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With government needing to raise an extra R28 billion in taxes, it is a foregone conclusion that taxes will go up. The only questions are, which taxes will go up, and by how much?
Estate Duty
The budget is expected to discuss the 2nd Davis Committee report. That report recommended the scrapping of the paragraph 4q deduction, which is the deduction for any bequests made to a surviving spouse. It also recommended the scrapping of roll overs between spouses for Capital Gains Tax and donations tax. Finally, it recommended raising the estate duty rate up to 25% on all estates with a value above R30 million. The quid pro-quo was that it further recommended raising the primary abatement from R3.5 million to R15 million, which would take the middle class out of the estate duty net entirely. It is doubtful that government will accept all of this, as together it won’t raise much extra revenue and could cause much hardship. It is more likely that government will adopt some piecemeal suggestions, like that of raising the rate of duty on estates with a value above R30 million to 25%.
Capital Gains Tax
Investors are nervously watching this one. The inclusion rates were already raised in last year’s budget, resulting in the effective rate for individuals increasing to 16.4%, to 22.4% for companies and to 32.8% for trusts. Surely, it can’t go any higher now? Any increase for companies and trusts would push their rates ever closer to their incomes tax rates. It would be hard to justify, given that there is no inflation indexing in our capital gains tax system.
 Marginal rates and dividends tax are the most likely increases
The most likely increase will be to marginal rates. Last year all the marginal rates, bar the lowest one, were increased by one percent. There was minimal relief for fiscal drag, apart from the lower three bands. It is expected that there will be similar measures adopted this year, which would take the top marginal rate to 42%.
The second tax likely to be increased is dividends tax. The rate has not been increased since dividends tax was implemented in April 2012. Raising the rate from 15% to 20% will reportedly raise R7 billion in taxes. This seems like a relatively soft target, which is unlikely to raise too many objections.
Conclusion
The Minister of Finance has little choice but to raise taxes. It is hoped that there will not be any radical changes, like the scrapping of spousal relief. In addition, it is hoped that there will be an update on the progression in talks on forced annuitisation of provident funds on retirement, planned to be introduced in 2018. That is now only a year away, and time is short to tackle all the legislative amendments that will need to happen in this area.﻿
CNBC Africa in partnership with Discovery Invest will break from regular broadcasting to bring you live coverage and analysis of South Africa’s Budget on Wednesday, February 22nd 2017.﻿ 
Tune into CNBC Africa, DStv channel 410 from 13h30 CAT on 22 February. Alternatively, livestream via CNBC Africa’s YouTube channel <a href="https://www.youtube.com/watch?v=ThndtDo7WFA">https://www.youtube.com/watch?v=ThndtDo7WFA</a> or website <a href="/tv/cnbc-africa-live/">/tv/cnbc-africa-live/﻿</a>

