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Taxation
Monday, March 1, 2010
A wordy cause

New Finance Minister Pravin Gordhan was always going to have little room to manoeuvre in his inaugural Budget delivered to Government on 17th February 2010. “In essence, he continued with the sound and conservative approach that served his predecessor so well,” comments Deneys Reitz, adding that the dramatic deterioration in government finances during 2009-2010 was always going to make it a tricky balancing act.

Navin Ramparsad, Head Legal & Compliance Momentum Wealth, agrees. “This was perhaps the most difficult budget speech post 1994, considering the deficit and prevailing economic environment.” He adds that at least the Minister heeded the call to assist individual tax payers by providing tax relief for lower and middle income earners, which he did in the amount of R6,5 billion.”
But this falls short of fully compensating for the effects of inflation. And besides this is not real money. The R6,5 billion is simply a note on a piece of paper about what they are not going to take in the future.
As Azar Jammine, chief economist at Econometrix, was quoted as saying, “The budget was largely an illusion.” Against the R6,5 billion relief, he said that “inflation will lift the combined tax bill of individuals by R22,6 billion, so basically he is only returning a quarter.” He further pointed out that the country already had “one of the steepest marginal tax curves” in the world.


As Michael Browne of Seed Investments, notes, “Income tax brackets were adjusted upwards, but all bands were adjusted by less than inflation. This means that employees who receive an increase in line with inflation will pay a greater portion of their income in tax.”
At least there was no change in the marginal tax rates for individuals, he says, as there had been speculation that the top 40% rate would be increased in line with other countries. “The Minister indicated that they would rather improve income tax receipts by broadening the tax base further and closing loopholes than increase the marginal rate, which penalises those compliant tax payers.”
But Gordhan also increased other taxes.
Vedika Andhee, director for Tax at Ernst & Young, says, "Taxpayers who smoke and/or consume alcohol will be forking out a whole lot more in 2011 with a packet of 20 cigarettes costing R1.24 more and a 340 can of beer costing 6.5 cents more.
"It has also been proposed that the fuel taxes be increased from 7th April 2010 to 25.5 cents per litre. This proposed change will affect all income earners. Arguably the lower income earners utilising public transport will be affected the most.”
Jammine notes, “This is steep,” and would contribute 0.13% to the inflation rate, according to his calculations.
In any event, in view of future deficit financing there is a distinct possibility that income tax burdens will have to be increased further, even assuming perceived tax loopholes are firmly closed.
Louise Vosloo, tax director at Deloitte, remarks, “Although the budget deficit is substantial it is an improvement on Treasury’s October forecast of 7.6%.” She says, however, that burgeoning public sector borrowing requirement is expected to rise to R299 billion in 2010/11 (an estimated 11.1% of GDP).
Notes Michael Browne, “The ‘go go’ years that we experienced in the middle of the first decade of this century are gone and Treasury is faced with a tough battle of declining revenue and growth. Borrowing requirements have sky-rocketed and they will do well to prevent the deficit from getting out of control in the coming years.” It has moved from a surplus of 1% of GDP in 2007/2008 to a deficit of 7.3% in just two years. That means individual debt is going to cost more to service in the future. So clearly it would be wise for individuals to focus on reducing debt as a major priority.
Consumers have already been bashed about the head with a shocking 24,8% increase in electricity tariffs. Nor should one forget the ongoing municipal rates increases that have been rushing through year in year out at levels way above inflation. And one hasn’t even begun to talk about school fees, and the future National Insurance burden.
It is not surprising then that individual household debt remains stubbornly high. ABSA noted that households’ ratio of debt to disposable income was 76,3% in the third quarter of 2009 – household mortgage debt took the lion’s share at 49,5% (the balance, 26,8%, would largely concern motor vehicle financing, credit card debt and hire purchase deals). The ratios reflect the amount of disposable income (mostly net income after tax) on the part of an average household that must be spent each month on repaying loans. In other words, the average household only has R23,70 left out of each R100 net of income tax to cover the costs of rates, water, electricity, food, clothing, fuel and a myriad of other family expenditure required to keep body and soul together.
Given future deficit financing that will be required of government and it is a safe bet that interest rates will also start to rise. Only a miracle in the form of a significant expansion in gross domestic product (unlikely) will stave off this possibility. In simple terms, when the biggest borrower in the country wants more money it pushes up the demand for debt, which obviously pushes up its costs. We could see the size of public borrowing increase from 23% of GDP in 2008/9 to about 40% of GDP by 2013. This could become a serious problem. It is crucial that expenditure growth be kept at moderate levels to avoid such unsustainable debt levels which threaten sovereign solvency.
Another danger lurking in the undergrowth concerns education with some 12 million students trying to work toward creating a better skills pool – well, hopefully. But it does not help for tens of thousands of university applicants to be booted into touch. Even four ‘A’s in matric may not be enough to get a place, given the chronic shortage of universities. Stories are legion and it has not been uncommon during the 2010 intake, for example, for a given faculty with, say, 500 places to turn 3 000 students away. Many matrics are having to take ‘a gap year’ while others with wealthier parents are going overseas to study. The upshot is less skills, less quality products and services in the longer term and less taxes. So Gordhan’s comment in the pre-budget review doesn’t make sense: “South Africa operates in a global village where our fortunes are partly dependent on how well we are able to leverage off the global economy.” Companies like Brazil, China and India were improving their competitiveness by raising skills levels, investing in infrastructure and removing obstacles to growth and unemployment. “South Africa must not be left behind.”
This is what I call “blaffle” – lots of talking about a self-evident truth that everyone seems to be ignoring. The government has simply closed far too many learning institutions down, while working consistently to keep skills of certain groups out of the system.
Fewer than six million taxpayers support almost 14 million grant recipients. The support figure is expected to rise to 16 million within three years. As it is, for the closing tax year, personal income tax was some R4 billion below the original estimate.
As Mike Schussler, an economist at Economists.co.za, says, “Look at South Africa’s dependency ratio – it’s three people to one taxpayer and it’s unsustainable.”
Unemployment remains higher than any comparable country. Only two out of every five South Africans of the working-age population (44%) had jobs.
The budget contained a lot of administrative tweaking once again, as salvo and counter-salvo between SARS and tax payers continued. Tax avoidance (OK) and tax evasion (not OK) remain in the balance as parties squabble over whether or not a given tax scheme or financial structure is permissible.
The usual outcome of all this is increasingly complex tax legislation and more expensive accounting procedures. Even the loopholes have loopholes. ‘Fringe benefits’ in salary packages have been attacked for years (since about 1984). One must never forget their original gestation was to avoid high taxation. At 40% the top marginal rate is still far too high. Any regime that seeks to help itself to more than a third of an earner’s money is bound to face counter-offensives by those seeking to maintain the status quo. Reducing income tax rates to, say, a more equitable 30% would remove a great deal of incentive for having fringe benefits and allow much of the costly paperwork to be shredded for good. It’s doubtful this ‘pipedream’ will ever gain a foothold.
According to Deloitte’s Tax Director, Nazrien Kader, SARS will concentrate on sophisticated tax loophole structures which have been a substantial loss to the fiscus in the past; improving their tax administration systems to achieve a better level of compliance; and focusing on, inter alia, large taxpayers and high net worth individuals.
Vedika Andhee says, "The budget contained nothing really earth shattering for individuals. As expected most of the relief was aimed at the lower income earners with the tax rebates finally hitting the double digit mark. Individuals below the age of 65 earning R57 000 or less will not be paying any tax. The allowance in relation to medical aid contributions has increased from R625 to R670 for the first two beneficiaries (insufficient bearing in mind the medical aid rates these days). SARS continues to encourage taxpayer savings by increasing the interest exemption from R21 000 to R22 300 for individuals below 65


