legislation. In a recent case, held in favour of the taxpayer, SARS challenged the treatment of the Transport, Insurance and Handling (TIH) costs. As a result, National Treasury has amended the legislation to clarify the treatment of the TIH costs in relation to gross sales. Given this development, we expect to see further changes in the mining royalty legislation.

Tax legislation for the oil and gas industry is currently governed by the Tenth Schedule to the Income Tax Act. It is proposed that South Africa will review its oil and gas tax regime in 2019.

Business, incentives: Heleen Etzebeth


  • Energy-efficiency savings tax incentive extended to 31 December 2022
  • Employment tax incentive extended to February 2029
  • Additional funding allocated to Jobs Fund and Small Business Incubation Programme
  • Review of anti-avoidance measure in Special Economic Zones
  • Review of venture capital tax incentive regime

In his Budget Speech, the Minister of Finance notes that the energy-efficiency savings tax incentive, which was due to expire on 31 December 2019, will be extended to 31 December 2022. The aim of the tax incentive is to encourage additional investment in energy efficiency and to offset the tax burden on industry that will be imposed by the introduction of the carbon tax. During 2019, government will review the design and administration of this tax incentive to improve its ease of use, effectiveness and economic impact.

The employment tax incentive has been extended for a further ten years to February 2029. In addition, the income bands will be adjusted upwards to partially cater for inflation. The incentive will taper to zero at a monthly maximum income of R6,500 (previously R6,000).

The Minister also makes mention of the success of the Jobs Fund grant. The Jobs Fund is a vital complement to private sector job creation. Since its inception, the fund has disbursed R4.6 billion in grant funding and created over 200,000 jobs. The Jobs Fund is set to receive additional funding over the next three years. The Minister further noted that R481.6 million has been allocated to expand the Small Business Incubation Programme.

In his 2018 Budget speech, the Minister of Finance approved six special economic zones (SEZ) which allows for a reduced corporate tax rate of 15% together with other tax incentives. The SEZ regime will be refined to address the unintended misalignment between the tax provisions and the Special Economic Zone Act (2016).

In addition, the anti-avoidance measures relating to transactions between a company and its connected persons will be reviewed to address the unintended consequences to legitimate business transactions.

The venture capital company tax incentive provides a tax deduction for shares purchased in a venture capital company. In 2018, changes were made to this tax regime to prevent abuse of various aspects of this incentive. It is noted that some taxpayers are attempting to undermine other aspects of the regime to benefit from excessive tax deductions. It is proposed that these rules be reviewed to prevent such abuse.

Business, general: Mohammed Jada & Brigitte Keirby-Smith

Highlights – A more powerful SARS!

  • SARS to strengthen its operations, rebuild enforcement capacity, re-establish a large business division and set up a dedicated unit to combat syndicated tax evasion
  • Carbon tax to be introduced on 1 June 2019
  • Introduction of robust anti-avoidance legislation

Getting SARS on track bodes well for better revenue collection (which has been under-performing the last few years). This, coupled with a renewed vigour within SARS to tackle tax evasion, is good news for our economy. It is also proposed that tax loopholes be closed and tax legislation be updated as part of enhancing anti-avoidance measures. Business needs to ensure that they actively participate in the legislative setting process and now more than ever – ensure that its tax affairs are in order given the expected increase in SARS audit scrutiny.

Carbon taxes

Effective 1 June 2019, a carbon tax will be implemented. National Treasury will publish draft rules for consultation by March 2019. Further, the tax exemption on the sale of certified emission-reduction credits will be repealed from 1 June 2019. Let’s not forget that a new carbon tax on fuel has also been introduced (effective 5 June 2019) which will add 9 cents per litre to the price of petrol and 10 cents per litre to the price of diesel. 

The impact of these additional costs for energy-intensive businesses will need to be carefully modelled and we encourage business to actively participate in the consultation process over the next few months. On the plus side however, the section 12L energy-efficiency savings tax initiative is to be extended to 31 December 2022.

