Tax shocks announced
by Mark Freer
Finance Minister Pravin Gordhan presented the third budget of President Jacob Zuma’s term in Parliament yesterday. His budget speech – in the African National Congress’s centenary year - was keenly anticipated, judging by the number of comments and predictions on social media like Twitter. Gordhan spelled out evidence to show the South African economy has demonstrated resilience since the 2008 crisis, but what is now needed is a new dynamism to create jobs and grow the economy.
True to his consistent and somewhat conservative style, Gordhan’s speech remained steadfast in addressing the challenges of creating jobs, reducing poverty, building infrastructure and expanding the economy. The shocks today were some surprising announcements on the tax front as discussed under the below tax proposals.
It is clear the economic environment remains uncertain. Although there are signs of a revival in the US economy, much of Europe is in recession. On the positive side, SA’s finances are in good health. The budget deficit is projected to be 4.6 percent for 2012/13 and this is planned to reduce to three percent by 2015. Several first world economies would love to have such a low budget deficit number. Put into context, sub-Saharan Africa will grow 5.5.percent in 2012 compared to 1.2 percent in advanced economies – and negative growth in the euro area. With these growth imbalances in the world, new growth poles are redefining the global economic structure. In the last five years, China has grown 60 percent and India 45 percent, compared to advanced economies that have barely shown positive growth. Gordhan noted the western dominance of at least 200 years is under severe challenge. These changes mean ongoing volatility and uncertainty in world economies and SA is not immune. Our challenge, as Gordhan indicated, is to turn the country into a true gateway for African investment and development.
Total government spending in SA will reach R1.1 trillion next year with the priorities being infrastructure investment; improving competitiveness in industry and investment in technology. However, education, health and social assistance remain the largest categories of expenditure – soaking up 58 percent of total expenditure against 49 percent a decade ago. The budget provides social grants to almost a third of our population; it pays for largely free services at public health facilities and no-fee schools for 60 percent of learners and also pays for housing, water and electricity in poor communities.
There will be an increased focus on spending by government departments and municipalities. Those under-spending or misspending their allocated funding risk losing the allocations and the relevant officials held liable.
There was a welcome recovery in job creation during 2011, but employment is still not at the 2008 pre-crisis peak and South African unemployment remains high at 23.9 percent.
Gordhan confirmed our tax system’s underlying principles - that it be fair, efficient, transparent, certain and uncomplicated. Fortunately, tax collections have recovered over the past two years, following a decline during the global recession. This means until now, the government has continued spending without having to raise taxes – unlike many other countries.
Yesterday’s shock was that the new dividends tax – set to replace the secondary taxation on companies (STC) effective April 1 this year – will be levied at 15 percent or five percentage points higher than STC and certainly not what the market expected. This new tax means the South African Revenue Service (SARS) will collect R15 tax out of every R100 dividend. Despite this surprise rate hike, the new tax will collect R1.9bn less than STC, largely because dividends received by South African resident corporates and pension funds are exempt. This takes the effective company tax rate from 34.5 percent to 38.8 percent – a very disappointing move considering SA competes internationally to attract companies in establishing their businesses here rather than in other countries offering lower tax jurisdictions.
The second major surprise was the hike in capital gains tax (CGT). In an unexpected move, taxpayers will pay more CGT on the sale of capital assets after March 1 this year. Currently individuals pay CGT at a maximum 10 percent rate on a capital gain, but this figure rises to 13.3 percent. Likewise, the effective companies CGT increases from 14 percent to 18.6 percent, but that implementation date is unclear.
Clearly the government is under pressure to collect more revenue and has chosen these two mechanisms – together with the expected fuel levy, sin tax and electricity levy increases – to achieve this goal.
The summarised tax changes (brackets denote tax relief):
|- personal income tax bracket adjustments||(10.6)|
|- CGT rate increase||0.8|
|- dividend withholding tax||5.5|
|- STC abolition (net of new dividends tax)||(7.5)|
|- fuel levy||4.5|
|- sin taxes on tobacco and alcohol||1.8|
|- electricity levy||1.9|
After last year’s announcement that the tax treatment of retirement contributions – to pension, provident, retirement annuity and similar vehicles – would be wholly revamped next month, nothing was said for another year. Yesterday Gordhan said the implementation of this major change had been pushed out to 2014.
The conversion from the medical deduction system to a medical rebate system will go ahead, as announced last year, from March 1, 2012. This system penalises taxpayers with more expensive medical plans, the specific intention of the move.
An announcement was expected on funding the new National Health Insurance (NHI), an initiative being phased-in over a 14-year period from this year. Gordhan indicated there would not be any extra revenue needed for NHI in the next year, but that an additional R6bn would be needed by 2014/15. Funding options include raising value-added tax (VAT); a payroll tax on employers; a tax surcharge on individuals and a user charge.
On the positive side, Treasury is considering allowing as a deduction, interest incurred on debt taken out to acquire a controlling interest in shares. Currently this deduction is denied in SA. Legislation will also introduce special economic zones with possible corporate tax rate reductions and job creation incentives.
Another negative for business is that carbon taxes will be introduced from 2013/14 at R120 per ton of carbon dioxide emissions above certain exempt thresholds. It is a pity that revenue from this new green tax will not be earmarked for green initiatives.