This is according to Adam Samie, CEO of Lion of Africa Insurance, who says improved infrastructure will mitigate risks from a disaster management perspective. “The need for improved infrastructure was highlighted by the recent flooding across South Africa which caused severe damage and hampered service delivery.”

Samie says that new infrastructure projects, both regional and national in scale, will require more public / private partnerships between government and insurers, which will have a positive impact on the short-term insurance sector.

“Improved infrastructure will have a spin-off effect on the insurance sector as a whole, which will be required to increasingly develop and put in place innovative risk solutions. For example, infrastructure expansion pertaining to our ports and railways or large scale construction projects will now require renewed expertise in marine and engineering insurance respectively.”

He adds that improved infrastructure funding will also have a positive effect at a municipal level as the majority of claims are often a result of insufficient maintenance. “Traditionally, this is not necessarily due to negligence on the part of municipalities, but simply infrastructure failure as a result of lack of maintenance.

“We welcome the announcement of the formation of the Municipal Infrastructure Support Agency in late 2012, which will focus on rural municipalities that lack planning capacity. This will ensure the ongoing maintenance and improvement in infrastructure and will also help to avoid paying for costly large-scale replacements. The fact is that maintenance is far cheaper than replacement and rural municipalities in particular will now pay cheaper insurance premiums due to proactive risk management.”

Samie also welcomes the measures that will be put in place to combat financial mismanagement by government departments and municipalities, as well as ensure effective infrastructure spending. “This will ensure value for money and also aid the development of local suppliers and support industries such as insurance.”

He says that overall, the insurance sector can be satisfied with the 2012 Budget Speech. “The expansion in infrastructure investment is one of the central priorities of this year’s budget and will not only improve the quality of life of people living in poorly maintained environments, but also aid other key challenges such as job creation and expanding our economy,” concludes Samie.

A positive announcement is that certain loans from South African companies to foreign (African) subsidiaries will be treated as equity in nature. South African groups that set up operations in other African countries often take many years before their foreign operations become profitable. Commercially, it does not make sense to charge interest on loans to loss making operations. However, failure to charge interest creates the risk of transfer pricing adjustments in South Africa. If the loans are treated as equity in nature, it will allow for interest free loans to be made, in particular during start-up phases, which is certainly positive news for these groups.

The headquarter company regime was introduced in January 2011 to promote South Africa as a gateway into Africa. Since it was announced and the first version of the legislation governing the regime was introduced, there have been many amendments, mostly positive, to make the regime more attractive to foreign investors. A further positive development, is the announcement by the Minister of Finance that the legislation will be refined to deal with issues faced by headquarter companies that trade in foreign currencies and also to deal with transfer pricing issues faced by these companies.

The Minister not only stuck to his previously announced intentions to proceed with consolidating the finances of the South African government, albeit at a relatively slow pace so as not the jeopardise the expected gradual recovery in the economy, but he even tightened his projections marginally. For example, the projections for net government debt now show debt to stabilise at 38,5% of GDP compared with 39,7% previously, although the commensurate number for gross debt remains at 42,4%.

Slight upward revisions to revenue projections, combined with small downward adjustments to expected expenditure, will result in the budget deficit being on average about 0,5% of GDP smaller in the next three years than projected in the Medium-Term Budget Policy Statement in October 2011. Of course one can still question the feasibility of these intentions because they rely on some debatable assumptions, for example cost-of-living adjustments for civil servants averaging a below-inflation average 5% per annum in the next three years. In fact, the upward revision to the National Treasury’s inflation forecasts in the near term means this assumption is now even more heroic than previously.

The focus of the budget is in the right place, emphasising the pre-eminence of higher inclusive economic growth as the primary and only sustainable way of reducing unemployment, poverty and inequality. The expansion in social grants is coming to an end, with the rate of increase levelling off. To quote the Minister: “Redistribution is not a substitute for economic growth and job creation”. It is interesting to note from the budget speech that the social wage is averaging R3 940 per month for a family of four.

The budget furthermore realises that the private sector is expected to be the primary driver of this process – one only hopes the Government will not be disappointed in its expectations, lending further support to those people in government who are pushing for the state to play a much more aggressive leading role in economic development.

There are numerous measures contained in the budget that will support this trend, for example the much-increased incentive to households to save while government dissaving is also set to be eliminated by 2014/15, and the reduction in taxes on small business and the simplification of tax procedures for them. However, it is regrettable is that even more aggressive steps are being ruled out by a lack of resources.

