Budget Speech

The Minister of Finance, Enoch Godongwana, stated that, for the first time in 17 years, debt will stabilise and continue to fall in the coming years. The budget deficit has narrowed significantly, and debt-service costs are also falling. The world has taken notice:

• South Africa has been removed from the FATF grey list.
• We secured our first credit rating upgrade in 16 years.
• And borrowing costs have eased, creating space for growth and development.

These are signals of restored credibility. Of renewed resilience. And of a nation regaining its footing. The lesson is a simple but powerful one: steady structural reform and responsible public finances are the bedrock of a prosperous and more inclusive South Africa.

The more things change, the more they stay the same – No changes to:

• CGT inclusion rates;
• Corporate income tax rate;
• VAT rate.

Significant changes:

• Personal income tax brackets (and sin taxes) increased with inflation;
• Compulsory VAT registration threshold increased from R1 million to 2.3 million;
• Voluntary VAT registration threshold increased from R50,000 to R130,000;
• Donation tax exemption for natural persons up from R100,000 to R150,000;
• Primary residence exclusion up from R2 million to R3 million;
• Annual exclusion for CGT increased from R40,000 to R50,000.

Individuals, employment, and savings

Allowing rollover treatment of capital allowances on allowance assets transferred between spouses

The Income Tax Act (1962) regulates the transfer of assets between spouses through section 9HB of the Act. This provision establishes a rollover mechanism for the transfer of trading stock, livestock, and capital assets between spouses. However, the recoupment component of the rollover for allowance assets is not provided for, as section 9HB does not prevent the recoupment of capital allowances in the hands of the transferor spouse under section 8(4)(k) of the Act, nor does it allow the transferee spouse to take over the accumulated allowances previously claimed. It is proposed that section 9HB be amended to prevent the recoupment of capital allowances on the transfer of allowance assets between spouses and to provide for the carry-over of accumulated allowances to the transferee spouse.

Limiting the donations tax exemption rules where a spouse ceases to be a tax resident

Section 56 of the Income Tax Act exempts donations between spouses from donations tax. The government has become aware of tax avoidance arrangements, particularly involving high-net-worth individuals planning to cease to be South African tax residents. The arrangement involves deliberately staggering the cessation of tax residence between spouses, with significant assets transferred to a spouse who has already become non-resident before the remaining spouse ceases residence. In these circumstances, the donations tax exemption applies, while the subsequent cessation of tax residence by the remaining spouse results in a reduced income tax liability under section 9H of the Act. These arrangements are designed to avoid both the donations tax and the income tax on cessation of residency, undermining the original policy intent of these provisions. It is proposed that the donations tax exemption rules applicable to spouses be limited to donations made to a spouse who is a resident, effective from 25 February 2026.

Extending the eligibility for the medical scheme fees tax credit

Certain statutory medical schemes face regulatory constraints that remove them from the Council for Medical Schemes' authority. Consequently, individual members of these schemes are not eligible for the medical scheme fees tax credit under section 6A of the Income Tax Act. It is proposed that eligibility for this tax credit be extended to such members, provided that the schemes offer benefits and adhere to governance and solvency requirements that are at least equivalent to those prescribed under the Medical Schemes Act (1998).

Retirement provisions

Determining the application of the de minimis limit for multiple living annuities held with the same insurer or fund

The Income Tax Act allows a living annuity to be commuted and paid as a lump sum when the value of the assets falls below the prescribed de minimis limit, currently set at R125,000. This limit is applied on a per-insurer or per-fund basis, depending on whether the living annuity is provided by the fund or purchased from an insurer, whereby the value of all living annuities held by an annuitant with the same insurer or fund is aggregated when applying the limit. However, differing interpretations of the law exist regarding whether the R125,000 limit applies per policy or cumulatively per insurer or fund. Applying the limit on a per-policy basis could undermine retirement income security by enabling the early commutation of multiple small annuities and facilitating tax-driven restructuring of retirement assets. It is therefore proposed that the definition of “living annuity” in section 1 of the Act be amended to explicitly provide that the prescribed de minimis limit must be determined cumulatively where an annuitant holds multiple living annuities with the same insurer or fund.