Budget 2017: These South African taxes are likely to go up

Since 2009, National Treasury has embarked on fiscal expansion to enhance the public sector’s infrastructure programme and support future economic capacity in South Africa. However, anaemic global economic growth over the last nine years has left the Treasury’s countercyclical expenditure programme unable to lift the GDP growth above 2% per annum.
Consequently, a combination of slow growth and lower tax buoyancy have reduced the in-year 2016/17 revenue estimate by R23 billion. Without policy adjustments, gross tax revenue will – this financial year – fall short of Budget 2016 estimates by R36 billion for 2017/18 and R52 billion for 2018/19. These budget deficits are leaving South Africa’s sovereign rating on the brink of being downgraded to non-investment grade.
 In order to mitigate against this revenue shortfall, Minister of Finance, Pravin Gordhan, announced in his 2016 Medium-term Budget Policy Statement (MTBPS) that an additional R13 billion for 2017/18 and an additional R43 billion over the Medium Term Expenditure Framework (MTEF) will have to be sourced through various tax increases.
In this article, we explore the Minister’s possible tax options to raise the required tax revenue and close the revenue shortfall.
Personal Income Tax (PIT)
Revenue potential: R7.5 billion &#8211; R10.0 billion
PIT accounts for at least 35% of tax revenue. It is largest source of tax revenue and the most buoyant since 2010. This is due to higher-than-inflation wage increases, tax increases and reduced tax relief. South Africa has a progressive tax system, which means higher income individuals pay a higher proportion of tax. Consequentially, this means if Minister Gordhan were to generate significantly higher revenue, he would have to increase taxes for higher income earners. ﻿
<img loading="lazy" decoding="async" src="/media/19332555/graphic_1_598x336.jpg" width="598" height="336" alt="Graphic 1"/>﻿
One option to raise additional revenue is to introduce a 45% marginal tax rate for individuals earning above R1.5 million per annum. Based on preliminary calculations, Treasury can realise between R7.5 billion and R10.0 billion using this option. However, high income individuals are often skilled and mobile. A punitive tax rate might encourage aggressive tax planning or incentivise them to relocate to countries with lower tax rates.﻿
Corporate Income Tax (CIT)
Revenue potential: R0.0 billion
In the current weak macro-economic environment, Treasury is unlikely to increase CIT, as this could result in base erosion, capital flight and hence generate little revenue. Furthermore, increasing the CIT rate will be uncompetitive. South Africa’s current statutory tax rate is already higher than most tax jurisdictions. (See below). However, there is room for Treasury to lower the tax rate to attract investment and send a business friendly signal.﻿
<img loading="lazy" decoding="async" src="/media/19332562/graphic_2_597x336.jpg" width="597" height="336" alt="Graphic 2"/>﻿
Value-added Tax (VAT)
Revenue potential: R0.0 &#8211; R15.0 billion
South Africa’s VAT rate is relatively low compared to most tax jurisdictions and there is less risk of tax avoidance and tax planning associated with this tax (see below).﻿
<img loading="lazy" decoding="async" src="/media/19332569/graphic_3_597x336.jpg" width="597" height="336" alt="Graphic 3"/>﻿
Preliminary calculations by KPMG suggest that a 1 percentage point increase in VAT could yield approximately R15 billion in additional revenue. However, the Davies Tax Commission First Interim report on VAT<a href="#_ftn1" title="">[1]</a>highlighted that an increase in VAT will have a negative impact on inequality, real GDP growth and inflation. Furthermore, VAT increases will be disliked by labour unions. Despite a high revenue yield these factors make a VAT increase
<div>Specific Excise Tax
Revenue potential: R5.0 billion &#8211; R7.0 billion
Treasury is likely to realise additional revenue through higher-than-inflation adjustments in sin taxes, particularly in luxury products like cigars, spirits and wines. In Budget 2016, this raised an additional R2.3 billion. However, disproportionate increases in specific excise taxes might encourage black market consumption. ﻿
<div><img loading="lazy" decoding="async" src="/media/19332576/graphic_4_597x336.jpg" width="597" height="336" alt="Graphic 4"/>﻿</div>
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Furthermore, a new specific excise duty on sugar-sweetened beverages (SSBs) was announced in 2016 and could generate approximately R2.5 billion to R4.0 billion. However, this tax will be introduced at a higher effective tax rate than most other countries that have a comparable tax and is set at higher rates than most wines and spirits in South Africa. Furthermore, any job losses and impact on industry growth will have negative second round effects for the PIT and CIT tax bases.﻿
Fuel levy
Revenue Potential: R5.0 billion &#8211; R7.0 billion 
Treasury is also likely to increase the fuel levy. However, with higher crude oil prices the Minister will not have the same space to increase fuel levy compared to the last two budget periods, where he raised R6.6 billion and R6.8 billion, respectively.﻿
Other adjustments
Additionally, the Minister has the option of progressively providing reduced tax relief to raise short-term revenue. In Budget 2016, Treasury raised R7.6 billion through this option. However, failure to give tax relief over a sustained period is regressive, as lower income groups are disproportionately hurt by an increased tax burden. We also expect the Minister to announce other progressive adjustments to wealth-related taxes, similar to last year’s changes to property taxes. ﻿
Conclusion
While it is impossible to predict the exact adjustments the Minister will announce, above we outline several possible tax adjustments to raise the required revenue. We expect a combination of these tax measures to raise at least R13 billion in the 2017/18 fiscal year.﻿
  
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<a href="#_ftnref1" title="">[1]</a> Davis Tax Committee: Value-Added Tax &#8211; First interim report, 2015﻿
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Tax predictions for S.A's Budget 2017

