Finance Minister Pravin Gordhan’s budget speech on Wednesday seemed mainly to target the wealthy with tax changes, but if you’re a middle-income earner, don’t think you’ve got off scot-free.
If your income is keeping pace with inflation, a larger portion of it will go to the taxman, and you’ll be hit by the higher fuel levy and higher “sin taxes”.
Gordhan and his team at National Treasury created a new tax bracket for people earning over R1.5 million a year. These individuals, whom Treasury estimates to number just over 103 000, or about 1.4 percent of registered taxpayers, will be subject to a marginal rate of 45 percent, compared with the current 41 percent, and this will bring in about R4 billion extra for the government.
However, Nazmeera Moola, the co-head of fixed income at Investec Asset Management, says that by far the biggest contribution to the government’s coffers (about R12 billion) will come from the limited adjustments for bracket creep, whereby the tax brackets lag inflation – also known as fiscal drag. “The upshot is that every single taxpayer is affected and paying the price of South Africa’s slow growth and inefficient expenditure.”
The brackets have been increased by only one percent, although the rates associated with each bracket remain the same. This means you will pay slightly less tax if your income remains constant, but you will pay more as a portion of your income if your income increases by, for example, the inflation rate of between six and seven percent.
Also increasing by only one percent, instead of keeping pace with inflation, are the primary, secondary and tertiary rebates, which increased to R13 635 (from R13 500), R7 479 (from R7 407) and R2 493 (from R2 466) respectively. Even pensioners, to whom the secondary (for people aged 65 and over) and tertiary (for those aged 75 and over) rebates apply, will be paying proportionately more if their pensions are inflation-linked.
The tax thresholds, below which you do not pay income tax, increased by one percent to R75 750 (from R75 000) for taxpayers under 65, R117 300 (from R116 150) for taxpayers aged between 65 and 75, and R131 150 (from R129 850) for taxpayers aged 75 and over.
Ricardo Teixeira, the chief operating officer for BDO Wealth Advisers and a Certified Financial Planner, provides examples of how fiscal drag will affect all taxpayers, not just those whose salary increases put them into a higher bracket (see “Income tax examples”, below and tax tables).
Lower- and middle-income earners
Siphamandla Mkhwanazi, the general consumer economist at Standard Bank, says that although the new tax bracket was specifically directed at high-income earners, the overall effect of this year’s tax changes will be felt across the board.
The increase of 30 cents a litre in the fuel levy and the nine-cent increase in the Road Accident Fund levy will have a substantial effect on lower- and mid-income earners, because they spend a relatively higher portion of their income on transport than the wealthy do (13 percent, on average, versus six percent for wealthy households).
Mkhwanazi says the drag on the tax brackets will disproportionately affect the middle-income group. “We estimate that bracket creep alone, on average, took away four percent of middle earners’ discretionary income (income left over after all necessities have been paid) in the 2016/17 tax year, and this is set to increase to an average of 10 percent in the 2017/18 tax year. The middle-income group drives mass consumption in South Africa, and therefore this will negatively affect household consumption expenditure and, ultimately, GDP growth,” he says.
The sin tax changes – higher duties on alcohol and tobacco products (see “Paying for your sins”, left) – will not have a big impact, he says, because the rise in the final price of these products will be small.
Mkhwanazi says it’s good for consumers that value-added tax (VAT) wasn’t touched, but an increase in VAT is “not entirely out the window” for next year. A hike would have affected low-income earners more than any other segment.
Burden on the wealthy
Kelly Pretorius, a senior associate in tax at Bowmans, notes that the personal income tax burden has been steadily increasing since 2011.
“A sudden increase of four percent is arguably quite drastic, and continuing to raise personal income tax over a long period could have negative consequences for growth and investment. This is particularly so when the burden is being carried by a limited number of taxpayers, who may be encouraged to migrate to ‘friendlier’ tax jurisdictions (and have the means to do so),” she says.
Teixeira says although the new tax bracket for the wealthy will bring in only a modest R4 billion, Treasury will receive more through the knock-on effect of the new bracket on capital gains tax (CGT), even though the rates for CGT have not changed. Also, the new 45-percent rate applies to trusts, which means trusts will be faced with a more onerous tax burden on income and capital gains.
He believes the higher tax for the wealthy is not enough to drive negative behaviour in the way of emigration or tax avoidance.
“One must remember,” he says, “that the effective rate for these high earners will be lower (at about 35 percent) than the marginal rate of 45 percent, and that the wealthy take advantage of tax deductions, such as adding more to their retirement savings.”
Teixeira says Treasury mitigated tax avoidance risk by increasing dividends withholding tax from 15 percent to 20 percent to prevent the wealthy from structuring their affairs to pay dividends instead of personal income.
Taxpayer earning R300 000
If you are under 65 years of age and your taxable income for the 2016/17 tax year was R300 000, and it remains R300 000 for the 2017/18 tax year (which starts on March 1), you will pay R49 347 in tax, compared with R49 780 for the 2016/17 tax year, or 16.4 percent of your income instead of 16.6 percent. However, if your income increases by seven percent, roughly the inflation rate, to R321 000, you will pay R55 858 in the 2017/18 tax year, or 17.4 percent of your income instead of 16.6 percent.
Taxpayer earning R402 000
If you are under 65 and your taxable income for the 2016/17 tax year is R402 000, and it remains R402 000 for the 2017/18 tax year, you will pay R80 968 in tax, compared with R81 400 for the 2016/17 tax year, or 20.1 percent of your income instead of 20.2 percent. However, if your income increases by seven percent, roughly the inflation rate, to R430 140, and you move from the 31 percent marginal tax bracket in 2016/17 to the 36 percent bracket in 2017/18, you will pay R90 675 in the 2017/18 tax year, or 21.1 percent of your income instead of 20.2 percent. Put another way, you will earn R28 140 more year on year, but will pay away 17 percent (or R4 731) of that amount due to bracket creep.