• Sep 2010
• 
• about asa
• 
• advertise
• 
• subscribe
• 
• Xl Magazine
• 
• contact us
• 
• search

Tax Matters: Mind the Gap

This gap is mitigated to some extent by the fact that, while companies are taxed at a flat rate, individuals are taxed at staggered rates. Therefore the marginal rate only applies to income over R552 000 per annum.

Once an individual is earning megabucks, the staggered rates that apply to the first R552 000 becomes increasingly irrelevant. Therefore, the 12% gap between the corporate rate and the marginal individual rate is very, very tempting for high earners.

What makes things even worse for employed people is that they are generally entitled to virtually no tax deductions. If you are an employee then you are probably paying a lot of tax. Unless you work on commission or for a dodgy employer that doesn't withhold PAYE.

These factors have caused people to try not to become employees but rather to sign contracts in the name of corporate entities. The government knows this. It deeply resents people trying to transform employment income artificially into corporate income. Over the year, we have had loads of anti-avoidance legislation aimed at this sort of thing. This legislation includes the labour broker and personal service company rules. Essentially these rules in certain circumstances look right through a company and deem a relationship to be one of employment, even if the person deemed to be the employer has contracted effectively with an employee, but through the guise of a company or a cc.

As with many pieces of legislation designed to address perceived abuses, in some respects, these rules go beyond even the scope of abusive behaviour. So, for example, a genuinely independent consultant (in other words, where there is no question of a disguised employment relationship) may find himself deemed to be an employee of his client simply because his company or cc derives more than 80% of its income from that client in a particular year.

All of this highlights the one problem with the gap: it leads to much avoidance behaviour, which leads inevitably to more and more of anti-avoidance legislation.

The other problem is that high tax rates make it harder for us to attract skilled people. What makes our individual tax rates high isn't just the marginal rate (which actually isn't as high as all that), it's the fact that, by European and North American standards, our marginal rate comes into effect at a low level.

When our corporate tax rate was cut by 1% it was emphasised that this was in order for us to be as internationally competitive as possible. It is important to remember that, apart from competing with other countries for corporate investment, we are also competing for skilled individuals.

Our tax policy makers have shown that they are aware of the need to try not to make our tax system unattractive to skilled individuals who may be considering working in South Africa. Previously, the Income Tax Act provided that foreign residents temporarily working in South Africa would become tax resident here after a period of three years. This meant that, in addition to their South African earnings (which would have been subject to tax from the start), foreign income and capital gains would also be pulled into the South African tax net. This would have had very unattractive consequences for many individuals since it might have resulted in them being taxed in South Africa on unrealised gains (because of leaving South Africa once their contract here was over) as well as on foreign currency gains.

Therefore, the period before which an expatriate becomes tax resident in South Africa was extended from three to five years. This has enabled such individuals to extend their period of working in South Africa by a further two years without being subject to punitive tax consequences. This is a good example of a tax policy that considers the needs of skilled people. However, in many other respects South African individual taxpayers get a tough deal.

Skills are in short supply in South Africa and yet employees still make the biggest single contribution to tax revenues. In the current difficult environment, it is tempting to try to fill the hole in tax collections by imposing an added burden on individuals – for example, by raising the marginal tax rate. As regards tax collections, this is probably a more immediately effective option than raising the corporate tax rate.

However, our tax policy makers should continue to remember the need to be competitive – not only in order to attract foreign corporate investment, but also skilled individuals. This applies not only to inbound experts but also to skilled South Africans, who might otherwise be tempted to go in search of greener pastures abroad.

Billy Joubert , BA LLB, H Dip Tax, H Dip International Tax, an Admitted Attorney of the High Court of South Africa is Tax Director Head: Transfer Pricing at Deloitte.

• Print this article
• View more articles from the 'in practice' section.

Submit a comment
First Name:	*
Comment:	*
	Items with * are required.
Anti-Spam Policy
To complete your post please type in the words that you see in the image below. (Note: The image is case sensitive.)  Generate new Code

Comment(s)

• No comments have been made.

• CPD Verifiable Articles
• Budget Issues: Finance vs IT (15min)
• The Role of the Auditor and the Companies Act (30min)
• GAAP and Tax (15min)
• HR Matters
  The Impact of Anxiety (15min)

• Additional CPD Articles
• No items available

• Latest Comments
• i'm currently studying for a corporate law diploma and had to do an essay on the strenghts and weaknesses of business rescue. the article has been of great help since I didn't have enough time to do research due to my work overload and keeping my 18 month old boy happy. I got 82% on the essay. thanx a million
  read more
• I would like to be part of the learnership for accounting for next year i am available at any time convinient to you.
  read more
• A warranty on a repaired item becoming void if it is abused or if normal wear and tear is determined should apply to new items as well and not just repaired items
  read more
• Awesome article, this has been very helpful!
  read more
• The argument blaming directors of insider trading based on the fact that share prices traded lower after the directors hedged their shares does not hold water. Correlation does not automatically imply causation. A likely reason for the share performance drop is the signalling effect of the act of the director hedging their shares. This action would lead investors to be sceptical about the prospects of the shares and hence those shares would trade lower.
  read more

• Latest What to Watch