Don't focus on a few negative items; look at the Budget in its totality. That was the message Finance Minister Malusi Gigaba had for journalists at a press briefing on his Budget speech, which he presented in Parliament on Wednesday.
Although some aspects may cause pain – and the wealthier you are, the more pain you’ll feel – if you view them in the context of the Budget as a whole, you will find they are offset by benefits, direct or indirect.
The main benefits the government hopes will flow from “making some tough decisions” in producing the Budget are stronger economic growth and averting another credit ratings downgrade. There are also specific benefits aimed at the poor, and greater support for small business.
What may surprise you were the things that did not happen: no changes to capital gains tax, dividends tax, or to the taxes, limits and allowances relating to interest income, retirement fund savings and tax-free savings accounts, among others.
The main tax-related features of the Budget that will affect you directly as a consumer are:
A single-percentage-point rise in value-added tax (VAT), from 14% to 15%, to take effect on April 1, will bring in about R23 billion for the government.
David Crosoer, an investment analyst at PPS Investments, says the increase will result in a once-off increase in Consumer Price Index inflation of at least 0.5% over 12 months. “It’s unlikely that a stronger rand will offset this inflationary impact,” he says.
How much extra you pay will depend on what percentage of your consumer basket comprises zero-rated items, Crosoer says. “In a worst-case scenario, it’s unlikely to be more than 0.9% of your expenditure.”
He says the government had little choice but to raise VAT “to plug a gaping expenditure hole. Were this not implemented, South Africa would have faced the real possibility of further ratings downgrades and the potential significant depreciation of the rand. This would have had an adverse impact not only on the government’s ability to borrow, but also an inflationary impact on South African consumers more detrimental than the VAT hike.”
Hermann Marais, an associate at law firm Bowmans, says the increase in the VAT rate may not hit lower-income consumers as hard as was feared.
He says that, if you look at the average annual expenditure of households that Statistics SA categorises as “poor” in its 2017 Poverty Trends, various categories of expenditure are not subject to VAT. These include fuel (the average transport cost is R3 957 a year) and housing costs of R6 966 a year (mortgage bond repayments and rent are exempt from VAT).
“Basic foodstuffs, too, are zero-rated. They include brown bread (but no longer rye and low-GI bread), dried beans and other legumes, maize meal, milk, amasi, rice, fresh fruit and vegetables, eggs, vegetable oil and tinned pilchards. These items make up at least 46% of the normal food purchases of the average poor household, according to Statistics SA,” Marais says.
Marais says the removal of the VAT zero-rating on fuel, as was proposed in the 2017 Budget Review, would have dealt a far greater blow to lower-income consumers. “If this had happened, the cost of fuel would have risen by 14%, with knock-on effects on the prices of goods that are transported. Consumers would have been hit hard, especially commuters making use of public transport and taxis,” he says.
Johann Els, the senior economist at Old Mutual Investment Group, believes the VAT increase is not inflationary and will not drive up prices in general, nor will it particularly hurt the poor.
He says although VAT is generally assumed to tax the rich and the poor equally, the wealthiest 30% of people pay 85% of all VAT in South Africa. He says a fully VATable basket of goods costing R100 will, after the increase to 15%, cost 88 cents more.
Els regards the VAT increase as positive and evidence that the government is “willing to make tough choices”.
Income tax bracket creep
The government will again employ a stealth measure used last year: bracket creep or fiscal drag. This refers to the income tax brackets “dragging” behind inflation.
If you are a middle-income earner who has recently had an inflation-linked pay increase, bracket creep may hurt, because a larger percentage of your income is likely to go to the taxman. If you haven’t had an increase, you will pay slightly less tax, but, in both cases, you will be taking home less in real (after-inflation) terms.
The lowest four income tax brackets (see the tables on page 21) have been partially adjusted for inflation, through a 3.1% increase. The top three brackets remain the same as last year – they have not been adjusted at all.
Linked to the income tax brackets are the primary, secondary (for people aged 65 to 74) and tertiary (for people of 75 and older) rebates. These have also been subject to below-inflation adjustments: 3.17%, 3.8% and 3.25% respectively.
