By Arthur Kamp and Alwyn van der Merwe, 5 March 2015
On the face of it he hasn’t deviated from the tone set in the MTBPS. In fact, we have received confirmation that a prudent fiscal path will be followed in order to stabilise Government’s debt ratio. However, a year ago we have also warned that revenue is likely to fall short and that the tax payer is likely to fund the shortfall with higher taxes.
Against the backdrop of a revenue shortfall for 2014/15 of R14.7 billion below the 2014 budget review forecast, the Minister announced additional revenue-raising measures. These were relatively limited though, amounting to a net R8.3 billion after adjustments for fiscal drag are accounted for. Discouragingly, the ratio of tax revenue to gross domestic product (GDP) increases to 26.2% by 2017/18; certainly a step backwards.
The marginal personal income tax rate was adjusted by one percentage point for those who earn more than R181 900. This was interesting because, technically, this does enhance progressivity of the tax system (since the marginal tax rate for income earners below this threshold was not adjusted), but it is contrary to the expectation that the richest should shoulder the burden of adjustment. Relief for fiscal drag is worth R8.5 billion to households, but they give R9.42 billion back due to the marginal tax rate increase.
To align itself with the growth objective, a tax structure should, theoretically, be supportive of building savings and encouraging investment. The net effect of tax changes announced in Budget 2015 is a slight skewing in the direction of indirect taxes. It’s not much, but the change on margin is in the right direction.
Further, the Treasury refrained from raising tax rates on the proceeds of savings (for example, dividend tax). In effect, capital gains tax went up marginally as a result of the higher personal income tax rate. To this end the introduction of tax-free savings accounts are welcome, although this intervention may merely prompt substitution (shifting savings from one vehicle to another).
There is also a strong focus on expenditure (indirect) taxes, but not VAT. Excise duties were increased in excess of inflation. The increase in excise duties nets the Treasury an additional R1.84 billion, while the increase in the Road Accident Fund and fuel levy nets the Treasury R6.49 billion in 2015/16. Hence the total increase for indirect taxes is R8.33 billion.
But, after all is said and done, the first objective is to stabilise the debt ratio. The Minister commendably stuck close to his deficit reduction plan as outlined in the MTBPS in October 2014 (the consolidated budget deficit declines to 2.5% of GDP by 2017/18 from 3.9 per cent of GDP in 2015/16). If the main budget primary balance (revenue less non-interest spending) declines over the next three years as outlined in budget 2015 (from -1.7 per cent of GDP in 2014/15 to 0.0% in 2017/18), the total gross loan debt ratio can be expected to stabilise at just below 48% three years from now.
On balance, the rudder has turned. Hopefully, the ship will follow. But, the path to fiscal sustainability remains onerous and long.
By Anton Maskowitz and Carien Strauss
Minister Nene’s maiden budget speech has been described as a 'boring budget' or a 'non-event'. On closer scrutiny, and in the words of Judge Dennis Davis, a guest speaker at the South African Institute of Tax Practitioners and the Chairman of the Tax Reform Committee, the budget is indeed boring because it is in fact a 'holding' budget. From this statement it would seem that Minister Nene was confined to the armour he has at his disposal at the moment, but there is probably much more to come. Future tax proposals will therefore depend on the proposals of the Davis Committee and the Judge promised to issue his Report on Wealth Taxes within the next few weeks. He commented during his address at the Budget breakfast that wealth taxes are extremely complex and he would prefer to issue his report for public comment before making his recommendations to Treasury. One of the areas that he will address in his report and which received specific mention during his presentation is estate duty.
The most relevant tax proposals contained in the 2015 Budget were the following:
Firstly, to limit tax planning opportunities, it is proposed that a maximum age at which withdrawals must be taken be introduced which proposal is in line with other countries that have similar retirement funding arrangements. The proposed age is unknown at this stage and will most likely only be communicated in the next Taxation Laws Amendment Bill.Secondly, it is proposed that an amount equal to the non-deductible contributions made to retirement funds be included in the dutiable estate when a retirement fund member passes away. For example, if an individual made a R5 million lump sum contribution to an RA and at the time of death the remaining non-deductible contributions amounts to R4 million, this amount will be included in his or her estate for estate duty purposes. From this it is evident that Treasury intends to address abuse of the current RA legislation, which was ever only intended for legitimate retirement planning. It seems that individuals who have already made contributions to RAs in order to avoid estate duty and who dies after the proposals are enacted, will unfortunately also be caught by these new proposals given that the triggering mechanism is the date of death.
What also became apparent from Minister Nene’s Budget speech and the comments made by Judge Dennis Davis during his address at the budget breakfast is that there will be increased scrutiny on base erosion and profit shifting ("BEPS") activities focussing on offshore trusts and controlled foreign companies (CFCs). Judge Davis intends to propose to Treasury to include questions on income tax returns which will specifically ask corporates whether they have any entity in their corporate structure located in a tax haven or low-tax jurisdiction and also whether taxpayers have a vested/contingent interest in an offshore trust, or control the offshore trust by way of a 'letter of wishes'. The Judge remarked that in the event that these questions are not answered truthfully, the relevant taxpayers “will be jailed”. In addition, consideration will be given to subject (CFCs) held by interposed trusts to tax in South Africa. This is the strongest indication yet that the benefits of utilising an offshore trust to avoid the CFC rules from applying to a non-resident company, will be eliminated.
Exchange control allowances will increase from 1 April 2015, and
The significance hereof is that individuals may, from the 1st of April 2015, remit R11 000 000 per calendar year abroad for investment purposes. Where individuals have already utilised their R4 million allowance to date for the current calendar year, they may apply for a further R6 000 000 on or after the 1st of April 2015.