Tax increases of ZAR 28 billion are proposed. This amount will be derived as follows:
- ZAR 18 billion from personal income tax (by not adjusting income tax brackets and rebates in line with inflation);
- ZAR 1.5 billion by not increasing medical tax credits; and
- ZAR 8.5 billion from an increase in the VAT rate (from 15% to 15.5% with effect from 1 May 2025) and above inflation increases in excise duties on alcohol and tobacco excise duties.
Corporate income tax
Corporate tax policy proposals include:
- further measures targeting the circumvention of third party backed share rules. Third party backed share rules treat dividends on such shares as income (except where the funds, derived from the issue of the third party backed shares, are used for certain qualifying purposes – such as the acquisition of equity shares in an operating company);
- amending the definition of hybrid equity instrument (shares with debt-like characteristics), in so far as it applies to preference shares, in order to address schemes designed to avoid the re-characterisation of dividends on such shares as income;
- returning to the original policy intent to limit asset for share rollover relief to transferor shareholders holding less than 20 per cent of the listed shares in the target company before the transaction;
- reviewing asset for share and amalgamation transaction rules, allowing for tax deferral, where such transactions involve collective investment schemes (transfers to a collective investment scheme under such rules has allowed for unintended tax avoidance during changes of shareholding in listed companies and when the collective investment scheme disposes of the shares as part of a corporate restructure);
- clarifying/revising interest deductibility limitation rules (applicable when (i) a South African debtor incurs interest in favour of an exempt entity in a controlling relationship with it and the creditor is not taxed thereon – section 23 M, and (ii) in respect of certain reorganisation transactions and acquisition transactions – section 23N) as follows:
- the definition of interest in section 23M is to be aligned to the definition of interest in section 24J and this interest definition will apply to calculate ‘adjusted taxable income’;
- back-to-back lending arrangements where there is no controlling relationship between the ultimate lending institution and the debtor should also be eligible for a carve out (a carve out currently exists where the ultimate lending institution has no controlling relationship with the debtor and if the interest charged does not exceed the official rate of interest plus 100 basis points);
- clarifying the treatment of foreign exchange differences when foreign exchange gains do not accrue in favour of creditors;
- 2024 amendments enacted to align 23N with section 23M (which take effect from 1 January 2027) are to be reviewed with a view to a proposal in the 2026 Budget;
- providing clarity on the tax treatment of ongoing capital distributions to holders of participatory interests in collective investment schemes.
International tax
International tax policy proposals include:
- amendments to the definition of equity share to confirm that that the definition includes shares in a foreign company;
- amendments to section 23(m) (which prohibits deductions in relation to employment remuneration) to expressly allow for foreign taxes to be deducted when determining taxable income;
- amendments to counteract schemes that seek to avoid controlled foreign company exit charges (through the controlled foreign company acquiring all the shares in the South African holding company);
- reviewing the comparable country exemption as it does not consider tax systems of countries that provide a refund to certain shareholders of a foreign company for tax paid by the company declaring a dividend. A tax refund should be taken into account in applying the comparable tax exemption.
- possible amendments to ensure that the flow through principle, applicable to trusts, does not have unintended consequences where non-residents are involved (given the interaction between section 7 and section 25B);
- reconsidering rules providing for deferral of foreign exchange differences until the debt is realised, in respect of debt between related parties (deferred exchange gains are to be triggered on the portion of an exchange item realised and to clarify the classification of debt that is not recognised in the financial statements for financial reporting purposes);
Incentives
- The Urban Development Zone incentive (to address urban decay within inner cities) sunset date will be extended by 5 years to 31 March 2023;
- The government has decided not to amend the leasing provisions, and 1 megawatt generation threshold, in the renewable energy allowance (section 12B);
- The diesel refund system (enabling farming, mining, and forestry businesses to qualify for a refund of the general fuel levy and RAF levy for 80 percent of eligible diesel fuel purchases) is to be simplified and amended so as to apply the refund for all eligible diesel purchases declared to SARS with effect from 1 April 2026;
Individuals
Tax changes impacting individuals include:
- addressing double non-taxation by amending lump sum, pension and annuity exemptions. This will apply to such amounts received, by South African residents, from foreign retirement funds for previous employment outside South Africa;
- addressing the ‘loophole’ allowing taxpayers, below the maximum marginal rate, to offset losses from certain trades against other sources of income. Government will review the threshold at which ring-fencing rules will apply;
- adjusting the monetary threshold amounts (in the transfer duty table) by 10% to compensate for inflation (without increasing transfer duty rates) with effect from 1 April 2025.
