Finance Minister, Trevor Manuel will present the annual budget at 14h00 this afternoon. And as usual the business world will focus on every letter of his address.
Having just attended a pre-budget presentation at The Mount Nelson hotel in Cape Town, we thought wed share some of Old Mutual Investment Group's (OMIGSA) predictions before the speech gets underway.
Johann Els, economist with OMIGSA Economic Research believes Manuel will have as much as R15 billion to 'play' with in the 2007/2008 tax year.
The private taxpayer might be last in line
After years of concessions to private taxpayers, Old Mutual expects the current budget to offer less tax relief to individuals. Part of the reason for this is that further tax cuts would impact negatively on steps already taken by the Reserve Bank's to keep inflation in check.
Any large cut in the levels of personal taxation would once again boost the amount of disposable cash in the hands of consumers - nullifying the effect of last year's 200 basis point hike in interest rates.
Old Mutual Business Environment Manager, Abri Meiring, said that the best scenario for private taxpayers would be a reduction in the top marginal rate from 40% to 38%. However, this was unlikely and Manuel would probably be satisfied with slightly altering the existing tax bands to compensate for fiscal drag.
Tax on retirement funds
Tax on retirement funds has been steadily diminishing in past years. It is currently at 9% and Meiring believes government should abolish this tax entirely.
The life and investment industry is particularly interested in what any news on governments proposed National Pension Scheme. Such a fund was mentioned by President Thabo Mbeki in his State of the Nation Address earlier this month.
It is unclear exactly what measures will be introduced; but Meiring hopes the government will move to a TEE system. This means that money contributed to the retirement funds is taxed, the build up in the retirement fund is exempt and the money paid out of the fund is also exempt.
Meiring summarised Old Mutual's view on Social Security Tax. He believes that business and the Department of Social Development should hammer out a solution based on recommendations made by the Taylor Committee and by National Treasurys Retirement Fund Reform document. He stressed the importance of getting it right the first time, because this is not the type of thing you can chop and change at a later stage.
Could this mean the end of tax deductions for Retirement Annuity and Provident Fund contributions? And exactly how does Manuel propose to fund the National Pension Scheme? We will have to wait and see what the budget speech reveals.
Could business be the big winner this year?
The outlook for companies in this years budget is considerably rosier than that for private taxpayers. There is hope that last years expected reduction in the basic rate of income tax for companies will happen this year. This would result in the rate dropping from 29% to 28%.
Meiring also hopes that Manuel will announce a reduction in the Secondary Tax on Companies (STC). He believes that National Treasury should phase out STC and introduce a dividend withholding tax to bring SA in line with major economies around the world.
The beneficiaries of tax concessions to business will most probably be small businesses. It seems that the much publicised tax amnesty for small businesses has not had the desired result - and it will be interesting to see if any further plans to broaden the business tax collection net are announced.
Meiring believes there is a chance that the tax band for small companies will be raised, and the conditions for qualifying as a small company softened. The current income tax on small business is set at 10% on income up to R300, 000 (with the first R40, 000 exempt).
Look out for tomorrow's newsletter
Because the budget has such a huge impact on the South African economy, we will provide further comment on Manuel's budget speech in tomorrow's newsletter. We will focus on the impact the budget might have on retirement savings, in particular as it applies to the proposed National Pension Scheme.
Editor's thoughts:
There is plenty of speculation in the run up to the budget speech. If you listen to enough commentators you can predict the major changes with reasonable accuracy. Send an email to gareth@fanews.co.za with your thoughts on the 2007/2008 budget.
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