South Africa’s 2025/26 budget, presented by Finance Minister Enoch Godongwana on March 12, 2025, comes at a pivotal time for the nation. The budget’s unveiling was notably delayed due to internal disagreements within the coalition government, particularly concerning a proposed increase in the Value-Added Tax (VAT).
It was a bit like watching a movie and you your friend has already ruined the ending so we know what was coming, just not how bad it would be.
INDIVIDUALS
Personal income tax brackets and rebates will not be adjusted for inflation in 2025/26. The personal income tax proposals are effective from 1 March 2025 and expected to raise revenue of R19.5 billion. No changes to medical tax credits are proposed – these will remain at R364 per month for the first two beneficiaries and at R246 per month for the remaining beneficiaries. This is now the 3rd year in a row tax bracket have not been adjusted.
There is no change to the interest exemptions for people over 65 (R34 500) or under 65 (R23 800), those remain unchanged and have remained unchanged for several years.
There is no change in donations tax rates, dividends tax rates, retirement annuity contributions etc. Those all remain unchanged.
Cross-border tax treatment of retirement funds
SARS is of the view that the current treatment of cross-border retirement funds may result in double non-taxation, particularly where South Africa is granted the taxing right by treaty. It is proposed that changes be made to the rules that currently exempt lump sums, pensions and annuities received by South African residents from foreign retirement funds for previous employment outside South Africa, with amendments in the current legislative cycle.
Excise duties on alcoholic beverages and tobacco-related product
Government proposes to increase excise duties on alcoholic beverages by 6.75 per cent for 2025/26 The guideline excise tax burden as a percentage of the retail selling price of the most popular brand within each tobacco product category is currently 40 per cent. Government proposes to increase tobacco excise duties by 4.75 per cent for cigarettes, cigarette tobacco, and electronic nicotine and non-nicotine delivery systems (“vaping”). The proposed increase for pipe tobacco and cigars is 6.75 per cent
Closing loopholes in the ring-fencing of assessed losses
Currently, Section 20A of the Income Tax Act allows taxpayers earning below the maximum marginal tax rate threshold to continuously offset losses from certain trades against other sources of income. This has led to tax system exploitation, where individuals effectively reduce their taxable income and, in some cases, receive full refunds of their employees’ tax.
The government interestingly calls that a loophole which is interesting because nobody operates a business intentionally at a loss. To address this, it has been proposed that the threshold for the application of ring-fencing rules be reviewed and amended. The objective is to prevent undue tax benefits while maintaining fair treatment for genuine business losses. Further details on the revised threshold and implementation timeline will be provided following the review process.
BUSINESSS
Foreign exchange gains / losses on group loans
Government plans on refining deferral of exchange difference rules on debt between related companies. Section 24I of the Income Tax Act deals with the tax treatment of gains and losses on foreign exchange transactions. However, rules apply for postponing the taxation of exchange differences until the debt is realised. It is proposed that the policy be reconsidered so that deferred exchange differences are triggered on the portion of an exchange item realised during the year of assessment.
Reviewing the Fourth Schedule to allow for one nominated employer for company group structures
and employee share scheme trusts of a group of companies
The provisions of the Fourth Schedule to the Income Tax Act will be reviewed to determine if they should be amended to allow one employer to be nominated by a group of companies, or by an employee share scheme trust for a group of companies, to apply to be registered as the employer on their behalf for purposes of pay-as-you-earn withholding and payment, return submissions and IRP5 certificate generation of multiple companies in a group context or an employee share scheme trust. This may require, among others, extending the joint and several liability principles in the Fourth Schedule for the entities concerned
VALUE ADDED TAX
Increase in VAT rate
VAT is levied at the standard rate of 15% on the supply of goods and services by registered vendors. The rate increases to 15.5% from 1 May 2025 and to 16% from 1 April 2026. The R1 million threshold for the purposes of compulsory VAT registration remains unchanged.
Consideration of further VAT zero rating
The VAT system currently zero rates 21 essential food items in an effort to make them more affordable for lower-income households. Government proposes to extend the list of zero-rated basic foods to mitigate the effect of the VAT rate increases. From 1 May 2025, zero rating will be extended to include edible offal of sheep, poultry, goats, swine and bovine animals; specific cuts such as heads, feet, bones and tongues; dairy liquid blend; and tinned or canned vegetables.
GENERAL TAX ADJUSTMENTS AND PROPOSALS
Adjustment of transfer duty
In line with regular reviews of tax thresholds, the transfer duty brackets will be increased by 10% to account for inflation, while the transfer duty rates will remain unchanged. These adjustments, outlined in Table 4.6 of the budget, are set to take effect from 1 April 2025..
Extending the urban development zone tax incentive
The Urban Development Zone (UDZ) tax incentive, first introduced in 2003, was designed to revitalize inner cities by encouraging investment in areas affected by urban decay. To provide greater certainty for investors and allow for adequate consultation with municipalities, the government has proposed extending the incentive’s sunset date by five years.
This means that businesses and property developers will continue to benefit from the tax deduction for qualifying developments within designated urban zones until 31 March 2030. The extension aims to sustain urban renewal efforts, attract further investment, and support economic growth in key metropolitan areas.
Review of the renewable energy allowance
In 2023, the government introduced a temporary renewable energy tax incentive to encourage investment in sustainable energy solutions. However, this incentive expired on 28 February 2025 and will not be extended.
The 2024 Budget Review indicated that the government would reassess certain aspects of the original Section 12B incentive, particularly the leasing provisions and the 1-megawatt (MW) generation threshold. After a thorough review, it has been decided that these provisions will remain unchanged, and the temporary incentive will not be reintroduced or extended.
This decision underscores the government’s shift towards a more long-term approach to renewable energy investment, relying on existing tax incentives and broader energy policy measures.
Carbon tax
The carbon tax remains a key instrument in South Africa’s climate change strategy, aimed at reducing greenhouse gas emissions. As part of the annual adjustments, the carbon tax rate has increased from R190 to R236 per tonne of carbon dioxide equivalent, effective 1 January 2025.
Additionally, from 2 April 2025, the carbon fuel levy will rise by 3 cents per litre, bringing it to 14c/litre for petrol and 17c/litre for diesel, in line with the requirements of the Carbon Tax Act (2019).
To align with the overall tax increase, the carbon tax cost recovery quantum for the liquid fuels sector has also been adjusted, increasing from 0.69c/litre to 0.99c/litre as of 1 January 2025. These measures are intended to strengthen South Africa’s commitment to reducing emissions while ensuring that industries contribute to climate mitigation efforts.
Customs voluntary disclosure programme
The Tax Administration Act (2011) provides for a voluntary disclosure programme but excludes customs and excise. It is proposed that the Customs and Excise Act be amended to provide for a customs and excise voluntary disclosure programme
Clarifying the meaning of audit certificate to be issued by public benefit organisations
Section 18A of the Income Tax Act provides that a claim for a deduction for a donation made to an organisation as specified in that section is not allowed unless supported by a receipt issued by the organisation containing the information as prescribed in that section. The section further prescribes that the organisation conducting mixed section 18A and non-section 18A activities must obtain and retain an audit certificate confirming that all donations received or accrued in the year for which receipts were issued were used solely to undertake activities covered by section 18A of the act.
Some uncertainty exists about how the term “audit certificate” must be interpreted and whether it should bear reference to terminology contained in the Auditing Profession Act (2005). It is proposed that the term be clarified in the context of this section.
Author: Michael Rushby
