Based on President Thabo Mbeki`s State of the Nation Address and subsequent debate in Parliament, the common thread this year appears to focus on the poor by way of social pensions and grants, health care, education, security, job creation and social services. One can expect synergy in this regard when Minister Trevor Manuel presents his budget to Parliament on Wednesday 20 February 2002.
It is a well known fact that the South African Revenue Services (SARS) has once again exceeded its budget for revenue collection in current fiscal year. South Africans should applaud SARS on this achievement notwithstanding the fraying of tempers at times as a result of the frustration that taxpayers are faced with when dealing with SARS. The administration at SARS can only get better, but without taking anything away from SARS, one hopes with bated breath that this happens sooner rather than later.
This increased collection, together with the proceeds from privatisation projects completed within the current year will allow the Minister room to cut income tax once again. The major benefit in tax cuts would go to the low and middle income earners. This will go some way towards easing their plight given that their spending power has reduced significantly in the last year when one takes into account the effect on consumer goods and transport as a result of the increase in the fuel price and the exchange rate movements.
What can one expect from the Minister by way of taxation?
- The tax threshold (the maximum taxable income that may be earned free of income tax) for persons under the age of 65 may be expected to increase from R23 000 to R30 000. Similarly, for those over 65 years the threshold may be increased from R39 150 to R45 000. The maximum marginal tax rate for individual and the limit at which this become effective may be amended. The rate could be reduced to 40% to close the gap between the effective corporate rate and individuals rate. The threshold may be increased from R215 000 to R250 000.
- The interest and foreign dividend exemption may be increased from R4 000 to R5 000 for those under 65 years and from R5 000 to R6 000 for those over 65 years. Much has been said to increase savings by South Africans, but there currently does not appear to be much incentive. Need we talk about the Saambou effect on savings! One hopes that savings is addressed this year in a more meaningful way.
- The SITE limit (on normal wage and salary earners without fringe benefits) should be increased from the current R60 000 per annum to around R80 000. This will go a long way to releasing capacity in SARS to enable them to deploy staff to apply the complex new laws introduced in the last year. It will be futile to have new complex laws intended to increase tax take without them being properly administered.
- The Skills Development Levy ("SDL") introduced on 1 April 2000 and increased to 1 percent on April 2001 may be increased to 1.5 percent. This could be used to fund job creation projects. A point worth noting is that the SDL was projected to bring in an equivalent amount to Capital Gains Tax ("CGT"). This begs a question given the administrative requirements of CGT verses SDL in relation to the total revenue that will be raised. This may say something about many of the country`s abolishing or considering abolishing Capital Gains Tax.
- The rate of Secondary Tax on Companies ("STC") payable on net dividends by a company may be reduced from 12.5% to 10%. This would reduce the effect of corporate tax rate from 37.78% to 36.36%. This tax was introduced in 1991 as a temporary measure and is still with us after more than 10 years.
- The alternative may be to abolish STC but increase the corporate tax rate to 35% which will still be in line with First World Countries (which South Africa is constantly benchmarking its tax system against).
- Now that foreign dividends are taxed, attention may turn to taxing local dividends once again. Local dividends were made exempt from income tax when STC was introduced. Most first world countries still tax dividend income and allow a credit in one way or another for the tax paid on such income by the company declaring the dividend. Previously, dividends were taxed to the extent of one third. This could be re-introduced if STC is abolished.
- Financial institutions were singled out as an area of focus by the fiscus in last year`s budget. To date no new tax has been introduced to increase the effective rate of tax of these taxpayers as was threatened last year. One may recall that banks, long term insurers and pension funds where previously (from 1991 to 1997) subject to a financial services levy of 0.75% on gross interest. This was introduced at the time VAT came into effect. A similar levy/tax could be re-introduced for this sector.
- The unfortunate consequence with any such introduction will be that this tax will be passed on directly or indirectly to the consumers by way of an increase in the lending interest rate by banks. There are numerous other ways to increase the effective tax rate of the financial institutions without the cost thereof being passed to the general consumer body directly and no doubt these are being examined by the fiscus.
- The tax on retirement funds was also introduced as temporary tax in 1996 and currently stands at 25%. It has been said that the entire taxation of retirement funds and benefits will be looked at holistically. It is hoped that the Minister will announce a date by when taxpayers` can expect this exercise to be completed. There are only a few things worse than planning for one`s retirement in a totally uncertain tax environment.
- Last year did not see any changes to fringe benefits taxation. It has been stated in the past that the intention is to tax all benefits at their case equivalent so as to remove the incentive for structuring remuneration. This is an area that SARS has focused on very successfully by setting up their Woodmead Project team and it would appear that fringe benefits are not favoured by SARS. Some changes to private mileage, value of private use of vehicles, tax free portions of subsistence allowance and contributions to medical aid and pension and provident funds may be expected.
- The various financial limits in the Income Tax Act could be adjusted as they have not been adjusted for many years and hence do not reflect commercial reality. Some examples are the R1 750 pension fund contribution, entertainment allowance of R2 500, subsistence allowance of R65, R150 and US$120 daily limits.
One hopes that with the introduction of the source basis of taxation, capital gains tax and the taxation of foreign dividends, serious consideration will be given to reducing the total tax bill of taxpayers.
It is often said that our tax rates are in line with those of first world countries, if not lower, but what is lost sight of in making this comparison is what does the average South African get for the taxes paid in comparison with the citizens of those first world countries? This is the real challenge that faces our government.
*By Nithia Nalliah, Corporate Tax Partner, Deloitte & Touche
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