By Ferdie Schneider, National Head of Tax at BDO
Minister Godhan delivered his first Budget Speech in a while on 24 February 2016. This has been mooted by many to be one of the most difficult budgets since 1994. The budget was delivered against the background of widespread speculation that the rating agencies are seriously reassessing rating South Africa down. This, in itself, would have a significant impact on the South African economy, currently suffering a weak Rand, high levels of unemployment and CPI and interest rates on the increase, with low growth expectations. Amidst this all, it is a year of general election, and labour, NEDLAC, and COSATU, are playing a very active role in influencing government policy.
Budget estimates show that the budget deficit will decrease from 3.2% in 2016/17 to 2.4% in 2018/19 (3.9% in 2015/16). Debt stock, as a percentage of GDP, is expected to stabilise at 46.2% in 2017/18 (compared to 43.7% projected in the 2015 Budget). The Minister announced that the government expenditure ceiling will be lowered by R10bn in 2017/18 and R15bn in 2018/19 through reductions in public sector compensation budgets.
An amount of R31.8bn has been reprioritised over the medium-term expenditure framework period to support higher education, the New Development Bank and other priorities. Government’s expenditure ceiling is cut by R25bn over the next 3 years to bring the budget deficit down to 2.4% of gross domestic product by 2018/19, and to stabilise debt as percentage of GDP around 45% of GDP. Public sector wage bill will be cut, but provision for contingencies like drought relief and additional spending has been made and increases in expenditure on for example on higher education and small business development continue. State Owned Enterprises have briefly been touched on by the Minister, but outright privatisation seems (except token privatisation in certain instances) to be a non-starter.
Growth in GDP is estimated at 1.3% in 2015, 0.9% in 2016, 1.7% in 2017 and 2.4% in 2018. This does not compare well to average global (3.1% in 2015) and sub-Saharan (3.5% in 2015) growth numbers and is also considerably lower than last year’s estimates. Export growth is expected to grow by 9.5% in 2015, 3.0% in 2016 and 4.6% in 2017 while imports will grow at an estimated 5.3% in 2015, 3.7% in 2017 and 4.5% in 2017. Consumer inflation (CPI) will decrease to 4.6% in 2015, accelerate to 6.8% in 2016 and is then forecasted to consolidate at around 6.3% in 2017 and 5.9% in 2018. Capital formation is forecasted to grow by 1.1% of GDP in 2015, 0.3% in 2016, 1.4% in 2017 and 2.7% in 2018. Household consumption is set to grow by 1.4% in 2015, 0.7% in 2016, 1.6% in 2017 and 2.2% in 2018. The balance of payments will remain negative, namely -4.1% of GDP in 2015, -4.0% in 2016, -3.9% in 2017 and 2018.
Real economic growth, investment, and savings stimulation programmes by Government has been touched on but is most probably difficult to tackle in the current economic climate.
Spending programmes over the next three years
Government will spend R457.5bn (R11.5bn addition) on social grants. To address, to some extent the university funding issues, R93.1bn (R15bn additional to higher education) is allocated to transfers to universities, while the National Student Financial Aid Scheme will receive R41.2bn Government will spend R707.4bn on basic education, including R45.9bn on school subsidies, R38.3bn on infrastructure, and R14.9bn on learner and teacher support materials. Government will allocate R108.3bn for public housing, and R102bn on water resources and bulk infrastructure. In addition, R171.3bn will be allocated to transfers for the local government equitable share to support the expansion of access of poor households to free basic services. The national non-toll road network will be strengthened and improved by R30.3bn, whilst R13.5bn will go to Metrorail and the Shosholoza Meyl to subsidise trips and long-distance passengers. The Budgets sets aside R10.2bn for manufacturing development incentives and also R4.5bn for national health insurance pilot districts.
Social Grant increases
Social reform is a priority of government. Minister Godhan mentioned that the Social Reform Report is ready for publication and that he will meet with the relevant Minister/s to discuss further. The issue of affordability is, however, still a major stumbling block. The budget did address some social grant increases. State old age grants are increased from R1 415 to R1 505 per month whilst State old age grants for over 75s from R1 435 to R1 525. War veteran grants are increased from R1 435 to R 1 525. Disability grants are increased from R1 415 to R 1 505. Foster care grants increased from R860 to R890, care dependency grants from R1 415 to R1 505, and child support grants from R330 to R350.
The South African Tax Burden to GDP ratio is currently 25.7% (2014/15), which is roughly in the middle of developed and developing economies. Personal Income Tax and Corporate Income Taxes are relatively high whilst VAT is relatively low, especially compared to countries with high levels of social spending. The Budget estimates this to increase to 26.3% in 2015/16 and 27.8% in 2018/19, which seemingly will pull South Africa’s ratio more into the lower developed economies and increase the gap between South Africa and developing countries.
