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Finance Minister Tito Mboweni will be in the spotlight next week when he delivers his maiden budget speech on Wednesday, 20 February to the nation.
Fortunately, we do not expect the budget to have many surprises or controversial elements this year due to the multiple changes made to the finance ministry over the last twelve months as well as the upcoming elections in May.
Instead of introducing any significant tax hikes, we feel that further reductions or capping in government expenditure is essential in order to curb the budget deficit. There are however, some subtle ways that Treasury can generate some additional revenue from taxpayers, without causing too much alarm.
Let’s look at some of the options available to the Finance Minister: VAT
Considering that Treasury took the bold step to raise VAT from 14% to 15% in 2018, we think it can be safely assumed that there will be no further adjustments to the VAT rate this year. This is in spite of the fact that the VAT rate of 15% is still relatively low by international standards. We are actually hoping for the Minister to announce some more Zero-Rated items to offset some of the harsher effects of the prior year increase.
Capital Gains Tax (CGT)
CGT inclusion rates were increased in 2016 from 33,3% to 40% for individuals and from 66,6% to 80% for Companies and Trusts. There has been no adjustment to this inclusion rate since 2016, however the introduction of the 45% tax bracket in 2017 for individuals had the effect of increasing the maximum effective CGT rate from 16,4% to 18%.
Investors breathed a sigh of relief last year, when no changes were made. However, once again this tax, which predominantly affects the wealthy, is under scrutiny. There is the possibility that National Treasury could look to raise the CGT inclusion rate for individuals from 40% to 50% which some predict would generate approximately R2,5bn. However, there is the risk that this would discourage investment, which may be more damaging in the long run and not worth the relatively insignificant revenue that this adjustment may raise Corporate Tax
The corporate tax rate is currently 28% in South Africa and most analysts do not predict an increase here. In fact, there have been calls to reduce the corporate rate to stimulate growth and improve economic competitiveness. We think an increase would deter foreign investment and hinder economic growth which South Africa can ill afford, while a decrease, seems too much of a gamble to make. It seems likely therefore, that the rate of 28% is set to stay a while longer.
It is estimated that there are only about 7 million taxpayers in South Africa out of a population of 56 million people (i.e. 13%). This relatively small tax base already faces high tax rates, with limited benefits received.
The super wealthy (those earning more than R1,5m per year) were hit in 2017 with the new 45% bracket. South African tax residents working overseas will be targeted next when their income above R1m will be taxed from 1 March 2020. Applying even more pressure to this small tax base could increase emigration rates and cause a potential slippage in tax compliance, which is already a concern.
In the light of the above, we don’t foresee any major increase in personal income tax rates.
There will of course, be the usual adjustment in the tax brackets for inflation – so, as you earn more, the tax rates are adjusted accordingly so that you are not poorer than you were last year. However, we think Treasury might sneak in some additional revenue here by implementing a less than inflationary adjustment to the tax brackets
Medical Schemes Tax Credit
Medical scheme members currently receive a medical tax credit of R310 per month for the first two beneficiaries and R209 per month for the remaining medical scheme members. Unlike an expense deduction, which reduces taxable income, the medical credit is a direct deduction against the taxpayer’s actual tax liability and therefore is a set amount, which is not dependent upon the taxpayer’s income level.
Treasury have been hinting for a while that they are considering the reduction of the medical tax credit in order to fund the National Health Insurance (NHI). This is another controversial area - eliminating this credit entirely will upset many people who are dependent on it in order to access private medical care. They are essentially being compensated for not accessing the government health service. The government health system can’t cover everybody and therefore it relies on people seeking alternative (expensive!) private health care and therefore should incentivise taxpayers accordingly.
We think the medical credit is here to stay (for 2019/2020 at least), but it seems likely that it won’t be adjusted fully for inflation. Similar to when Treasury stopped increasing the interest rate exemptions, these could just remain the same until inflation catches up.
We do believe however, the end of the Medical Tax Credits is on the horizon.
Fuel and Road Accident Fund (RAF) Levies
Although there is need to increase fiscal revenue at the moment, the Treasury is most likely to look for revenue in other ways, especially after the very large fuel levy increase we saw last year. Large increases in the fuel levy could have inflationary effects and of course increase transports costs. This is not an ideal scenario as government works hard to stabilise the economy and reverse some of the economic malaise we have had in the last few years.
Follow TaxTim on Twitter and Facebook as we provide real time updates during the budget speech on 20 February. We will be sending out our 2019 updated Salary Calculator as soon as the new rates are announced.