Anti-dividend stripping provisions

Share buy-backs and dividend stripping arrangements that involve the target company distributing a substantial dividend to its current company shareholder (thus diluting its value) and subsequently issuing shares to a third party, will be amended. Important to note is that the proposed effective date for these changes is 20 February 2019.

Value-shifting rules 

In asset-for-share transactions (where the market value of the assets acquired differs from the shares issued in exchange), the anti-avoidance legislation currently in place will be amended to  clarify that any difference in value arising due to a deferred tax liability relating to such asset, should not be subject to the value-shifting rules. 

Capital gain arising from anti-avoidance rules 

High-value assets transferred to a company in return for shares issued by the company (with a different value), triggers a deemed capital gain or a deemed in specie dividend for one of the parties. The company issuing shares in exchange for assets is also deemed to have acquired the assets for expenditure equal to the market value of the shares, but this does not include any capital gains previously triggered by the anti-value shifting rules, thereby resulting in possible double tax when the company subsequently disposes of the assets. It is proposed that the rules be amended to prevent this. 

Special interest deduction for debt-funded share acquisitions

Special interest deduction following company reorganisations after an acquisition: 

Current provisions allow a special interest deduction relating to debt-financed acquisitions of controlling shares in an operating company, but require that the acquirer of those shares assess whether they still qualify for the deduction under certain circumstances. It is proposed that this requirement be reconsidered if the acquirer remains a (direct or indirect) controlling shareholder of the specific entity after certain reorganisation transactions.

For start-up companies: 

It is noted that some taxpayers are claiming the special interest deduction for debt-funded capitalisation of newly established companies. As this deduction is intended for debt-funded acquisitions of a controlling interest in companies that already generate income, it is proposed that changes be made to ensure that taxpayers do not claim the deduction for unintended purposes.

Clarifying the interaction between corporate reorganisation rules and other provisions of the Income Tax Act

Exchange items and interest-bearing instruments: 

Clarity will be provided with regards to how exchange items and interest-bearing assets should be treated under a corporate restructuring. It is proposed that the transfer of these items/assets should be excluded from the rules on the basis that unrealised values on the date of transfer should be triggered in the transferor company.

Anti-avoidance provisions within intra-group transactions: 

Multiple anti-avoidance measures are contained within the corporate rollover provisions, however, it is not always clear as to how these measures interact with each other, with potential double taxation implications. It is proposed that clarity be provided as to how these measures interact.

De-grouping charges

Provisions relating to controlled foreign companies (CFC) in sections 9D and 9H determine that the year of assessment in which a de-grouping takes place, starts and ends on the same day. It is proposed that changes be made to align these provisions across the corporate reorganisation and CFC rules. 

Amending rules to allow company deregistration by operation of law

It is proposed to allow for a company law merger to be recognised as part of the steps to deregister a company, by operation of law. Typically, the section 44 amalgamation group relief tax rules would be used to implement this transaction (which calls for a transfer of assets). This clarification is welcomed.

Refining the VAT corporate reorganisation rules 

VAT relief applies in instances where assets are disposed of as a going concern as part of a corporate reorganisation transaction (sections 42 or 45). However, transfers of fixed property may not always involve a going concern, especially in a sale and lease-back situation. It is proposed that these VAT rule be amended to clarify the treatment in these instances.

International tax, core: Ide Louw


  • Continuous commitment to combat and expand base erosion and profit shifting initiatives
  • Rebuilding SARS’ critical skills and harnessing information-sharing agreements
  • Addressing the controlled foreign company rules
  • Aligning the permanent establishment definition with that in the multilateral instrument

South Africa has played an active role in the efforts to combat base erosion and profit shifting through the Organisation for Economic Co-operation and Development (OECD)/Group of Twenty Inclusive Framework. It remains a key focus area, and South Africa intends to expand the work already under way to combat base erosion and profit shifting.

