Johannesburg - The 2017 Budget Speech is all about tax, as Finance Minister Pravin Gordhan looked for creative ways to raise money and tighten expenditure while continuing to deliver on national priorities, says Nazrien Kader, managing partner of Deloitte Africa Taxation Services.
In his view, Gordhan's 2017/18 Budget is possibly the hardest any finance minister has had to put together since the dawn of SA's democracy.
"Gordhan’s speech took place against the backdrop of the International Monetary Fund’s forecast of a 0.8% national growth rate, an ongoing and historic drought impacting consumers across the country, rising food prices and consumer inflation, a volatile rand, low or non-existent savings, foreign capital outflow, and the spectre of a ratings downgrade. It is a daunting task to say the least," said Kader.
Gordhan had already warned in October that Budget 2017 would necessitate a rise in taxes. The Mini Budget projected that the fiscus would collect R23bn less revenue than that forecast in February 2016. This has now been revised to R30.4bn in the current budget. The 2017/2018 Budget would need to raise additional tax revenue by about R28bn – even after reducing the government expenditure ceiling by R10bn.
"This was an unequivocal notice that taxes would be raised. Since then, Minister Gordhan and his team have been working out how best to generate this additional revenue without penalising growth or exacerbating inequality," said Kader.
"Sticking and achieving new year’s resolutions won’t be easy against an expectation of moderate GDP growth recovery and backdrop of erratic weather patterns, rising food prices and consumer inflation, a volatile rand, low or non-existent savings, foreign capital outflow, and the continuous threat of a credit ratings downgrade."
GDP growth is expected to increase from 0.5 % last year to 1.3% in 2017, and will continue to improve moderately over the medium term.
In addition, Government net debt now stands at R2.2trn, or 47% of GDP. Interest payments are a rising share of expenditure and stands at R162bn.
"It is imperative that debt levels stabilise to manageable levels," said Kader.
The proposed expenditure for 2017/18 totals R1.56trn, projected revenues amount to R1.41trn. The balance of R149trn, or 3.1% of GDP, will be borrowed.
"Commodity prices, however, are in rebound and the exchange rate seems to have stabilised following its rapid depreciation last year, which both bodes well for business and investor confidence in this sector. For this reason as well as an increase in labour stability, corporate income tax revenues are projected to outperform government projections," said Kader.
"Disappointingly, no mention was made of any incentives to encourage investment in South Africa. However, legislation for mining development and land redistribution is on the cards. Currently there is no support for expanding the general manufacturing base in the country."
To ensure a balanced and sustainable recovery, the State will have to raise an additional R28bn in tax revenues. In part, this will be financed through the introduction of a new 45% tax bracket for higher income earners, impacting taxpayers who earn R1.5m or more per year, and allowing for a mere 1% inflation adjustment to tax brackets for all other taxpayers.
Individuals continue to carry the lion’s share of the tax burden, contributing an additional R16.5bn of this R28bn target for additional revenue.
There was no further news on the Davis Tax Committee proposals on estate duty and donations tax, but loans to companies held by trusts are now in the firing line.
"In addition, the tax rate applicable to trusts has been increased to 45%, which means that, although the inclusion rate stays the same, the effective capital gains tax (CGT) rate will go up to 36% for trusts. Similarly the highest effective CGT rate for individuals with taxable income over R1.5m will increase to 18%," said Kader.
"That could be a bitter pill for taxpayers to swallow but it remains a daunting task for the minister and his team to increase revenue without penalising growth or exacerbating inequality."
Limited tax relief for individuals
It wasn’t all take and no give from the finance ministry.
The cap on annual contributions to tax free savings accounts has been increased by 10% to R33 000, which has long been overdue. The cap on retirement fund contributions has been unchanged at R350 000. Supporting new entrants into the property market will be the increase in the threshold of the property value to R900 000 before transfer duty will become payable.
Previously, mining companies could waive debts and have no impact on the base cost of the assets acquired using the debt. In future, these debt waivers will reduce the base cost – a change which will align treatment of the mining sector with that of other sectors.
Debt waivers for dormant companies or companies in business rescue have been simplified by granting relief from income tax on waivers between group companies. Capitalisation of debt is allowed, but capitalised interest which was claimed as a deduction may be recouped according to the latest proposals.
Share buybacks will come under greater scrutiny, particularly where share buybacks are used to avoid payment of capital gains tax, or to substitute income tax with minimal capital gains tax, in artificial debt repayment schemes. Further amendments are on the table to close loopholes relating to tax on dividends.
A sugary tax remains on the agenda, as further consultations will continue during the year. The tax is aimed at combatting obesity and diseases such as diabetes, and is indicative of ways how government could expand the revenue base, while simultaneously achieving national objectives, in future.
The proposed carbon tax and its implementation date will be considered further in Parliament this year, and a revised carbon offset allowance regulation will be published in mid-2017.
During the first phase of the tax (until 2020), there will be no impact on the electricity price, suggesting that electricity generation will be carbon tax exempt. However, there is already a carbon tax on electricity in the form of an environmental levy of 3.5 cents per kWh.
Redistribution in support of education, health services and municipal functions in rural areas remains the central thrust of our spending programmes. Education receives a collective R320.5bn, with R31.6bn going to university subsidies and R15.3bn to the National Student Financial Aid Scheme.
In total, health receives R187.5bn, and social protection – which includes old age, child support and disability grants – receives R180bn.
Agriculture, rural development and land reform receives R26.5bn. Funds will also be allocated to drought relief for farmers and water-stressed communities.
Healthcare and National Health Insurance
Government remains committed to increasing investment towards health promotion and the National Health Insurance (NHI) is moving into the next phase of implementation with key lessons from the 11 pilot projects to be incorporated.
- Designing contracts with healthcare workers;
- More effective chronic medicine dispensing;
- Strengthening district health services;
- Supportive information systems.
The NHI Fund will be established during this next phase. Further details will be given in the adjustments budgets in October 2017, including details on longer-term financing arrangements.
The medical scheme tax credit was increased in line with inflation. Future tax relief for individual taxpayers remains uncertain as the concept of universal health coverage evolves. The tax credit is likely to be used to help fund NHI.
"Budget 2017 will see all of us pinching our pennies and tightening our belts. At the same time, we’re also expecting government to follow through on promised spending efficiencies such as a clampdown on wasteful expenditure, a zero tolerance approach to public sector corruption, a more efficient municipal rates system and a culture of thriftiness which permeates across government and parastatals. We will be judging the Minister on how and where our tax money is spent," said Kader.Read Fin24's top stories trending on Twitter: