Budget 2017 – Focussing on what matters

While the budget has long past, people will be looking back at it only now feeling the full impact of the announcements made by Pravin Gordhan at the end of February.

The main purpose of the budget was to instil a measure of discipline in the economy in the hopes of avoiding a downgrade to junk status. However, some people would not be aware of how the budget will impact them over the long term.

Wealth tax issues

While the increase in tax on the wealthy is the most eye-catching change, this will only impact around 100 000 tax payers. The real concern is that there has been little increase in tax brackets, leading to what is termed bracket creep. This is much steeper than the numbers that are grabbing the headlines.

If you are a normal salaried worker, your tax will go up by more than inflation if you move up the brackets, leaving you with less money to pay bills. This silent increase in tax is likely to raise more than three times more money than the tax on the wealthy.

Individual income tax is the simplest source of revenue to adjust but it was already raised two years ago. It will be difficult to justify any increase since they are not able to show an improvement in curbing wasteful expenditure and combatting corruption.

Once again, Treasury will need to balance its need to raise gross tax revenue in the short term with the need to encourage increased investment and growth in the country. Raising taxes on high-net-worth individuals may actually drive them to emigrate to more tax favourable jurisdictions, which means taking their money out of the country.

Dividend withholding tax

There was an increase in dividend withholding tax from 15% to 20%. While this may have surprised some, there is logic behind the rationale. Dividend withholding tax was introduced in 2012 to replace secondary tax on companies. It affects the dividends portion of your investment’s overall return.

It makes sense that it has gone up to keep in line with the increase in income tax, as if you own a company, you may pay yourself a dividend instead of a salary, and this keeps the rates paid on each of these routes in balance.

Retirement at tax free savings

Retirement fund investors and investors in tax-free savings accounts are not impacted by dividend withholding tax discussed above. However, the increase in contribution limits for tax-free investments may seem a little disappointing to some people.

When things are tight you need to budget carefully, but tax-free investments are encouraging more people to save, and the increase could have been more significant without having a big negative impact on the fiscus.

Contributions to a tax free investment account are limited to R33 000 per tax year and R500 000 in total, and cannot be replenished if withdrawn. The structure is therefore not ideal for short-term savings given the restriction on lifetime contributions.

However, at the end of the day, it must be remembered that Retirement funds remain the best option for long-term savings allowing contributions of up to 27.5% of taxable income up to a R350 000 limit.

Provided investors reinvest the tax deductions received from the South African Revenue Service on contribution, retirement funds provide a tax-efficient option for long-term savings.

Alternative investments

Those who are saving over a shorter or medium term period should consider the potential tax benefits of an endowment for investment terms exceeding five years.

An endowment is taxed in the hands of a life company and not the investor, removing any tax reporting responsibility from the investor.

An investment option suited to short-term savings (less than five years) is a normal discretionary investment.

It provides unrestricted access to savings and investors benefit from interest exemptions and capital gains tax exclusions. Annual interest exemptions are R23 800 for those under 65 and R34 500 over 65, while the exclusion amount is R40 000 capital gain.

The regulator has indicated that interest and capital gain exemptions will not be adjusted for inflation going forward, so while they hold value in the short term, the benefit will diminish in the long term.

The curious case of VAT

One of the biggest talking points leading up to the budget speech was whether there would be an increase in the VAT rate. 

This has been a topic of debate for a while now. One the one hand, increasing the VAT rate would be one way to broaden the tax base. However, the African National Congress relies heavily on the votes of the poor and vulnerable sector of the economy which it argues will be the hardest hit if there was a VAT increase. 

Many commentators were happy that government never increased the VAT rate. However, there were some in the industry that feels that there would have been a benefit of a 2% increase. 

Raising the VAT rate is the fairest and quickest way to increase revenue and it has remained unchanged for quite some time. It is also widely known that South Africa’s VAT rate is low when compared to other African countries, which is why there is a growing case that there is scope to increase VAT.

Tactically Treasury’s best best move would be to announce a 2% increase in VAT and to adjust that number down to 1% after the initial pushback from consumers.

Come what may, we desperately need to restore confidence in the economy. But in order for this to occur, government also needs to play its part.The responsibility to save this economy is now on us, whether we like it or not.

Overall sentiment

What were the sentiments of economic commentators regarding the budget?

The real loser from this Budget is the average South African taxpayer. If your salary goes up by inflation, but the tax brackets remain the same, you come out poorer. The increase in contribution limits for tax-free investments is a little disappointing. - Richard Carter, Head of Product Development at Allan Gray.

People need to focus on tax free savings. The impact on investment returns is becoming an important consideration for investors and smart investment decisions can boost returns. - Hugo Malherbe, Executive of Product Development at PPS Investments.

Government has done well to put out fires in the Medium Term Budget Policy Statement, and the cyclical drivers of gross domestic product growth have been performing admirably given our sluggish growth. This may well be a very balanced budget. - Lesiba Mothata, Chief Economist at Investment Solutions.

This was both a fascinating budget and a budget where Gordhan did the right thing… or was forced to do it. The 2017 budget was a real reflection of the pain felt by South Africans during the year. - Kevin Lings, STANLIB Chief Economist.