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Deloitte House View

Tax relief for individuals to compensate for inflation

Delivering his debut National Budget, Finance Minister Pravin Gordhan, confirmed that extremely tough global and domestic economic conditions made the past year one of the most challenging periods the budget office had faced since 1994. 

The Minister said that, taking into account the state of the economy and the financial stress of households, he did not intend to increase the burden on individual tax payers. They would be given some relief by adjusting thresholds to increase disposable income to compensate partially for inflation. This relief, amounting to R6.5 billion, would support the overall economic recovery and most of it would be provided to taxpayers in lower-income brackets. 

Another change impacting on individuals is that of medical scheme contributions and medical expenses. From 1 March 2010, the monthly monetary caps for deductible medical scheme contributions will increase. The conversion of these deductions into non-refundable tax credits first mentioned in the 2009 budget, will be deferred to 1 March 2012. 

The Minister indicated that the government is busy laying a foundation for the introduction of the system.

“As expected, the R30 000 income tax exemption for retrenchment packages is to be merged into the retirement lump sum tax exemption, thus the two will be treated equally,” commented Billy Joubert, Tax Director at Deloitte. “The concern is that merging the exemption for retrenchment packages into the retirement lump sum payments may leave the taxpayer worse off than before.” 

Annual tax-free interest income will be increased from R21 000 to R22 300 for individuals below 65 years, from R30 000 to R32 000 for individuals 65 years and over, and from R3 500 to R3 700 for foreign interest income. 

The company car fringe benefit rules will be tightened by increasing the deemed monthly taxable values. This amendment is said to be necessitated to limit the potential abuse of company car fringe benefits. 

Employee insurance packages will be taxed fully as fringe benefits on a monthly basis. 

According to Deloitte, the main change for low income earning individual taxpayers is the discontinuation of the SITE system with effect from 1 March 2011, as the personal income tax threshold for taxpayers younger than 65 years is approaching the SITE ceiling of R60 000.

The Minister placed strong emphasis on tax compliance and broadening the tax base. To encourage taxpayers to come forward and avoid the future imposition of interest on outstanding taxes, defaulting taxpayers will be granted a window of opportunity from 1 November 2010 to 31 October 2011 to disclose undeclared tax liabilities. Deloitte is of the view that SARS will introduce stringent penalties at the end of the grace period. 

According to Deloitte’s Tax Director, Nazrien Kader, SARS will concentrate on sophisticated tax loophole structures which have been a substantial loss to the fiscus in the past; improving their tax administration systems to achieve a better level of compliance; and focusing on, inter alia, large taxpayers and high net worth individuals. 

In the spirit of the government’s efforts to demonstrate energy efficiency and environmental consciousness, a flat rate CO2 emissions tax will be imposed on the sale of new passenger motor vehicles with effect from 1 September 2010. Additional environmental taxes and charges are on the cards. 

As usual, sin taxes will be increased. 

Economic View on the Budget 

The estimated budget deficit for 2009/10 has come in at 7.3% of GDP, which although substantial, is an improvement on Treasury’s October forecast of 7.6%. And, in spite of a burgeoning public sector borrowing requirement, which is expected to rise to R299 billion in 2010/11 (an estimated 11.1% of GDP), Treasury proposes not to raise the overall tax burden this year. Rather, they plan to increase revenues through broadening the tax base, closing loopholes and improving compliance. 

But while efforts to avoid increasing the tax burden on households are noble, they could be short-lived. Treasury has indicated that under their current assumptions the public sector will need to borrow a whopping R1.1 trillion in the four fiscal years to 2012/13. This much debt could be difficult to raise, especially given South Africa’s relatively low savings rate. Current plans to reduce the size of the budget deficit and therefore borrowing requirement hinge on a gradual but consistent recovery in economic growth (and therefore tax revenue) as well as a moderation in growth in expenditure. This will include smaller increases in public sector salaries and lower growth in government employment, cost savings and reprioritisation of other expenditure. If expected growth does not materialise, or government fails to rein in spending sufficiently, we could face higher taxes in future.

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