South Africans anxiously await the 2011 Budget Speech during which it is hoped the Minister of Finance, Pravin Gordhan, will offer income tax relief.
This year’s budget will be challenging, given the projected shortfall in revenue collections, the state of the economy and the very significant slowdown in consumer spending. How will the Minister of Finance deal with individual taxpayers in the 2011 budget?
Whether real tax relief is given to taxpayers in this year’s budget remains to be seen. We don’t anticipate that this will be the case, however, particularly for high and middle income earners.
Have taxpayers received real income tax relief over the years?
In the 2009 Budget Review, the Minister stated that tax relief would compensate taxpayers for wage inflation or fiscal drag. Fiscal drag is the phenomenon whereby wage increases result in the average rate of tax paid by individuals increasing due to the effect of wage increases being subject to tax at marginal rates. Similar statements were made in the previous Budget Reviews. However, the majority of the tax relief continues to be allocated to low wage earners.
The only way to accurately gauge whether real tax relief has been given is to select a base year for comparative purposes, with a hypothetical salary and benefit package. Then increase that package for subsequent years by the inflation rate applicable in the preceding year to determine the tax payable in respect of each year and to compare the average tax rate payable in respect of each year.
When considering the case of a relatively low-income earner, the 2001/2 tax year is used as the base year. Individuals received an annual cost to company package of R100000 consisting of a salary of R80000, provident fund contributions of R10000 and medical scheme contributions of R10000 on made by the employer on behalf of the individual, a spouse and two children.
The package has been increased by the CPIX inflation rate as published by Statistics South Africa every December, maintaining the relative allocation of the package between salary, medical scheme contributions and provident fund contributions. The inflation rate for December has been chosen, as this is likely to have been the latest available data at the time of the Budget Review in February.
The hypothetical taxpayer’s average tax rate has nearly halved from 16.4% for the 2001/2 tax year to 8.7% for the 2009/10 tax year. As a result, the individual’s tax burden has fallen dramatically because the taxpayer is paying less tax in monetary terms in the 2009/10 tax year than in the 2001/2 tax year, despite the fact that the remuneration package increased by more than 67% in that time.
Significant reductions in the average tax rate occurred in the 2002/3, 2003/4 and 2006/7 tax years. A significant portion of the individual’s tax relief in 2006/7 was attributed to the change in the way in which the tax-free portion of employer medical scheme contributions was determined. Prior to 2006/7, an employer could contribute up to two-thirds of medical scheme contributions before they became fringe benefit in the hands of the employee.
As a result, if an employer paid the full contributions to a medical scheme, one-third thereof would be taxable in the hands of the employee. With effect from the 2006/7 tax year this system was changed to allow employers to contribute to medical schemes on behalf of employees tax-free up to a monetary cap depending on the number of beneficiaries. In the absence of this change, our hypothetical low-income earner would have had an average tax rate of 10.2% for the 2006/7 tax year.
Real tax relief has been significantly muted since the 2007 Budget with no real tax relief being granted in the 2008 Budget and (somewhat surprisingly given the economic conditions) a small amount of real tax relief in the 2009 Budget.
Low-income earners have every reason to be satisfied with the tax relief enjoyed over the last eight years.
What about higher income earners? For someone in middle management who we will classify as a middle-income earner, it is clear that real tax relief has been granted between the 2002 and 2010 tax years. This has been significantly muted compared to the low-income earner, however, who has seen his average tax rate almost halved. Middle-income earners average tax rate is at around 80% of what it was for the 2001/2 tax year.
It is concerning that no real tax relief has been granted to such taxpayers since the 2007/8 tax year. In fact, there has been an element of fiscal drag since then, although this is relatively small.
For high-income earners, the real tax relief has been even less with the average tax rate for the 2009/10 tax year at approximately 87.5% of that for the 2001/2 tax year. Nevertheless, it is clear that, on the face of it, all taxpayers have enjoyed real tax relief over the last eight years.
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