All we want for….Budget 2008

With the 2008 Budget Speech this week, I am sure there are many of us asking ourselves “If I were Trevor Manuel……?” This question is particularly difficult, given the challenging economic environment facing our country. A reflection on the past year will reveal multiple interest rates increases, soaring fuel prices and a CPI annual inflation rate at November 2007 of 8,4%. And against a gloomy global economic outlook, this is not a pretty picture for the millions of South Africans struggling to squeak out an existence.

With the decrease in the rate of Secondary Tax on Companies from 12,5% to 10% (effective 1 October 2007), the effective corporate tax rate has dropped from 36.88% to 35.45%. This reduction is important for taxpayers that are self employed and who make use of a corporate entity through which to trade. In these instances, the option to draw remuneration (salary, benefits etc) versus dividends, if properly managed, can be extremely tax effective, given the widened gap in the maximum marginal rate of tax for individuals of 40% and the effective corporate tax rate of 35.45%. As individuals are taxed on a sliding scale of rates, this comparison needs to be applied with reference to that scale. The maximum marginal tax rate (of 40%) is currently triggered at a taxable income exceeding R450,000, while a marginal tax rate of 38% applies to taxable income exceeding R350,000. What this means is that once an individual taxpayer derives taxable income of R350,000, any additional taxable income would be more effectively earned if it were taxed through a corporate structure and paid as a “tax free” dividend. To illustrate this principle, take a taxpayer with taxable earnings of R1 million. If this amount were paid to him as remuneration, his tax bill (before rebates) would be R351,125. Through proper structuring (i.e. R350,000 remuneration and R650,000 dividend), the tax (before rebates) drops to R316,580, a tax saving of R34,545.

Clearly this disparity is one that needs review. Furthermore, where taxpayers qualify for the beneficial tax rates afforded to Small Business Corporations, this gap is even greater. For the majority of South African taxpayers that are salaried earners, there is no luxury of structuring their tax affairs in this way. So “If I were Trevor Manuel…..” I would carefully review individual tax rates, ideally narrowing the gap with the corporate tax rate or alternatively extending the thresholds at which that higher rates are triggered.