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Taxation
Sunday, April 1, 2007
Surprise, surprise

In my budget preview I expressed the view that this year’s budget would not lend itself to much creativity, but as always the Minister of Finance has managed to spring a surprise or two on us.

Comments Sanlam chief economist Jac Laubscher, “The biggest surprise is the announcement that the Secondary Tax on Companies is to be lowered from 12,5% to 10%, but more importantly to be phased out and replaced with a tax on dividends at shareholder level.
“In view of my past campaign to have STC scrapped, the announcement is to be welcomed. One only hopes that the tax on dividends will be designed to avoid double taxation, i.e. that company profits paid out as dividends will not be taxed in the hands of both company and shareholder.”
He says a second pleasant surprise is the scrapping of the remaining tax on the interest and rental income of retirement funds, without waiting for the reform of the system of retirement provision to be completed. Along with other measures, e.g. increasing the tax-exempt amounts of interest individuals may earn, it will help to encourage a culture of saving.
“A third surprise,” says Mr Laubscher, “is the extent of tax relief provided to individuals, totalling R8,4 billion. If allowance is made for compensation for bracket creep, the cash value of the reduction in tax is probably approximately R4 billion. Although this is only about half the value of the tax relief granted last year, it is still questionable whether this is wise in view of buoyant household consumption expenditure at a time when the deficit on the current account of the balance of payments is problematically high.
“With tax relief spread over all income groups (from raising the tax threshold to increasing the income level at which the top marginal rate kicks in), it will hopefully result in a marginal improvement in household savings.”
As expected, the projected revenue for 2006/07 was raised to produce a budget surplus of 0,3% of GDP – under spending amounting to R2 billion will also make a small contribution to this outcome. Apparently the National Treasury is reluctant to assume this positive trend will to continue, as the budgeted revenue for 2007/08 has been increased only marginally when compared with the Medium-Term Budget Policy Statement (MTBPS) of 25th October 2006.
Likewise the expenditure budget for 2007/08 has been left almost unchanged compared with the MTBPS, resulting in a projected budget surplus of 0,6% of GDP (0,5% of GDP in the MTBPS). The contribution that government savings will make to national savings is to be welcomed in view of the deficit on the current account, as I share the concern expressed by the Minister regarding over-reliance on foreign capital inflows to keep the SA economy going.
The announcement regarding exchange control relaxation is another small step in the right direction, he comments. “More important are the steps to increase the liquidity in the domestic foreign exchange market, in particular the establishment of a rand futures market by the JSE.
“As I have argued in the past, the volatility of the rand can partly be ascribed to the skewed development of the foreign exchange market because of the uneven way in which exchange controls have been removed since 1995, viz. fully on non-residents but only partially and gradually on residents, which has resulted in trading in the rand moving offshore to a large extent,” he adds.
Hopefully these measures will contribute to greater stability in the exchange rate of the rand by encouraging more two-way trade.
 

Copyright © Insurance Times and Investments® Vol:20.3 1st April, 2007
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