The amount of interest income that is exempt from tax grew by 6.2% from R 21 000 to R 22 300 which is less than the current 6.3% inflation rate. While the amount exempted from tax grew by less than inflation, the effective amount that you can invest in money market products without being taxed grew by around 84% from R 190 000 to R 350 000. “This large increase is as a result of the sharp fall in interest rates,” explains Browne. “These amounts have been calculated assuming an interest rate of 11% last year compared to 6.35% this year.”
Of much joy to many individuals was the suggestion that there might be the abolishment of estate duty in the future. The rationale behind this thinking is that estate duty doesn’t bring in much (relatively) revenue and that the truly wealthy individuals have legal structures, like trusts, to circumnavigate this tax.
Exchange controls for individuals remain as is for now, but Treasury continues to work on the reform on exchange control regulations. The change in the way that dividends are treated (i.e. taxed in the hands of the investor as opposed to the company) is nearly complete with a few minor issues to sort out before it can be properly implemented.
Notes Deloitte, another change impacting on individuals is that of medical scheme contributions and medical expenses. From 1st March 2010, the monthly monetary caps for deductible medical scheme contributions will increase. The conversion of these deductions into non-refundable tax credits first mentioned in the 2009 budget, will be deferred to 1st March 2012. The Minister indicated that the government is busy laying a foundation for the introduction of the system.
According to Deloitte, the main change for low income earning individual taxpayers is the discontinuation of the SITE system with effect from 1st March 2011, as the personal income tax threshold for taxpayers younger than 65 years is approaching the SITE ceiling of R60 000.
In summary, Vosloo comments, “While efforts to avoid increasing the tax burden on households are noble, they could be short-lived. Treasury has indicated that under their current assumptions the public sector will need to borrow a whopping R1.1 trillion in the four fiscal years to 2012/13. This much debt could be difficult to raise, especially given South Africa’s relatively low savings rate. Current plans to reduce the size of the budget deficit and therefore borrowing requirements hinge on a gradual but consistent recovery in economic growth (and therefore tax revenue) as well as a moderation in growth in expenditure. This will include smaller increases in public sector salaries and lower growth in government employment, cost savings and reprioritisation of other expenditure. If expected growth does not materialise, or government fails to rein in spending sufficiently, we could face higher taxes in the future.” By Nigel Benetton

As a separate BOX
Comments Jerry Vilakazi, ceo of Business Unity South Africa (BUSA), “The Budget was balanced and appropriate given the current global economic environment. We agree that partnership is the most effective way to tackle economic challenges facing the South African economy. We also believe that economic growth is integral to the achievement of the stated objectives of reducing unemployment; poverty and inequality levels. We are convinced that an enterprise development centred economy is the most sustainable way to achieve these objectives.
“The explicit clarification of government policy on the Mandate of the Reserve Bank, inflation targeting and exchange rate management is welcome and will strengthen investor confidence in the South African economy,” he adds. Policy certainty, combined with further discussions on further liberalisation of exchange controls will inevitably reduce the cost of doing business.
BUSA believes that a stable financial sector is crucial for the stability of the South African economy, as well as the protection of consumers. In that regard, we welcome the regulatory initiatives (domestic and international) highlighted by the Minister.

Copyright © Insurance Times and Investments® Vol:23.3 1st March, 2010
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