As expected, the financial burden of the proposed infrastructure plans is to have little direct impact on the national balance sheet and will be carried by state-owned enterprises, development financial institutions, and the private sector because of the lack of manoeuvrability in the national budget. Any increase in the state’s contingent liabilities because of guarantees being granted to public entities to facilitate their access to the capital market and lower their cost of borrowing can nevertheless not be ignored.

An interesting development is the proposed new format for the consolidated government account, creating separate operating and capital accounts, each with its own revenue base and resultant balance. This will help to focus the minds of people in government on the progress achieved in changing the composition of government expenditure in favour of greater capital spending at the expense of current expenditure. This harks back to the 1970s when the government accounts were similarly split.

However, although the spotlight is on the Minister of Finance and the National Treasury on budget day, one should always bear in mind that the budget is nothing more than a summary of the financial implications of the policies followed by government collectively. The budget will therefore only be as good as its implementation by all involved, and unfortunately the capability constraints in the civil service are well documented. Attempts to bypass these constraints, especially where capital spending is concerned, by creating special agencies to execute plans, are welcome, but care should be taken not to effectively raise costs by duplicating dysfunctional structures.

However, no mention is made of the budgetary implications of these proposals, neither of the amounts involved (with the exception of Transnet), nor how they are to be financed and over what time frames. It is also not clear to what extent the plan includes projects that are already in the pipeline and budgeted for. At this stage public sector infrastructure expenditure is budgeted to increase at an average rate of 5,6% per annum in the next three years, declining from 7,8% of GDP in 2011/12 to 6,8% of GDP in 2014/15. These numbers clearly do not support a major new infrastructure drive by Government.

We will therefore have to wait for the Budget to see whether there are any changes to the medium-term budget to accommodate the initiative. The MTBPS nevertheless acknowledges that “financing the economic support package will require significant additional resources”.

The unfortunate reality is that there is no fiscal space to accommodate the jump in government expenditure implied at face value by the infrastructure plan. The regrettably sharp increase in current expenditure in the past three years will haunt the fiscus for many years to come. The National Treasury was therefore spot-on in emphasising in the MTBPS that aligning the public finances with the objectives of growth and development requires a reprioritisation of expenditure. The MTBPS also mentions that excess reserves and cash held by government entities need to be mobilised to this end.

The unavoidable conclusion is that the financing of the infrastructure drive will largely come from public-private partnerships (as foreseen in the National Development Plan) and from persuading institutional investors to take up bonds issued by the semi-government institutions that will be at the forefront of implementation (as hinted in the New Growth Path document). Whether the latter action is necessary is a moot point, as institutional investors will surely not object to taking up bonds issued at market-related returns.

The President’s announcement that he will convene a Presidential infrastructure summit to discuss the implementation of the plan with “potential investors and social partners” points in this direction. My expectation is that the President may well be surprised by the positive response he will receive. Businesses that have been hamstrung in their expansion plans by infrastructure bottlenecks will be only too willing to cooperate in resolving them. Institutional investors have set up a number of funds specialising in socially responsible investment, including infrastructure, in recent years, and the growth of these funds has been restrained by a dearth of investment opportunities more than anything else.

The 2012 budget was delivered in an environment where economic uncertainty will remain with us for a while. The challenge, as Minister Pravin Gordhan puts it, was to ‘write a new story about SA – the story of how working together we drove back unemployment and reduced economic inequality and poverty’.

Mr. Gordhan also emphasized that South Africans should not ask what the government can do for them but rather what I can do. The solutions that we adopt in South Africa we ourselves have to implement.

The budget was in line with what markets expected. The challenge for Mr. Gordhan would be to keep the wage bill at 7% where it was decreased from last year’s 11%

Although there was an income tax relief of 9.5 billion rand, one has to bear in mind the hidden taxes so to speak. So what does it mean for the man on the street?

Smokers will pay 58 cents more for a packet of cigarettes and a bottle of wine will cost you 18 cents more. The fuel levy increased by 20 cents a litre plus the eight cents a litre increase in the Road Accident Fund levy. Capital Gains Tax for individuals and special trusts will increase from 1 March from 25% to 33.3% Companies and Trusts will see an increase from 50% to 66.6% Withholding tax on dividends will be implemented on 1 April 2012, but there is an incentive to save in that Pension funds will not be subjected to this.

I would suggest that South Africans make the most of the available tax concessions to save. An introduction of tax exemptions on short and medium term savings was proposed. Proposals include a saving of up to R30 000 per annum and up to R500 000 over a lifetime where no interest or dividends or Capital Gains Tax would be levied. Also remember the current tax exemptions on retirement provision and medical aids. With the new withholding tax on dividends, retirement annuities will be the most tax efficient vehicle to save for your old age.