Hikes aimed at the wealthy
A wealth tax, touted by the Davis Tax Committee, which has provided input to the government on tax reforms, has not materialised in this year’s Budget, but the government has introduced certain measures aimed specifically at the wealthy:
• Estate duty increased to 25% on estates with a value of more than R30 million; and
• Donations tax increased to 25% on donations of more than R30 000.
Citadel fiduciary managing director Hilary Dudley says although this will bring in some additional revenue, these increases were a “strategic move” to counteract the VAT rate increase.
“Treasury could not be seen to be taxing lower- and middle-income earners and disregarding the wealthy. From a tax point of view, the Budget seemed to balance calls to tax the wealthy with the need to broaden the tax base,” she says.
Another measure aimed at the wealthy is an increase in the ad valorem excise duties on imported motor vehicles and luxury goods, such as cosmetics and electronics.
Effective from April 1, says the 2018 Budget Review, the maximum ad valorem excise duty on motor vehicles will be increased from 25% to 30%.
The classification of cellular telephones will be updated to include smartphones. The rates, now at 5% and 7%, will be increased to 7% and 9%.
“Government will also consult on a proposal to replace the flat rate for cellphones with a progressive rate structure based on the value of the phone,” the document says.
Fuel levy increases
A measure that may hurt the poor because of the relatively high portion of their income they spend on transport are the increases in the fuel levies, effective April 4.
The general fuel levy will increase by 22c to R3.37 a litre of petrol and to R3.22 a litre of diesel. The Road Accident Fund levy will increase by 30c to R1.93 a litre. The overall increase of 53c will push up the cost of fuel by about 4%. However, the increase may be offset in the future by a lower petrol price on the back of a stronger rand.
Excise duties on alcoholic beverages will increase by between 6% and 10%, and on tobacco products by 8.5%. Among others, wine will cost 23 cents more per bottle, beer 15c more per can, spirits R4.80 more per bottle, and cigarettes R1.22 more per packet of 20.
Green and sugar taxes
The following measures will be effective from April 1:
• The plastic bag levy will increase by 50% to 12c a bag;
• Vehicle emissions tax will increase to R110 for every gram above 120g of carbon dioxide per kilometre for passenger vehicles and to R150 for every gram above 175g of carbon dioxide per kilometre for double-cab vehicles;
• The levy on incandescent light bulbs will increase from R6 to R8; and
• A health-promotion levy that will tax sugary beverages is yet to be finalised.
A FEW POSITIVES
To offset the impact of the VAT increase on the poor, the government has increased its social grants by more than the inflation rate (currently 4.4%) in most cases. According to the Budget Review:
• The old-age, disability and care-dependency grants will increase by 5.9% to R1 695 a month;
• The over-75 and war veterans grants will increase by 5.9% to R1 715 a month;
• The foster-care grant will increase by 4.3% to R960 a month; and
• The child-support grant will increase by 6.6% to R405 a month.
Rob Cooper, a tax expert and the director of legislation at Sage, says great news for taxpayers and employers is that the government has scrapped the 12 000km-a-year limitation for using the prescribed rate per kilometre to calculate travel reimbursements. “This will simplify travel reimbursement administration but could open the door for increased levels of non-compliance in respect of travel reimbursements. On the whole, however, this will make life much easier for businesses,” Cooper says.
Special economic zones
National Treasury has decided that six special economic zones (SEZs) should be recognised by the Economic Tax Incentive Act. Employers will be able to claim a tax incentive for all employees working in one of these SEZs, irrespective of an employee’s age, but subject to qualification tests such as minimum wage and maximum remuneration.
Outside of the SEZ, employers can claim for the incentive only for employees aged 18 to 29 years. “This is a great way to generate more employment in the SEZs,” Cooper says. The SEZs are Coega, Dube Trade Port, East London, Maluti-a-Phofung, Richards Bay and Saldanha Bay.
(Also see stories on free higher education, support for SMMEs, medical tax credits and NHI, and higher offshore limit for retirement funds.)