You and budget 2016

A1_B“I have a simple message. We are strong enough, resilient enough and creative enough to manage and overcome our economic challenges” (Finance Minister Pravin Gordhan in the Budget Speech)

How am I affected?  The highlights

(Note that these are proposals, subject to final legislation.

The effect on revenue collections is shown in brackets)

  • The good news was income tax and VAT rates were not increased. Income tax relief was restricted to lower earners (+R7.6 billion)
  • Capital Gains Tax inclusion rates were increased for both individuals (from 33% to 40%) and companies (from 66% to 80%) – see the table below for the effective rates (what you will actually pay) (+R2 billion)
  • Sin taxes (alcohol, cigarettes) were raised (+R2.2 billion)
  • Fuel levy up 30 cents a litre (+R6.8 billion)
  • Green and health taxes:  A new levy on new and retread tyres from October 2016, plus increased levies on plastic bags, light bulbs and motor vehicle emissions, with a new “sugar tax” (only due 2017) aimed at reducing sugar consumption (+R0.5 billion)
  • Transfer duty is up for top-end property sales with the introduction of a new band of 13% on sales over R10m (see the table below for details) (R100 million)
  • Increased medical aid tax credits (see the table below) (-R1 billion)
  • A new Special Voluntary Disclosure Programme (VDP) will be introduced in October for individuals and companies (but note trusts will be excluded, unless agreed that persons other than the trust effectively hold the assets) to declare undisclosed off-shore assets
  • Amendments to retirement taxation have been standardised so that individuals can claim 27.5% of taxable income (up to a limit of R350,000) on pension funds, retirement annuities and provident funds. Employers may continue to contribute to the employee’s retirement funds but this will be taxed as a fringe benefit to the employee and will be part of the R350,000 allowable deduction 
  • Trusts: Also proposed (it has to go through the usual approval process and the final legislation may well differ from the proposal) is that assets will, if transferred to a trust via loan account, fall into the founder’s deceased estate, and that interest free loans to trusts will be treated as donations. 

The new tax and transfer duty tables

NOTES TO THE NEW TAX TABLES
  2016/17 CHANGES FROM LAST YEAR
Rebates
Persons under 65 R13,500 Increased by R243
Secondary (Age 65 to below 75) – total rebate R20,907 Increased by R243
Tertiary (Age 75 and older) – total rebate R23,373 Increased by R243
Tax Thresholds
Persons under 65 R75,000 Increased by R1,350
Secondary (Persons 65 to below 75) R116,150 Increased by R1,350
Tertiary (Persons 75 and older) R129,850 Increased by R1,350
Interest Exemption
Persons under 65 R23,800 No change
Persons 65 and older R34,500 No change
Dividends
Taxed at 15% No change No change
Medical Aid Tax Credits per beneficiary
First two beneficiaries R286 p.m. each Increased R16
Third and more R192 p.m. each Increased R11
Business Travel – Tax free
Up to 8,000 kilometres per annum R3.29 per km Increased by 11 cents per km
Travel Allowance 
Travel allowance still taxable at 80% No change No change
(Logbook compulsory)
Other Taxes
Capital Gains Tax – Individuals/Special Trusts* 16.4% Increase of 2.75%
Capital Gains Tax – Companies 22.4% Increase of 3.8%
Capital Gains Tax – Trusts* 32.8% Increase of 5.49%
Fuel Levy Increases by 30 cents a litre
Cigarettes Increases by 82 cents per packet of 20
Wine (Unfortified) Increases by 18 cents a 750 ml bottle
Spirits Increases by R3.94 a 750 ml  bottle
Beer Increases by 11 cents a 340 ml bottle
* Represents the maximum effective  rate of Capital Gains Tax

 

TRANSFER DUTY RATE ADJUSTMENTS 2016/2017
Property value (R) Rates of tax
R0 – R750,000 0% of property value
R750,001 – R1,250,000 3% of property value above R750,000
R1,250,001 – R1,750,000 R15,000 + 6% of property value above R1,250,000
R1,750,001 – R2,250,000 R45,000 + 8% of property value above R1,750,000
R2,250,001 – R10,000,000 R85,000 + 11% of property value above R2,250,000
R10,000,001 + R937,500 + 13% of property value above R10,000,000
Table compliments of GhostDigest

Why was this Budget so important?

Since “Nenegate” in December, the country has been fearful of a Rating Agencies’ downgrade which would put the nation’s debt at junk status.  This would force all foreign bond holders to sell their bonds, ushering in another Rand crash and almost certainly a recession. The country was thus looking to Finance Minister Gordhan to resolve this.

In essence, the ratings agencies were looking for two things:

  1. An improvement in the nation’s budget deficit to GDP and an improvement in the country’s borrowings to GDP ratio. These can be summarised as fiscal consolidation.
  1. A road map to improving economic growth – the IMF reckons we will only achieve 0.7% growth this year with a risk the country could slip into recession

So how did the Minister do and are we headed for junk status?

Overall, quite well. With prudent tax increases and expenditure reductions, he achieved the fiscal consolidation the market was looking for: The budget deficit ratio will be 3.2% in 2016/7, 2.8 % next year and 2.4% in 2018/9. The debt to GDP will be 46.2% in 2019 (anything over 50% would be viewed unfavourably by ratings agencies).

In terms of point 2 above, the Minister has promised to clean up State Owned Companies (SOCs) and to look at bringing equity partners into these entities. He is also looking to amend all laws that discourage investors. The Minister committed the government to spend R870 billion in infrastructural projects in the next three years. This kind of expenditure creates economic growth.

Further, administrative and managerial positions in government are frozen with the aim of reducing 20,000 positions over the next three years. Procurement in government will be standardised. Savings are already evident and R25 billion is forecast to be saved over the next three years. Expenditure such as new motor vehicles for office bearers and travel will be reduced. Drought relief and the university students’ fee freeze were provided for.

Whilst the market saw the Rand immediately drop forty cents against the Dollar and bond yields rose during the 2016 Budget Speech, it is a solid budget with the latter probably more attributable to Moody’s simultaneous downgrade of Brazil. How credible the budget is and whether we can avoid a rating downgrade will depend on how well the above proposals are implemented.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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