Budget makes justice a priority

In a Budget that once again favoured individual taxpayers (with R8.4bn in tax relief), he also announced the scrapping of tax on retirement funds and some relief for business in the form of a planned phasing out of the contentious secondary tax on companies. There was also good news for legal services. Manuel announced that the Department of Justice\'s Budget would increase by 52%. In addition the police are set to receive an extra R11bn by 2010 – taking the total police Budget up to R44bn, according to a Moneyweb report. Announcing increases in police personnel, Manuel pointed out that while police officers were vital, their job was annulled if the legal system reinforcing it was weak. To this end, the total personnel complement of Justice and Constitutional Development is expected to increase from 18 893 in 2003/04 to 22 798 in 2009/10. ‘A large portion of this increase is in the personnel contributing to court services, such as prosecutors, judges, magistrates, lay assessors, interpreters and court managers. The assignment of two prosecutors per court will be fully implemented over the MTEF period. In addition, 39 additional judges and 37 magistrates will be appointed in 2007/08.’ The government is also prioritising the modernisation of court processes and ensuring access to justice services for. R1.5bn is allocated to improve the administration of justice, increase the statutory provision for judges and magistrates\' salaries, and enhance capacity in the NPA, the Legal Aid Board, the Special Investigating Unit, the judiciary and the magistracy. Understanding that information is a crucial tool in the fight, the Department of Correctional Services will receive R2.9bn ‘for the implementation of a master information systems plan’. Full Moneyweb report

Predictions that Manuel would abolish the unpopular secondary tax on companies held true when he announced it was to be phased out. Business Day says the first step of the phasing out of STC sees the tax on dividend distributions cut from 12.5% to 10% from October 1 this year, a measure representing R2bn of the total net tax relief package of R12.4bn. Manuel said that STC would be replaced with a withholding tax on dividends at shareholder level as from end-2008. Full Business Day report

On exchange controls, FIN24 takes the view that although Manuel announced further steps to ease exchange controls, the measures were largely cosmetic, and came as a disappointment to those hoping to see significant change. Measures such as the R2m limit on individuals\' offshore investments and the rule that exporters repatriate their proceeds within 180 days of receipt remained in place. However, Manuel said the current shareholding threshold for foreign direct investment outside of Africa would be lowered from 50% to 25% to further enable SA companies to engage in strategic international partnerships. Exporters\' accounts, known as Customer Foreign Currency (CFC) accounts would be simplified by allowing a single CFC account for trade and services related payments, and the range of permissible transactions would be expanded. SA\'s financial markets would be further developed and liquidity in the currency market enhanced by permitting the JSE Securities Exchange to establish a rand futures market, Manuel said. Full FIN24 report

The government also wants to make it more attractive to business to seal BEE deals. Manuel, notes Moneyweb, has made a number of proposals aimed at making corporate reorganisation easier where BEE deals are facilitated. Changes scheduled for October are in connection with, among other things, share cross-issues. In some structures, the operating company issues ordinary shares to the BEE entity. In return, the BEE entity issues preference shares (which operate as a quasi loan) to the operating company, says National Treasury. ‘If the ordinary shares reach a predetermined value, the BEE entity sells a portion of the ordinary shares for cash and redeems the BEE preference shares.’ Rules are required, says National Treasury, to ensure that in the ‘dual dispositions’ there aren\'t any unwarranted gains or artificial losses. Full Moneyweb report

The anti-avoidance rule is an issue taken up in a commentary by tax experts from Mallinicks Attorneys. They note: ‘It is interesting that, National Treasury, in the Budget Review, comments that the new general anti-avoidance rule is ‘under intense scrutiny by some in an effort the circumvent it’ and ‘the practical operation of the general anti-avoidance rule will be monitored with appropriate amendments to ensure its effectiveness’.’ They add that this is a formidable piece of legislation that will be very difficult to circumvent. If anything, the real risk is that it may be applicable to categories of transactions which are the true target of the legislature, namely those that exploit or frustrate the provisions of the tax legislation. Mallinicks Commentary

On estate duties, Manuel has proposed increasing the exempt threshold for estate duties to R3.5m. It is currently R2.5m, after being increased last year from R1.5m, notes Moneyweb. Also included is an increase to the monetary threshold below which no capital gains tax is imposed at death, from R60 000 to R120 000. The threshold below which no donations tax is payable should move from R50 000 to R100 000. Full Moneyweb report

Tax dodgers beware. Manuel said an additional R1.3bn would be poured into SARS\' information technology systems. It will become harder to evade tax as SARS moves towards a ‘single customer view’, notes Moneyweb. ‘The modernisation of the (SARS) will enable it to manage increased administration volumes. A single customer view, automation, e-business and improved walk-in services will be supported by enhanced risk management,’ said Manuel. Full Moneyweb report

Regarding the possible imposition of a windfall tax on the liquid fuels sector, Manuel said recommendations involved either an outright tax on windfall profits or an incentive arrangement for new investment in liquid fuel capacity, according to a FIN24 report. Although Manuel said both proposals had merit he assured the industry it would be consulted before the matter was finalised. This implies that companies like Sasol could avoid the tax if they invested a portion of their profits in expanding their productive capacity. Full FIN24 report

The issue of Road Accident Fund claims was raised, too, with the Treasury conceding that the present scheme was unsustainable. According to a Moneyweb report, the RAF has created a headache for Treasury, and it admits as much in the Budget. ‘Despite the increase in revenue from direct transfers and increases in the fuel levy and sales volumes, the fund\'s accumulated deficit of R18,4bn in 2005/06 indicates that the present scheme is unsustainable’, it concedes. A staggering 443 399 claims were outstanding in 2006, up from 347 742 in 2005. This is despite the fact that ‘progress has been made in the settlement rate’. Full Moneyweb report

The Treasury will release the long-awaited second draft of its retirement fund reform document tomorrow morning following the release yesterday by Manuel of more details of the new compulsory social security scheme that government plans to introduce in 2010. A Business Day report, the retirement fund reform document, which deals with the taxation and regulation of SA’s 13 600 private pension, provident and retirement annuity funds, was originally released for discussion in November 2004 and Treasury officials promised a new version in 2005 and again last year. But it was delayed by work on the new social security scheme, with which the retirement proposals will now be aligned. Government is to consult trade unions and employees on the new scheme during the second half of this y ear. Full Business Day report Budget speech (PDF file)