The commitment to re-establish the SARS large business centre, recruiting additional resources, and harnessing opportunities arising from information-sharing agreements between national tax authorities will be key to SARS’ successful enforcement and litigation initiatives.
Other international tax proposals include:

  • In 2012, the Supreme Court of Appeal held in the case of CSARS v Tradehold Ltd (132/11) [2012] ZASCA 61, that a tax treaty overrules domestic law in the instance of a clash. As South Africa accepted a narrow permanent establishment definition as contained in the OECD multilateral convention, it is proposed that the domestic definition of permanent establishment be aligned to that contained in the multilateral instrument.
  • Taking cognisance of the global trends towards reducing corporate tax rates, it is proposed that the 75% high-tax exemption contained in the controlled foreign company rules (section 9D) be reduced.
  • Additional robust measures to be introduced in the controlled foreign company rules (section 9D) to address the circumvention of the anti-diversionary rules.
  • Revisiting the seven-year limit for foreign tax relief on blocked foreign funds – most likely due to a number of countries across the African continent having liquidity and currency challenges.
  • The reintroduction of the incorporation requirement for a domestic treasury management company to qualify for relief under the regime.
  • Other changes include revising the criteria for recognised exchanges and clarifying the interaction of capital gains tax and foreign exchange transaction rules.

International tax: TP Michiel Els


  • Enhancemnet of information-sharing agreements
  • Alignment of transfer pricing rules with OECD Model Tax Convention

It is clear from Finance Minister, Tito Mboweni’s, budget speech that SARS will be strengthening its IT team and IT systems so as to enable the collection of more taxes. It is further proposed that SARS will enhance its information-sharing agreements with other national tax authorities to combat base erosion and profit shifting.

In recent years, the submission of transfer pricing documentation has become compulsory for taxpayers with affected transactions above a specified threshold. Included in the tax proposals, is a review of the “affected transaction” definition set out in the transfer pricing rules which currently applies to transactions between connected persons as defined. This differs from the OECD Model Tax Convention, where transfer pricing rules apply to transactions between associated enterprises. The difference between connected persons and associated enterprises is significant. If a broad interpretation of associated enterprises is adopted, this could result in a wider application of these transfer pricing rules, and may lead to the arm’s length principle being applied to situations for which it was not intended. Further, the reference to associated enterprises could change the way taxpayers document their international transactions as the element of “control” would play a far greater role in determing what constitutes an affected transaction.

Taxpayers should also expect changes to the way in which transfer pricing is being regulated. Documentation will be even more important in justifying compliance with the arm's length principle. It therefore comes as no surprise that SARS is extending and tightening controls over cross-border transactions between companies within the same group, with a view to stemming the illicit outflows of funds from South Africa and improving revenue collections.

Individuals: Elizabete Da Silva


  • Unchanged personal income tax brackets
  • Unchanged medical tax credits
  • Extending the scope of amounts constituting variable remuneration
  • Updating the Employment Tax Incentive Act in line with the National Minimum Wage Act
  • Increase in the eligible income bands for the employment tax incentive 

The 2019 budget was uneventful in as far as it relates to individual taxpayers. Unlike previous years, where tax brackets were subjected to inflationary adjustments, no such changes are to be effected for the 2020 tax year. And while the primary, secondary and tertiary rebates will be increased by 1.1 per cent, there is no change proposed to the monthly medical tax credit for medical scheme contributions.

A controversial topic for South Africans working abroad, is the impending amendment to the foreign employment income exemption which will come into effect on 1 March 2020. Effective from that date, employees qualifying for the foreign employment income exemption will no longer receive full exemption in that only the first R1 million of foreign earned remuneration will qualify for exemption. It is proposed in the Budget documents that some form of relief be granted to the employees working abroad, where they are subject to monthly withholding tax in South Africa and in their host country. This will be achieved by allowing the South African employer to reduce the monthly employees’ tax withheld by the foreign taxes withheld on the same income. This, however, will provide limited relief for employees working in low-tax jurisdictions. It is further noted that workshops will be held with stakeholders before the implementation of any resulting amendments which will be processed during the 2019 legislative cycle. The dates for these workshops have already been confirmed for March, and taxpayers and employers are invited to raise their concerns in order for these to be tabled at this forum.       