Corporate reorganisation rules

Extending the rehabilitation fund regime

In 2006, the government introduced a unified regime for the tax treatment of mining environmental rehabilitation funds, with the objective of applying their assets solely to rehabilitation on premature closure, decommissioning, final closure, and post-closure coverage of any latent and residual environmental impacts. As a result, under certain conditions, all cash contributions to the mining rehabilitation fund are tax-deductible, and the fund's growth is exempt from tax. Like mining operations, nuclear facilities are subject to strict legislative requirements for environmental rehabilitation and decommissioning through adequate financial provisioning to support environmental preservation. It is proposed that the rehabilitation fund regime be extended to include nuclear facilities.

Withdrawing the proposal to align the two different interest limitation rules

In 2024, the Taxation Laws Amendment Act included amendments to align the formula contained in the rules that limit interest deductions in terms of section 23N of the Act with changes that had been introduced to section 23M of the Act (formula applicable to interest in respect of debts owed to persons not fully subject to tax). Over the past two years, concerns have been raised that the proposed alignment in section 23N of the Act, with an effective date of 1 January 2027, is not necessary given the distinct nature of the rules and transactions to which sections 23M and 23N of the Act respectively apply. It is proposed that the 2024 amendment to align the formulas be withdrawn.

Aligning short-term insurance taxation with IFRS 17 terminology

While most of section 28 of the Income Tax Act was updated to reflect International Financial Reporting Standard (IFRS) 17, section 28(3B)(a) was inadvertently omitted from these consequential amendments. Currently, this subsection continues to use outdated terminology for “liabilities on investment contracts” and “insurance liabilities relating to premiums and claims.” It is proposed that section 28(3B)(a) of the Act be amended to align the deduction with the amounts deducted under subsection (3) or (3A) and included under subsection (4), thereby aligning the tax treatment of insurance liabilities transferred between short-term insurers with the requirements of IFRS 17.

International

Aligning the interaction between controlled foreign company (CFC) inclusion and domestic treasury management company (DTMC) currency translation rules, Section 9D(6) of the Income Tax Act requires that the net income of a CFC be determined in its functional currency (for example, US dollars). When including the relevant amount in the income of a South African shareholder, it must be translated into rands using the average exchange rate for the CFC’s foreign tax year. Section 25D(5) of the Act, however, provides that where the South African shareholder is a DTMC (for example, with a US dollar functional currency), any amount received in a currency other than its functional currency (such as the rand attribution of an amount of net income) must first be determined in the DTMC’s functional currency (US dollars) and thereafter translated back into rands using the average exchange rate applicable to the DTMC’s year of assessment. At issue is that the current interaction between section 9D(6) and section 25D(5) of the Act may inadvertently create onerous translation requirements, resulting in distortions in the taxable income ultimately reflected in South Africa. To resolve this anomaly, it is proposed that legislation be amended to ensure that, where a DTMC is the resident shareholder of a CFC, section 9(6) of the Act does not require the translation of an amount of net income into rands.

Services rendered to a customs-controlled area enterprise (CCAE) or special economic zone (SEZ) operator

Taxpayers requested that the Value-Added Tax (VAT) Act (1991) be amended to reflect the policy position on services rendered in terms of the zero-rating provisions of section 11(2)(k) of the VAT Act. There is confusion about whether all services rendered to a CCAE or to an SEZ operator in a customs-controlled area are required to be physically rendered therein to qualify for the zero-rating. It is proposed that section 11(2)(k) of the VAT Act be amended to reflect that the services must be physically rendered in the customs-controlled area to qualify for zero-rating.

Supply of gold to banks

Refineries rely on pooled contributions from various depositors to achieve the required purity and volume of gold. The input includes low-grade by-products, recycled bullion, previously manufactured gold from jewellery, coins, and dental alloys. Section 11(1)(f) of the VAT Act provides for the zero-rating of gold, in specific forms, supplied to the listed entities that have not “undergone any manufacturing process other than the refining thereof or the manufacture or production in order to achieve such specific forms”. It is difficult to trace or isolate unprocessed, primary-source gold, and the refined product will likely contain both primary and secondary gold that have undergone processing. This results in suppliers not being able to comply with section 11(1)(f) of the VAT Act, and the South African Revenue Service (SARS) must follow protracted audit procedures to confirm the validity of the zero-rating. In light of this, it is proposed that section 11(1)(f) of the VAT Act be repealed.

