HANNA ZIADY: It’s fair to say that this week has been dominated by National Treasury’s budget, which was tabled in parliament on Wednesday. Perhaps more importantly dominated by Finance Minister Pravin Gordhan’s speech – what he said, what he didn’t say, and what’s changed in terms of tax and expenditure. It is an awful lot to digest. And so tonight we are joined by Wouter Fourie, a certified financial planner and director at independent wealth manager Ascor.
Wouter is here to answer the questions that you have about this year’s budget. Good evening, Wouter, and welcome to the show.
WOUTER FOURIE: Hanna, good evening and thank you for the opportunity.
HANNA ZIADY: Good to have you with us. Wouter, let’s start by looking at the ever-topical issue of personal income tax. I’ve a question about that. The minister didn’t increase the marginal tax rate, so that remains unchanged at 41%. But not all of the tax brackets, as far as I understand, were adjusted to compensate for inflation. So some of us are effectively taxed more this year. Explain how that works.
WOUTER FOURIE: I think we can start off with a big sigh of relief, because all of us actually expected an income-tax hike, and speculation was that it would go up from 41%, the top bracket, to even as high as 43%. So a big relief when we got the announcement from the budget.
HANNA ZIADY: If you are on the margin, that is.
WOUTER FOURIE: So if you look at the different brackets, what the minister is trying to do is he is taxing the high-income earners more. That’s the basics of it. Every year they do adjust the brackets to make sure that they keep up with inflation. But this year they tweaked the brackets a bit more. So the high-income earners will pay more and that’s also been expected – that they will target the high-income earners this year.
HANNA ZIADY: Progressive taxation. And that is the function of moving up into a tax bracket. So, as your salary increases with inflation, above inflation if you are lucky, you move into a new tax bracket and are taxed more. They haven’t adjusted those tax brackets to account for inflation, effectively.
WOUTER FOURIE: Yes, that’s correct.
HANNA ZIADY: But there is some tax relief – the good news is R5.5 billion to be exact – to limit the impact of this. Really that relief is aimed at lower- and medium-income earners, as we heard. That I guess limits the impact of fiscal drag.
Capital gains tax was also increased. What is capital gains tax, and what were the adjustments announced in this year’s budget? What effect will they have?
WOUTER FOURIE: Excellent. I think it’s important, if you talk about capital gains tax. to use the example of a tree and apples, where the tree is your capital and the apples represent your income. So your salary that you earn will represent the apples, and that’s taxed at your normal income tax rate. But the tree represents capital. So a tree would be something like a rental property, where the rent is the apples, taxed at the normal income tax rate, and the tree, which is a property – if you sell the property it will then be taxed at a different calculation rate.
HANNA ZIADY: Okay. So you are taxed on the growth of that investment.
WOUTER FOURIE: That’s correct.
HANNA ZIADY: And what is the major change that’s been announced? Have they increased the amount of tax that will be levied on returns on investments?
WOUTER FOURIE: If you look at investments and you make a profit on an investment, for example if you buy a property – and I’m going to use a property as an example – and the property is not your primary property that you stay in, your house, it’s a second property, and the day you sell that property you make a profit on it, for example you buy it for R1 million and you sell it for R1.5 million, the R500 000 profit that you made is then seen as capital gains. That is then included in your normal income tax. But it is included at a specific rate. Now, the current rate before the announcement of the budget was 33.3% for individuals, and that has been upped now to 40%. So 40% of the R500 000 will be included in your normal income tax and of that you are allowed to deduct R30 000 at the current positon. And now with the new budget it’s an exclusion of R40 000 you can deduct from that, and then you pay your normal income tax on that. So in effect it actually helps you to pay less tax on the profits that you make.
HANNA ZIADY: Interesting, because the perception is that you are paying more. But I suppose that they’ve also increased the threshold at which you have to pay tax. Is that so?
WOUTER FOURIE: Yes. But just to get back to the capital gains tax, if you do the calculation, if you’ve got an inclusion rate of 40%, and you are taxed at your maximum marginal rate of 41%, your effective tax rate is actually 16.4%. Now that is brilliant, because the lowest end of your normal income tax bracket starts at 18%. So if I had to choose between paying income tax or capital gains tax, I’d choose capital gains tax every day.
HANNA ZIADY: Interesting indeed. Also the transfer duties on properties have changed. Tell us a bit about those. What’s happened there?
WOUTER FOURIE: The transfer duty is a cost that you pay when you purchase a property. And what they also tried to do there is once again they focused on the higher income earners and the guys with big properties, people with lots of money who have millions to spend on properties. I’m going to try and give you the rates within a second or two – I’ll quickly look them up and give you the rates as they change as well.
HANNA ZIADY: While you are looking for those rates, we do have a question coming through on the SMS line from André, wanting to know whether mineral water falls under this new sugar tax. I think I can safely answer that question and say no, it doesn’t. As far as I know it’s only sugar-sweetened fizzy drinks that will taxed now for the inclusion of sugar. So sparkling water, I think, will be safe. But not much detail from Treasury on exactly what that sugar tax will entail, how much they predict it will bring in to the fiscus. That’s only coming into effect next year, March, April, I think. I was quite amused personally at the fact that the Treasury was weighing in on the weight of South African citizens and flagging the risk of obesity as a big problem in our country. So Treasury is doing its bit for health. Someone called it the Tim Noakes Tax the other day, which I thought was quite funny.
