Every year, Trevor Manuel emphasises how much tax is given back to taxpayers in the form of income tax relief. In the 2009 Budget Review the South African finance minister explained that tax relief would compensate taxpayers for wage inflation or fiscal drag. Fiscal drag occurs when wage increases cause the average rate of tax paid by individuals to increase as a result of wage increases being subject to tax at marginal rates.
But who really benefits from these adjustments and how have other changes affected the annual adjustment of tax tables and rebates and most importantly the taxpayers’ average tax rates?
Kyle Mandy, head of national tax and technical for PricewaterhouseCoopers SA says, “We examined the case of low income earners through to high income earners and make use of practical examples to help you understand the true effects of the tax relief. The only way to accurately gauge whether tax relief had an effect on the taxpayers is to select a base year for comparative purposes.”
Mandy uses this technique, combines it with hypothetical salary packages that increase over time and considers the inflation rate applicable to the preceding year.
Comparative tables are used to clearly illustrate the results. Some of the findings prove that while low-income earners experienced an approximate drop of 50% in their average tax rates since the 2002 tax year and that middle-income earners enjoyed a decrease of approximately 20%, higher salary earners have only benefited from a drop of approximately 12.5%.
However, Mandy does point out that the evaluation doesn’t paint the full picture. “As we all know, Manuel usually gives with the one hand while taking a bit with the other.
Unfortunately, much of what he takes is in the form of indirect taxes, making an assessment of the overall tax burden of individual taxpayers extremely difficult to assess in any given tax year, let alone over a number of tax years,” says Mandy.
However, the regular reduction in tax efficient structuring opportunities available to salaried taxpayers can be assessed. Over the past few years, Manuel managed to significantly reduce a number of structures commonly used by higher-income earners to reduce their overall tax burden. These include:
1. The elimination of deductions to entertainment expenditure in the 2002/3 tax year,
2. The capping of tax-free contributions to medical schemes in the 2006/7 tax year,
3. The increase in deemed private mileage for travel allowance purposes in each of the 2005/6 and 2006/7 tax years.
4. The capping of vehicles costs and taking into account of residual values in the 2005/6 tax years.
All in all, taxpayers have generally enjoyed real tax relief over the last eight years or so. But, the dangers of cutting tax relief for middle and high income earners are real and can’t be ignored.
Another factor that needs to be taken into account is the fact that the deemed travel expenditure table is not adjusted on an annual basis and this results in a significant fluctuation in the tax rates of taxpayers receiving travel allowances.
For example, a middle-income earner with no travel allowance sees his average tax rate increase by only 0.1% for the 2009/10 tax year, but such an earner receiving a travel allowance sees an increase in his average tax rate of 0.4%. The difference is attributed to the fact that the travel allowance cost tables haven’t been adjusted between the 2008/9 and 2009/10 tax years.
Notwithstanding the above, the average tax rates of our hypothetical middle and high-income earners for the 2009/10 tax year are still significantly less than those for the 2001/2 tax year, although the real relief is significantly less at average tax rates of 84.7% and 92.8% respectively of the average tax rates for the 2001/2 tax year.
Mandy says, “Of some concern is the shift of a significant portion of the aggregate individual tax burden from low-income earners to middle and high-income earners as a result of the greater real tax relief given to low-income earners. While tax relief for low-income earners is an admirable policy, it must be borne in mind that South Africa's tax regime is already massively redistributive.”
Making the tax regime even more redistributive is likely to impede South Africa attracting and retaining critical skills that it desperately needs in order to grow the economy at a satisfactory and sustainable pace.
In this regard, certain of the proposals made in the 2009 Budget Review are cause for concern, especially the change to a credit system for medical scheme contributions capped at 30% of the current deduction to be introduced in two years and the scrapping of the deemed business kilometre regime for travel allowances proposed to be implemented for the 2010/11 tax year.
Get the latest issue of FAnews