Editor’s Note:
In this third newsletter for 2025 we consider the following:
VAT Increase Withdrawn
Budget Newsletter No. 2.2025, status quo.
Foreign Pensions – Budget Proposal to withdraw the tax exemption
Trust Taxation – Budget Proposal to clarify technical inconsistencies
SARS Ins, draft Ins, draft BGRs, BCRs, BPRs, VRs, Guides and draft Guides Noter-Up
Tony Davey – Editor | Duncan McAllister – Co-Editor
tonyd@harding.co.za / www.tonydavey.com
The proposal contained in the first tabling of the National Budget, 12 March 2025, to increase the VAT rate to 15.5% effective 1 May 2025 and to 16% effective 1 April 2026, has been withdrawn in the revised National Budget tabled 21 May 2025. Thus, the status quo of the 15% VAT rate remains.
(On 27 April 2025 SARS issued a media release welcoming the order of the Western Cape High Court to suspend the 0,5% increase in the VAT rate that was scheduled to come into operation on 1 May 2025. SARS noted that vendors therefore had no basis for implementing the VAT increase and urged them to readjust their systems back to 15%).
BUDGET NEWSLETTER
Our Budget edition newsletter published on 12 March 2025 providing the Tax rebates, Rates and Tables remains unchanged by the Budget tabled on 21 May 2025.
FOREIGN PENSIONS – PROPOSAL TO WITHDRAW THE TAX EXEMPTION
The2025 Budget Review published by National Treasury, chapter 4, ’Revenue Trends and Tax Proposals‘, refers, inter alia, to cross-border tax treatment of retirement funds. To quote:
’The current treatment of cross-border retirement funds may result in double non-taxation…….. (my underlining).
It is proposed that changes be made to the rules that currently exempt lump sums, pensions and annuities received by SA residents from foreign retirement funds for previous employment (my underlining) outside South Africa, with amendments in the current legislative cycle.’
The current exemption is contained in Section 10(1)(gC) and refers to two scenarios being any,
’i) Amount received by or accrued to any resident under the social security system of any other country; or
ii) Lump sum, pension or annuity received by or accrued to any resident from a source outside the Republic as consideration for past employment outside the Republic ……..’.
The proposal appears to affect only scenario (ii) and not scenario (i). A Double Tax Agreement (DTA) would have limited application, as most DTAs provide that a foreign pension is taxable only in the country of one’s permanent residence which means that no foreign tax is paid, but if the proposal is enacted, South Africa has full taxing rights.
We await developments, but in our view, any foreign pension exemption removal would be a disincentive for expatriates (with their economically beneficial spending power) to return to the RSA, as certain other countries offer tax holidays in such circumstances.
TAXATION OF TRUSTS AND THEIR BENEFICIARIES
Annexure C ‘Additional Tax Policy and Administrative Adjustments’ of the Budget Review, 2025 contained the following proposal in relation to trusts:
‘In 2023, amendments were made to the rules relating to the taxation of trusts and their beneficiaries by limiting the flow-through principle to resident beneficiaries. It has come to government’s attention that the interaction between sections 7 and 25B of the Income Tax Act and the tax treatment of income and assets vested in beneficiaries of trusts could have unintended consequences where non-residents are involved. It is proposed that these aspects be reviewed.’
It is unclear exactly what this proposal is aimed at, but it may relate to some inconsistencies between the equivalent provisions of the Eighth Schedule dealing with capital gains.
When section 25B(1) was amended to block the conduit principle from applying to non-resident beneficiaries, the impact when income flows through multiple non-resident trusts does not seem to have been considered. By contrast, paragraph 80(2A) of the Eighth Schedule contains a separate rule for attribution to resident beneficiaries of non-resident trusts. It permits a capital gain to retain its character when distributed through multiple non-resident trusts until it reaches a resident beneficiary. By blocking attribution between non-resident trusts in section 25B(1), the character of the income would be lost by the time it reached a resident beneficiary.
Section 7(5) deems income back to a donor when a trust is funded by a donation, settlement or other disposition and
- the income has not been vested in a resident beneficiary; and
- is causally related to the donation, settlement or other disposition.
Unlike paragraph 70 of the Eighth Schedule, section 7(5) does not specify that the donor must be a resident. If income were attributed to a non-resident donor, SARS may find it difficult to collect the tax.