Each year the Treasury emphasises the income tax that is “given back” to taxpayers, particularly the low-wage earners, but what is concerning is that real tax relief for low-income earners comes at the expense of middle- and high-income earners, writes Kyle Mandy, the head of national tax technical at PricewaterhouseCoopers SA.
While tax relief for low-income earners is an admirable policy, South Africa’s tax regime is already massively redistributive. Making it even more so could impede the country attracting and retaining critical skills required for growth.
Using hypothetical taxpayers and structured inflation-adjusted salary packages across three income groups since the 2001/2 tax year, tax relief is evident in all groups. The low-income groups, however, have been the most obvious beneficiaries.
Low income earners
For a specific low-income earner earning about R178 000 currently, the average effective tax rate has nearly halved from 16,4% for the 2001/2 tax year, to 8,7% for the 2010/11 tax year. The tax burden in this case has fallen dramatically. The taxpayer is paying less tax in monetary terms in the 2010/11 tax year than in the 2001/2 tax year, even though the remuneration package has increased by 78% in that period. Low-income earners can definitely be satisfied with the tax relief received over the past several years, notwithstanding that they did not see any real tax relief in the 2010 budget.
Middle-income earners
Analysing middle income earners (about R710 000 total package in current terms), real tax relief between the 2002 and 2011 tax years has been far more muted. While low-income earners have seen their average tax rate almost halve, middle-income earners’s average tax rate has declined by only 20% from the 2001/2 tax year, going from 30,7% to 24,7%. Of specific concern is that no real tax relief has been granted to this class of taxpayer since the 2007/8 tax year and, in fact, there has been a small element of fiscal drag with the average tax rate increasing from 24,4% to 24,7% since the 2008 tax year.
Evaluating high-income earners (around R1,25-million in current terms) real tax relief is even less. The average effective tax rate of the high-income earner has moved to 29,6% in 2010/11, from 33,7% in 2001/2, a reduction of only 12,5%.
Apart from the more muted tax relief given to middle and high-income earners, the shifting of the tax burden has also come about partly by eliminating or significantly reducing employee tax benefits commonly used by these taxpayers. These include the:
- Elimination of entertainment expenditure deductions (completed in 2002/3)
- Capping of tax-free contributions to medical schemes (completed in 2006/7)
- Increase in deemed private mileage for travel allowances (completed in in both 2005/6 and 2006/7)
- Capping of vehicle costs and the inclusion of residual values for travel allowance purposes (completed in 2005/6)
- Failure to annually adjust the deemed travel expenditure table
Middle-income earners will pay 0,3% more tax with changes to medical deductions.
There are more adjustments in the pipeline which will further burden higher income groups. The proposal to change the medical scheme contribution deduction to a credit system with effect from the 2013 tax year will benefit taxpayers with current taxable incomes of R221 000 or less, and who are taxed at current maximum marginal rates of tax of up to 25%. For a middle-income earner, this change would raise the average tax rate for the 2010/11 tax year by 0,3%.
Travel allowance adjustments increase average tax rate by 3,3%.
Additionally, the already promulgated scrapping of the deemed business kilometre regime for travel allowances will hit hard. For a hypothetical middle-income earner with limited business travel, this new regime could increase his average tax rate by as much as 3,3% or R21 886. His average tax rate rises to above 2002/3 levels and reverses any real tax relief enjoyed since that time.
Obviously, the higher his actual business travel relative to his deemed business travel, the more muted will be the effect of this amendment.
Pressure building on middle and upper income earners
While all taxpayers have enjoyed real tax relief in the past decade to some degree or another, this is in significant danger of being eroded, and especially so for middle- and high-income earners. We saw significant reductions in the average tax rates in the 2002/3, 2003/4 and 2006/7 tax years. However, real tax relief has been notably more muted since the 2007 budget, with no real tax relief being granted in the 2008 Budget and limited relief given in the 2009 budget for low-income earners.
The 2010 budget saw this trend clearly starting to reverse with relief given for fiscal drag only for low-income earners. Middle- and high-income earners were not fully compensated for fiscal drag and there is a definite slow upward trend in their average tax rates over the last three budgets. The trend is worrying, particularly in light of the minister’s comment that taxes may need to rise in the future. Pressure is definitely starting to be put back on individual taxpayers and on middle- and high-income earners in particular.