I hope that answers your question, André. Wouter, so transfer duties have changed – what’s changed?
WOUTER FOURIE: Firstly, I’d like to add onto that sugar tax. I actually thought it was an April Fool’s joke because, if you look at the implementation date, it’s April 1 2017 – an April Fool’s joke. So I thought wow, this is interesting.
HANNA ZIADY: It could be. We’ll have to wait and see.
WOUTER FOURIE: That was the interesting part of the budget, I need to say. Getting back to the transfer duties on properties, the idea is when you purchase a property you pay tax on it. The new rate will be on the first R750 000. So on any property less than R750 000 you won’t pay any transfer duties – on a zero rate.
And then there are four or five different scales. From R750 000 up to R1.250 million, 3% of everything above R750 000; the next bracket is 6%, 8%, 11%; and then on R10 million and more you are going to be taxed as high as 13% of the value above R10 million, plus the R937 000 that creeps up into the bracket.
So those of you with the very expensive properties – maybe it’s a good thing to buy your property today, or before February 29, because the new legislation kicks into place on March 1. So Hanna, you can buy that property this weekend.
HANNA ZIADY: That R10 million property that I have had my eye on!
Somebody tweeted us, AbstractZack, wanting a comment on the allocation to higher education in light of the #fees must fall. The Treasury announced in its budget that R16.3 billion would go to higher education, R5.7 billion of that to address the funding shortfall that universities are now facing by keeping fees for the 2016 academic year at 2015 levels, R2.5 billion goes to NSFAS, which is the National Student Financial Aid Scheme, and R8 billion to enable current students to complete their studies. So that makes up the R16.3 billion allocated to higher education.
Wouter, do you have an opinion on this?
WOUTER FOURIE: Well I can add my son is a first-year student, so I’m very excited about this.
HANNA ZIADY: That fees have stayed the same?
WOUTER FOURIE: That’s it. But if you look at the bigger picture, wow, what an incredible offer to put us in a position where we can actually help students with their fees. If we have a budget going forward to accommodate this in future, I would greatly support that. I think those are some of our biggest challenges in this country – education is a challenge and that also leads to unemployment at the moment. We need to uplift the skills in the country. So I’m totally for it, and I’m glad to see there’s action to the words at the moment.
HANNA ZIADY: There we go, AbstractZack. I hope that answers your question.
Getting back to questions around the budget, the one thing that has been topical in the recent weeks is the Taxation Laws Amendment Act, which the minister made mention of, but effectively which he is calling the Revenue Laws Amendment Bill because they have postponed the annuitisation requirement for provident fund members for two years – again postponed that. But we will see tax benefits introduced as of the March 1 for all retirement fund contributions. So that includes retirement annuities, pension funds and provident funds. Wouter, what is significant about these?
WOUTER FOURIE: Once again, I’m very excited about the changes in legislation because for the first time it’s putting everybody on the same path, and the benefits in terms of the tax deductibility towards contributions of your retirement are fantastic. A lot of people don’t really understand the process. Let me take a simple example, once again, and explain it to you:
If you decide to invest R1 of your money for retirement, you’ve got the option to use a pension fund, a retirement fund, an annuity fund or a provident fund. At present, legislation before the new budget speech, from March 1 your current contributions towards the provident fund are not tax-deductible. But with the new legislation they will be tax-deductible. So in effect what happens is you take R1, you put it away for your retirement, aged 55 or older, by doing that you are allowed to deduct the R1 from your taxable income. That’s a wow, because what happens in effect is when you submit your tax return form, Sars will refund you your marginal tax rate. So if you are sitting at a tax rate of 30%, in effect what happens is you are getting the R1 benefit and it’s actually costing you, in terms of your cash flow, 70c. So that’s an immediate 30% bump up on your retirement.
HANNA ZIADY: A no-brainer to invest for retirement. What are the changes, briefly, as we are nearly out of time, for members of pension funds and RAs? If I am contributing to an RA, what will be significant?
WOUTER FOURIE: The current contributions are limited to 15% of your taxable income. The new legislation allows 27.5%. So it’s a huge increase – but they’ve put a cap on top of it. So you are not allowed to contribute more than R350 000 in a specific tax year.
HANNA ZIADY: To an RA?
WOUTER FOURIE: To an RA or a pension fund or a provident fund. You are allowed to contribute more, but you are not going to get the tax benefit in that specific year. It will roll over to the next year. Current legislation allows you to contribute as much as you can afford. If you are a specialist or business owner and you’ve got an annual income of R20 million or R30 million, you can contribute 15% of that.
HANNA ZIADY: And get the full tax benefit. That was Wouter Fourie, a certified dividend planner – Financial Planner of the Year, in fact – and director at independent wealth managers Ascor. Wouter, thanks for joining us on the show.