Mon, May 20, 2024

The official Financial Regulation Journal of SAIFM

No wealth tax but taxing the wealthy

Maarten Ackerman

In his 2018 Budget Speech, Finance Minister Malusi Gigaba has found a balance between raising taxes on the wealthy, broadening the tax base and providing a safety net for the poor. The rand appreciated somewhat and bond yields traded lower soon after the Minister started to speak, signalling firm approval from the markets.

Citadel Chief Economist and Advisory Partner Maarten Ackerman states that overall the budget was very balanced, acting largely to stabilise state finances and keep credit ratings agencies at bay.

“The figures overall were fairly conservative. Economic growth was estimated at 1.5% in 2018, and projected to rise to 2.1% in 2020. He also prioritised the need to address the growing budget deficit, aiming to reduce the deficit from an estimated 4.3% of GDP in 2017/18 to 3.6% in 2018/19.”

Faced with a R48.2 billion hole to fill, Gigaba found some interesting ways to raise the necessary revenue. His major tool is to raise the VAT rate from 14% to 15% – for the first time in 25 years – which will serve to broaden the tax base and is expected to yield R22.9 billion in additional revenue.

“While VAT is a regressive tax – hurting the poor more than the wealthy – this hike has been offset to some extent by above inflation increases in social grants, a more populist compromise ensuring that the effects are largely felt by higher income earners.”

“In addition to the zero VAT-rating on basic food items and fuel, lower income earners will also see some relief from an increase in the bottom three personal income tax brackets and rebates, whereas the top brackets will see no such relief.”

In total, the increase in indirect taxes is expected to raise R28.7 billion, with the balance coming from a 52 cent hike in the fuel levy, an increase in alcohol and tobacco product excise duty of between 6% and 10%, a rise in ad-valorem excise duty rate on luxury goods from 7% to 9%, higher environmental taxes and the introduction of a health promotion levy, also known as the ‘sugar tax’.

Direct taxes, which have borne the brunt of revenue increases in recent years, were also largely left untouched, although below-inflation adjustments to personal income tax brackets will raise an additional R7.5 billion.

“In one of the speech’s biggest surprises, however, the widely anticipated increase in Capital Gains Tax also did not materialise, nor was a new form of wealth tax introduced,” he says.

“Acknowledging that company tax is already at the upper end of the global scale, this was also left unchanged, which is important if government is to stimulate job creation.”

The total increase in tax revenue is R36 billion.

Ackerman notes that seen together with an anticipated R85 billion in expenditure cuts to be implemented over the next few years, the budget will likely be enough to stave off a credit rating downgrade in the short-term, but warns that South Africa will still remain at risk.

“Agencies will be watching closely over the next three to six months to see how policies addressing job creation, poverty and economic transformation are implemented,” he warns.

He further observes that in terms of budget allocation, social development was fastest growing expense item, followed by interest repayments on debt. This was largely driven by the allowance of R57 billion over the next three years for the funding of free higher education, although the budget remained hazy on where this revenue would be generated, he says.

“This also means that while government has managed to increase their support for vulnerable households and appease ratings agencies in the short term, this may have come at the expense of further infrastructure spending for the long-term.”

Lingering uncertainty over wealth and estate duty taxes

Despite the numerous tax measures introduced in the budget speech, uncertainty over future tax increases remains, says Citadel Fiduciary Managing Director Hilary Dudley.

For example, the estate duty rate increased to 25% on estates above R30 million, seeing National Treasury finally implementing one of the recommendations from the Davis Tax Committee’s (DTC) final report on Estate Duty, while the donations tax rate also increased to 25% on donations above R30 million.

This being said, there is still uncertainty over the implementation of other proposals made by the DTC, such as a possible increase in the estate duty exemption from R3.5 million to R15 million, the possible abolition of the spousal exemption from estate duty and Capital Gains Tax rollover, or the proposed changes to the taxation of trust income, she notes.

“In fact, the only mention made regarding the DTC was that government would respond to the DTC’s report on tax administration and introduce draft legislation to give effect to some of its recommendations this year. This means that South Africa is effectively heading into a fourth financial year with uncertainty around proposed changes to wealth taxes.”

Although the Minister suggested that the proposed tax changes will in total generate an additional R36 billion in 2018/19, estate duty and donations tax are historically not large contributors to revenue, she observes.

“However, the increase of these wealth taxes was a strategic move, in that Treasury has finally grasped the nettle and pulled the VAT lever.  Treasury cannot be seen to be taxing lower and middle income earners and disregarding the wealthy. From a tax point of view, the Budget seemed to balance calls to tax the wealthy with the need to broaden the tax base.”

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