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By Harry Joffe: Head of Marketing Legal for Discovery Life and Discovery Invest
Budget 2020 has as its main surprise the tax increases that did not happen. With all the experts predicting major increases in value added tax (VAT), capital gains tax (CGT) and marginal rates, Minister Mboweni went the opposite way.
As he said in his budget speech, “Over the past five years, Government has increased rates of personal income tax, dividends tax, capital gains tax and VAT, while raising the fuel levy and excise duties on alcohol and tobacco. The tax-to-GDP (gross domestic product) ratio has steadily increased over this period, reaching 26.2 per cent, which is close to its democratic-era peak of 26.4 per cent in 2007/08. The 2019 budget announced that an additional R10 billion in tax revenue would be raised in 2020/21 to support fiscal consolidation. At the time, real GDP growth was expected to be 1.5 per cent for 2019 and 1.7 per cent for 2020.
Since then, the economy has faltered and growth estimates have been revised down to 0.3 per cent for 2019 and 0.9 per cent for 2020. Substantial tax increases may obstruct short-term recovery. As a result, Government will not raise any taxes to collect the additional R10 billion in 2020/21.”
Living up to the promise of not raising taxes
The Minister raised all the tax brackets at slightly more than the inflation rate, as well as the primary, secondary and tertiary rebates. Even the medical tax credits, which no one expected to be raised at all, were slightly increased to R319 for the main member, R319 for the 1st dependant and R215 for each additional dependant thereafter. In addition, the annual limit on contributions to tax-free savings accounts will be increased from R33 000 to R36 000 from 1 March 2020.
Company tax rates likely to reduce in the future
More importantly, Minister Mboweni recognised that South Africa’s company tax rate is increasingly becoming uncompetitive saying, “South Africa’s corporate income tax rate has remained unchanged at 28 per cent for more than a decade. As the gap with our trading and investment partners grows, the country’s relative competitiveness declines. India, the United States and the United Kingdom have all recently reduced their corporate income tax rates below 28 per cent. Reducing the corporate income tax rate will encourage businesses to invest and expand production, and improve the country’s competitiveness as an investment destination…”
Although the company tax rate was not reduced in this budget, it is likely to happen soon in the future; after legislation can be put in place to limit corporate interest deductions and to combat base erosion and profit shifting.
Tax changes for South Africans abroad
The Minister also announced some transfer duty relief, by increasing the various bands to allow for inflation, but most important were the proposed changes in terms of expats and South Africans living offshore.
Firstly, the Minister announced an increase to the cap on the exemption of foreign remuneration earned by South African tax residents working abroad to R1.25 million per year from 1 March 2020. This exemption has now been increased before it has even come into force!
Secondly, Minister Mboweni announced that the whole concept of emigration through the Reserve Bank will be phased out, and that “natural person emigrants and natural person residents will be treated identically. Additional restrictions on emigrants – such as the restrictions on emigrants being allowed to invest, and the requirement to only operate blocked accounts, have bank accounts and borrow in South Africa – will be repealed”. This will be replaced by comprehensive tax verification.
Conclusion
While the relaxation on the foreign exchange control administrative requirements are to be welcomed, it does create some interesting uncertainties. Currently, to cash in a retirement annuity, an individual has to be below the age of retirement on his contract and emigrate formally through the South African Reserve Bank. How will this process work now, if emigration will come to an end? It seems that the South African Revenue Service will require the individual to end his tax residency in South Africa, but that is not so simple. Although there is the time-based test [based on the number of days spent in South Africa], there is also the “ordinarily resident” test, which can deem an individual to be a tax resident in South Africa even if he has not lived in the country for a few years.
It is hoped that the National Treasury will make the rules regarding cashing in of retirement funds on leaving South Africa simple and easy for people to understand. If that is the case, then the ending of the requirements to emigrate will be welcomed by all.
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Discovery Bank is an authorised financial services provider.
This article is sponsored, written and provided by Discovery Bank.
