Budget puts strain on too-small tax base
The devil is in the detail of this year’s budget despite a concerted attempt to achieve a sound balance between tax increases and spending cuts.
Although there was an acknowledgment that taxpayers are paying their fair share of taxes, this did not stop the treasury from announcing increases of up to 50% by way of stealth taxes.
Reducing income inequality is crucial in South Africa and expectations before the budget were that the top marginal rate of tax may be increased, possibly with an increase in value-added tax. Neither of these changes was forthcoming and instead there were a lot of rather sneaky increases.
Finance Minister Pravin Gordhan made it clear that current taxes on the wealthy are under review by the Davis committee.
He also said in the finer print that a super-tax bracket is an option – and so the door remains open for further tax increases on higher-income earners in the near future.
Trusts – that favourite preserve for protecting generational wealth – came in for renewed scrutiny.
To limit taxpayers’ ability to transfer wealth without being taxed, the government proposes to ensure that the assets transferred by a loan to a trust are included in the estate of the founder at death (by implication, subject to estate duty) and to categorise interest-free loans to trusts as donations (presumably subject to donations tax).
Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered as a measure to broaden the tax base.
Importantly, trusts are excluded from the extended voluntary disclosure programme aimed at raking in revenue for previously undeclared offshore income and assets.
South Africa’s voluntary disclosure programme gives noncompliant taxpayers the opportunity to correct their tax affairs. The new proposal is to relax voluntary disclosure rules for a period of six months, from October 1, to allow noncompliant individuals and firms to disclose assets held and income earned offshore.
With effect from 2017, international agreements on information sharing will enable tax authorities to act more effectively against illicit flows and abusive practices.
The government also proposes to increase the inclusion rate for capital gains for individuals from 33.3% to 40%, and for companies from 66.6% to 80%. This will raise the maximum effective capital gains tax rate for individuals from 13.7% to 16.4%, and for companies from 18.6% to 22.4%.
However, the annual amount above which capital gains become taxable for individuals will increase from R30 000 to R40 000 and the effective rate applicable to trusts will increase from 27.3% to 32.8%.
Among other moves to increase taxes on wealthier taxpayers, the government proposes to increase the transfer duty rate on property sales above R10-million by 18%, from 11% to 13%.
The persistent challenge remains that the tax base in South Africa is too small to achieve the country’s growth objectives of 5% to 7% and one can understand the predicament the government finds itself in. This is why the positive noises about the joint initiative between the government and business to improve levels of inclusive economic growth should be welcomed.
The rich do come worst off in this year’s much-anticipated budget, and it is a concern that this very small number of taxpayers may be in for more pain down the line. But, on the whole, a fairly balanced result was achieved between proposed tax increases and spending cuts.
As a compromise, the government has committed itself to reining in spending and cutting the public-sector wage bill, and much-needed rationalisation is being pursued for unwieldy state-owned entities. The expenditure ceiling is to be cut over the next three years by R25-billion.
These proposals can be viewed as a breath of fresh air in a budget that ultimately sends a strong message that concerted action by the public and private sectors will take place to turn the economy around.
Nazrien Kader is managing partner of Deloitte Africa Taxation Services.