During the introductory remarks of his 2017 Budget Speech, Finance Minister Pravin Gordhan highlighted the African proverb, “If lions work as a team, they will bring down even the buffalo”. The speech and the tax proposal recommendations that followed were a combination of high profile announcements, but between the lines were many stealth like tactical measures, that were akin to a pride of lions working as a team.
It was common knowledge from the Medium Term Budget Speech in November last year that tax revenues would fall short of targets, and that Pravin and his team of lions at National Treasury had to find something in the region of R28bn in extra revenue, i.e. taxes.
A new top marginal tax rate of 45% on taxable income above R1,5mwas announced, and together with extremely limited relief for bracket creep will yield R16,5bn. In simple terms, bracket creep is when you receive a salary increase or bonus that pushes you into a higher tax bracket, and there is no commensurate inflation linked adjustment to the tax bands. An examination of the current tax bands, to those announced for the new tax year, show virtually no movement, meaning that most salary earners will unwittingly be moving up the bands and paying more tax. Of the R16,5bn in anticipated increase in personal taxes, R12,1bn will come from bracket creep, and only R4,4bn from the new uber tax band.
The graph below shows how personal income tax reflected as a percentage of Gross Domestic Product (GDP) is the tax that is the undisputed “winner” as far as government is concerned. It must be remembered that this tax is paid by a small base of only 7,4m taxpayers or 13,5% of the population. The latest proposals will only serve to increase this gap relative to VAT and corporate income tax.
(Source: National Treasury)
The next significant contributor to the R28bn hole, is a whopping 33% increase in the Dividend Withholding Tax (DWT), from its current level of 15% to 20%. This is expected to bring in R6,8bn. From government’s perspective, this is an easy sell and even easier to collect. The tax is withheld by corporates when they pay out dividends, the corporates then have 30 days to pay the DWT over to SARS. This increase is effective immediately, so there will be no mad rush to declare dividends before month end! This does cunningly increase the effective rate of unlocking profits in companies from 38,8% to 42,4%. To prevent arbitrage National Treasury always like to keep the top individual marginal tax rate in line with the combined effect of the company tax rate and DWT.
Last but not least, is the perennial increase in the so called sin taxes and fuel levies. These are expected to raise R5,1bn. The bulk of this will come from a 10,5% or 30 cents/litre increase in the fuel levy. This is a consumption tax that once again is fairly easy to collect and will have an immediate uplift of revenue to SARS.
There was no increase in the VAT rate. In hindsight, it probably proved to be too much of a political hot potato for the ANC to tackle at this point in time. There was a mention that there would be an attempt in 2018 to broaden the VAT base by reducing the number of zero rated items, with fuel being specifically mentioned. It would appear that the policy of government is to leave the VAT rate unchanged, but improve its application and overall tax take.
There were no changes to CGT or the attribution rates, 40% for individuals and 80% for trusts and companies. Estate duty and donations tax remained unscathed by this years budget speech. There was an honorable mention that government would consider the recommendations of the Davis Tax Committee as pertaining to estate duty, in the 2018 edition of the budget.
Pravin and his team at National Treasury had the unenviable task of bringing down a buffalo, in the shape of the rating agencies potential downgrade. They needed to have courage, yet act with stealth and wisdom. Common consensus is that this was a sensible budget in the most trying of times. Hopefully Pravin Gordhan and his deputy Mcebisi Jonas will live to fight another day and remain part of the National Treasury team for some time to come.