If you earn 000 or more you will be financially worse off in the 2009/2010 tax year. Although on the surface tax relief of R13,6-billion sounds good, the bulk of that relief (R9,11-billion) will go to people earning less than R250 000 a year.
The reality is, after inflation adjustments to maintain their purchasing power, higher-income earners will pay more tax.
A person who earned R300 000 last year and who receives an inflation-linked salary increase of 6% will receive a before-tax income of R318 000 this year. This salary increase is purely to maintain purchasing power and is not a real salary increase. Last year this taxpayer would have paid R73 210 in tax. This year he or she will pay R77 060 — effectively making him or her R3 850 worse off after inflation.
Similarly, a person earning R750 000 last year, with an inflation-adjusted increase to R795 000, will pay R13 960 more in tax this year.
The tax burden on higher-income earners continues to increase and, according to this year’s budget, the 5,5% of taxpayers (297 000) who earn more than R500 000 a year will pay 38% of the personal income tax bill.
Tax changes to watch
Travel allowance: As from the 2010/2011 tax year all employees deducting for travel allowance will have to provide a log book. The default practice of claiming business travel from total kilometres travelled will be scrapped in 2010/2011.
Medical deductions: Proposals have been made to replace the medical schemes contribution deduction with a non-refundable tax credit. The tax credit would be set at 30% of the total contribution, although a cap on this contribution will be considered. The change from a tax deduction to a tax credit means that it will not lower the marginal rate of tax paid as is currently the case. This is in line with the global practice of moving from tax deductions to tax refunds.
Dividend tax: The taxation of dividends in the shareholder’s hands will come into effect in 2010. Local taxpayers will be taxed at 10%, whereas domestic retirement funds, public benefit organisations and domestic companies are exempt. Foreign investors are eligible for tax-treaty benefits.
What your green sins cost
Sin taxes have increased as usual. But this year we can add carbon emissions to our list of sins. A tax on incandescent light bulbs has been introduced and taxes on plastic bags and international air travel have been increased.
If you don’t move to energy-efficient bulbs your light bulbs will cost you R3 more. You will also pay R150 more in taxes to fly abroad and every plastic packet you buy will make the South African Revenue Service 4c richer. Plastic bags are expected to net SARS R90-million in the upcoming tax year.
Increases in the fuel levy were above expectation. It would appear government is taking the fall in petrol prices to push through higher taxes. The fuel levy increases by 23c for petrol and 24c for diesel. Because of the fuel levy and road accident fund levy, which increases by 17,5c from April 1, we will pay R2,14 in taxes for every litre of petrol we buy and R1,99 for every litre of diesel. Every time you fill up with petrol you will give the tax man R128.
Buying a diesel car probably won’t save you tax either. Government aims to equalise the fuel levy paid by petrol and diesel users because of an increase in passenger vehicles using diesel.
You may rather want to consider investigating cars with the lowest carbon emissions, as there are proposals for the existing ad valorem excise duty on motor vehicles to be adjusted to incorporate CO2 emissions.
The 2c per KWh electricity levy comes into effect this year. Government expects this levy to contribute R20-million to revenue. On a personal basis, if your electricity bill is about R500 a month, you are probably using about 1 400 KWh of electricity. The levy will increase your bill by about R28.
Changes to retirement funds
In this year’s budget proposals were made to phase provident funds into pension funds.
Craig Aitchison, head of Old Mutual Actuaries and Consultants, warns against rash decisions by employees to cash in their provident funds. ”This is nothing new. Part of the retirement process is to ensure that one’s retirement provides one with an income, not just a lump sum. However, part of the reform dialogue is that existing rights will be protected,” says Aitchison.
He adds that the changes will not happen overnight and will be part of a broader discussion that could see the one-third lump sum paid from a pension fund increased for a greater balance between income and lump-sum benefits.
Therefore companies with existing provident funds should rather wait to see how the changes will be implemented. But Aitchison says for companies looking at setting up retirement benefits for employees a pension fund may be more desirable as there will be fewer changes to legislation in the future.
This debate is also likely to include discussions about preservation of funds when changing jobs. Aitchison says it is government’s intention to legislate some form of compulsory preservation — the issue is how this will be practically implemented.
The budget also indicated that there might be a cap on tax deductions to pension funds. An earnings cap, above which no tax subsidy will be provided for contributions towards retirement savings vehicles, has been proposed. The 15% tax deduction from employer and employee contributions will remain. But people earning, for example, R1-million might find that the 15% tax deduction is only for the first R500 000 earned. These figures are still to be decided.
Ernie Lai King of Denys Reitz says changes have been made to retirement annuity (RA) contributions by employers to ensure that employees receive the tax benefits they would have received if they were contributing directly to an RA. Currently employees pay a fringe on RA contributions made by the employer. But until now they have not been able to receive the tax deduction of 15% of non-retirement funding. ”To make it a fairer system, employees can now receive that deduction,” says Lai King.
Over 65 score
Pensioners will be facing a significant decrease in their income over this year as interest rates are expected to fall a further 250bps. But on the tax front Trevor Manuel gave pensioners tax relief well above inflation adjustments.
The tax-free interest income ceiling is to be increased from R27 000 to R30 000 for people over 65 years. That is an 11% increase. Added to the increase of the tax-free income threshold to R84 200 for people over the age of 65 means that a retired couple can earn R228 000 (R19 000) from investments a month without paying tax. That is a 13% increase on last year’s tax-free benefits — double the rate of inflation.
For younger savers the tax-free interest income ceiling is to be increased to R21 000. One can invest R200 000 in a money market account without paying tax on the interest income.
Although the capital gains tax exclusion of R1,5-million on one’s primary residence was not increased, to make life simpler for lower- and middle-income earners, any home sold for R2-million or less will not attract capital gains tax.