Belinda Beresford
The rich man in his castle and the poor man at the gate should each in their own degree be feeling at least content with the personal implications of the latest government budget.
Minister of Finance Trevor Manuel has continued the government’s intention of redistributing income by relieving the direct tax burden on lower-income earners. Happily for wealthier South Africans, the effects should trickle up, reducing income tax paid by all but the very wealthiest of individuals.
The tax threshold has been raised in tandem with estimated inflation to R19 526 for people younger than 65, while for those older than 65 the threshold is R33 717.
The tax brackets have been restructured: for people earning between R33 001 and R50 000 the marginal rate is 30%. Between R50 001 and R60 000 the marginal rate is 35%, while it is 40% for income between R60 001 and R70 000. Individuals earning between R70 000 and R120 000 pay marginal tax rates of 44%. The marginal rate remains at 45% for those earning more than R120 001.
The government estimates that 6,6% of taxpayers fall into this top bracket, providing just less than 46% of the total tax burden and gaining 17,5% of the tax relief. Slightly more than three-quarters of taxpayers earn less than R60 000, and provide 16% of the tax revenue.
Individual taxes contributed little more than 42% of the government’s total tax revenue for the 1998/1999 finance year, compared to just under 33% for 1984/1985. The proportions of direct taxes (such as income taxes) and indirect taxes (such as value-added tax or general sales tax) have remained relatively stable.
One of the reasons for the rise in individuals’ contributions to the government’s coffers has been the success of the South African Revenue Service in collecting taxes.
For the 1998/1999 financial year the revenue service is expected to collect R178,9-billion rand – more than R2-billion higher than the target it was set in last year’s budget. This is good news for registered and up-to-date taxpayers, not so good for those still evading their tax responsibilities: new tax payers mean the burden is spread more widely, and the government can move further in reducing tax burdens.
For such high net worth individuals who’ve exceeded their R400 000 limit for (legal) overseas investments, there was disappointment in that exchange controls were not relaxed further. However, in his speech Manuel said the government expected “to be in a position to announce further relaxation in exchange controls later this year”. He also said that the government expected interest rates to come down further.
The budget was generally greeted with satisfaction by the financial services industry, which had anticipated more aggressive action on a number of fronts including fringe benefits and taxation of capital gains tax.
Financial services company Citadel, for example, said it was notable that there had been no increase in taxes on pension funds. However, this could be because the government was waiting to take a more holistic overhaul of the taxation system, rather than a permanent decision not to raise such taxes.
Certainly Giselle Gould of the Institute of Retirement Funds said her organisation had “appreciated” the budget – especially since tax relief meant people would have more money to spend, or invest in their retirement funds.
However, the budget is not likely to have much effect on people dependent on a state old-age pension who will only get a 4% rise or R20.
Deloitte & Touche manager Jaco la Grange said the budget was “not surprising or onerous at the lower end, a very good budget for the wealthier”. According to his firm’s calculations, a two child family with an income of R50 000 per annum would be about 0,6% better off in real terms, while a family on R250 000 a year would gain about 0,1%.
However, La Grange said Deloitte & Touche had noticed that the revenue service was becoming more aggressive in cracking down on salary structuring and tax reduction schemes. Even without legislative changes, the revenue service “already has all the tools to investigate or look at these things”, he said.
La Grange also pointed out that there could be surprises during the year which were not announced in the budget, and that people should stay alert to possible impacts on their financial planning. For example, the beginning of January saw losses in trusts being ringfenced to prevent abuse for tax loss reasons by trust beneficiaries.