The South African tax system is based on a progressive system when taxing individuals.
The Finance Minister announced a new tax bracket in the 2017 budget for taxing individuals that earn in excess of R1 500 000 per annum taxable income, taking the maximum marginal rate of tax up to 45%. This new tax bracket is applicable for the period 1 March 2017 to 28 February 2018. The budget revenue trends and tax policy confirm that 103 353 individual taxpayers will be affected by this increase. It is estimated that these taxpayers will contribute 26,3% of the total taxes that are collected from individual taxpayers, that is, R126,3 billion. The total budgeted collections from individuals is R482,1 billion. It is anticipated that the introduction of the new tax bracket will contribute R4,3 billion towards the revenue estimates.
These taxpayers have not received any bracket creep adjustments to counter the effects of inflation. What this means is that even without an increase in taxation they are already worse of as a result of the added effects of inflation. The effect of not passing on this bracket creep adjustment results in a tax saving which effectively contributes to the revenue estimate of R12,1 billion.
The Minister also announced that the dividends withholding tax is increased from 15% to 20% from 22 February 2017. The reason for the immediate increase in the dividends withholding tax rate from 15% to 20% is to remove tax arbitrage. Without this 5% increase in dividends withholding tax after accounting for the corporate tax rate the combined statutory rate on dividends is 38,8%. This is the effective tax rate for shareholders extracting dividends from a company. With the increase of the dividends withholding tax to 20%, after accounting for the company tax rate the combined statutory rate on dividends is now 42,4%, which is in closer alignment with the maximum marginal rate for individuals of 45% applied to the new tax bracket. The budget estimates that the increase in the dividends tax withholding rate will contribute R6,8 billion to the revenue estimate.
The trust tax rate is also increased from 41% to 45%.
There are also consequential capital gains tax implications as a result of the increase in the maximum marginal rate for individuals and trusts from 41% to 45%. The effective capital gains tax for individuals increases from 16,4% to 18% and for trusts it increases from 32,8% to 36%.
The tax to GDP ratio is increased 26% in 2016/17 to 26,7% in 2017/18. The Katz Commission Report into Taxation previously recommended that ‘The commitment of the Government to avoiding increases in the present percentage of national and provincial tax revenue to GDP of about 25% is supported.’ We are now moving beyond the 25% recommendation.
WHERE TO FROM HERE?
If we have reached the tipping point of taxing the wealthy, the question then arises where to from here? In this regard, the budget looks towards the introduction of new taxes in the form of a sugar tax on beverages as well as a carbon tax. In addition, there is also a warning that VAT is not untouchable. The budget proposed that the zero-rating on fuel be removed. This will, however, be subject to consultation leading to the 2018 budget.
Muneer Hassan CA(SA) is a Tax Consultant, Senior Lecturer in Taxation at UJ and lecturer on the Gauteng Board Course