Guiding consumers since 2009

How to make the most of the budget speech

By Jessica Anne Wood

Peter Attard Montalto, a research analyst from Nomura, noted: “The budget is looking increasingly threadbare in the face of threats to growth, future higher education and health care costs and forthcoming equity injections into SOEs likely to remove the unchanged reserve pencilled in. There is now virtually nothing left in the revenue store except a VAT increase. The scatter-gun approach on revenue should fill the pencilled-in gap with much emphasis on taxing high earners; however, we think growth expectations are still too optimistic and remove the need for more difficult decisions on expenditure with significant cuts in irregular expenditure still required. We are concerned by the step-up in contingent liabilities, and while ratings agencies view the budget as ‘ok’, [they] are likely to focus on this and the risks to growth.”

First National Bank (FNB) stated that for the 2017 Budget Speech, National Treasury had very little room to manoeuvre. However, it believes that Treasury did its best to deliver a progressive budget that “stays the course of fiscal consolidation, but also attempts to promote transformation and greater economic inclusion.

The bank noted that the proposed changes are set to affect the higher income earners the hardest. The new tax bracket of 45% for those earning R1.5 million per year will impact approximately 100,000 South Africans.

However, Malusi Ndlovu, head of Old Mutual Corporate Consultants, pointed out that it was not a surprise that Minister of Finance Pravin Gordhan and Treasury raised the necessary additional revenue (R28 billion) primarily through personal taxes.

“I am not surprised by the rise in the top marginal income tax rate to 45%, given the R28 billion revenue gap Minister Gordhan needed to plug. As a form of wealth tax, it’s more politically acceptable than a VAT increase; like the National Minimum Wage, it also has a redistributive effect that could help reduce inequality,” said Rob Cooper, tax expert and director of legislation at Sage.

He added: “That said, given that high-income earners in South Africa already carry a heavy tax burden, government should perhaps be cautious about adding too much more to it in the next Budget Speech. There is a balance to be struck between collecting a fair share from the wealthy and taxing them so heavily that tax avoidance or moving overseas become attractive options to them.”

While no increases were made to the lower income tax brackets, there was only minimal fiscal drag adjustments made, meaning that while there wasn’t an official tax increase, lower income earners will still be paying more tax.

Derick Ferreira, senior product manager at Old Mutual, said: “Unfortunately, the tax brackets are increasing slower than inflation, meaning that ultimately, consumers’ tax is increasing at a faster rate than their actual salary. For example, according to the new tax tables, should you be earning a taxable income of R35 000 per month, and your taxable income increases by 6% as a result of an annual increase, your tax payment goes up by 9.6% while your after tax income only goes up by 5%. This effect of ‘bracket creep’ will unfortunately affect the middle class most.”

Make the most of your tax benefits

Ferreira pointed out that while the budget did little to bring relief to consumers’ pockets, there are ways that they can make the most of the proposed changes. He stressed the importance of consumers making the most of the various savings vehicles that are available, these include retirement funds, retirement annuities and tax-free savings accounts (TFSA).

In a positive move for consumers, Treasury announced that the annual allowance for TFSA has increased from R30,000 to R33,000, however, the lifetime allowance remains R500,000. However, Ndlovu highlighted: “Although the lifetime limit of R500,000 wasn’t mentioned, it is unnecessary at this stage as we’re only entering the third year since its introduction and we trust that this limit will also be adjusted in time.”

Taking into account the increased annual limit, it will now take just over 15 years to reach your lifetime allowance. If you have made use of your TFSA annual limit of R30,000 until now, you would have saved R60,000 (excluding interest earned). That means you have an additional R440,000 that you can invest until you reach the lifetime allowance. With the increase to R33,000 in the annual limit, it will take you just over 13 years to save the remaining R440,000 tax-free savings you have available.

With the additional financial pressure that consumers will face this year, Ferreira advised that consumers seek professional financial advice to ensure that they optimise their tax position. “This includes making appropriate use of savings options that offer them income tax concessions, in order to ensure they are able to provide sufficiently for retirement.”

Furthermore, Ferreira highlighted: “With the introduction of the Tax Law Amendment Act last year, contributions to all retirement savings vehicles are now tax deductible up to 27.5% of the highest of either your taxable income or total remuneration, up to a maximum of R350,000 per tax year. The growth on retirement investments are also free of tax on interest, dividends and capital gains, which not only results in significant tax savings but also assists in compounding the potential growth.”

Phillip Faure, global head of wealth advisory at Standard Bank Wealth and Investment, added: “This is a Budget that will hit the pockets of taxpayers quite hard. However, it is important to stick to a long-term wealth plan and to increase the focus on savings by harnessing a structured, disciplined plan that promotes savings and investment. The need for structuring suitable financial plans is emphasised in this new super tax environment.”


For more information on the budget speech, click here.

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