The upcoming Budget will be a critical one given there is no more room for the upward revision of deficit targets as seen over the last few years. As a result of the current slow growth environment, the tax increases and expenditure cuts set in October’s Medium-term Budget have to be adhered to if Treasury is to deliver a positive Budget. However, given that the current fiscal year is running about R5 billion short of target, Treasury will have to go beyond the tax and expenditure targets set in October requiring an even tighter Budget.
The Medium-term Budget last year set out targets of R20 billion for expenditure cuts and R28 billion for tax increases in order to achieve the R48 billion contraction target needed for the Budget. With the current fiscal year running R5 billion short, due to slower tax growth and slight over-spending, they will need to go bigger on tax increases and expenditure cuts this year to make this up.
Whether or not they actually do take these necessary steps remains to be seen, but it will be a very big positive if they do as it will be a departure from the historical trend.
The rating agencies will be watching this very closely. Treasury sticking to the 3.1% Budget deficit target they set in October in the Medium-term Expenditure Framework is one of the crucial issues they will be considering in the decision on SA’s sovereign rating.
They will also be keeping an eye on the actual mix of tax increases introduced by the Budget. For example, if they decide to increase VAT, this would be viewed as a significant step in the right direction. While most economists are skeptical about the prospects of an actual VAT hike, there is increasing talk of a 0.5% VAT hike, which would contribute R10 billion to the Budget, although I still think the probability of this falls below 50%, despite the market and currency strength that such a move would bring. 
A VAT increase is a notoriously unpopular political move among lower income groups, particularly during an election cycle. Nonetheless, the chances of a VAT hike are still better than this time last year given the increased pressure that Treasury is under. If they were to raise the VAT rate, they can still sell such a move politically by, for example, raising the top marginal rate by more, by increasing social grants, zero rate more food stuffs or even introducing a much higher VAT rate on luxury goods. While a varied VAT rate structure is not favoured by Government, it can still be done.
The fact that growth is picking up marginally, the improvement of the global economic environment, and stabilising employment numbers are all positive factors for the tax take or growth. The risk of tax increases in this year’s Budget is that, while we know that hikes will happen across the board, we don’t want Treasury to become too reliant on tax increases over the prioritising of expenditure cuts. We need them to focus on both, but expenditure cuts are more challenging given that public sector wages, social grants and interest payments make up 60% of the total expenditure budget. So where do they cut if they cannot easily cut these components?
The risk of rising taxes hurting the economy through downward pressure on SA’s currently improving growth can be avoided through a suitable mix of taxes. “If the tax increases come in at the top level, as we expect they will, then the impact on the man in the street won’t be as severe.
So yes, while a 2% VAT hike would be painful, a 0.5% increase could be manageable in terms of impact on the consumer. And if, as we expect, the mix means hiking the top marginal tax rate, which includes the wealth or rich taxes such as capital gains tax and dividend taxes, then we don’t expect the economy and consumer to be put under increased pressure. Of course there will be tax hikes such as fuel levy and excise increases, but these will be the normal increases we see every year.
In order to meet the Ministry’s tax target of R28 billion, other tax options, in addition to those already mentioned, include an increase in estate duties, securities and sugar taxes. I do not expect the much-talked about Wealth tax to be implemented in the short term.
A tighter Budget is key when it comes to SA’s policy mix as it could give the SA Reserve Bank the room that they need to be able to cut interest rates as we still expect them to in the second half of this year. At least some of the tax pain expected from this Budget will be negated by lower inflation and interest rates &#8211; but the bulk of the tax pain will be at the top end.

