Thursday, 23 February 2012 - 20:00

 

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Budget Speech 2012

Being a country’s Finance Minster is never an easy task. It is one of those jobs where you’re only able to please some of the people some of the time. With many world economies currently struggling with sluggish growth and high debt levels, this job is understandably not on the top of everyone’s list of most desirable job list.

South Africa is fortunate in that it doesn’t have high debt levels and growth is at least expected to be positive, but the levels of unemployment require that we grow at rates not often seen in South Africa. Public debt is expected to rise to 38% of GDP in 2014/2015 and then fall from there, this is much more sustainable than the figures closer to (and in some cases above) triple figures in Europe. Economic growth is expected to come in at 2.7% for 2012 which compares unfavourably to Sub Sahara Africa (5.5%) and developing Asia (7.3%), but is better than Developed economies at 1.2%. With inflation to the end of January coming in at 6.3%, South Africans should see nominal economic growth of around 9% in 2012.

The budget contained the usual target areas, but it was noticeable that there was a slight shift in focus from spending on consumption to spending on development of infrastructure. Pravin Gordhan wants government departments to rein back on salaries and focus instead on improving efficiency of delivery – it is estimated that only 68% of planned expenditure was spent in the current financial year! Social spending currently comprises 58% of government expenditure – up from 49% a decade ago – and the Minster admitted that the best way to reduce this dependence is through job creation and economic growth, not just increasing the subsidies.

In tough economic times there is extra focus on revenue collection and in this instance SARS (which Mr Gordhan used to be head of) has assisted in bringing in 5 million tax returns in the most recent tax season – this is some 23% more than the prior year. There was also an extra R 1 billion in tax revenue from the recent Voluntary Disclosure Programme. By widening the tax net the government is hopefully able to keep tax increases to a minimum by spreading the burden across a bigger income pool.

Personal Income Tax

There was the usual bracket creep for income tax rates. The chart below shows the monthly tax payable and average tax rate for the new (2013) tax year for tax payers under 65. It also shows the tax saving made at various income levels – you will notice that there are bigger percentage savings for the lower income levels.

The change in medical expense treatment has been discussed before by Treasury. Previously, qualifying medical expenditure came off your income (and in essence was credited at your marginal rate) this has been now been changed to a tax credit system. This change has the effect of giving a bigger tax break to those with marginal tax rates below 30% and reduces the deduction from those with higher marginal rates. R230 per month for the first two beneficiaries and R154 per month for each beneficiary thereafter from qualifying medical spend (medical aid contributions) will be taken off your tax bill from 1 March 2012.

Two of the bigger announcements that will particularly affect high net worth individuals with large discretionary savings are the increase in the tax on dividends to 15% (remember this tax is moving from the company’s responsibility to the tax payer’s responsibility from 1 April 2012). Secondly the inclusion rate on capital gains will be increased from 25% to 33.3% for individuals and special trusts and 50% to 66.6% for companies and other trusts. This will make the effective tax rate on capital gains just over 13% for individuals in the top income bracket (from 10%) and nearly 27% for family (and other) trusts (from the previous 20%). To help alleviate some of the pain the annual CGT threshold has been increased to R 30 000 (from R 20 000) the exclusion on death to R 300 000 (R 200 000) and on primary residences to R 2m (R 1.5m).

As savers in recognised retirement products (pension, provident, retirement funds) get relief from dividend tax and capital gains, the Treasury is, in essence, trying to make these regulated savings mechanisms more attractive. Naturally you do pay income tax rates when they mature, so each individual would need to look at their own specific situation. There is also consideration being given to savings products that would provide tax exempt growth for the short to medium term – with limits being imposed to avoid high net worth investors getting any undue benefit.

The annual budget is an opportune time for investors to relook at their investments to determine whether they have taken advantage of the breaks offered by government and optimised their portfolio based on the current and proposed legislation.

Take care,

Mike Browne
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966

Thu, 23 Feb 2012

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