The Katz tax commission mostly makes sense, but some recommendations seem to have been hastily arrived at, reports Reg Rumney
Most recommendations of the Katz tax commission were hailed by commentators this week — with some bothersome exceptions that pointed to hasty decisions and gave the impression of tinkering with the system.
Under fire are proposals to:
* Limit pension fund and retirement annuity contributions.
* Increase the taxing of the car allowance fringe benefit.
While not punitive, these have been slated as basically unthought-out.
Severely criticised was the proposed “presumptive” tax on companies. This taxes companies on the basis of their gross assets, and though at a low rate — R15 000 for every R10- million of assets — has been slammed as a wealth tax in disguise.
Universally hailed are:
* The merging of the discriminatory three-rate structure into one tax table for married persons, married women, and unmarried people.
* The personal income tax relief for middle-class individuals.
* The strong emphasis on improving tax collection.
The commission had about three-and-a-half months to report. Not surprisingly, it avoided dealing with larger issues of tax reform, such as the People’s Endeavour suggestion to Reform Taxes so that income tax is completely replaced with a consumption tax.
It left until a later date matters such as a capital gains tax, and the abolition of secondary tax on companies which has been slated as adding to South Africa’s international uncompetitiveness — it did recommend scrapping non- resident shareholders’ tax, also unpopular with foreign investors.
It recommends no change, for now, in the Value Added Tax rate or the way it is implemented. The union movement has criticised VAT as regressive and called for more basic items to be zero rated. The commission instead plumps for targeted poverty relief and suggests that zero-rating of some items be scrapped as the reconstruction and development programme takes off.
The commission’s report does deal in detail with the constitutionally correct need for a non-discriminatory rate of tax, and provision of relief from fiscal drag bracket creep — whereby inflation pushes taxpayers into ever higher salaries and therefore tax brackets.
The personal income tax recommendations, if accepted by the government, will roll back slightly for the first time in years the effects of inflation. It does not ensure that in coming years government will avoid the boon of fiscal drag.
The commission said imposing some sort of legal limit on taxes or government spending should be investigated. It did not accept the South African Chamber of Business proposal that the government be required to account specifically for inflation every year.
Where the commission did lay itself open to charges of tinkering is on clawing back some of the R3-billion in tax revenue lost through its reforms.
Clearly, the simplest way of doing this, and of ensuring the informal sector pays its share, is to raise VAT. Just as clearly, this would be an unpopular move. The commission resisted political pressure to zero-rate more basic items than are already zero-rated.
It also held back from taxing employer contributions to medical aid schemes. This would have netted R2-billion, but would have been a dramatic step in the light of the present state of health care.
It is hoped some of the money will be raised through the increased efficiency of collection brought about by the commission’s recommendations. The commission believes shaking up customs and excise and inland revenue could bring in at least an extra R5-billion tax a year, and recover more of the arrears of R9-billion now outstanding. Reforming customs and excise and inland revenue will take time.
To bring more people into the tax system the commission relies on a tax amnesty and the required use of a tax number in dealings with the state.
To recover some of that R3-billion immediately the report suggests:
* Scrapping the outdated child rebates to bring in R600- million.
* Phasing out or more carefully targeting the old age rebates, which cost the country R200-million.
* Taxing the car allowance fringe benefit more heavily, and capping the vehicle value allowed at R150 000. A gain of R600-million is forecast.
* Limiting the tax-deductibility of contributions to pension funds and retirement annuities. This is likely to garner R200-million.
The proposed cap on contributions to pension funds of R9 000 may seem reasonable, but Val Davies of Ernst & Young points out that if it is not regularly adjusted for inflation it will soon be a severe limitation on the ability of individuals to fund their retirement. The same applies to the cap of R27 000 on contributions of retirement annuities.
Perhaps even more pertinently, retirement funding is a complex issue, and the subject of an investigation by the Mouton Commission — and recognised as crucial in a country where the burden of providing for the aged is already great.
“One should not look at any tax treatment of retirement funding in isolation,” warns Old Mutual personal finance expert Abrie Meiring.
Left out of the commission’s inquiries, for example, is the question of the tax-free treatment of the lump sums paid out on retirement.
Meiring points out there could equally have been a cap on the tax-free treatment of the benefit on retirement. He also finds an anomaly between leaving “defined contribution” provident funds, which it says have become fiscally priveleged savings accounts, undisturbed, while denying income tax-deductibility for “defined benefit” funds.
Marius van Blerck, of the SA Fiscal Commission, considers the logic faulty behind the taxing of car allowances more heavily.
There should, he says, be a proper balance between the two so that one can take a normal economic decision about which is better.
The report notes: “The rapid growth of car allowances in remuneration packages indicates they are an attractive form of fring benefit, especially for employees who do not regularly use a car for business purposes.”
Van Blerck says the present system is marginally biased towards company cars and against car allowances.
However, most employers appear to have opted for car allowances, not because it favours the employee, but because the company can avoid administrative hassle while giving employee more choice.
The report says: “The commission does not believe that the tightening up of the provisions relating to car allowances will precipitate a switch to company car schemes, the administrative disadvantages of which are by now well known to employers.”
It does not advance any evidence this will not happen.
Indeed, say Van Blerck, companies are likely to come under pressure from employees to switch. And then when, as promised, Inland Revenue reverses the bias, they will no doubt be forced to switch again.
Meiring thinks it was a “quick fix” get R500-million for the state and is not backed by substantial research.
Kessel Feinstein partner Beric Croome thinks the presumptive tax is more of a nuisance than anything else. The whole thrust of the report is to increase administrative efficiency in tax collection, he says, but this tax increases complexity.