With South Africa precariously placed on the cusp of a credit rating downgrade, being able to demonstrate to the global credit rating agencies that ‘SA Incorporated’ is solvent and growing has been a key focus of the 2016 National Budget. Besides controlling expenses, the Minister of Finance has taken aim indirectly at the SA citizen and corporates to increase the pool of revenue to balance our budget.
Despite their being no change in tax rates or any material revision of tax brackets, tax revenue will increase by R18 billion in 2016/17. This will largely be through inflationary increases in taxpayers’ earnings which results in a higher effective tax rate being applied to the taxpayer. In fact, the number of taxpayers with taxable income in excess of R500,000 is estimated to increase to 926,000 in 2017 from 783,000 in 2015. This change in taxpayer demographic alone will result in more than 89% of the additional tax revenue being collected from the high income earner.
Mid to top income earners will only account for approximately 13% of registered taxpayers, yet will contribute in excess of 64% of total annual personal tax revenue in 2017. Evidence of the classical economic maxim of collecting tax on an ‘ability-to-pay’ principle.
Put into perspective, as a taxpayer in the entry level tax bracket, you are likely to keep approximately R926 of every R1 000 in taxable income you earn in 2017. Whereas a top income earner will only keep approximately R713 of every R1 000 in taxable income that they earn. During the 2016 tax year, the net cash retained by these taxpayers would have been R920 and R716 respectively. Although appearing to be immaterial, when applied to one’s total taxable income the increase is significant.
In fact, when one reflects on the trend over the past five years (tax years 2012 to 2017), the impact of tax rate and income bracket adjustments has been material. A top income earner in 2017 will be paying R13 000 more in annual income tax than they were paying in 2012 (adjusted for inflation). Whereas an entry level taxpayer would be paying only R891 more.
Although essential to balance the country’s budget, the increased contribution to our country’s available reserves through personal income tax is a drain on our individual personal wealth creation. Through tax increases, National Treasury is able to divert potential savings by the individual to the state. To illustrate the point, let’s consider the impact of the increase in tax from 2012 to 2017 for taxpayers in each of the tax brackets. The graphic below illustrates the future value of personal wealth by taxpayers over a period of 5 years that has been forfeited by redirecting possible personal savings and investments.
Not only is a portion of our income being redirected away from personal saving, but thanks to the fuel levy and road accident fund increases there will be additional pressure on our personal budgets. For every R100 spent on fuel during 2015, we should budget to increase that spend to R112 in the next year, ignoring any currency or oil price impact.
So then how should we react to tax increases and the negative impact on our future wealth creation? Spend less. Save more.
Year on year, SA taxpayers have gradually been increasing their contribution to SA’s total revenue collection. Naturally, a large portion of such increase is inflationary as personal taxable incomes rise to maintain the purchasing power of the Rand. However, through an annual revision of the income brackets and tax rates applicable to personal taxable income, National Treasury is able to extract further increased contribution to our country’s revenue collection from the people. Capital Gains Tax, Estate Duty and VAT are other forms of tax that National Treasury can also use to increase the pot of income available to balance the budget.
If we focus on the individual tax payer, the tax tables are an effective, yet rudimentary, basis for determining an individual’s contribution to the country’s tax collection. There are six brackets of taxable income, with varying rates of taxation applicable to each bracket. The tax brackets and applicable rates have the effect of placing the lion’s share of the tax burden on the highest income earners in the land. This year has been no exception.
Being able to balance your personal budget after the National Budget speech is a key exercise for every South African family. The concept of balancing a budget always brings our human behaviours of balancing ‘wants’ and ‘needs’ against that finite amount of after tax income. With net disposable income reducing, the temptation to adjust spending by cancelling long term savings and insurance premiums is high on most families’ agendas. Best practice in financial planning and wealth management would challenge you instead to cut back on non-core expenditure such as airtime, data and retail consumption while maintaining your level of essential savings and insurance.
By Ricardo Teixeira, COO of BDO Wealth Advisers