Op-Ed: S.A. Budget must go bigger on tax & spending cuts

Finance Minister, Pravin Gordhan and the National Treasury, have their work cut out for them in the 2017/18 financial year. The economic stewards of our country will be working to reduce the budget deficit, and promote stronger gross domestic product (GDP) growth, while simultaneously providing the resources for a far-reaching social grant and service delivery responsibility.
The funding machine that enables this is tax revenue – the primary means of income for the South African government. This lays a further challenge at the feet of the Treasury: boosting collection for the South African Revenue Service (SARS), while not overburdening the taxpayers themselves. It’s a fine balance to strike, even more so in a global environment of disruption and uncertainty.
As the 2017 Budget Speech day approaches, many individual South Africans and corporate citizens will be hoping for good news, including minimum increases to the various tax rates that affect them. On the other end of the spectrum, recipients of government spending and organs of the state will be hoping for more to work with.
One positive element that will assist Minister Gordhan in this perpetual tug-of-war is the expectation of slightly elevated GDP growth in 2017 – an estimated 1%, compared to 2016’s bleak 0.4%. But as that remains far below the growth figures needed in our own National Development Plan (NDP), where else will Treasury look?
Tax predictions for 2017/18
Forecasting ahead of the Budget Speech is often an exercise in frustration and disappointment. We look to prior trends and the current conditions to take our best guess on a direction going forward. With that caveat in mind, I will say that we expect any changes in tax rates for the most part to be subtle and reasonably palatable.
Personal income tax: One of the big questions is whether Treasury will increase the maximum marginal tax rate. It seems unlikely that Treasury will include a substantial increase in this rate beyond the current 41%. Having said that, I suspect what we will see, and have seen in the last two years, is an effective increase in the tax rate of everyone but the lowest bracket through not adjusting for bracket creep and inflation. We may see a combination of those two, given the pressure to increase revenue collection.
VAT rate: The value-added tax rate is likely to remain unchanged. Although this is a proposition that has been robustly debated in recent years, an increase in this rate would place an additional tax burden on all consumers. Treasury is likely to try minimise the impact of additional taxes measures on poorer households and is therefore likely to steer clear of increases in regressive taxes such as VAT. If Treasury were to take such a bold step, we would expect it to be tied to a very strong reciprocal policy – such as the roll out of the National Health Insurance programme.
Anti-avoidance measures:We anticipate that we may well see a stronger stance from the Treasury on circumventing deliberate tax avoidance as it continues to be a significant hurdle for Treasury and SARS.
Corporate tax rate:The “big question” for tax practitioners will be whether Treasury announces an increase to the corporate tax rate, and frankly speaking, this could go either way. There are strong arguments for both sides, and I suspect this issue will keep analysts glued to their seats on Budget Day.
Carbon tax: Finally, I suspect that we may get some more details as to what is going on with the much-discussed carbon tax rate. Any certainty here would be welcomed by industry.
Businesses and households alike are under severe pressure, so Minister Gordhan is faced with some tough choices as to where to look for sources of additional revenue.  Personal taxes contribute more to tax revenue than corporate taxes do – some may see this as justification for an increase in corporate tax rates over personal income taxes. On the other hand, it doesn’t make sense to overheat the engine that is creating the jobs and growth opportunities we so desperately need, and that the Treasury should show cognisance of this. In the end, both businesses and private households may be facing higher tax rates.
More than the sum of its parts
What the Minister did so deftly in his previous Budget was to combine a host of small incremental changes across the board on all the “small” taxes, such as the various levies. These are the ones that – at first glance – don’t hurt to the same degree as leaps in personal or corporate tax rates. These do, however, increase the overall burden on households and their net effect was profound: giving the Treasury the much-needed funds to support extended education, health and social grant spending. We can expect him to take a similar approach in 2017.
Time and confidence creation
What we’ve described above is not a new approach, but a continuation of an existing astute strategy on Treasury’s part. Apart from filling the fiscal coffers, incremental changes to the existing taxes provide an additional qualitative benefit flowing from continuation that is not measured in rands and cents: time for consolidation and stakeholder engagement.
Several years ago, each Budget Speech heralded dramatic changes in tax rates and policies. While necessary, these changes create work – on the side of the corporate looking to be compliant, and on the Treasury side, adjusting to new frameworks. Conversely, when there is no significant changes to tax policy, and you don&#8217;t have significant new taxes being implemented, this frees Treasury up to engage with industry and stakeholders, to bed down any loose ends from previous policy shifts, and to refine our existing system to the benefit of everyone, both tax payers and Revenue Services. ﻿

