Gordhan picks pockets

By increasing the income tax brackets by just one percent, instead of in line with the inflation rate, the minister of finance will squeeze more in tax from mid-income earners. Martin Hesse reports

Finance Minister Pravin Gordhan’s budget speech on Wednesday seemed mainly to target the wealthy with tax changes, but if you’re a middle-income earner, don’t think you’ve got off scot-free.

If your income is keeping pace with inflation, a larger portion of it will go to the taxman, and you’ll be hit by the higher fuel levy and higher “sin taxes”.

Gordhan and his team at National Treasury created a new tax bracket for people earning over R1.5 million a year. These individuals, whom Treasury estimates to number just over 103 000, or about 1.4 percent of registered taxpayers, will be subject to a marginal rate of 45 percent, compared with the current 41 percent, and this will bring in about R4 billion extra for the government.

However, Nazmeera Moola, the co-head of fixed income at Investec Asset Management, says that by far the biggest contribution to the government’s coffers ( about R12 billion) will come from the limited adjustments for bracket creep, whereby the tax brackets lag inflation – also known as fiscal drag. “The upshot is that every single taxpayer is affected and paying the price of South Africa’s slow growth and inefficient expenditure.”

The brackets have been increased by only one percent, although the rates associated with each bracket remain the same. This means you will pay slightly less tax if your income remains constant, but you will pay more as a portion of your income if your income increases by, for example, the inflation rate of between six and seven percent.

Also increasing by only one percent, instead of keeping pace with inflation, are the primary, secondary and tertiary rebates, which increased to R13 635 (from R13 500), R7 479 (from R7 407) and R2 493 (from R2 466) respectively. Even pensioners, to whom the secondary (for people aged 65 and over) and tertiary (for those aged 75 and over) rebates apply, will be paying proportionately more if their pensions are inflation-linked.

The tax thresholds, below which you do not pay income tax, increased by one percent to R75 750 (from R75 000) for taxpayers under 65, R117 300 (from R116 150) for taxpayers aged between 65 and 75, and R131 150 (from R129 850) for taxpayers aged 75 and over.

Ricardo Teixeira, the chief operating officer for BDO Wealth Advisers and a Certified Financial Planner, provides examples of how fiscal drag will affect all taxpayers, not just those whose salary increases put them into a higher bracket (see “Income tax examples”, right).

LOWER- AND MIDDLE-INCOME

Siphamandla Mkhwanazi, the general consumer economist at Standard Bank, says that although the new tax bracket was specifically directed at high-income earners, the overall effect of this year’s tax changes will be felt across the board.

The increase of 30 cents a litre in the fuel levy and the nine-cent increase in the Road Accident Fund levy will have a substantial effect on lower- and mid-income earners, because they spend a relatively higher portion of their income on transport than the wealthy do (13 percent, on average, versus six percent for wealthy households).

Mkhwanazi says the drag on the tax brackets will disproportionately affect the middle-income group. “We estimate that bracket creep alone, on average, took away four percent of middle earners’ discretionary income (income left over after all necessities have been paid) in the 2016/17 tax year, and this is set to increase to an average of 10 percent in the 2017/18 tax year. The middle-income group drives mass consumption in South Africa, and therefore this will negatively affect household consumption expenditure and, ultimately, GDP growth,” he says.

The sin tax changes – higher duties on alcohol and tobacco products (see “Paying for your sins”, left) – will not have a big impact, he says, because the rise in the final price of these products will be small.

Mkhwanazi says it’s good for consumers that value-added tax (VAT) wasn’t touched, but an increase in VAT is “not entirely out the window” for next year. A hike would have affected low-income earners more than any other segment.

BURDEN ON THE WEALTHY

Kelly Pretorius, a senior associate in tax at Bowmans, notes that the personal income tax burden has been steadily increasing since 2011.

“A sudden increase of four percent is arguably quite drastic, and continuing to raise personal income tax over a long period could have negative consequences for growth and investment. This is particularly so when the burden is being carried by a limited number of taxpayers, who may be encouraged to migrate to ‘friendlier’ tax jurisdictions (and have the means to do so),” she says.

