Tax, tax and less tax?

In terms of VAT, Meiring says that R80bn was raised last year, and the rate has been constant for 10 years – a significant achievement – and 6.5% of GDP, and a VAT reduction is not on the cards. Meiring is the business environment manager at OMAM SA.

Angelo Coppola reports from Cape Town.

The fuel levy generates about R16bn last year. At the moment there may be a piggyback option could be introduced as provinces get on the bandwagon.

There is some talk on the environmental taxes, all creative thought processes at the moment.

He expects an adjustment in personal income tax, a discussion on retirement fund tax (RFT), and dealing with this inappropriate tax. At the moment it is at levels that most individuals aren’t even taxed at.

Added to which and at the core of most discussions in terms of personal and corporate tax, Meiring said that in 1997 SA was promised simplification of the tax system. Everything but simplification is the norm. Complexity means there can’t be compliance.

Business confidence thrives is they understand what they are paying for and don’t have to pay one cent more than they have too.

Tax

Retirement fund tax (RTF) as a percentage and rand value has dropped by 29.6% since last year, and in rand terms from R6.96bn to R4.89bn. As a percentage of tax revenue the drop has been from 2.5% to 1.6%, with a drop as a percentage of GDP, from 0.6% to 0.4.

The macro issues must be understood. The scene: the overall level of tax to GDP is generally below 25% of GDP and government has done this well. There is some concern – the level could exceed the 25% level, for the first time since the new government stepped in.

One of the bigger issues is the split between direct and indirect taxation. SA is out of sync with the rest of the world – we are in 60:40 split – in favour of direct taxation.

Added to which the acid test is tax administration and collection. Here government has been highly efficient in the past six years – but the tax gap is still very significant – there are 11.3m economically active people, 7.4m of them are known to SARS, with the 3.9m not known to SARS. Some 34% don’t contribute. A lot can still be done on the individual front.

On the collection front, there is institutional change. SARS has put systems in place, and it is rumoured that high net worth individuals may soon be the target in the SARS system, because of their links into big business.

Turning to personal income tax, there has been lots of relief over the past 10 years – and R4bn relief last year. Importantly though one of the reasons for this is due to the introduction of new forms of tax – like tax on retirement funds – which is responsible for some R5bn per annum, down from R6bn some time ago.

RFT is dealt under individual income tax – it was temporary in 1996, nearly 10 years later and its still there. This generated significant amounts of revenue – R39.49bn in that time.

Even in the current environment where we are looking at the retirement fund reform, people must understand that empathy and taxation should follow regulatory environment, says Meiring.

This is not the case when discussing RFT. This is an ad hoc levy of existing members of pension funds. Nothing in the current proposals stands in the way of reductions. There can be direct relief and people can actually begin saving and it wont affect consumption.

This may be the year – Meiring wants 15% or even 10%. But he warns that it could cost too much to get rid if it all together, as it raised nearly R5bn last year.

This tax deduction has a huge compound effect over 30 years, on pension funds. It is a massive drain and will only be felt over the long term

Meiring says that the finance portfolio committee has been supportive and wants to address this issue. The delay has caused harm and is unacceptable, according to the portfolio committee.

Tax incentives for savings have increased significantly. But is this a concession or not? Meiring says that this is not an incentive to save. As it stands it is only of any use for people in retirement and who are drawing from their savings. But what about the man in the street? How many people utilize this R11 000 incentive – not many?

The retirement annuity deduction is probably a better target, suggests Meiring, who explains that this amount has been in place for 20 years. The problem is that those that aren’t tax payers fall outside of this particular net.

A government or national savings fund – flawed as it is, is something to work with, and could be the solution. The problem is that the majority of locals can’t provide appropriately and the burden of social pensions would be unbearable. The debate here has to be creative.

Meiring says that the upper thresholds could be tested, to deal with the fiscal drag issues. There has been significant relief across the spectrum.

On a corporate level, Meiring says we shouldn’t forget where the corporate tax rates were, including STC, several years ago.

So how competitive are the local corporate tax rates. They aren’t. There is pressure to look at the STC rate, and perhaps remove it. It’s difficult to understand internationally. It has forced corporates to sit on cash piles. Bear in mind however that STC raised R6bn last year.

The relief aimed at SME market and the 15% tax on the first R150 000 is something that Meiring feels strongly about.

This needs to be reviewed and perhaps doubled to make it viable. It should be extended to include companies other than manufacturing. Service companies are where the growth is. He wants to extend this. SME are the most productive sector of the economy.

He anticipates that it wouldn’t cost the government R1bn, but the upside would be tremendous. SME growth is the key, and the incentives need to be increased to R300 000. The tax gap must be closed.

Notes:

* Employer provider medical benefits – the issues here are unclear as the bigger health provision issues remain unresolved – there is no debate in Nedlac.

* Health related issues – employer provides chronic medicine at the workplace – and there is one tax treatment, while those being treated with anti retroviral off the shop floor are treated differently from a tax perspective.

* Employer provided car allowances will be addressed – because these remain easy to manipulate.

* Tax and exchange control – the lawyer in Meiring says that the R65bn identified offshore – and a payment of a levy to resolve - would only make it fair that the law abiding citizen get the option to take more than the R750k allowance offshore.

* CGT and indexing was discussed, with the decision to review regularly. Time has come to review now. This ill-advised tax is flawed.

* CGT and investment in unit trusts has to also be addressed. The time has come.

* Estate duty needs to be addressed.

* Transfer duty was increased last year to exclude low-cost housing. The impact is a money spinner. R6.9bn from property sales last year and the quirks need to be ironed out.

* There has been significant focus on hybrid instruments – and revenue generated here will be significant. IT was pegged at R700m a couple of years ago, and set to grow. SA should follow the international best practice. Structured finance is the target and information is key.