Following the Finance Minister Nhlanhla Nene’s Budget Speech for 2015, there has been a lot of comment from people in the industry, particularly with regards to the changes relating to tax.
Daniel Silke, an independent political analyst, stated at the Mazars’ Cape Town Budget Review 2015/2016, that the Budget Speech needs to be considered in terms of the State of the Nation Address (SoNA) and the fragile political environment that we are currently in.
An important point that Silke raised was “Do we get value for our money?”
This has been reiterated by several people who state that they wouldn’t mind paying higher taxes if they could see the effects that their taxes were having.
Personal income tax
Di Seccombe, senior tax manager at Mazars explained that while the brackets have been widened, and tax has increased by just 1%, people are still losing out.
Although the minimum rate of tax has stayed at 18%, the taxable income bracket has increased to R181 900 from R174 550, which means that more people are now included in the lower tax bracket.
On the other hand, the rate of tax for higher income brackets has increased, meaning that they are now paying even more in tax.
For example, if you earn R701 301 per annum, you pay an average tax of R208 587, however, for every R1 that you earn above R701 301, you will be taxed 41%.
According to Seccombe, this means that the disadvantages are twofold. Firstly, everyone loses out on tax savings as these have decreased, and secondly, the rich are also losing more of their income to taxes.
Blanche Steyn Senior, lecturer of accounting studies at Monash South Africa, suggested that there is another way that Treasury could have generated revenue without having to increase personal income tax.
“A suggested approach would be the stimulation of industrialisation, stimulation of SMME’s and stimulation of manufacturing the government. If it’s taken into consideration that South Africa is a commodity consumer, the more money that is taken out of South African households will result in less funds going into growing the economy,” she said.
Retirement reforms
Professor Matthew Lester, an Associate Professor at Rhodes Business School and a member of the Davis Tax Committee, noted that retirement reforms have been delayed to 1 March 2016, with the possibility of being postponed further to March 2017.
According to Seccombe, one of the reforms that the government is wanting to implement is to stop people from using their retirement annuities (RAs) as a way to avoid estate tax. This is because funds within an RA are exempt from estate tax when you die.
Changes are also being made to the taxation of lump sums drawn from retirement funds. Seccombe points out that people are heavily taxed if they withdraw money from these funds prior to retirement.
The tax free savings accounts are being implemented from 1 March 2015, which has been introduced as a way to promote saving within the country. This could be seen as an alternative form of saving for retirement.
However, according to Lester, the long term benefits of a RA is better for people than investing in tax free savings accounts.
This is because you get a tax rebate for any funds that you deposit into an RA, which is not applicable to the tax free savings accounts.
The fuel levy
Silke noted that all the gains that consumers achieved with the drop in the global oil price have quickly been taken away by an increase in the fuel levy.
Seccombe agreed, pointing out that only a fraction of the increase is actually going towards improving and maintaining the road infrastructure, with a majority going to the Road Accident Fund (RAF).
The general fuel levy is increasing to 30.5 cents per litre, and the RAF contribution is increasing to 50 cents per litre, totalling an increase of 80.5 cents per litre.
However, Mazars explained: “Government proposes to reduce diesel fuel levy refunds to 20 percent and 50 per-cent of the general fuel levy respectively for land mining activities and generation of electricity by Eskom’s open-cycle gas turbines.”
Teresa Calvert Pidduck, senior lecturer of taxation at Monash South Africa said: “The increase in the fuel levy and road accident fund in an effort to address budget deficits was expected. This pushes the current tax on fuel from almost R3.33 per litre to R4.18 per litre. As oil prices have suffered a severe beating in recent months, the tax increase would not be felt by the end-consumer. It remains to be seen how this increase will impact the economy when the oil prices rises.
“An increase in the cost of fuel will hit the consumer the hardest, as businesses will feel the pinch and start increasing prices as a result. This will likely increase inflation and will again impact the ability of the poor to pay for basic necessities. The debate surrounding such a high increase in the fuel levy [versus] having increased VAT is ongoing. Ultimately, those in the lower income bracket will need to tighten their belts more than those in the higher bracket.
“Meanwhile, the increase in the road accident fund coupled with the operational changes in the proposed road accident fund is welcomed as it is likely to result in increased benefits to the injured party by excluding the middle man.”
Excise duties (Sin taxes)
All the experts agree that a rise in excise duties was expected, as this is a tax that is increased on a yearly basis. The increases are as follows:
· Beer increases by 15.5 cents a quart
· A bottle of wine increases by 15 cents
· Sparkling wine goes up by 48 cents a bottle
· Whisky increases by R3.77 a bottle
· A pack of 20 cigarettes increases by 82 cents
UIF
Seccombe highlighted that the Unemployment Insurance Fund (UIF) has a surplus of R90 billion, which will be used to improve benefits.
However, she noted that this is good news for both employers and employees for the coming financial year, as the maximum contribution to UIF for 2015/2016 will be R10 per month due to the large surplus.
Social grants
Lester pointed out that the life expectancy of people is increasing, and death rates are decreasing. According to Stats SA, by 2030 the South African population will be approximately 64 million.
This is a concern, as Silke revealed that more people receive social grants from government, than are employed.
Although he notes the importance of social grants, Lester believes that focus needs to be placed on reducing people’s needs for social grants. In other words, more should be spent on creating sustainable jobs, thereby reducing the need for social grants.