Budget Predictions for the 22nd

tax-1On the 22nd February 2017, Pravin Gordhan will be presenting his 2nd budget in his 2nd stint as Finance Minister. Time will tell as to whether it will his swansong budget speech, hopefully recent reports of renewed shenanigans within the government come to naught.

It is no secret that to appease the rating agencies, who are circling around South Africa likes hawks over a wounded animal, some strong measures need to be implemented. There needs to be a cut in government expenditure and an increase in government revenue. These measures will start the long process of reducing South Africa’s borrowings and increase the ability to service and repay debt. In the wake of recent setbacks at the ballot box, it will be interesting to see if government has the stomach for this tough medicine.

There are many ways to reduce expenditure, but there is only one way that government can increase revenue, and that is to increase taxes. So where do we believe these tax increases are going to come from?

  • There will be the standard annual “bracket creep” increases. This is where the income tax bands are not increased by enough to take into account the full effect of inflation.
  • The so called “sin taxes” will also get their annual treatment, with surcharges on alcohol and tobacco becoming more punitive.
  • In the continued strive to attract foreign direct business and provide employment, any increase in the corporate tax rate above its current rate of 28%, would be very surprising.
  • Last year the marginal rate of income tax was increased by 1% to 41%. We should expect another notional increase of a percent or two to this rate.
  • Inclusion rates for capital gains were also increased last year. For trusts and companies the inclusion rate is at 80%, which gives limited scope for further increase. However, on the individual front the current inclusion rate of 40% could be increased to 50%.
  • The Davis Tax commission made some recommendations as pertaining to estate duty. Estate Duty and Donations Tax have been at a flat rate of 20% for some time. There have been some rumours doing the rounds that we could see a new band based approach to these taxes. Something along the lines of zero estate duty for all estates up to R15m, a 20% rate for estates between R15m and R30m and then a 35% rate for all estates above R30m.
  • We also currently have the Special Voluntary Disclosure Program (SVDP) or amnesty in play until 31st August 2017. It is hoped that this amnesty program will add a few billion Rand to the coffers as a one off and also increase the tax base for the future.
  • The continued effect of applying current legislation more effectively should also enhance the SARS revenue take. The Davis Tax commission made special mention of this as pertaining to the taxation of trusts, both local and offshore.
  • March 2017 also sees the implementation of new legislation that applies to loan accounts from an individual to trusts. We could very well see further avoidance measures targeting trusts that will continue to make them a less favourable tax vehicle within which to hold assets.
  • All of the above points are valid and will add revenue to the state coffers. But they avoid the “elephant in the room”, which is an increase in the VAT rate. A 1% increase in the VAT rate is estimated to add about R14bn to the bottom line in a fairly short space of time. But such an action will prove to be very unpopular at the polls and with trade unions.

All in all, Pravin Gordhan and his team have a very delicate and difficult task awaiting them. Walking the tightrope between stimulation of the economy, appeasing the populace and showing fiscal prudence is not a job for the faint hearted. As South Africans, we should all wish him the best of luck and wisdom, and hope that his steady hand remains on the wheel for a considerable length of time.

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