Tax commentary
By Michelle Human, Senior Legal Specialist for Liberty Retail SA
The 2011 Budget Speech introduces some interesting changes to the law applicable to the taxation of retirement funds. Starting in March 2012, an employer’s contribution will be treated as a taxable fringe benefit, and employees will be able to deduct up to 22.5% of taxable income for their contributions to approved retirement funds. A maximum of R200 000 a year will be deductible. It is also proposed that the one third lump sum withdrawal amount allowed from pension fund and retirement annuity funds should be extended to provident funds as well. This is in the interest of protecting retirement savings and making sure that they are used only to provide an income during retirement, and not to satisfy short term goals.
Budget Speech 2011 commentary – broader outlook
By Tendani Mantshimuli, Consumer Economist at Liberty Retail SA
The South African economy has recovered from the recession of 2009 but the recovery is still fragile. Economic output increased at a better than expected rate of 4.4% in fourth quarter of 2010, bringing the overall annual growth for 2010 to 2.8%, up from the decline of -1.7% recorded in 2009. This made the economic landscape somewhat easier for Finance minister Pravin Gordhan to deliver his second budget. With the fragile economic recovery, government revenue has improved on the back of better individual and company tax collection. While the level of unemployment remains unacceptably high, the rate of retrenchment has declined with some jobs created in the last quarter of the year, bringing the unemployment rate to a marginally lower (24,0)% in fourth quarter of 2010.
As a result of the improved economic environment the budget deficit amounted to a projected 5.3% 2010/11and the outlook is for a further down to 4.8% in 2011/12. The minister was also able to provide some relief to low income earners and the poor in particular. He also provided some clarity on two burning questions: the job creation drive and funding for the National Health Insurance (NHI).
Priority areas
The priority areas that were highlighted in the budget are basically the same as those that were put forward in the New Growth Path:
Ø Continuing and broadening public investment and infrastructure
Ø Targeting more labour-absorbing activities in the agricultural and mining value chains, manufacturing, construction and service
Ø Promoting innovation through ‘green economy’ initiatives, and
Ø Supporting rural development and regional integration.
The budget commits to the priority areas listed above, which if followed through will result in sustainable economic growth with better job opportunities than the economy currently provides. The biggest challenge will be on the execution. There hasn’t been much clarity provided on exactly how jobs will be created and this will probably be made clear in the individual departmental budget votes. The priority is to create jobs for young people between the ages of 18 and 29 years who are unemployed and have nothing to look forward who, if their job expectations are not met, could be a recipe for social unrest. It was encouraging to hear that government is not planning to embark on austerity measures similar to those adopted in some advanced economies, fiscal policy will continue to be counter-cyclical in a disciplined manner supportive of growth.
Economy
The Treasury forecast for economic growth for 2011 is 3.4 %; this is expected to increase to 4.1% in 2012 and 4.4% in 2013. Government expenditure is expected to continue supporting growth which will also be boosted by the global economic recovery and improved commodity prices. There’s been an improvement in household spending and investment supported by some steady employment gains which will help sustain the economic recovery from increased investment sector by both government and the private sector where growth is expected to increase from 3.9% in 2011 to 6.8% in 2012. Export growth is expected to average 6.5% a year over the medium term as commodity exports benefit from strong demand and high prices.
The forecast for inflation still puts inflation within the upper band of the target band; however, the minister does acknowledge that there are serious upside risks that might jeopardise this goal. These include rising food and oil prices. The current account deficit is expected to widen from 3.2% of GDP in 2011 to 5% in 2013, hopefully from expansion in investment and not consumption expenditure.
Social
Government continued to expand the social grants network with the last announcement that there will be a phased extension of recipients of child support grant up to 19 years as announced by the State President in the State of the Nation address. In this budget, provision was made for increase of old age and pension grant increasing by R60 to R1 140 a month while the child grant increases by R10 to R260 in April and R270 from October. This is an important source of income to the poorest section of our population and reaffirms government’s stated commitment to improve the lives of even poor South Africans. All in all R97,6 billion has been allocated for this.
An extra R7bn was allocated to municipalities to cushion the poor somewhat from impending electricity and water tariff increases.
Tax Relief
There were no major changes in tax policy for individuals or companies. In line with the weaker revenue stream this year’s budget delivered tax relief of R8.1 billion across the board, modestly up from the R6.5 billion awarded in the 2009/10 budget. The lower income groups will benefit more. This is mainly to counter the effects of inflation. This is important as it will increase consumers’ disposable income and get them spending again; consumption expenditure by households constitutes about two thirds of GDP. For sustainable economic recovery to take hold, it’s important for private sector demand to increase and not depend on stimulus spending from government.
Saving incentives
In line with what the minister called “government’s goal of encouraging greater national savings” the tax free savings thresholds of interest and dividends were raised from R22 300 to R22 800 for taxpayers under 65 and from R32 000 to R33 000 for those over 65 years of age. Considering how tight the budget is this really shows that saving is considered a national priority if government set this incentive aside.
Excise Taxes
As expected, taxes on the so-called sin taxes increased. For example, a packet of cigarettes will cost 80 cents more, a 340 can of beer will be 6.4c more, while a 750ml bottle of spirits will set you back R2.86c more.
The ad valorem tax on motor vehicles will increase to 25% for vehicles over R900 000, not many South African will be affected by this, fortunately.
Also, to add to the expected increase in petrol prices as a result of rising oil prices, there will be an increase of 8c on fuel levy, not good news for disposable income. As expected we’re going to see a carbon emissions tax on new motor vehicles soon in line with government’s commitment to preserving our environment.
Policy announcements
NHI
As a start there will be a roll out of a rural health programme which is a precursor to the full National Health Insurance. Funding options include a payroll tax payable by employers, which will add cost to employers; an increase in the VAT rate although that remains a political hotcake particularly with the unions; and a surcharge on individuals’ taxable income. The minister emphasised that these are options only and that there will be full consultation beforehand.
Employment; particularly youth
Ø The learnership incentive scheme will be extended by a further five years
Ø A youth employment subsidy in the form of a tax credit costing R5 billion over three years, to be administered by SARS
Ø To support the objectives of the industrial policy action plan and the New Growth Path, certain investments qualify for tax relief. Consideration will be given to expanding such incentives for labour-intensive projects in Industrial Development Zones.
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