Against the backdrop of the weakening rand, the pain point of the increased marginal tax rate of 45 per cent, the increase in the VAT rate by 1 percent in April 2018 and the decline in household spend, can South Africans really afford another tax rate hike?
"According to tax statistics issued by SARS for the 2017/2018 tax year, total revenue collected from personal income tax is 38.1 percent," said Shohana Mohan, a SAICA Employees Tax Committee Member.
This is marginally higher than revenue collected from the corporate income tax and VAT revenue streams. While personal income tax revenue collection is higher than other taxes, the tax collection is spread across a smaller individual tax base and fewer personal income taxpayers. This is supported by the statistics issued by SARS which shows a reduction of 466 987 assessments between the 2016 and 2017 tax years.
Just what can personal income taxpayers expect when Minister of Finance, Tito Mboweni, delivers his speech on 20 February?
Inflationary and rate changes
1. Adjustment to the progressive tax rates for fiscal drag mainly benefitting lower- to middle-income earners;
2. Increase in the interest-free, tax-free savings investment annual contribution limit. The current annual contribution not exceeding R33 000 does not attract tax. This annual limit is likely to see an inflationary increase;
3. Capital Gains Tax (CGT) inclusion rate of 40 percent for individuals is likely to remain unchanged with the annual exclusion of R40 000 remaining steady; and
4. Sin taxes to increase – so personal income taxpayers will spend more on a packet of cigarettes and alcohol!
Residential accommodation – monthly fringe benefit capped deduction
The residential accommodation tax-free fringe benefit capped deduction of R25 000 per month for the first 24 months may see an inflationary adjustment given that the capped deduction has not been amended since the date of promulgation of the legislation dealing with residential accommodation provided to employees away from their usual place of residence.
Medical Schemes Fees Tax Credit (MSFTC)
In the 2017 Medium-term Budget Speech, it was proposed that the MSFTC be scrapped. Given the wide impact of scrapping the MSFTC on the private health insurance industry and low- to middle-income earners, the proposal did not come to fruition in 2018. Instead, the splitting of the MSFTC among contributing taxpayers was introduced so as to avoid a double dip in the claiming of the credit. Given the narrowing of ways to fund the budget deficit, we could potentially see the scrapping of the MSFTC in its entirety.
Official rate of interest aligned with prime interest rate
1. In the 2017 Budget Speech, it was proposed that a change to the definition of ‘official rate of interest’ be made so as to align the rate with the market or prime rate of interest. Taxpayers that borrow from their employer instead of approaching a commercial lender/banking institution will therefore be impacted and employers who provide this arrangement as an incentive to employees, may want to consider funding the fringe benefit tax liability, thereby increasing costs to the employer.
2. The official rate of interest is also used to quantify the fringe benefit subject to fringe benefit tax, where an interest free loan is provided to an employee, exceeding R3 000. The official rate of interest is also used for the purpose of quantifying the deemed donation attributed to a low or no interest loan made to a Trust for the purpose of the application of section 7C of the Income Tax Act, 1962 (the Act).
1. With effect from 1 March 2020, South African tax residents will no longer qualify for a full exemption of the remuneration they earn from services rendered abroad in terms of the application of Section 10(1)(o)(ii) of the Act. The first R1 million of remuneration will qualify for exemption, subject to meeting certain days’ requirements. The definition of remuneration as contained in the Fourth Schedule to the Act for employees’ tax purposes, does not define ‘remuneration’ for the purpose of the foreign remuneration exemption. Instead, reference is made to any form of remuneration which includes specific cash elements of pay as well as fringe benefits as referred to in paragraph (i) of the gross income definition.
2. In this regard, it is likely that we may see a carve-out of what is to be included in the R1 million (remuneration cap), more specifically a refinement of the fringe benefits to be included for the purpose of determining the R1 million remuneration cap.
3. Recommendations have been made to National Treasury to consider the exclusion of specific fringe benefits such as residential accommodation, schooling costs and the tax gross up (amongst others). We will have to wait in anticipation for Budget Day for further clarity as we gear up to the 1 March 2020 effective date of the new legislation.
Salient and Tax Administration changes
Whilst we don’t expect significant changes, there is scope to simplify and redraft the legislation in respect of the taxation of equity instruments.