Weekend Argus (Saturday Edition)
Genuine tax relief, or smoke and mirrors?
WHEN one weighs up his giving with the one hand and taking with the other, it’s difficult to assess whether South Africans will benefit overall from tax changes announced by Finance Minister Enoch Godongwana in his Budget Speech. However, at least he didn’t seek to increase the tax burden on financially-stressed South Africans for the 2022/23 tax year.
On the relief side, the personal income tax brackets, medical tax credits, rebates and tax thresholds will be adjusted by an “inflation-related” 4.5%. There will be no increase in the fuel levy, which many analysts had predicted.
However, sin taxes – excise duties on alcohol and tobacco products – will increase by between 5.5% and 6.5%, a more substantial hike.
There are also no inflation-linked increases to things such as annual contributions to tax-free savings accounts and exemptions on interest income (see below).
The adjustments to the tax brackets are 4.5%, based on Treasury’s inflation projections of 4.8% this year, dropping to 4.4% next year.
But are these projections realistic, considering the steep rise in global inflation over the past few months and the January year-on-year Consumer Price Index inflation figure coming in at 5.7%?
Hannes van den Berg, chief executive at Consult by Momentum, believes that when everything is taken into consideration, the relief may be less than one thinks.
“Citizens in general perceive inflation to be much higher than the basket used to measure inflation, and although the government did announce relief in the personal tax scales, I think there is a certain amount of ‘creep’ in there where the full extent of inflation is not going through to consumers.
So although the amount going back to consumers is in the billions (see below), it doesn’t fully match real inflation given a forward-looking view. Coupled with that are the lack of inflation-linked adjustments to, say, the maximum deductible retirement fund contributions of R350000 a year or to the exemptions on interest.
Those things, if you take everything into consideration, will result in an overall benefit much lower than the inflation rate,” he says.
Van den Berg also notes that tax concessions for working from home were not really addressed in the Budget. “That’s an added expense that people are incurring,” he says.
Income tax
In the past, the government has on occasion allowed for a certain amount of bracket creep (also known as “fiscal drag”) by not adjusting the tax brackets. This is advantageous to the government. In this scenario if your salary increases by the inflation rate but the tax brackets remain the same, you end up paying a slightly higher percentage of your salary to the taxman.
By increasing the brackets by the inflation rate, the percentage of your salary going to the taxman – if it also increases by the inflation rate – will be roughly the same. If you did not receive a salary increase this year – which applies to many employees owing to the adverse economic climate – your income tax will decrease slightly. In fact, in its 2022 Budget Review document, which accompanies the Minister’s Budget presentation, the government estimates adjusting the tax brackets will cost it about R13.5billion in revenue, which translates into money in your pocket.
Let’s take an example:
You are a salaried employee who earned R240000 in taxable income in the 2021/22 tax year. On that amount, you paid tax of R45104, less the primary rebate of R15 714 = R29 390 (12.25% of your income).
If your salary stays the same, for the 2022/23 tax year you will pay R44320, less the primary rebate of R16425 = R27895 (11.62% of your income).
If your salary increases by 4.5% in line with the government’s projected inflation rate, you will earn R250800. On this amount you will pay R47 128, less the primary rebate of R16425 = R30703 (12.24% of your income).
What is not changing
No mention was made, in Godongwana’s Budget Speech or the accompanying Budget Review document of any changes to the following taxes or exemptions, which will remain at their present levels:
♦ Interest income exemptions: These remain at R23 800 a year for individuals under 65 years of age and at R34500 a year for individuals of 65 and older.
♦ Capital gains tax: The inclusion rate (the percentage of the gain taxed as income) remains at 40% for individuals, with a R40000 annual exclusion.
♦ Dividend withholding tax: This remains at 20% on dividends from South African companies (withheld by the company concerned, not the responsibility of the shareholder).
♦ Donations tax: This remains at 20% on amounts over R100000, taxed in the hands of the donor, except when the donations are to a spouse or to an approved public benefit organisation. Amounts over R30million are taxed at 25%.
♦ Tax-free savings accounts: The annual contribution limit remains R36 000 and the lifetime limit R500000.
♦ Estate duty: The rate remains at 20% on the first R30m and 25% on amounts over that. The first R3.5m is not taxed, and for the second-dying spouse the threshold is R7m less any exemption used by the first-dying spouse.
♦ Retirement fund contributions: The limit for deductible contributions to retirement funds remains at 27.5% of the greater of remuneration or taxable income, to a maximum of R350000 a year.
♦ Tax on trusts: for trusts other than special trusts, the flat rate of 45% of income remains.
♦ Transfer duty on property: Rates remain the same according to the SARS tax table.
♦ Tax on retirement fund lump-sum withdrawals: Rates remain the same for pre-retirement withdrawals and for withdrawals at retirement, according to the SARS tax tables (go to www.sars. gov.za/tax-rates/income-tax/)
Implications for investors
Casey Delport, investment analyst at Anchor Capital, says that, overall, the budget is largely neutral but somewhat positive for bonds and the rand. “Investors will likely be pleased with deficits that are moderately smaller over the medium term than the consensus economist forecasts had expected, though they may still be concerned about downside risks to growth and the inevitable end to the current strong commodity cycle and what that will mean for tax revenues going forward.
“Furthermore, investors will be encouraged by the government’s continued rhetoric around its commitment to fiscal consolidation, wage bill curbs, disciplined support for state-owned enterprises, and permanent increases in social grants if accompanied by a sustainable funding plan.”