Section 7B is an anti-avoidance provision that defers the deduction to employers of variable remuneration to when the amounts are actually paid. It therefore aims to match the timing between the accrual and payment dates of certain forms of variable cash remuneration. It is proposed that the scope of section 7B be extended to include certain qualifying payments.

Given the recently promulgated National Minimum Wage Act (2018), amendments are required to the Employment Tax Incentive Act so as to align these two pieces of legislation. In addition, the income bands in the employment tax incentive will be adjusted upwards to partially cater for inflation. The incentive will taper to zero at a monthly maximum income of R6,500 (previously R6,000).

Tax admin: Mmangaliso Ndzimande

Amendments to the non-compliance penalty provisions

In accordance with the budget documents “[i]t has emerged internationally that offshore structures and arrangements are being designed in an attempt to circumvent financial account reporting under the OECD’s Common Reporting Standard”. This standard is used for the exchange of information between countries.

In order to identify and counter these structures and arrangements, it is proposed that the OECD’s model mandatory disclosure rules be implemented in South Africa. It is further proposed that penalties (similar to those currently in force for non-compliance with the reportable arrangement legislation) be inserted into the Tax Administration Act to sufficiently address non-compliance with the rules.

Curbing smuggling and illicit flows - Confidentiality provisions in Customs Legislation

The disclosure of certain information is currently prohibited under the Customs and Excise Act. The Government is, however, considering making amendments to the Customs and Excise Act in order to enable the disclosure of “names and associated reference numbers of customs clients, as well as other information necessary to verify legitimate financial flows”. The proposed amendments will align the Customs and Excise Act with a similar approach adopted in the Tax Administration Act.  

Implementing the SARS Commission recommendations

The budget documentation states that “South Africa requires its tax administration to be efficient, effective and impartial”. In this regard the government has started implementing certain “urgent recommendations” put forward by the Nugent Commission including inter alia:

  • The appointment of a new SARS Commissioner;
  • The re-establishment of a division that will focus on large businesses (to be launched in April 2019);
  • A new Illicit Economy Unit (which was launched in August 2018) to investigate syndicated tax evasion schemes in high-risk sectors, including the tobacco trade; and

SARS has taken steps to “strengthen the management of its information technology systems, rebuild its technical prowess, and harness opportunities arising from information-sharing agreements between national tax authorities”.

Indirect tax, VAT: Leon Oosthuizen


  • Review of inter-group relief for E-services effective 1 April 2019
  • List of zero-ratings expanded to support poor households
  • SARS strengthening of IT team and IT systems to impact VAT vendors
  • VAT refund backlog being cleared
  • Constitutional review of section 72 may impact taxpayers facing VAT legislative difficulties

The draft regulations on E-services effectively subjects foreign suppliers of electronic services, to a recipient in South Africa, to Value-Added Tax (VAT). While these draft regulations do provide relief for supplies between a “group of companies”, this definition requires a direct or indirect shareholding of 100%. As many South African companies have a B-BBEE shareholder and/or an employee share scheme in their shareholding structure, this inter-group relief has limited application. It is proposed that the “group of companies” definition in the draft regulations be amended to reflect this situation and thereby expand the scope of this inter-group relief. The new E-services rules will be effective 1 April 2019.

The VAT rate increase during 2018 had an impact on the poor. Government has therefore been forced to revisit the list of zero-rated items. In support of poor households, white bread flour, cake flour and sanitary pads will be zero-rated effective 1 April 2019.

SARS is strengthening its IT team and IT systems. This is a positive development and should assist SARS in increasing its ability to collect taxes. With VAT being a transaction tax, the most significant impact of improved IT systems may be felt by VAT vendors.