Up to now, taxpayers qualified for a set monthly deduction on their taxable income, based on their family composition. It was contended that these monthly deductions were more rewarding to wealthier taxpayers. As an example, if you pay tax at a rate of 40%, your medical tax benefit is 40% of the set deduction (R720 x 40% = R288), whereas a taxpayer with a tax rate of 18%, only receives (R720 x 18%= R129).

The new system ensures the same monetary benefit to everyone in the form of tax credits. This will operate in a similar fashion as the tax rebates afforded to individuals in that it reduces the tax payable by an individual (and not the taxable income). The tax credit amounts have been set to closely replicate the level of benefit a taxpayer in the 30% tax bracket was receiving within the 2011/2012 tax deduction system. Therefore individuals in lower tax brackets will receive slightly more than before and individuals in higher tax brackets slightly less in monetary terms.

Tax credit system for the 2012/2013 tax year

How the new tax credit system will impact employers

The employer does not get any additional benefit over the tax deduction it gets for the salary bill. The employee therefore gets the benefit of a tax credit. This change will impact payroll systems, as the tax credit will now have to be deducted from each employee’s PAYE tax amount, as opposed to reducing the employee’s taxable income as before.

Contributions made on behalf of retired employees by ex-employers (or an insurance company) remain a taxable fringe benefit.

Comparative example demonstrating different tax positions (in 2011/12 amounts)

Proposals being considered for the 2013/2014 tax year

· Taxpayers under the age of 65 – convert additional out-of-pocket medical expenses exceeding 7.5% of taxable income into a tax credit at 25% (doing away with tax deduction system)

· Disabled taxpayers or taxpayers with disabled dependants – convert additional out-of-pocket medical expenses into a tax credit at a rate to be determined

· 65 years and above – convert out-of-pocket medical expenses into a tax credit at a rate to be determined

Issued By: Bradly Howland Account Manager Redline on behalf of: Momentum Health

The new system ensures the same monetary benefit to everyone in the form of tax credits. This will operate in a similar fashion as the tax rebates afforded to individuals in that it reduces the tax payable by an individual (and not the taxable income). The tax credit amounts have been set to closely replicate the level of benefit a taxpayer in the 30% tax bracket was receiving within the 2011/2012 tax deduction system. Therefore individuals in lower tax brackets will receive slightly more than before and individuals in higher tax brackets slightly less in monetary terms.

The bottom line for consumers

The 2012 Budget again asks us to tighten our belts, focus on savings and to contribute a little more to the state coffers. Consumer Price Inflation, which on the back of rising food and petrol prices, is expected to increase to 6.2% this year, before tapering off to 5.1% in 2014.

Increases in sin taxes will be between five and eight percent this year and is always seen as a positive re-enforcement of moderation, however in context this is one example of how consumers will have less income available for all household expenditure, which also includes medical cover.

Medical cover can easily be up to 10-15% of the average family’s monthly household expenses, so consumers are encouraged to plan for this, as if you would your normal budget.

Having extra cover in the event of hospitalisation or chronic illness is important for the long-term health of your family and your pocket.

When looking for the right healthcare cover, most consumers want solutions that suit their unique needs, not products designed for the general population.

We have seen this trend increase dramatically over the last few years with more and more consumers buying different types of options that suit their individual needs better.

Many medical schemes now offer a range of affordable products with individual tailoring to maximise cost savings.

Members are encouraged to participate in their medical scheme’s wellness programmes and savings options. These not only help make being active more rewarding through added benefits such as gym memberships, but also help members to minimise any out-of-pocket health expenses.

Flexible complementary products, such as Momentum’s HealthSaver, have a prominent role to play in supplementing access to private healthcare cover, as it assists members with a dedicated savings account to allow them to tailor their day-to-day cover to their unique needs. This can also assist members with the funding of medical expenses that is typically not covered by their medical aid, such as cosmetic surgery.

Medical schemes have also negotiated with designated healthcare service providers to keep costs low for members, so it is important to tap into these. Members choosing to belong to options using these network providers typically benefit from a lower monthly contribution. Using a healthcare professional [hospitals, GP’s and pharmacists] outside of your medical scheme’s specified partner network could unfortunately mean that health claims are only partly reimbursed, resulting in a costly co-payment.

