All eyes will be on Finance Minister, Tito Mboweni, tomorrow when he delivers his budget speech on Wednesday, 26 February to the nation. Against the backdrop of a weak fiscal position, declining economic outlook and a threat of a Moody’s rating downgrade, he unquestionably has a mammoth task ahead of him.
Instead of introducing any significant tax hikes, we feel that reining in government expenditure (particularly the wage bill) is essential in order to curb the budget deficit.
We also hope that under the new SARS commissioner, revenue collection will improve due to efficiencies and tighter controls implemented in the organisation.
Sadly however, we don’t think this will be enough. Although it is a bitter pill to swallow, additional taxes to reduce Government’s spiralling debt burden seem to be inevitable.
Let’s look at some of the options available to the Finance Minister:
Personal Income Tax
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. In addition, South African tax residents working overseas will be hit next when the long anticipated ‘expat tax’ kicks in from 1 March 2020 (next week!) whereby their income above R1m will be taxed in South Africa. Applying even more pressure to this small tax base could increase emigration rates even further 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 should however, be the usual adjustment in the tax brackets to avoid ‘fiscal drag’ (i.e. the situation in which people pay a larger part of their income in tax, because the government does not increase the levels at which people pay tax at the same rate as that at which inflation is increasing).
However, in 2019 almost no relief was given for ‘fiscal drag’ and it seems very likely that Treasury will once again sneak in some additional revenue by implementing a less than inflationary adjustment to the tax brackets. It is expected that this could boost the state’s coffers by an additional R13 billion in tax revenue – an amount certainly not to be sneezed at!
There is a lot of talk around VAT this year. Treasury took the bold step to raise VAT from 14% to 15% in 2018 – with this increase still fresh in the minds of many, upping the rate to 16% is sure to cause a public outcry.
However, the VAT rate of 15% is still relatively low by international standards and an increase to 16% is predicted to raise approximately R25 billion.
Desperate times call for desperate measures –brace yourselves for some bad news here. We hope we are wrong.
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.
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.
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 2020/2021 at least), but it seems likely that (just like 2019) it won’t be adjusted for inflation and therefore will remain unchanged.
We do believe however, the end of the Medical Tax Credits is on the horizon.
Fuel levies and Sin taxes
As usual, we expect an above inflation increase to the fuel levy as well as to alcohol and tobacco products. The ‘sinners’ amongst us are always a soft target!
Follow TaxTim on Twitter and Facebook as we provide real time updates during the budget speech tomorrow, 26 February at 2pm. We will be sending out our 2020 updated Salary Calculator as soon as the new rates are announced.