• Sharebar
Taxation
Sunday, March 1, 2009
Balancing act

Addressing the challenges of the current international downturn, Minister Trevor Manuel said in his 13th Budget, presented to Parliament on 11th February 2009, that a sound financial system, healthy fiscal position and credible monetary policies all contributed to limiting South Africa's exposure. It also serves as key building blocks in financing future growth and development of our country. However, he also echoed Reserve Bank Governor Mboweni’s remark the week before, when reducing the repo rate by 100 basis points to 14%, that “the nation cannot decouple itself from dire global trends.”

Manuel tabled a R775 billion spending budget (excluding R60 billion in interest payments). With tax revenues undershooting budget and spending intentions topped up, the likely budget deficit this coming year will be some 4% of GDP, or R95 billion.
He stressed the fact that South Africa is borrowing money, not to rescue failed banks nor to delay artificially the restructuring of our industry and trade, but to construct roads and the power stations, the classrooms and hospital wards, and to transform public service delivery. Debt service cost will remain moderate over the next three years, however, at about 2,5% of GDP.

Some highlights of the Budget:
• Tax relief for individuals amounting to R13,6 billion;
• R13 billion more for social assistance grants and their administration;
• Extension of child support grant to age 15 this year; while consideration is being given, subject to affordability, to the extension of this grant to the age of 18;
• Reduction in the eligible age for men to 60 for the old age grant is in progress;
• With effect from April, the maximum values of the old age, disability and care dependency grants will rise by R50 to R1 010 per month;
• A delay in the implementation of new minerals and petroleum royalties until 1st March 2010;
• A review of the tax treatment of travel allowances;
• Taxation of energy-intensive light bulbs;
• An increase in the international air passenger departure tax to R150 for international destinations and R80 for flights to Southern African Customs Unions member states;
• Taxes on petrol and diesel increase by 40,5 c/l and 41,5 c/l respectively.

Comments Paul Hanratty, Old Mutual South Africa Managing Director, 'We believe that the Budget is a measured response to global events and is testimony to the prudent macroeconomic management of South Africa's economy in the past. The Minister put the relief of poverty centre-stage in limiting the negative impact of the international credit-crunch. He clearly stated that protecting the poor, employment and training, investing in infrastructure and building a competitive economy remain key to a prosperous future.”
The more South African consumers we turn into savers or investors, the better for our economy where a stronger savings culture will fuel the capital growth of South Africa. In essence, what we do to address our challenges today, will dictate the legacy we leave to future generations.

Income tax

Although South African taxpayers will be paying slightly higher excise duties on various items, the minister is also giving back a significant amount.
“Due to fiscal constraint in the good years we are now reaping the reward of an expansionary budget to help boost the economy during the tougher times ahead,” says Andrew Ruddle, Investment Product Actuary at Old Mutual.
A R13 billion tax relief for individuals countering inflation and providing real growth in money in consumer’s pockets ensures that under 65 year olds earning R120 000 p.a. will be saving tax of R1 476 p.a. People under 65 years of age that are earning R300 000 p.a. will be saving up to R3 926 p.a.
Taxpayers are being given additional encouragement to save through increased tax exemptions. The annual tax-free portion on interest income for consumers younger than 65 will increase from R19 000 to R21 000. Over 65ers will be saving an additional R2 500 with an overall tax-free interest income deduction of R30 000. There is also an additional R300 tax saving o­n foreign interest and dividends, and capital gains tax relief with an increase from R16 000 to R17 500 in the annual exclusion.
People contributing to medical schemes will benefit from a monthly increase in their deductible contributions to R625 for the first two beneficiaries from R570 previously. For every additional beneficiary tax deductible contributions are increasing from R345 to R389.
“On the other hand duties will be raised directly on cigarettes by an extra 88c per pack. For someone smoking a pack a day it will translate into an extra expense of up to R27.40 per month. Wine, spirit and malt beer lovers will also be dipping slightly deeper into their pockets. Furthermore, the average driver going through two 50 litre tanks a month will pay an additional R40.50 in petrol bills or R29.50 in diesel bills,” says Ruddle.
The overall savings that the average taxpayer will enjoy should be used to pay off debt and to put aside extra savings as a buffer for the tougher times that the Minister signalled lie ahead. Ruddle comments, “Together with recent regulatory changes affecting commission and early termination values on many savings products, the Minister has created a positive savings environment for the man in the street. The need for South Africans to save for their future has never been stronger, and this budget provides significant extra incentives for them to do so.”
Adds Navin Ramparsad – Head Legal & Compliance, Momentum Wealth, “Effective cuts in personal income tax, combined with adjustments to the interest exemption and annual exclusion for CGT, is aimed at promoting savings. These adjustments together with the interest rate cuts the preceding week will give consumers some relief in these difficult economic conditions. The adjustments to social grants may however be viewed as disappointing as there were expectations that this increase would be higher.” For homeowners the CGT exemption on the primary residence has been increased from R1.5m to R2m.

