This week, on 26 November 2019, the National Assembly passed the latest tax bills, which is set to be promulgated by the President after it has been passed by the National Council of Provinces. On the face of it, some concessions have been made for individual taxpayers, but these offer cold comfort in the bigger scheme.
Before we get to the truly profound implications, it is important to note the following amendments:
- The tax exemption of excess contribution amounts paid by taxpayers in respect of retirement annuities received by them will now extend to annuities received from provident funds and provident preservation funds as well, from 1 March 2020;
- The ordinary rebates available to taxpayers who receive a pension in respect of a deceased spouse will no longer be taken into account when tax is withheld on these amounts, from 1 March 2021;
- Previously, the transfer of one’s retirement interest from a pension fund to provident fund or provident preservation fund was non-taxable from 1 March 2019, but will now be retrospectively treated as a taxable event, potentially placing these taxpayers in a non-compliant position; and
- Section 12J of the Income Tax Act provides a tax deduction to taxpayers, in proportion to their investment in qualifying venture capital companies, which is intended to promote economic growth. However, this will now be subject to a maximum allowable investment of R2,5 million for individuals, which means more cash-in-hand for government.
Tax Man Always Searching for His Pound of Flesh
At first glance, it appears that there are no profound amendments to the Income Tax Act or the Tax Administration Act that would raid the pockets of taxpayers, to generate additional revenue. This is peculiar, since the prevailing budget deficit is a massive elephant in a room with grim economic prospects and a junk credit rating.
However, taxpayers must not be fooled. In the current economic climate and with SARS so far behind on collection, it is unlikely that the 2019 legislative cycle would not have been put to good use the drum up some more money.
Government is smart enough to understand that big changes cause controversy, as we have seen with the VAT rate increase or the amendment to the exemption on foreign employment income. With no such amendments, were taxpayers truly given a tax break in light of the current economic landscape?
No Change Means More Revenue
In truth, the biggest change by far is not a change at all, nor is it actually found in the Income Tax Act or Tax Administration Act.
The Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2019 proposes no amendment to the tax brackets which prescribe the rates of tax applicable to individual taxpayers. In a country with a relatively high inflation rate, this is a problem, since the salaries of employees generally increase in line with inflation. Where the tax brackets do not increase correspondingly, this results in so-called “bracket creep”.
In real terms, while this means that individuals are technically earning more, they are actually taking home less pay each month as compared to the previous year. In fact, in many cases taxpayers may be pushed into a higher tax bracket. The upshot is the taxpayer’s pay increase is wiped out by additional taxes.
It should also be mentioned that this is the second year in a row that the tax brackets have not been increased, which means that taxpayers will need to further reduce their cost of living for another year, in order to make ends meet. While this will not necessarily affect lower income earners, it will certainly have a significant impact on the already overburdened taxpayers in the middle- and higher-income brackets.
This also affects those who will be withdrawing lump sum benefits from their pension interest. In this case, the special tax rates applicable to these amounts also remain unchanged. This means that these persons will be forced to enter into retirement with less cash available to defray their cost of living – an unfortunate consequence of bracket creep.
Say Good-Bye to South Africa’s High Earners
The long-term effect of these changes (or lack thereof) can only realistically be determined over time. This is an effective measure to generate revenue over the short term, but the question must be asked; how much financial constraint taxpayers are willing take before it becomes unsustainable and individuals simply decide to leave South Africa?
We have already seen a massive jump in South Africans deciding to leave the tax net by formally noting their non-resident status by financially emigrating from South Africa. As it stands, National Treasury is already relying heavily on the higher earning segment of the individual tax base and measures like these forces the hand of taxpayers who are already contemplating their departure.
Ultimately, we lose important taxpayers and their descendants to the tax base permanently, which leads to less revenue for government. Cunning as it may be, it would seem that government’s band aid is a temporary fix that will exacerbate a far larger problem.