Finweek English Edition

When the government taxes by the backdoor

There’s a sneaky way in which the government can get its cut. And it’s all thanks to inflation.

- editorial@finweek.co.za

tito Mboweni, minister of finance, has delivered a decent budget. As always, the proof is ultimately in the delivery, especially as some assumption­s (especially around future GDP growth) seem optimistic. The good news is that the minister raised the tax brackets for personal income tax by 5% (keeping us a little ahead of inflation) and announced a one percentage point reduction in the income tax rate for companies from 1 April next year. In other words, for returns being submitted after April 2023. But I want to focus on how the budget impacts our investment­s.

The first is the annual limit on taxfree contributi­ons, which remained unchanged, with an annual limit of R36 000 and a lifetime cap at R500 000. The latter is not a concern for now, because even if we’ve been investing the full allowable annual contributi­on, we’re still not even halfway to that lifetime limit. I sincerely hope that it will be raised in the next few years. Not changing the annual limit also did not surprise me, but when the tax-free savings dispensati­on was introduced in 2015, the limit a year was R30 000. At an inflation rate of 5%, the annual cap should now be closer to R42 000. This is the crux, we’re falling behind inflation and this is how government­s tax by stealth, keeping increases below inflation and eroding our investment­s. For those wondering, I was fortunate to be able to deposit my full contributi­on on 1 March and I bought my preferred global exchangetr­aded fund (ETF), the Ashburton Global 1 200 Fund of Funds ETF (with code ASHEQF*).

Unfortunat­ely, there was also no change to capital gains tax (CGT) or dividend withholdin­g tax (DWT). Both are essentiall­y a tax on the wealthy, since investing requires a fair level of income and wealth. The individual CGT annual exclusion (deduction) remains at R40 000, so the first R40 000 of capital gain is not taxed. The inclusion rate remains at 40%, meaning that 40% of any capital gain in any tax year is added to your income and taxed at your marginal tax rate. In short, you pay your marginal tax rate on 40% of any capital gain above R40 000.

The problem here is that inflation growth is being taxed as opposed to only real growth (capital gain). Assume you bought an asset ten years ago and it grew at an average inflation rate of 5% a year. When you compound this growth, the asset value would have increased by almost 63%. However, this “gain” is actually inflation and nowhere is that fact taken into account when taxing capital gains. In an ideal world, value growth at the inflation rate should not be taxed, only growth above inflation should be taxed. Sure, the paperwork would be insane, but we are really being taxed on inflation and not actual growth. Keeping the inclusion rate and deduction rate unchanged means that any inflation growth immediatel­y hits us even harder. If the deduction was at least increased by inflation every year it would go some way to mitigating the inflation growth and make for a fairer tax. Government­s the world over use this crafty feature to essentiall­y tax by stealth. Not increasing the income brackets automatica­lly by the rate of inflation increases the amount of tax we actually pay. The CGT exclusion rate for sale of your primary residence also remains unchanged at R2m. Again, any inflation growth is now potentiall­y being taxed.The dividend tax rate remaining unchanged at 20% did not surprise me.

Our dividend taxation rate is low compared with many other markets and while inflation also has an impact here, it is a flat rate taxed from the first cent of dividends. Thus, it’s not as sneaky as CGT. ■

* The writer holds shares in the Ashburton Global Equity 1 200 Fund of Funds ETF.

Government­s the world over use this crafty feature to essentiall­y tax by stealth. Not increasing the income brackets automatica­lly by the rate of inflation increases the amount of tax we actually pay.

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