Estate duty

Under current legislation the primary abatement for estate duty purposes is R3.5 million; duty is only levied on the balance above that figure.
Manuel announced that the dutiable value of estates of surviving spouses would be further reduced by whatever portion of the primary abatement was unused in a first-dying spouse’s estate.
Comments Peter Stephan, Legal Product Manager at Old Mutual, “A transferable abatement would prevent the need for the estate planning technique of combining the abatement with the deduction of assets accruing to the surviving spouse under current legislation.”
Currently, the estate planning technique widely used entails a specific bequest to a beneficiary other than the surviving spouse - usually to a family or testamentary trust - to the value of the abatement. The remaining assets are bequeathed to the surviving spouse, which under current legislation are duty-free. This technique requires that wills are carefully worded to implement the technique, and it requires careful analysis of the spouses’ estates.
Problems that have occurred with this technique include estates consisting of assets that are not easily capable of being divided into specific bequeaths to the value of the abatement; failure to review the will to update the amount of the abatement from time to time; disputes as to which assets should be part of the bequeath and which assets should be part of the residue, and unintended capital gains tax consequences of a specific bequeath when no roll-over applies.
Now that the unused portion of R3.5 million is transferable to the surviving spouse (even if the surviving spouse inherits the whole estate of the first-dying spouse, which will be estate duty and capital gains tax-free) he or she can enjoy the total abatement afforded to both spouses (presently R7 million in total).
Says Stephan, “Trevor Manuel has thereby created a positive savings environment. This tax abatement can go a long way, and consumers should seek the assistance of a qualified financial adviser to assist them in investing the extra capital wisely in the context of a holistic financial plan, once expensive debt with high interest rates has been settled.”

Social assistance

At present, social assistance programmes reach 12,4 million people. The changes to the various qualifying criteria announced by the Minister are projected to lead to social grants reaching 13,4 million people by April 2009, contributing significantly to reducing poverty in South Africa.
The maximum values of the old age, disability and care dependency grants will rise by R50 to R1 010 per month in April. Raising the means test thresholds is an important part of the social security reform agenda. This otherwise creates a disincentive to save for lower paid employees, while increasing the cost of administering the grant.

Retirement provision

As part of the speech, the Minister commented that one option would be to phase out provident funds as a prelude to broader social security reforms. Currently, retirement funds can be pension funds or provident funds. Although there are tax differences, a key difference is the form of the benefit at retirement. In a provident fund a retiree can take his entire benefit in cash, while in a pension fund the retiree must use at least two-thirds of the benefit to purchase a pension. This means that members of pension funds are less likely to outlive their income or spend their hard-earned savings on things that will not improve their quality of life in old age.
For this reason, the state has once again questioned the future of provident funds. This may have significant implications for such funds and their members. However, assurance has been given that extensive consultation will take place between stakeholders before any decisions regarding the future of provident funds is taken. As such, the changes are unlikely to be introduced this year.
The potential phasing out of provident funds could take any number of forms. Based on previous comments by the Minister of Finance, savings already in provident funds may be unaffected by any changes. Maintaining the existing savings in provident funds would be helpful for members relying on their retirement savings to pay off housing loans. However, this can create a cumbersome double membership situation which could increase administrative costs. The administration of tax could also prove burdensome.
The practical considerations involved in a transition to the new system and the communication to members will require careful consideration. Provident fund members, trustees and advisors should stay abreast of these developments. Given that changes are unlikely to be finalised soon and that existing rights will be recognised, members of provident funds need not be concerned about the safety of their retirement savings.