Time period to deduct notional input tax

A vendor is allowed a notional input tax deduction on the acquisition of second-hand goods when such goods are acquired under a non-taxable supply from a resident of South Africa for the purpose of making taxable supplies in terms of section 16(3) of the VAT Act. When the vendor subsequently exports the second-hand goods, the vendor may apply zero-rating in terms of section 11(1)(a) of the VAT Act unless the supplier of the second-hand goods or a connected person has deducted notional input tax on the acquisition thereof under section 16(3) of the VAT Act. Similarly, in the case of an indirect export by a qualifying purchaser, the VAT Refund Administrator may only refund the qualifying purchaser to the extent that the VAT charged exceeds the notional input tax deduction. Where the seller had not claimed the notional input tax at the date of sale but obtained a valid and completed VAT 264 as per section 20(8) of the VAT Act, the presumption is that there is an intention to claim the notional input tax at a later stage, so the sale cannot be zero-rated and must be standard-rated instead. The limitation on the refund and the implication for the zero-rating apply only when the supplier has claimed the notional input tax and has five years to claim the tax. This creates a risk that the fiscus will incur a financial loss if SARS refunds the full amount, including the notional input tax portion, on the basis that it was not claimed by the seller, and the vendor later claims the notional input tax. It is proposed that section 16(3) of the VAT Act be amended to restrict the deduction of the notional input tax to a tax period not later than the tax period in which the supply of the secondhand goods takes place, subject to the five-year prescription rule.

Electronic services and intermediaries

The 2024 amendments to section 54(2B) of the VAT Act introduced the concept of a written agreement between the intermediary and the principal supplier. Where a principal makes a supply of electronic services via an intermediary’s platform, the intention was to hold the intermediary liable to account for the VAT on the electronic services provided. It has come to the government’s attention that this poses compliance risks for SARS in that they must engage the principal to recover the VAT, and intermediaries may have difficulty in entering into agreements with smaller foreign electronic principals, who are often most likely to be non-compliant, to account for the VAT on their behalf. It is thus proposed that section 54(2B) of the VAT Act be amended to state that the default situation is that the intermediary accounts for the VAT, unless there is an agreement to the contrary. The joint and several liability will still apply.

Leasehold improvements

A problem arises when leasehold improvements are supplied to a lessor who is not a vendor (for example, a lessor that falls below the VAT registration threshold or makes only exempt supplies). The adjustment under section 18C of the VAT Act must be made by a lessor who is a vendor where leasehold improvements are applied for non-taxable purposes. Based on the current wording of the provision, if the lessor is not a vendor, section 18C does not apply. This means that a lessor who is not a vendor will receive the benefit of leasehold improvements in respect of VAT that was effectively not incurred by that lessor. It is proposed that the VAT Act be amended so that this treatment is no longer restricted to lessors who are vendors, and that a specific declaration channel be made available in this regard.

Refunds for carbon budget compliance
The 2025 Taxation Laws Amendment Bill provides for refunds of taxes paid on greenhouse gas emissions that exceed the mandatory carbon budgets allocated to companies by the Department of Forestry, Fisheries and the Environment if companies comply with the five-year carbon budget. Stakeholders thought that the wording of the proposed section 17A(2) of the Carbon Tax Act (2019) on the carbon budget refund, which refers to “the immediately preceding tax period”, is unclear and creates uncertainty regarding which tax period is meant. To provide policy certainty to taxpayers and remove any ambiguity in the legislation, it is proposed that the reference to the immediately preceding tax period be deleted.

Furthermore, it is proposed that the legislation clarify that a refund may be claimed in the third year for the first two tax periods and for the remaining tax periods. Therefore, from year three to five, and over the five-year carbon budgeting period, a refund may be claimed in the sixth year. This will address concerns about inaccuracies in the emissions and tax liability assessments for the first two tax periods and over the five-year carbon budgeting period. The proposed amendments will come into effect on a date to be determined by the Minister of Finance.

Carbon tax thresholds for 1A4a activities
Commercial and institutional sector entities have invested in backup diesel generators to address concerns about load shedding and electricity supply shortages. The generators are mainly used during supply disruptions for short periods, and the additional capacity is not fully utilised. Stakeholders are of the view that the cost of complying with the carbon tax is significantly higher than the tax liability of companies falling within this sector. To ease the compliance burden on companies, it is proposed that the capacity-based threshold for the commercial/institutional activity (Intergovernmental Panel on Climate Change code 1A4a) be replaced with an emissions threshold of 25,000 tonnes of carbon dioxide equivalent, effective from 1 January 2026.