Government revenues for 2016/17 will include a 37.5% contribution by personal income tax, 16.9% by corporate tax, 25.6% by VAT, and 5.5% by fuel levies.
The Budget announced that R18.1bn additional tax revenue will be raised in 2016/17, with R15bn additional in each of the subsequent 2 years. The R18.1bn comprise of R9.5bn in higher excise duties, higher fuel levies and other environmental taxes. Capital gains tax and transfer duty combined will raise an additional R2bn, whilst R13.1bn will be raised through adjustments to counter fiscal drag. Tax relief that will reduce the tax take includes R5.5bn relief for fiscal drag (with a focus on lower and middle income earners), and a R1.1bn increase in medical scheme deductions. The fuel levy is raised by 30c/l to R2.85/l for petrol and R2.70/l for diesel on 6 April 2016. The Road Accident Fund levy will remain at 154c/l as it will be replaced by the Road Accident Benefit Scheme.
The effective rate for CGT for individuals and Trusts will rise from 13.7% to 16.4% (marginally from 33.33% to 40%), for companies from 18.6% to 22.4% (marginally from 66.67% to 80%), and other Trusts to 32.8%. Capital gains tax excludes R2m gains or losses on sales of primary residences, most personal use assets, retirement benefits, long-term insurance policies, and an annual exclusion of R40 000 for individuals and special Trusts. Transfer duty on property sales exceeding R10m will increase from 11% to 13% on 1 March 2016.
Government proposes to introduce a Sugar Tax on 1 April 2017 to help reduce excessive sugar intake.
A Tyre Levy of R2.30/kg of tyre will be implemented with effect 1 October 1 2016.
The Plastic Bag Levy increased from 6c to 8c per bag.
Hybrid (subordinated) debt instruments issued by non-residents potentially result in double non-taxation. Interest payments on debt and dividend payments on equity are treated differently for tax purposes. Hybrid instruments containing debt and equity elements may allow tax deductions by the one party whilst not taxing the other party. Current tax rules reclassify interest payments as dividends, but interest deductions can only be disallowed for tax residents. This results in mismatches. Government will implement changes to address these mismatches with effect 24 February 2016.
Withholding tax on service fees will be withdrawn.
Tax expenditures include a VAT zero rating estimated at R20bn (2013/2014). Medical credits, R20bn. Retirement funding R28bn. Petrol R16bn. Rates R10bn. The zero rate basket could be relooked at to explore the composition of the R20bn loss in revenue between the rich and the poor and also whether targeted relief could not be done better than with the VAT zero rate.
Tax on retirement funding will change from 1 March 2016 as previously announced. Deductions of contributions will be increased to 27.5% of the greater of remuneration or taxable income, subject to a ceiling of R350 000. The forced annuitisation of provident fund proceeds above R247 500 has been postponed and may be considered on 1 March 2018.
Sin taxes hikes will increase by between 6% and 8%. These include: Beer 11c/340ml; fortified wine 27c/750ml; ciders and alcoholic fruit beverages 11c/340ml; unfortified wine 18c/750ml; sparkling wine 59c/750ml; spirits 394c/750ml; cigarettes 82c/packet of 20; cigarette tobacco 94c/50g; pipe tobacco 27c/25g; cigars 432c/23g.
Assets transferred to Trusts against interest free loans to save on donations tax and estate duty will be tackled by deeming interest free loans to such Trusts as donations.
The Minister also announced a relaxation of voluntary disclosure rules for a 6 month period from 1 October 2016 in respect of undisclosed assets abroad.
The Minister had a difficult Budget to deliver, especially in light of the current socio-economic and political environment. Taxation saw very little changes and no real changes on personal income tax. Shifting more of the tax burden to the rich, and away from the poor, is evident in the Capital Gains Tax increases on individuals and corporates, fiscal drag tax increase to higher income earners, changes to trusts, and transfer duty increases above R10m. This is good news for lower (and to some extent middle) income earners. The Budget did not aggressively attack the State Owned Enterprise problems which South Africa faces and also did not really address strong growth initiatives, although this could be difficult in current circumstances. The Budget made welcomed commitments on curbing State expenditure, especially the wage bill. The discipline to follow through would instil trust. The final question remaining is whether this (second) maiden speech of Minister Godhan will send a strong enough message to appease the rating agencies.
Overall, the Budget can probably be described as a conservative pragmatic approach under circumstances that did not allow for more boldness.