Welcome news for taxpayers is that SARS is making progress in clearing the VAT refund backlog. Outstanding refunds reduced from R41.8 billion in September 2018 to R31 billion by the end of January 2019.

Taxpayers facing difficulties with the VAT Act often rely on section 72 rulings which provides SARS with discretionary powers to assist taxpayers in cases where such difficulties arise. A constitutional review of this section is proposed which may place a limitation on SARS’s current discretionary powers.

Indirect tax: Customs Leon Oosthuizen


  • Carbon tax will be implemented effective 1 June 2019
  • Additional carbon tax to be included in the price of fuel effective 5 June 2019
  • Road Accident Fund levy and the general fuel levy to increase effective 3 April 2019
  • Specific excise duties on tobacco and certain alcoholic products increased effective 20 February 2019
  • Increase in Health Promotion Levy

Carbon tax

The Minister of Finance confirmed that the much-anticipated carbon tax will be implemented effective 1 June 2019. Carbon tax aims to lead South Africa to reducing greenhouse gas emissions based on the “polluter pays” principle. To ensure a smooth administration, SARS will publish draft rules for consultation by March 2019.
Carbon tax will be levied at R120 per ton of carbon dioxide equivalent. Tax incentives will, however, be introduced to reduce the impact of the carbon tax on energy intensive sectors, including the mining, iron and steel industries. Tax incentives will be available through tax credits for the renewable energy premium and the existing electricity generation levy.

The Minister also announced that a carbon tax will be levied on fuel at a rate of 9 cents per litre for petrol and 10 cents per litre for diesel. This means that South Africa will introduce another levy on fuel over and above the existing levies already included in the fuel price. This carbon tax on fuel will be effective 5 June 2019.

Fuel levies

Fuel levies are also increasing and will raise the price of petrol and diesel by 20 cents per litre, effective 3 April 2019. This increase comprises a 15 cent per litre increase in the general fuel levy and a 5 cent per litre increase in the Road Accident Fund levy.

Therefore, taking all the above into account, the overall increase in the petrol price will be 29 cents per litre (taking the tax portion to R6.63 per litre) while diesel will increase by 30 cents per litre (taking the total tax portion to R5,49 per litre). It is expected that the increase in these levies will generate an additional R1.3 billion in tax revenue.

Sin taxes

As expected, increases of between 7.4 and 9 per cent on excise duties on tobacco and certain alcoholic products will be effective 20 February 2019. Treasury expects that the increases will raise an additional R1 billion in tax revenue.

Health Promotion Levy (HPL)

The HPL, which taxes “sugary beverages”, was implemented on 1 April 2018. In terms of the current legislation, sugary beverages include those beverages with both intrinsic and added sugars, including other sweetening matter. 100% fruit juices and most dairy products are excluded and do not attract the HPL. The HPL will be increased to 2,21cents per gram (previously 2,1 cents per gram) of the sugar content that exceeds 4 grams per 100ml.

Pre-Budget expectations

Watch as EY Africa tax experts, Lucia Hlongwane, Mmangaliso Nzimande, Mohammed Jada and Brigitte Keirby-Smith, share their views on the topic.

Will the speed of the digital tax revolution leave you behind?

Key Contacts

EY - Mmangaliso Nzimande

Mmangaliso Nzimande

Africa Tax Controversy Leader

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EY - Leon Oosthuizen

Leon Oosthuizen

Indirect Tax Services Leader

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EY - Natasha Meintjes

Natasha Meintjes

Global Compliance and Reporting Services

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EY - Mohammed Jada

Mohammed Jada

Business Tax Services Leader

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EY - Marius Leivestad

Marius Leivestad

International Tax Services Leader

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EY - Ekow Eghan

Ekow Eghan

South Africa Tax Leader

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EY - Chad Schaefer

Chad Schaefer

People Advisory Services Leader

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