Budget wrap-up

Mike Browne of Seed Investments writes that yesterday was the first time in around a decade and a half that South Africans didn’t hear Trevor Manuel deliver the national Budget Speech. Pravin Gordhan has become the finance minister, after successfully running SARS, at a very difficult time.

 The “go go” years that we experienced in the middle of the first decade of this century are gone and Treasury is faced with a tough battle of declining revenue and growth. Borrowing requirements have sky-rocketed and they will do well to prevent the deficit from getting out of control in the coming years.

Every year much fanfare is made at the changes to tax brackets, tax rates, and the like. While the nominal numbers grab the lion’s share of the media attention, much of the change is typically just adjusting for inflation. There will generally be some changes that are above inflation, and some that are below inflation.

First off there was no change in the marginal tax rates for individuals. There was speculation that the marginal rate, particularly for the top bracket (40%), would increase in line with other countries, but this wasn’t the case. The Minister indicated that they would rather improve income tax receipts by broadening the tax base further and closing loopholes than increase the marginal rate, which penalises those compliant tax payers. Income tax brackets got adjusted upwards, but all bands were adjusted by less than inflation. This means that employees who receive an increase in line with inflation will pay a greater portion of their income in tax.

The amount of interest income that is exempt from tax grew by 6.2% from R 21 000 to R 22 300 which is less than the current 6.3% inflation rate. While the amount exempted from tax grew by less than inflation, the effective amount that you can have invested in money market investments without being taxed grew by around 84% from R 190 000 to R 350 000. There has been a large increase as a result of the sharp fall in interest rates. These amounts have been calculated assuming an interest rate of 11% last year compared to 6.35% this year.

Of much joy to many individuals was the suggestion that there might be the abolishment of estate duty in the future. The rationale behind this thinking is that estate duty doesn’t bring in much (relatively) revenue and that the truly wealthy individuals have legal structures, like trusts, to circumnavigate this tax.

Exchange controls for individuals remain as is for now, but Treasury continues to work on the reform on exchange control regulations. The change in the way that dividends are treated (i.e. taxed in the hands of the investor as opposed to the company) is nearly complete with a few minor issues to sort out before it can be properly implemented.

Most consumers of ‘sin products’ – tobacco and alcohol – will have to pay more for their ‘sin’ as a result of above inflation increases in the taxes on these products. Government claims that this is a result of trying to improve the health of the population, and while there is some merit in the argument, it’s most likely because these are easy areas to target. Traditional beer taxes weren’t increased.