The analysis below examines the tax implications of the recent 2012 Budget speech on Southern Charter clients, this includes the following:
1. Major changes affecting taxpayers,
2. Explanation of the Medical Tax Credits,
3. An illustrative example of the Medical Tax Credits, and
4. A breakdown of the Dividends Withholding Tax and its impact.
1. Major changes affecting taxpayers
Medical Schemes (Implementation of tax credits)
- Please see detailed explanation and illustrative example below.
Capital Gains Tax
Effective 1 March 2012, capital gains tax effective rates will increase as follows:
- Individuals maximum from 10% to 13.3%
- Companies 14% to 18.6%
- Trusts from 20% to 26.7%
Effective 1 March 2012, capital gains tax exclusions will increase as follows:
- Annual exclusion: R20 000 to R30 000
- On death: R200 000 to R300 000
- Primary residence R1.5 million to R2 million
Endowment products will also be affected by Capital Gains Tax. The effective rate for the individual
policyholder fund will increase from 7.5% to 10% and the effective rate for the company policyholder
fund will increase from 14% to 18.6%.
- Dividend withholding tax, effective date 1 April 2012, has since its initial proposal increased from 10% to 15%.
- Withholding tax on interest for foreigners was initially proposed at 10% and will now increase to 15% in line with dividend withholding tax. The effective date remains the 1 March 2013.
In line with taxation on local dividends, foreign dividends will also be taxed at 15% from 1 April 2012.
Please see attached detailed explanation of the Dividend Withholding Tax.
To encourage South Africans to save for retirement, contributions by employees and employers to
pension, provident and retirement funds will be tax deductible by individual employees. Effective 1
March 2014, individual retirement tax deductions will increase as follows:
- Under 45 years: 22.5% (of the higher of taxable or employment income) with a cap of R250 000
- Age 45 and older: 27.5% (of the higher of taxable or employment income) with a cap of R300 000
- Minimum threshold of R20 000 to allow low income earners to exceed the percentage thresholds
- Roll over relief and exemption on retirement for non-deductible contributions
Tax preferred savings and investment accounts
To encourage greater savings among South Africans, tax-preferred savings and investment accounts are proposed as alternatives to current tax-free interest income caps. This will encourage a new generation of savings products.
- Investment returns (including interest, capital gains and dividends) and withdrawals exempt from tax
- Annual contributions limited to R30 000
- Life time contribution limited to R500 000
Effective 1 April 2014
2. Explanation of the Medical Tax Credits
Medical deductions to be converted to tax credits for persons below 65 years of age.
The medical tax credit is a fixed amount that will be offset against tax payable. It will replace
the tax deduction that was granted for medical schemes contributions, and is applicable
to a person or a dependant with or without a disability.
What is the difference between a tax credit and a tax deduction?
A tax deduction will generally lower the taxable income on which you pay tax. For example,
the amount you contribute to your medical scheme is deducted from your taxable income so
that you pay tax on a smaller amount.
A tax credit will generally lower the tax that you must pay. Once your tax is calculated the
tax credit is then offset against this tax payable to reduce the amount of tax you pay.
How will the new system work?
For the tax year starting 1 March 2012 if you are younger that 65 years of age a tax credit for
medical schemes contributions will be granted to you per month as follows:
R 230 for the taxpayer
R 230 for the first dependant
R 154 for each additional dependant
Is there a difference in the tax treatment for persons with Disabilities?
For a person with no disability, medical scheme contributions in excess of 4 x the total
credits and out of pocket medical expenses combined in excess of 7.5% of taxable income,
can be claimed as a deduction from taxable income.
For a person with a disability or a dependant with a disability, medical scheme contributions
in excess of 4 x the total credits and out of pocket medical expenses can be claimed as a
deduction from taxable income , (not subject to the limit of above 7.5% of taxable income as
for non-disabled persons ).
As from 1 March 2014, the additional medical deductions claimed by taxpayers below the age
of 65 will be converted to medical tax credits at a rate of 25% ( 33% for persons with
disabilities or dependants with disabilities)
How do the changes affect taxpayers over 65 years?
They will not be affected by the changes that come into operation on 1 March 2012.
As from 1 March 2014 taxpayers 65 years and older will be able to convert all medical scheme
contributions in excess of 3 x the total tax credits plus out of pocket medical expenses into
a tax credit of 33%.
3. Illustrative example of the Medical Tax Credit
Therefore Mr A will receive an additional R 248 ( R 15 641- R15 393) included in his net salary received for March 2012
The tax payable under the new system of tax credits is based on the new tax tables effective 1 March 2012