S.A's Budget 2017: Greater than the sum of its parts

Any measure that can boost the local economy beyond the projected 1.1% growth is at the top of the 2017 National Budget Speech wish-list for South Africa&#8217;s vital small and medium enterprise (SME) sector. Coupled with the hope that there is no further political turmoil, the ideal scenario for existing and aspirational SME owners would be long-term stability within the economic cluster.
This is according to Ben Bierman, Managing Director of Business Partners Limited (BUSINESS/PARTNERS), the leading local risk financier to SMEs, who says that with the promise of overall business growth that the year holds, the time to enhance specific support measures for South Africa&#8217;s small businesses in the budget is now.
“Provided South Africa can maintain a stable political environment this year, the Budget Speech is bound to contain some growth opportunities for entrepreneurs. And given the outlook for growth that can be achieved this year, South Africa&#8217;s entrepreneurs should be a major focus area for the government,” says Bierman.
Pro-SME initiatives that BUSINESS/PARTNERS would like to see in the 2017 National Budget Speech include:
1.    Increased tax relief and tax breaks for small businesses: Even though Finance Minister Gordhan is expected to raise taxes in order to balance the Budget, a strong pro-growth argument can be made to strengthen the main tax incentive for owner-managed businesses with a turnover of less than R20m. Known as tax relief for Small Business Corporations, the measure allows small businesses to pay a lower tax rate than the standard 28% Companies Tax on their first R550 000 of taxable income.
Business owners would also like to see the R20m turnover cut-off increased, as well as the size of the incentive itself. At the same time the Turnover Tax incentive can be strengthened by increasing the qualifying threshold of R1m turnover, and by lowering the tax rate that qualifying micro businesses pay on their turnover even further.
2.     Growth enhancing VAT exemptions: One of the heaviest compliance burdens on small businesses is the requirement that VAT must be paid on an invoice basis. Having to pay VAT over to the South African Revenue Service (SARS) for money that has not yet been received can be an enormous, sometimes fatal, drain on the cash flow of many small businesses, as some procurers are notorious for not paying invoices timeously.
In the nineties, small businesses below a certain size were allowed to pay VAT only when they received payment, but this was scrapped after syndicates used the exemption to create false VAT claims against SARS. Restoring the exemption, coupled with the necessary policing measures, could do more for the cash flow of small businesses than any number of tax incentives.
The time is also ripe to increase the R1m-turnover threshold for VAT registration, which has remained the same for many years. While SMEs are generally responsible corporate citizens, paying VAT is not only a cash-flow burden, but also requires intensive paperwork and time, which growing businesses should be able to do without &#8211; for as long as possible.
3.    Further relief of red tape impacting SME growth:  Apart from the VAT suggestions, South Africa&#8217;s entrepreneurs will welcome more measures in the Budget that will decrease the administrative compliance burden for SMEs. Despite the calls for austerity, investing in process improvements and administrative efficiency is a long term benefit, although the chances are that they will be limited as austerity continues to bite.
4.    Funding for SME support: Funding for the programmes of the Department of Small Business Development, the Small Enterprise Development Agency, the Small Enterprise Finance Agency and the Industrial Development Corporation can be increased, provided these departments have a coordinated and effective strategy targeting meaningful changes to the SME ecosystem to improve business formation and growth.
5.    Commitment to working more closely with the private sector:Without costing anything, Treasury can enhance the impact of existing funds aimed at developing and supporting entrepreneurs through closer cooperation with private-sector players.
BUSINESS/PARTNERS has identified three sectors in which support for entrepreneurs is likely to yield the most return in the form of jobs and economic growth: tourism, private education and information technology and communications (ICT). Dedicated funds for technical assistance and finance to SMEs is one sure way to boost these growth sectors. Another is to further ease regulations that threaten to stifle the industries, where possible &#8211; for example the strict visa requirements that were recently imposed on tourists to South Africa.
Bierman concludes: “The necessary tweaks and incentives aimed at SMEs within the budget can also work to provide the needed stimulus to grow the economy, however, the impact of these schemes are only really effective when they are made at scale and changes at scale is what we are hoping for.”﻿

South Africa Budget Day

Budget 2017: These South African taxes are likely to go up

Tax predictions for S.A's Budget 2017

Op-Ed: S.A. Budget must go bigger on tax & spending cuts

S.A's Budget 2017: Greater than the sum of its parts

S.A needs a pro-SME Budget

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South Africa Budget Day

Budget 2017: These South African taxes are likely to go up

Tax predictions for S.A's Budget 2017

Op-Ed: S.A. Budget must go bigger on tax & spending cuts

S.A's Budget 2017: Greater than the sum of its parts

S.A needs a pro-SME Budget

News Tips

Advertise With Us

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