Budget predictions MEDICAL TAX CREDIT
Major increase in income tax rates is unlikely, but CGT inclusion rate could rise
FINANCE Minister Tito Mboweni will be in the spotlight tomorrow when he delivers his maiden Budget speech. We at TaxTim do not expect the Budget to have many surprises or controversial elements this year, because of the many changes made to the finance ministry over the past 12 months, as well as the elections in May.
Instead of introducing any significant tax hikes, we believe that further reductions on, or the capping of, government expenditure is essential to curb the budget deficit. There are, however, some subtle ways in which the National Treasury can generate additional revenue from taxpayers without causing too much alarm.
Let’s look at some of the options available to the Finance Minister:
VALUE-ADDED TAX (VAT)
Considering that the Treasury took the bold step to raise VAT from 14 to 15 percent 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 percent is relatively low by international standards. We are, in fact, hoping for the minister to announce more zero-rated items to offset some of the harsher effects of last year’s increase.
CAPITAL GAINS TAX (CGT)
CGT inclusion rates were increased in 2016 from 33.3 to 40 percent for individuals and from 66.6 to 80 percent for companies and trusts. There has been no adjustment to this inclusion rate since 2016.
However, the introduction of the 45 percent tax bracket in 2017 for individuals had the effect of increasing the maximum effective CGT rate from 16.4 to 18 percent.
Investors breathed a sigh of relief last year, when no changes were made. However, this tax, which predominantly affects the wealthy, is once again under scrutiny. There is the possibility that the National Treasury could look to raise the CGT inclusion rate for individuals from 40 to 50 percent, which some predict would generate about R2.5 billion. 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 in South Africa is 28 percent, and most analysts do not predict an increase. In fact, there have been calls to reduce the corporate rate to stimulate growth and improve economic competitiveness. We believe an increase would deter foreign investment and hinder economic growth, which South Africa can ill afford, while a decrease seems like too much of a gamble. It seems likely, therefore, that the rate of 28 percent is set to stay a while longer.
PERSONAL INCOME TAX
It is estimated that there are only 7 million taxpayers in South Africa out of a population of 56 million (in other words, 13 percent). This relatively small tax base already faces high tax rates, with limited benefits received.
The super wealthy (those earning more than R1.5 million a year) were hit with the new 45 percent bracket in 2017. South African tax residents working overseas will be targeted next when their income above R1m will be taxed from March 1, 2020. Applying even more pressure to this small tax base could increase emigration rates and cause a 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 be the usual adjustment in the tax brackets for inflation – as you earn more, the tax rates are adjusted accordingly so that you are not poorer than you were last year. However, we think the Treasury might sneak in some additional revenue by implementing a less-than-inflationary adjustment to the tax brackets. Medical scheme members receive a medical tax credit of R310 a month for the first two beneficiaries and R209 a 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.
The Treasury has been hinting for a while that they are considering the reduction of the medical tax credit to fund the National Health Insurance. This is another controversial area – eliminating this credit 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 relies on people seeking alternative (expensive) private health care, and it should incentivise taxpayers accordingly.
We think the medical credit is here to stay (for 2019/20 at least), but it seems likely that it won’t be adjusted fully for inflation. Similar to when the Treasury stopped increasing the interest rate exemptions, these could just remain the same until inflation catches up.
We do believe, however, that the end of the medical tax credits is on the horizon.
FUEL LEVY
Although there is a need to increase fiscal revenue, the Treasury is most likely to look for revenue in other ways, particularly after the large fuel levy increase last year. Large increases in the fuel levy could have inflationary effects and increase transports costs. This is not an ideal scenario as the government works hard to stabilise the economy and reverse some of the economic malaise we have experienced over the past few years.