One of the most widely anticipated budget speeches was presented yesterday against a fiscal backdrop of a cocktail of economic challenges.
This year’s challenges include: low economic growth, a climbing budget deficit, continued high levels of unemployment, poverty and income inequality, a weakening rand, a severe drought, student fees crisis etc.
The Minister articulated a careful balancing act between on the one hand, an equitable burden of tax and on the other hand, a progressive programme of expenditure, together with austerity measures to go with that spending.
The key test will be whether South Africans (including government) will be able to translate this Budget into action.
Key budget take outs
1. The Minister recognised that taxpayer morality in South Africa is high. He noted that the SA public’s compliance with tax obligations is high and that hence, government is mindful that it needs to improve the impact of every rand spent, and that it needs to eliminate waste and corruption.
2. Government proposes to raise an additional R18.1 billion in revenues in 2016-17 year and an additional R15 billion in each of the subsequent two fiscal years.
3. The R18.1 billion additional revenue will mainly come from:
- higher excise duties (including increases of between 6% and 8.5% in the duties on alcoholic beverages and tobacco products).
- an increase in the capital gains tax inclusion rate (currently 33.3% of an individual’s capital gains is subject to income tax. It is proposed that this rate be increased to 40% for individuals and for companies that it be increased from 66.67% to 80%. An increase is also proposed in the annual amount above which capital gains become taxable.
- an increase in the transfer duty rate on properties above R10 million – this rate will increase from 11 per cent to 13 per cent.
- an increase of 30 cents a litre in the general fuel levy;
- increases in other environmental taxes (such as the plastic bag levy and incandescent global tax levy)
4. A new tyre levy is also proposed, effective 1 October 2016 and a sugar tax is proposed to be implemented with effect from 1 April 2017 to reduce excessive sugar intake.
5. Personal income tax relief (for fiscal drag) of R5.5 billion has been granted
This relief will come in the form of adjusting the tax brackets upwards to compensate low and middle income earners for the impact of inflation. No fiscal drag relief will be granted to higher income earners. If full relief for fiscal drag was to be granted, it would have amounted to tax relief of R13.1 billion, however it is only proposed to provide this relief to lower and middle income earners and hence the relief only amounts to R5.5 billion – which is in line with government’s intention to promote a progressive tax system in SA.
Other personal tax relief includes an increase in the monthly medical tax credit allowances.
6. Base Erosion and Transfer Pricing was also highlighted
A continuing issue which government is grappling with is how South Africa can effectively combat the significant financial leakages in the South African economy – which arise due to the erosion of our tax base and companies shifting their profits from SA to no-tax or low tax jurisdictions where they have no or very little economic presence.
The Minister indicated that they will continue to act aggressively against the evasion of tax through transfer pricing abuses, misuse of tax treaties and illegal money flows. Further measures will be taken to address such revenue losses, including inappropriate use of hybrid debt instruments.
7. Retirement reform changes
The Minister confirmed that the implementation of the changes relating to the preservation of retirement savings in provident funds would be postponed until 1 March 2018. However, all other retirement reform changes will however go ahead and be implement on 1 March 2016 as planned (e.g. the tax changes relating to the taxability of employer contributions and the tax deductions which employees may claim will be effective 1 March 2016.
8. Rules of the Voluntary disclosure programme will be relaxed and additional relief will be offered for a period of six months, from October this year, to allow non-compliant taxpayers to regularise their affairs. This is essentially to encourage those taxpayers who may still have significant amounts of cash and assets offshore, to bring those assets into the South African tax net.
9. Reducing red tape for small businesses
To support business development for small businesses, SARS is working to reduce red tape for these taxpayers. It has rolled out small business desks, designed small business tools to help businesses register for tax at their own premises and implemented a single tax registration process, which will eliminate the need to re-register for different taxes.
10. Withdrawal of withholding tax service fees
The withholding tax on service fees has introduced unforeseen issues, including uncertainty on the application of domestic tax law and taxing rights under tax treaties. To resolve these issues, it is proposed that the withholding tax on service fees be withdrawn from the Income Tax Act and dealt with under the provisions of reportable arrangements in the Tax Administration Act.
11. Looking to the future
a. Wealth tax – Minister noted that our current taxes on wealth are still under review by the Davis Committee.
b. There is room to potentially increase the VAT rate.
c. Learnership incentives and employment tax incentives will be considered and may be extended for another year.
d. Taxation of non-executive directors’ fees – A non-executive director’s fees may be subject to both employees’ tax (PAYE) and VAT. Views differ on whether to deduct PAYE from these fees or if the director should register as a VAT vendor. It is proposed that these issues be investigated to provide clarity.
Anthea Scholtz – Tax Partner, Deloitte