Which taxpayers have received real income tax relief over the years?

Each year Treasury emphasises the income tax that is ‘given back’ to taxpayers, particularly the low wage earners. This comes mainly in the form of an annual adjustment to tax tables and increased individual rebates, compensating for wage inflation or ‘fiscal drag’.

Kyle Mandy, Head: National Tax Technical at PricewaterhouseCoopers SA, asks how much real tax relief has truly been provided over the years, and which taxpayers have really benefited.

Using hypothetical taxpayers and structured inflation-adjusted salary packages across three income groups since the 2001/2 tax year, Mandy says that tax relief is evident in all groups. “However the low income groups have been the most obvious beneficiaries.”

For a specific low income earner, earning around R167 000 currently, the average effective tax rate has nearly halved from 16.4% for the 2001/2 tax year, to 8.7% for the 2009/10 tax year. “The tax burden in this case has fallen dramatically” highlights Mandy. “The taxpayer is paying less tax in monetary terms in the 2009/10 tax year than in the 2001/2 tax year, even though the remuneration package has increased by more than 67% in that period. Low-income earners can definitely be satisfied with the tax relief received over the past several years.”

Analysing middle income earners (around R670 000 total package in current terms), real tax relief between the 2002 and 2010 tax years has been far more muted. “While our low-income earner has seen his average tax rate almost halved, our middle-income earner's average tax rate has declined by only 20% from the 2001/2 tax year, going from 30.7% to 24.6% in this period. Of specific concern is that no real tax relief has been granted to this class of taxpayer since the 2007/8 tax year and in fact, there has even been a small element of fiscal drag.”

Evaluating high-income earners (around R1,2 M in current terms), Mandy says that real tax relief is even less. “The average effective tax rate of the high-income earner has moved to 29.5% in 2009/10, from 33.7% in 2001/2, a reduction of only 12.5%.”

A concerning trend is that real tax relief to low income earners comes at the expense of middle and high-income earners. “While tax relief for low-income earners is an admirable policy, South Africa's tax regime is already massively redistributive. Making it even more so could impede us attracting and retaining critical skills required for growth” says Mandy.

The shifting of the tax burden has come about partly by eliminating or significantly reducing employee tax benefits commonly used by middle/high-income earners. These include the:

· elimination of entertainment expenditure deductions (done in 2002/3);

· capping of tax-free contributions to medical schemes (done in 2006/7);

· increase in deemed private mileage for travel allowances (done in both 2005/6 and 2006/7);

· capping of vehicle costs and the inclusion of residual values for travel allowance purposes (done in 2005/6); and

· failure to annually adjust the deemed travel expenditure table.

There are more adjustments in the pipeline which will further burden higher income groups. The proposal to change the medical scheme contribution deduction to a credit system will benefit taxpayers with current taxable incomes of R210000 or less, and who are taxed at current maximum marginal rates of tax of up to 25%. For a middle-income earner, this change would raise the average tax rate for the 2009/10 tax year by 0.3%.

Additionally, the already promulgated scrapping of the deemed business kilometre regime for travel allowances, will hit hard. For a hypothetical middle-income earner with limited business travel, this new regime could increase his average tax rate by 2.5% (R16394) if it was applied in the 2009/10 tax year. His average tax rate lifts to above 2002/3 levels and reverses any real tax relief enjoyed since that time. Obviously, the higher his actual business travel relative to his deemed business travel, the more muted will be the effect of this amendment.

Mandy concludes that while all taxpayers have enjoyed real tax relief in the past decade to some degree or another, this is in significant danger of being eroded, and especially so for middle and high-income earners. “We saw significant reductions in the average tax rates in the 2002/3, 2003/4 and 2006/7 tax years. However, real tax relief has been notably more muted since the 2007 Budget, with no real tax relief being granted in the 2008 Budget, and limited relief given in the 2009 Budget. The 2010 Budget will be one of the most challenging in light of the downturn, constrained consumer spending and tax revenue collection shortfalls. We may see some relief being given to lower income groups, but it is highly unlikely that middle and high income earners will be pleased.”