Customs and Excise Act

Providing enabling provision relating to Admission Temporaire/Temporary Admission Carnets (ATA Carnets)

The ATA Carnet system, established under the ATA and Istanbul Conventions, enables the temporary admission of certain goods, such as commercial samples, professional equipment, and exhibition items, into foreign territories without the payment of duties or taxes. Carnets were historically issued in paper form by the National Guaranteeing Associations and manually processed at border posts. The World Customs Organisation and the International Chamber of Commerce have launched an electronic ATA Carnet Project that mandates fully digitised carnets. To ensure that South Africa can implement the new requirements of the international agreement, an amendment to the Customs and Excise Act is proposed to enable the Commissioner to issue rules governing the issuance, use, and submission of international carnets for goods temporarily imported or exported.

Amendments to facilitate the administration of carbon tax refunds

The insertion of section 17A in the Carbon Tax Act in 2025 provides for a refund where an entity complies with carbon budgets over a five-year period. Carbon tax refunds are administered under the Customs and Excise Act, and a 2-year prescription period applies to customs and excise refund claims. It is therefore proposed that the Customs and Excise Act be amended to facilitate the administration of carbon tax refunds claimed over a longer period.

Discretion to exempt non-compliance in relation to rebates in Schedules No. 3, 4 and 6

Section 75(10) of the Customs and Excise Act gives the Commissioner broad discretion to exempt or condone non-compliance by taxpayers who fail to meet conditions or requirements prescribed by rule or in the notes to Schedules No. 3, 4 and 6 in respect of any goods specified in an item of these Schedules. The modern legislative approach is to move away from broad discretion and to provide criteria for its exercise, enhancing clarity and certainty. It is proposed that the discretion be redrafted accordingly.

Separating the carbon fuel levy from the general fuel levy

When the carbon fuel levy was introduced under the Carbon Tax Act, SARS’s systems were not designed to facilitate separate payment of these levies. As a result, the carbon fuel levy applicable to petrol and diesel was included as part of the general fuel levy provided for in Part 5A of Schedule No. 1 to the Customs and Excise Act. Since the implementation of the carbon fuel levy, new tariff items subject to the levy have been introduced by the Taxation Laws Amendment Act (2024). Systems changes were required to accommodate the integration of these new tariff items, and the carbon fuel levy can now be separated from the general fuel levy. It is proposed that a new Part 5C be inserted into Schedule No. 1 of the Act to provide for the administration of the carbon fuel levy separately.

Amendments in relation to electronic heated tobacco products

Taxing electronic heated tobacco products based on tobacco content (weight) rather than by stick (quantity) is considered a more effective public health strategy because it reduces the industry’s ability to control the tax base and encourages healthier consumer choices. It is proposed that the statistical unit of measure “per 10 sticks” be changed to “per kilogram net” for electronic heated tobacco products.

Income Tax Act

Excluding certain exempt entities that are companies from the definition of “provisional taxpayer”

The definition of “provisional taxpayer” in the Fourth Schedule of the Income Tax Act excludes certain entities that are subject to partial taxation. The exclusion of these entities was mainly aimed at reducing their compliance burden, for example, by addressing the difficulty of determining how provisional tax should apply to amounts subject to exemption only up to a specified threshold. In terms of paragraph (b) of the definition of “provisional taxpayer”, any company is a provisional taxpayer. It is thus proposed that fully exempt entities and certain partially exempt entities, which are regarded as companies, should also be excluded from being classified as provisional taxpayers.

Additional requirement with regard to the obligation to withhold employees’ tax for non-resident employers

The Fourth Schedule of the Income Tax Act was amended by the Tax Administration Laws Amendment Act (2023) to extend the obligation to withhold employees’ tax to non-resident employers conducting business through a permanent establishment (PE) in South Africa. It has been argued that this amendment can have anomalous consequences if the employee in question is not also effectively connected to the PE. For example, a non-resident employer with a PE in South Africa could employ a South African resident employee in its home country who has no connection to the South African PE. In such circumstances, the non-resident employer would have a withholding obligation in respect of the South African resident employee, even though employment is not exercised in South Africa. Hence, it is proposed that the PE requirement for non-resident employers should be amended to include an additional requirement that the employee is effectively connected to the PE in South Africa.