In addition, consult your pharmacist about generic medicines and how these can work for you. Generic medicines are just as effective as brand names and typically cost much less.

“Trusts continue to be hammered in respect of Capital Gains Tax which does not bode well for wealth creation.”  – David Nathan, senior partner Grant Thornton

“We were disappointed that dividend tax has effectively been increased by 50% (from 10% to 15%). STC used to be payable by companies at 10% of the dividend whereas now the shareholder pays and the rate will be 15%.”- David Nathan, senior partner Grant Thornton

“The Minister said we should turn our country into a true gateway for investment and development into Africa.  However we’re disappointed that he has done nothing to abolish or even to mitigate the wasteful and unnecessary bureaucratic system of exchange controls.” Leonard Brehm, national chairman of Grant Thornton SA

“The Minister said the government is committed to an environment that will encourage business investment.  Why then did he put the CGT rate up by one third and the dividend tax rate by 50%? This simply punishes investors.” Leonard Brehm, national chairman of Grant Thornton SA.

“We’re disappointed that nothing further has been mentioned about the abolition of Estate Duty which was alluded to several years ago. Estate Duty coupled with a higher Capital Gains Tax is detrimental to many people who have managed to accumulate wealth in their lifetime. ” David Nathan, senior partner Grant Thornton Johannesburg.

On  the increase to the dividend tax

“Certain listed companies have announced a delay in declaring their dividends pending the introduction of the new dividend tax system, but they now need to make other provisions. Following the changes in the dividend tax rules announced today, it will provide companies with an incentive to declare dividends before 1 April.” Neville Sweidan, Partner Grant Thornton

SMME support

“Regarding small, micro and medium sized enterprises, it is encouraging that there is some tax relief given to small, micro and medium enterprises. The reduction in the administrative burden is also welcomed.” Cliff Watson, executive tax manager, Grant Thornton

Gauteng tolls

“The special appropriation of R5,8 billion towards the debt related to the project, is encouraging. The idea of the halving and capping of these fees is welcomed. However, it should be taken into account that a person with an e-Tag would need to travel approximately 1833 km per month, or 46 km per day one way on the toll road to reach the cap of R550 per month. In addition to this, individuals would spend an average of R51,24 per month following the increases in the fuel levy and Road Accident Fund.” Cliff Watson, exeutive tax manager Grant Thornton Johannesburg

Indirect taxes

“The special economic zones are welcomed – it could create a possible reduction in headline corporate tax rate for businesses within the selected zones.” Wian de Bruyn, Associate Director, Grant Thornton Johannesburg

NHI

“It is worrying that the taxpayer is still in the dark as to how NHI is going to be funded.” Barry Visser, Senior tax manager, Grant Thornton, Johannesburg

Raod Accident Fund

“In light of capping of Road Accident Fund benefits, the increase in the Road Accident Fund levy is difficult to understand, unless there are more serious problems in the RAF that have been publicised.” Neville Sweidan, Partner, Grant Thornton

Customs

“It is encouraging that there will be a continued focus by customs on import consignments to review the value of imported goods.” Wain de Bruyn, Associate Director, Grant Thornton

Carbon tax

“It seems likely that the government will be moving in the direction of a draft policy paper some time this year.” Wian de Bruyn, Associate Director, Grant Thornton Johannesburg

VAT

“The VAT exemption for bargaining councils and political parties’ income is encouraging, as the move is to be in line with other similar exemptions. There are proposals to alleviate double vat charge on certain supplies or importation of goods.” Cliff Watson, executive tax manager

Capital Gains Tax

While the relief is encouraging regarding the exclusions for primary homes, the CGT inclusion rates have increased and individuals will pay 3,3% more while companies’ contribution will increase by 4,6%.” Barry Visser, Senior Tax manager Grant Thornton

On infrastructure, support and development

“We agree with the Minister where he emphasises that business should invest in our future – he alluded to 43 planned public infrastructure projects of which transportation and logistics, social infrastructure and energy were the main focus areas.  Yet he provided no clarity or role for the Private Sector or on PPPs in general.” Christelle Grohmann, director Grant Thornton Advisory Services.

“To further invest in the EDZs (economic development zones) in order to use them as a mechanism for infrastructure growth would require more specific detail,.  It makes it hard to entice big investors into these zones without detailed information specifically relating to the ROIs and overall worth.” Christelle Grohmann, director, Grant Thornton Advisory Services.

On Tourism

“We are very disappointed with the lack of mention of budget allocations for the Tourism sector other than a brief mention with no data on SANParks.  This is disappointing given expenditure and investments in 2010 – it indicates a serious lack of continuity.” Lee-Ann Bac, director Grant Thornton Advisory Services.

