VAT impact on investors

HIGHER RATE: 2018 CAN BE SEEN AS VICTORY

The stand-out item of the 2018 budget must be VAT. New tax measures to raise an additional R36 billion in 2018-19 were announced – mainly through a higher VAT rate and below-inflation adjustments to personal income tax brackets.

What higher VAT means for investors

In choosing to raise the bulk of his additional income for 2018-19 from VAT, Finance Minister Malusi Gigaba is encouraging citizens to continue working hard and to save and invest. If personal income tax, capital gains tax (CGT) or dividends tax were raised, these measures would have been discouraging. This year can, therefore, be seen as victory for investors.

CGT and dividends tax unchanged

Against expectations, the CGT inclusion rate remained at 40% of gains above the R40 000 annual CGT threshold. No CGT is payable on tax-free savings accounts (TFSAs) and retirement products.

Last year, Treasury raised the dividends withholding tax (DWT) rate from 15% to 20%. While private share portfolios – which generate dividends – are associated with the wealthy, middle-class unit trust investors were also hit by this increase, which will erode even more of their net investment income. It’s encouraging that this rate was left unchanged. No DWT is payable on TFSAs and retirement products.

Less left of your salary to save

Following a similar tactic as with last year’s budget, Gigaba announced more bracket creep – upwardly adjusting the existing personal income tax brackets by less than inflation. Employees receiving a salary increase equal to inflation in the new tax year will be worse off in what they can buy with their new net of tax salary.