No nasty shocks for companies
There’s definitely more give than take in this year’s budget when it comes to corporate SA
As widely expected, there were no major tax proposals in this year’s budget.
The corporate tax rate will shift down to 27% (from 28%) from April 1 this year. Expectations are that the tax rate should ratchet down to 25% in the medium term though this was not specifically addressed in finance minister Enoch Godongwana’s budget speech.
There have been increasingly audible calls for further tax relief for companies especially from those involved in heavy industry amid the load-shedding disruptions. The renewable energy tax relief does provide some comfort in this regard.
Overall, tax revenue collections for 2022/2023 are expected to total R1.69trillion exceeding the previous year’s budget estimate by R93.7bn and the 2022 medium-term budget estimate by R10.3bn.
Local businesses have played their part in buoying the fiscus. The revised budget pencils in corporate tax of R345bn, with another R36bn stemming from dividends tax. The forecast is for R336bn in 2023/2024, R345bn in 2024/2025 and close to R370bn in 2025/2026.
The fiscus owes a large debt to South Africa’s mining sector, in particular, which made up nearly 30% of provisional corporate tax collections.
Higher profitability in the services sector also supported corporate and dividends tax collections.
Still, Therese Havenga, head of business transformation at Momentum Investo, cautions that though corporate income taxes performed well, more intense loadshedding is likely to weigh on collections in the coming months.
There was good news for small businesses. The government has made “small business corporations” exempt from paying income tax on the first R95,750 of their taxable income in the new financial year. This is a 4.9% increase over the previous threshold of R91,250. Micro businesses are exempt from paying tax on the first R335,000 of income.
Whether this will please hard-pressed small business owners is not certain. Jeremy Lang, chief investment officer of Business Partners, recently argued that the tax exemption for small businesses is not being increased at a rate high enough to make the difference needed for small businesses to regain ground in a way that is impactful and sustainable.
“This is a challenge that needs to be addressed as a matter of urgency and in tandem with revisions to the current employment tax incentive ... If SMEs are to benefit materially enough to grow their ventures and help alleviate the scourge of youth unemployment, tax incentives that support this objective need to be revised upwards at a rate that exceeds inflation.”
But the key development for companies in this year’s budget is the tax incentive available for businesses to promote renewable energy which will be temporarily expanded to encourage rapid private investment to alleviate the energy crisis.
The current incentive allows businesses to deduct the costs of renewable investments over a one-, two- or threeyear period. This creates a cash flow benefit in the early years of a renewable energy project.
Businesses are able to deduct 50% of the costs in the first year, 30% in the second, and 20% in the third for qualifying investments and with certain power generation limitations.
Under the expanded incentive, businesses will now be able to claim a 125% deduction in the first year for all renewable energy projects with no thresholds on generation capacity. But the adjusted incentive will only be available for investments brought into use for the first time between March 1 2023 and February 28 2025.
On the other hand, the government has adjusted the minimum royalty rate for oil and gas companies. It wants to keep the flexibility of the royalty rate, which is determined by profitability, rather than opt for a flat rate for oil and gas companies.
The Budget Review says this decision recognises that companies face varying costs and profit levels depending on whether they are, for example, operating in deep or shallow waters.
“However, to ensure that the country is adequately compensated for the loss of its finite resources, the minimum royalty rate will be increased from 0.5% to 2%, with the maximum remaining at 5%.”