Environment and fuel consumption

A number of initiatives were announced to address environmental challenges, most specifically climate change.
The extent of the environmental challenges facing South Africa was emphasised, as well as the particularly severe impact that they can have on poor communities (for instance those sited close to industrial areas). The international trend towards the use of market-based instruments to address environmental challenges was referred to as precedent for the proposed initiatives.
The first proposed incentive is additional income tax allowances for energy efficient equipment. These allowances may be as high as 15%, but they will be conditional upon proof of resulting energy efficiencies. Such efficiencies will be measured over a two or three year period and will have to be certified by the Energy Efficiency Agency. The additional allowances are intended to complement provisions in environmental legislation that require the elimination of inefficiencies in the use of energy, water and raw materials.
In a related issue, the clarification of the tax treatment of certified emission reductions (CERs) in terms of the Kyoto Protocol’s clean development mechanism was announced. It is proposed that proceeds from the disposal of primary CERs will either be tax exempt or subject to capital gains tax rather than normal income tax. Secondary CERs will be classified as trading stock and taxed accordingly. It is intended that this clarification will encourage clean development mechanism projects in South Africa.
While the above two initiatives will decrease the tax burden on environmentally beneficial projects, there are then several initiatives that will increase the tax burden on environmentally unfriendly products. It was proposed that the levy on plastic bags be increased from 3c to 4c per bag. A new environmental levy on incandescent light bulbs was also proposed. It would be in the regent of R3 per bulb and would be levied at the manufacturing or import level.
The promotion of fuel efficient motor vehicles is also to be exercised through the imposition of new duties, or at least the recalculation of existing duties. New motor vehicles are currently subject to duties based solely on price. It is proposed that a component of these duties will, in future, be based on each vehicle’s fuel efficiency (and carbon emissions). The proposal is expected to be effective from 1st March 2010.
Manuel also announced that 23% of the general fuel levy will be earmarked for metropolitan municipalities to support expenditure on roads and transportation infrastructure. This is done to replace the loss of income due to the scrapping of the Regional Services Council and Joint Services Board levies. To improve the financial position of the Road Accident Fund (RAF) the levy HAS BEEN raised by 17.5c a litre to a total of 64c a litre. The general fuel levy will ALSO rise by 23c and 24c per litre for petrol and diesel respectively.

Government debt

When Trevor Manuel assumed office in 1996 the ratio of public debt to GDP was a staggering 48%, ensuring that a large portion of the country’s GDP was spent servicing this debt. Unpopular as it was at the time, Manuel oversaw greater control of public spending that allowed amounts borrowed to be systematically paid off. The debt servicing burden was slowly but surely decreased and currently stands at 2,5% of GDP. The current level of actual debt is 23% of GDP, which makes it possible for the government to increase borrowing (as it attempts to provide fiscal stimulus through increased spending).
Effectively this longer term strategy has now allowed for an increase in government debt to assist in providing a less restrictive than expected budget. The government says it will, however, take into account the cost of any debt raised, given the global economic crisis, and weigh this up with the potential benefits that the debt would be able to achieve.
Just how hard the impact of events on the economy has been in 2008 was reflected in revised growth estimates, the decline in revenue collections, the consequent increase in the budget deficit, with these tendencies gathering strength into the coming fiscal year.
GDP growth for 2008 was estimated at 3% and for 2009 was lowered further to 1.2%. One major consequence was a major decline in tax collections relative to budget, amounting to R14 billion in 2008 and R50 billion expected in 2009.
At the same time the Minister upped his spending estimates for 2009 relative to his budget baseline by some R50 billion, indicating the extent to which extra spending is being allocated this coming year, especially for infrastructure and social security.
Comments Cees Bruggemans, Chief Economist of First National Bank, “As a consequence, the budget stance went from a surplus of 1.7% of GDP in 2007 to a deficit of 1% of GDP in 2008, a change of 2.7% of GDP, indicating the extent to which the Minister borrowed more this past year to keep supporting the economy with state expenditure even as his revenue collections fell away.”
In 2009 the Minister will be even more accommodating in having to reflect disappointing tax collections as well as undertaking extra spending, allowing the budget deficit to rise to 3.8% of GDP.
He adds, “If reality this year turns out even worse than here assumed, as it did very much so last year, with especially export performance suspect this year in light of still deteriorating global conditions, his budget deficit could ultimately peak at 4%-5% of GDP in 2009.”
Thereafter the deficit is projected to start subsiding again from 2010 onward, as the Minister assumes a revival in growth performance and tax collections.

Interest rates

“If your trade partners are going down, and so many are already in deep recession, one must accept that one’s own exporters are going to struggle, indeed severely so. This implies output, income and employment losses to come,” observes Bruggemans – echoing Mboweni’s opening sentiment.
With inflation already nearly halfway down at 9,5% from its 13,6% August peak, and poised to drop within the 3%-6% target by 3Q2009, if not sooner, and with global inflation trends and our own weakening economy all reinforcing the inflation decline in coming quarters, there is clear scope for further interest rate easing.
“I expect the SARB now to lower interest rates by 450 points, peak to trough, prime moving from 15.5% to 15% in December 2008, to 14% February, to 13% by April 2009 and to 12% by June 2009,” says Bruggemans.
“Thereafter, depending on global and local circumstances and the inflation forecast flowing from it, and taking due cognizance of any upside inflation risks (rand, oil, food, politicians) there could still follow further 0.5% cuts in two subsequent MPC meetings, prime falling to 11.5% in August 2009 and possible to 11% in October 2009. One would then expect prime to go on hold through much of 2010.”

Copyright © Insurance Times and Investments® Vol:22.3 1st March, 2009
650 views, page last viewed on August 20, 2019