Reviewing the penalty regime for underestimation of provisional tax

To trigger the penalty for underestimating provisional tax, a taxpayer must first underestimate their taxable income outside acceptable tolerances. If the taxpayer submits an estimate that is within the acceptable tolerance but pays no provisional tax, the underestimation penalty cannot be imposed. The only penalty applicable in these instances is the lesser late payment penalty. It is proposed that, with effect from 25 February 2026, the timely payment of the amount of the estimate be required before it may be relied on. There are existing rules to prevent duplication of underestimation and late payment penalties. Furthermore, the R1 million cap for relying on amounts based on historical assessments, rather than current estimates, will be increased to R1.8 million for years of assessment commencing on or after 1 March 2026.

Value-Added Tax Act

Expanding documentary requirements for second-hand goods

Second-hand goods remain part of the illicit economy. There is no requirement under the VAT Act or Tax Administration Act (2011) for second-hand goods dealers to be licensed or have documents prescribed under any other relevant Acts, such as the Second-Hand Goods Act (2009). The Second-Hand Goods Act seeks “to regulate the business of dealers in second-hand goods and pawnbrokers, in order to combat trade in stolen goods; to promote ethical standards in the second-hand goods trade; and to provide for matters connected therewith”.

Section 21 of the Second-Hand Goods Act requires dealers to keep a record in a prescribed form containing certain information, with additional information prescribed under section 24 of that Act for dealers in second-hand motor vehicles. To mitigate the risk of fraudulent notional input tax claims, it is proposed that the documentation requirements for second-hand goods vendors under section 20(8) of the VAT Act be extended to those prescribed under the Second-Hand Goods Act and its regulations.

Additional information required on tax invoice on acquisition of second-hand goods subsequently supplied by vendor

The zero-rate on exports does not apply to second-hand goods on which the supplier has deducted notional input tax. In this case, the supplier must levy VAT equal to the notional input tax deducted to recoup the notional input tax. Similarly, in the case of an indirect export by a qualifying purchaser, the VAT Refund Administrator may only refund the qualifying purchaser to the extent that the VAT charged exceeds the notional input tax deduction. To ease compliance for purchasers and administration, it is proposed that section 20 of the VAT Act be amended to require that the tax invoice issued by the supplier on the subsequent supply of second-hand goods on which a notional input tax was claimed must reflect the purchase price paid by the vendor on acquisition and the amount of notional input tax previously claimed.

Removing the distinction between eFilers and non-eFilers

To encourage vendors to submit returns and make payments electronically, vendors using eFiling are permitted to do so on the last business day of the month in which filing is required, rather than on the 25th of that month. As the vast majority of VAT vendors now make use of eFiling, the objective of increasing uptake has been achieved. Hence, it is proposed that the distinction be removed by creating a single, simplified system that requires all VAT vendors to submit returns and make payments on the last business day of each month.

Tax Administration Act

Permitting pre- or post-deposit screening of refunds by banks

The Tax Administration Act requires banks to report suspicious tax refunds to SARS and to hold them for up to 2 business days while SARS investigates. SARS is working with banks to explore screening potential refunds before they are deposited into taxpayers’ accounts. This will expedite legitimate refunds. It is therefore proposed to explicitly permit banks to conduct pre- or post-deposit screening of refunds.

Interest relief on defaults disclosed during the voluntary disclosure application

In the recent Medtronic International Trading S.A.R.L case, the Constitutional Court held that it is not possible to combine a voluntary disclosure application with a request for remission of interest under the various tax Acts without legislative authority to this effect. It is proposed that provision be made to specifically permit applicants for voluntary disclosure relief to simultaneously apply for the separate remission of interest, under the provisions of the relevant tax Act, in respect of the defaults disclosed in the voluntary disclosure application. It is further proposed that this amendment take effect from 1 March 2026 to assist potential applicants without affecting existing applications.

Tax compliance status pending the outcome of a request for remission of penalty

Section 164(6) of the Tax Administration Act suspends the taxpayer’s obligation to pay tax pending SARS’s decision on the suspension of payment request. In terms of section 256 of the Act, a taxpayer must be indicated as “tax compliant” during this interim period. Section 256 of the Act does not provide for a scenario where a taxpayer’s obligation to pay tax is automatically suspended pending the outcome of a request for remission of penalties in accordance with section 215(3) of the Act. It is proposed that this anomaly be addressed. It is further proposed that the periods for which a suspension under sections 164 and 215 of the Act continues after a request has been rejected by SARS be aligned to 10 business days.