South African Minister of Finance Trevor Manuel is likely to unveil some reductions in personal income taxes as part of the government’s 2004/05 Budget when it is released on Wednesday, but these reductions will be smaller than those in previous years, perhaps limited to half of the R13,3-billion in cuts implemented in 2003/04, according to Old Mutual Asset Managers (Omam).
Speaking at a pre-budget briefing in Cape Town on Tuesday, Omam tax expert Abri Meiring and economist Rian le Roux said that the National Treasury would probably only have about R5-billion to R7-billion to spend on personal income tax breaks for the 2004/05 financial year, due to shortfalls in revenue stemming mainly from lower-than-expected corporate tax collections.
The expected tax reductions would likely come in the form of raising the threshold income levels in each of the tax brackets to compensate for inflation (or “fiscal drag” as it is known), as promised in the medium-term Budget policy statement (MTBPS) in November.
“While we are not likely to see any reduction in the top marginal tax rate, we could see an adjustment to the top income threshold level to R270Â 000 from the current R255Â 000,” Meiring opined. “Plus the lowest income threshold of R30Â 000 could be raised to R35Â 000.”
Meiring noted that the South African government had implemented personal tax cuts totalling R62-billion since 1995, with the largest cuts coming in 2002 and 2003 of R14,9-billion and R13,3-billion, respectively. This had been made possible by “tremendous strides” in tax collection efforts, as well as new sources of tax, such as that on retirement funds.
While authorities worried that the scope for further collection advances was limited, he referred to the latest annual report from the South African Revenue Service (Sars), which highlighted that of the 11,3-million economically active people in South Africa, 3,9-million of them were “unknown” to Sars, meaning that there was still “huge scope” for further improvements in tax collection.
For individuals, the 2004/05 Budget could also bring relief through the further raising of the level of tax-free interest income, Meiring and Le Roux noted.
Regarding other taxes, they agreed that there would not likely be any changes to the current 10% level of value-added tax, and no changes in company tax, given that the current effective rate of 37,8% (comprising 30% corporate profits tax and 12,5% secondary tax on companies) was a competitive level internationally.
They did foresee inflation-linked increases in the fuel levy and in excise duties on tobacco products and alcoholic beverages. They cautioned that these increases should not be much higher than inflation, or they would encourage future inflation throughout the economy.
Meiring suggested that the current R1-million individual exemption for capital gains tax (CGT) should be raised to compensate for inflation, and exemptions to both donations tax and estate duty should be hiked as well. Further refinements to CGT were also likely to be introduced.
As for the tax on retirement funds, which was reduced last year from 25% to 18%, Meiring called for it to be abolished completely and replaced with a more pragmatic and compelling formula to incentivise retirement savings. He noted that there seemed to be an “apathetic” view on the part of the authorities towards the long-promised holistic review of tax incentives for retirement savings, as the study, promised to be completed in 2002, was still not forthcoming.
“The 18% rate is still inappropriate,” he said. “We are completely out of sync with the rest of the world in our tax treatment of savings. The formula needs to be rewritten to provide for 15% of non-retirement income to be contributed to retirement annuity funds on a tax-free basis; or R300 every month for each individual.”
He said that this formula had been proposed to the Treasury and was notable for being simple, well-targeted for people at the lower income levels, and easy to promote, among other attributes.
Meiring also expected the government to provide more clarity on tax treatment for employer-provided medical benefits and to introduce some environmentally focused tax incentives, such as the diesel rebate. — I-Net Bridge