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The 2018 Budget Speech and its tax implications

on Wednesday, 14 March 2018.

The 2018 Budget Speech and its tax implications

The 2018 budget speech was delivered on 21 February 2018, this article will summarise the most important tax amendments.

This was a difficult budget and it was indeed tough on the taxpayer. You could argue that the VAT rate increase is extremely harsh, however in my opinion the only other option was to further burden the higher income earners with income tax or increase the corporate tax rate. Neither of which were really an option since in my opinion both the individual taxpayer and corporates are over burdened as it is.

Make no mistake, the higher earning individuals have not escaped the recoupment of the shortfall. The top 3 brackets on the individual tax table brackets were not adjusted for inflation. Meaning that if your salary increases with inflation you will possibly fall in a higher tax bracket due to your salary being adjusted for inflation but not the tax table brackets (the so called bracket creep).

Government plan to collect R1 345 billion in the 2018/19 tax year with the following split:

Personal income tax R505.8 billion (38%)

VAT R348.1 billion (26%)

Corporate income tax R231.2 billion (17%)

Customs and excise duties R97.4 billion (7%)

Fuel levies R77.5 billion (6%)

Other R84.8 billion (6%)

Screen Shot 2018 03 14 at 13.53.06

 

Personal income tax statistics

Based on the figures released by SARS regarding the 2016 tax year (source http://www.sars.gov.za/About/SATaxSystem/Pages/Tax-Statistics.aspx) the following is some interesting graphs.

Percentage of taxpayers in income groups (for example 13.4% of the number of taxpayers earn above R500 000 per annum)

Screen Shot 2018 03 14 at 13.53.40

Percentage of taxable income (amount that is taxable NOT the actual tax) in income groups (for example 42.5% of the taxable income of taxpayers consists of taxpayers who earn above R500 000 per annum)

Screen Shot 2018 03 14 at 13.53.46

Percentage of assessed tax (actual tax paid over to SARS) in income groups (for example 63.9% of the tax assessed by SARS of taxpayers consist of taxpayers who earn above R500 000 per annum)

Screen Shot 2018 03 14 at 13.53.52

Thus if we review the split of the 2018/2019 tax revenue adjusted to show the amount personal income taxpayers earning above R500 000 per year are contributing to the total:

Screen Shot 2018 03 14 at 13.53.29

It can now be seen that personal taxpayers earning above R500 000 per annum contributes approx 24% of the total revenue collected by government. Remember that this is projected 2018/19 revenue and the percentages used based on 2015/16 tax year data.

Keep in mind that these group of taxpayers (earning above R500 000 per annum) are also indirectly taxed with VAT, Dividend tax, donations tax, estate duty and fuel levies. Thus indeed a group that is taxed heavily and in my opinion the reason that it was decided to increase the VAT rate and not again put the full burden on this group.

Herewith a summary of the changes:

VAT rate increase

The VAT rate will increase from 14% to 15% effective 01 April 2018. This is the first increase in the VAT rate in 25 years. 

Tough on everyone.

Change in Rebates

The primary rebate changes from R13 635 to R14 067 (3.16% increase), which is below inflation.

The secondary rebate (persons 65 and older) changes from R7 479 to R7 713 (3.12% increase), which is below inflation.

The tertiary rebate (persons 75 and older) changes from R2 493 to R2 574 (3.24% increase), which is below inflation.

No relief here, the fact that the increase is below inflation indicates that the taxpayer will in effect be paying more tax.

Tough on all personal tax payers.

Change in Tax Thresholds

The changes in tax thresholds off course directly translates from the change in the rebates (total rebate divided by the minimum tax rate)

Persons below the age of 65 with income less than R78 150 (R14 067 / 0.18) will not have to pay tax.

Persons 65 and older, but younger than 75 with income less than R121 000 (R21 780 / 0.18) will not have to pay tax.

Persons 75 and older with income less than R135 300 (R24 354 / 0.18) will not have to pay tax.

Same as with the rebates (direct translation), the fact that the increase is below inflation indicates that the taxpayer will in effect be paying more tax.

Dividend Tax Unchanged

The dividend witholding tax rate is unchanged at 20%. 

It is positive that there was no increase here as this will be good for investor confidence.

Interest Exemptions

The interest exemptions stays unchanged at R23 800 for persons younger than 65 and R34 500 for persons 65 and older.

Effectively this will result in more tax being paid be the taxpayer since there was no adjustment for inflation.

Retirement fund contributions

Nothing changed here (see https://www.chconsulting.co.za/blog/item/tax-deductions-for-pension-retirement-and-provident-funds-simplified)

The fact that the maximum contribution of R350 000 was not increased is again a decision that will result in the taxpayer paying more tax since there was not adjustment for inflation.

Medical aid tax credits

The medical aid tax credit for the main member and first dependant changed from R303 to R310 (2.31% increase). The credit for each additional dependant increase from R204 to R209 (2.45% increase).

This again is below inflation and will effectively result in more tax for the taxpayer.

Change in donations tax

The donation tax rate has changed from 20% to 25% for donations above R30 million. 

This change targets the very wealthy and should not have an effect on most taxpayers.

Change in estate duty tax

Similar to donations tax the estate duty tax increases from 20% to 25% for estates with a value of above R30 million.

Change in fuel levy

The general fuel levy increases by 22%

Tough on everyone.

Change in personal income tax brackets

The first three brackets we adjusted for inflation of about 3.1% increase and last three brackets were not adjusted for inflation. As explained in the introduction this effect is felt for the income group earning above R500 000 per annum (or if you want to be technical above R423 300 in the 2018/19 tax year)

The conclusion is that this was a tough budget on everyone, whether you are a personal income tax payer or just making use transport and buying food from social grants received and whether you earn very little or a lot.

Author: Chris Herbst, CH Consulting

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