From an exchange control perspective, consideration is being given to allowing individuals to bank unused travel allowance amounts in a foreign currency account (instead of being compelled to sell it to an Authorised Dealer within 30 days of return to South Africa).
Employment tax incentive
The formula to calculate the incentive and eligible income bands will be adjusted (partly due to minimum wage adjustments since the last increase in the value of the incentive in 2022) from 1 April 2025. The value of the employment tax incentive is to be maintained at a maximum of ZAR1 500 per month in the first 12 months and ZAR750 per month in the second 12 months of eligibility. The maximum value will apply to employees earning between ZAR2 500 and ZAR5 500 monthly. The incentive declines to zero at a monthly income of ZAR 7 500.
Value-Added Tax
It is proposed that:
- debit and credit notes, in respect of a business acquired by way of an asset for share transaction or an intra group transaction, be allowed to be issued by a transferor (currently this is limited to an acquiror of a business disposed of as a going concern under section 11(1)(e));
- an intermediary’s scope be widened to include accounting for VAT on supplies facilitated on behalf of local suppliers (currently intermediaries may account for VAT on supplies made on behalf of foreign suppliers of electronic services as if made by the intermediary);
- testing services (of medication, medical devices or samples) be clearly zero rated to avoid interpretational challenges associated with section 11(2)(l)(iii) and section 11(2)(l)(ii) of the VAT Act (in the context of clinical trial services to an offshore client involving a local patient and also to deal with situations where samples with no value are not subsequently exported);
- the regulations on the domestic reverse charge mechanism relating to valuable metal be amended (by broadening the definition of residue);
- the definition of insurance be revised in light of Constitutional Court decision in the Capitec Bank case;
- the VAT treatment of the temporary letting of residential properties be updated to ease administration; and
- the VAT treatment of airtime vouchers supplied in South Africa for exclusive use in a foreign country be reviewed.
Tax administration
Tax administration proposals include the following:
- the Customs & Excise Act is to be amended to provide for a voluntary disclosure programme;
- the term ‘audit certificate’ in section 18A of the Income Tax Act is to be clarified (applicable to organisations conducting mixed 18A and non 18A activities);
- the Fourth Schedule will be reviewed to determine whether to allow for one nominated employer (for a group of companies or an employee share scheme trust) to be registered as the employer for purposes of withholding PAYE, payment of PAYE, submission of PAYE returns and IRP5 generation;
- the concept of a bona fide inadvertent error is contentious and its scope is to be clarified by linking it with the substantial understatement behaviour category;
- the interaction between the tax compliance status system and SARS’ entity scoring model will be reviewed to determine if synergies in approach can be achieved.
SARS has been allocated additional resources (ZAR 3.5 billion in the current year and an additional ZAR 4 billion over the medium term). SARS intends leveraging artificial intelligence, data science, scanning technologies and modernisation to improve compliance.
Various matters under consideration
- A discussion paper on collective investment scheme taxation was released in late 2024 and consultations will continue in 2025 (Government acknowledges administrative concerns raised on the fully tax transparent proposal - it does not intend to tax all collective investment scheme returns as income);
- A consultation paper will be published on unlocking institutional funding for infrastructure through certain investment vehicles that will enjoy flow through tax benefits;
- South Africa’s tax treaty network is to be expanded and certain treaties re-negotiated;
- A discussion paper on the taxation of alcoholic beverages was released late last year. Public consultations will be held on the new excise framework in 2025;
- Government seeks to bring parity to the VAT treatment of goods purchased online as some offshore suppliers are not VAT registered;
- Government is considering whether access to the ‘retirement pot’ should be granted in cases of retrenchment (as part of phase 2 of its retirement funds reform process).
Feel free to contact CMS’ tax team should you have any queries relating to tax policy proposals outlined in the 2025 Budget Review.