Teixeira says although the new tax bracket for the wealthy will bring in only a modest R4 billion, Treasury will receive more through the knock-on effect of the new bracket on capital gains tax (CGT), even though the rates for CGT have not changed. Also, the new 45-percent rate applies to trusts, which means trusts will be faced with a more onerous tax burden on income and capital gains.

He believes the higher tax for the wealthy is not enough to drive negative behaviour in the way of emigration or tax avoidance.

“One must remember,” he says, “that the effective rate for these high earners will be lower (at about 35 percent) than the marginal rate of 45 percent, and that the wealthy take advantage of tax deductions, such as adding more to their retirement savings.”

Teixeira says Treasury mitigated tax avoidance risk by increasing dividends withholding tax from 15 percent to 20 percent to prevent the wealthy from structuring their affairs to pay dividends instead of personal income.

martin.hesse@inl.co.za

• Dividends tax was increased from 15 percent to 20 percent. • The annual limit on contributions to tax-free savings accounts was increased from R30 000 to R33 000. • The capital gains tax (CGT) inclusion rate for individuals remains 40 percent. • For taxpayers on the new highest marginal tax rate of 45 percent, the maximum effective CGT rate is 18 percent. • Estate duty and donations tax remained unchanged at 20 percent. earn above R1.5 million a year will be taxed subject to a top marginal rate of 45 percent. Taxpayers who earn less than this but more than R708 311 will be subject to a marginal rate of 41 percent.

ENDOWMENT POLICIES

On investments in endowment policies, the life assurance company pays tax at 30 percent on your behalf. These policies can be advantageous for anyone whose tax rate exceeds 30 percent.

King says that investing in an endowment policy can also be advantageous for investors whose assets are held in a trust, because trusts will now pay income tax at a rate of 45 percent, and the CGT rate for trusts is 36 percent.

Howard says the disadvantage of using an endowment is that your money is locked in for five years.

The Budget Review states that if the top marginal tax rate had been increased without increasing dividends tax, there would be more opportunity for people, particularly the self-employed, to engage in tax arbitrage by paying themselves dividends instead of a salary.

The tax rate on foreign dividends will be adjusted in line with the new rate for local dividends.

The CGT inclusion rate and the CGT exemptions were left unchanged, but the effective CGT rates for taxpayers on the highest marginal tax rate of 45 percent will increase from 16.4 to 18 percent.

Bruce Russell, an associate director at Grant Thornton Cape, says the increase in the rate of dividends tax may require some shareholders to rethink the way in which they sell their investments.

Previously, the maximum effective CGT rate of 16.4 percent, as against the dividends tax rate of 15 percent might have encouraged shareholders to secure their exit via a share buy-back, which avoids dividends tax. But with the new marginal tax rate of 45 percent for individuals with a taxable income of over R1.5 million, the highest effective CGT rate for individuals is marginally lower, at 18 percent, than the new dividends tax rate of 20 percent, he says.

Russell says that shareholders disposing of shares by way of share buy-backs should consider concluding these arrangements before the end of February, because Treasury has proposed to introduce measures that prevent the deferral of income tax where a shareholder disposes of shares by way of a share buy-back.

He says Treasury has not yet provided the date from when these anti-avoidance provisions will apply, but it would not be surprising if they started on from March 1. If you belong to a medical scheme, from March 1 you will be able to deduct from the tax you owe a medical tax credit of R303 a month for yourself and the first dependant you register on the scheme, according to changes announced in this week’s budget.

If you have more dependants registered on the scheme, you will be able to deduct R204 a month for each of them.

These amounts have increased from R286 and R192 respectively for the current tax year, and represent increases of just less than or more than six percent.

Medical scheme contributions typically increase by a few percentage points more than the inflation rate each year.

According to Alexander Forbes’s Diagnosis publication, over the past 16 years, inflation as measured by the Consumer Price Index averaged 5.7 percent, while medical scheme contribution inflation was 7.6 percent a year, a difference of at least 1.9 percent a year.

However, the increases announced for 2017 were higher than in previous years, and ranged from 10 to 17 percent, following a significant increase in hospital claims. – Laura du Preez