“The detailed budget estimates show an encouraging increase from R52 million to R70 million – however, this is less than $10-million and paltry compared to our biggest tourism competitor (Australia) that has an annual budget of $170 million.” Lee-Ann Bac, director Grant Thornton Advisory Services.

On housing

“It is encouraging that Treasury is putting a focus on housing with tax-break options for developers. In addition, the recognition that housing finance institutions and low income earners require additional financial and other support is laudable. We would hope that the mortgage support facility comes to fruition.” Lee-Ann Bac, director Grant Thornton.

On impacting M&A transactions

“An increase in capital gains tax for individuals and trusts could result in a slight decline in transactions in the short term, as sellers’ after-tax receipts will be lower than expected. This combined with possible targeting of leveraged transactions, (continuing the theme from last year’s disastrous suspension of Section 45), could scupper a number of M&A transactions, particularly in the Private Equity and BEE space.” Steven Kilfoil, director Grant Thornton Corporate Finance.

“This has come as quite a shock given that all previous announcements and the law as it stands at present indicate a 10% rate. The proposed 50% increase in the dividends tax rate to 15% so late in the day will no doubt cause considerable administration burdens on those companies and regulated intermediaries that have to account for the tax.

“More importantly, the rate of tax is part of the law that can only be changed by an Act of Parliament.  One hopes that this too will be possible before the implementation date. In essence, given that domestic companies are exempt from the withholding tax on dividends, it is only individuals and non-residents who will be affected by the increased rate. Then again, given that most double taxation agreements (DTA) entered into between SA and foreign jurisdictions reduce the rate, usually to 5%, non-residents too should not be unduly affected by the proposed increase.”

Increase in inclusion capital gains tax (CGT) rates

“This announcement was an obvious means of generating additional revenue, notwithstanding the stated reason being to reduce tax arbitrage and broaden the tax base. While a few foreign countries tax capital gains on the same basis as ordinary income, most either provide for inflation indexation or reduced inclusion rates (like SA).

“In effect, the effective tax rate payable by an individual (at top marginal rates) will increase from 10% to 13.32% (an increase of 33.2%), while the effective CGT rate for companies and trusts will increase from 14% to 18.65% (a 33% increase).

“Foreigners owning property in SA will be adversely affected by the increase because non-residents are required to pay CGT on the disposal of any immovable property owned by them in SA.

“The rate increase is due to come in on 1 March 2012 – so there are at least a few days left to benefit from the old rate.”

Interest incurred on share purchases

“The proposal to allow a deduction for interest incurred on the acquisition of shares to be deductible in certain circumstance is VERY welcome.”

Issued by: FTI Consulting  on behalf of: Webber Wentzel

It is enough of a struggle to have a handicapped child, particularly where that child requires significant medical support, well in excess of any normal level of expenditure. In the past, these costs have been fully tax deductible, which has made caring for the child more affordable. From 1 March 2014, expenses relating to a handicapped will no longer be deductible but to the extent that expenses exceed three times the total allowable tax credits will be converted to a tax credit of 33,3%. For a higher rate payer with medical costs of R100,000 per annum, the credit will be R16 740 as opposed to the tax value of the deduction of R40,000. This will come as a severe blow to those providing medical care to their handicapped loved ones and unfortunately may affect the quality of the care that can be afforded.

These include the 15% dividend tax, an unexpected 50% increase from the expected rate, capital gains made will be subject to an increased inclusion rate resulting in the increase of the effective tax rate from 10% to 13.3%, and the proposed taxation on luxury goods.

Furthermore, the annual interest exemption will be phased out to make space for tax preferred savings- and investment accounts.

For those working and seeking to accumulate pensions for their retirement, the introduction of pension capping will come as a serious blow. Although the tax deductible limit has increased to 22,5%, the annual tax deductible retirement contribution will be limited to R250,000 per annum for individuals under the age of 45 and R300,000 per annum for individuals over the age of 45. For those who left retirement funding until their later years of employment (as prior to this they could not afford significant contributions), the effect of taxation of the contributions to the pension fund, will leave those short of their intended capital or income requirements on retirement.

The budget review indicates that there is room for improvement on the compliance of high net-worth individuals and this will be a focus area for the South African Revenue Service (SARS) in the coming year.

Clearly, high-net worth individuals will make a greater contribution to the fiscus, and can expect greater scrutiny and audits of their personal tax affairs.