This year’s budget was a little more tempered for individual taxpayers. We may have become used to having loads of money put back into our pocket each year, but this year Finance Minister Trevor Manuel held back, covering only for inflation adjustment and the impacts of changes to car allowance and medical aid contributions last year.
The message was clear: high spending and borrowing levels by consumers made the treasury reticent to give too much tax relief. By now most readers will be up to speed on what the tax relief means to them, but there is some detail that individual taxpayers will find interesting, such as what was not in the budget:
Car allowance
After the car allowance shocks of 2005 and 2006, which saw car allowance tax benefits reduced drastically, both for travel allowances and company cars, this year saw no further increase in these rates.
Foreign investment allowance
Last year the minister increased to R2-million the amount an individual can invest offshore. There was no further increase this year and, judging by Reserve Bank Governor Tito Mboweni’s comments that there were few South Africans who could utilise more than this allowance, it is unlikely we will hear more about this for a while.
Transfer duty
After giving a substantial relief to home buyers last year by raising the threshold before you pay transfer duty on a house purchase from R190 000 to R500 000, the minister gave no further relief this year.
Marginal tax rate
There was speculation that the marginal tax rate, currently 40%, would be reduced. The idea is that if government wants to reduce the company tax rate it would have to do so in line with individual tax to prevent arbitrage opportunities. In other words, it wants to avoid creating an incentive for individuals to form companies to lower their tax rate. This was not the year for a tax rate cut, but it is something to watch out for as part of a more comprehensive overhaul of the tax system.
Value-added tax
While labour movements may be disappointed that VAT was not scrapped, as Manuel pointed out, once they can tell him where to find R155-billion to replace VAT income, he will gladly do so. However, there is an argument that South Africa is out of line with global trends where indirect taxes such as VAT, which is a consumption tax, is higher than direct personal tax. Many economists would like to see a higher rate of VAT with a lowering of personal tax, but as a political hot potato, it is not likely to be addressed too soon.
Interesting developments
Small business: Small business commentators have argued that, irrespective of the tax breaks provided by government, the red tape and administration of taxes for small businesses have an enormous impact on their ability to perform, especially when they employ one or two people who are trying to focus on building a business. Any time filling in complicated tax forms is lost revenue. In the budget, the national treasury announced that the South African Revenue Service (Sars) has commissioned a small business tax compliance cost study. It expects to introduce a more simplified tax regime for small businesses by 2008.
Provisional taxpayers: In further attempts to minimise red tape, Sars is looking at ways of minimising compliance and administrative burdens.
Refund payments: There will be no more cheques from Sars. All tax refunds will be made directly into taxpayer’s bank accounts. This is to decrease delays in payment as well as circumvent cheque fraud. Sars refund cheques have been a specific target for syndicates in the “refund scam” whereby the fraudster pretends to be a representative of Sars claiming that a refund cheque was incorrectly deposited into the individual’s account and that the money must be repaid immediately. The victim discovers later that the cheque was fraudulent and no such money was ever in their account. On a cynical note, it also gives Sars more data on the banking habits of individuals.
Living annuity drawdowns: Currently, living annuities allow pensioners to withdraw retirement funds of between 5% and 20% of their capital a year. This high drawdown rate often leaves pensioners with insufficient funds. It is proposed that the drawdown be shifted to between 2,5% and 17,5%.
Sole proprietors: Last year government amended the rules for small business operators in terms of automatic “deemed employee”. Originally, the idea of a deemed employee was introduced to clamp down on pay-as-you-earn (PAYE) tax avoidance by people who effectively worked for a company, but called themselves consultants. The changes last year were to trusts and companies that were exempt from deemed employee triggers, such as client control or supervision over hours of service performance and over the manner in which duties are performed as well as regular payments. That has now been extended to sole proprietors so small operators do not need to form companies to receive similar treatment.