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Key areas to look out for in the 2018 budget

Tax sources that could be targeted, and possible problems in implementation, as explained by personal tax expert Rob Cooper from Sage.

NASTASSIA ARENDSE:  Tomorrow we’ll all be listening with bated breath as the finance minister delivers his 2018 Budget Speech. So earlier today I caught up with Rob Cooper, the director of legislation at Sage. We spoke about some of his thoughts that the minister should clarify in his statement tomorrow.

ROB COOPER:  Well, the challenges are very obvious, just to start there. The hole in the bucket that the minister of finance has to fill is big – R50 billion-plus. So whether he can cut expenditure, what he can increase, we’ll have to see. But it’s going to be a difficult balancing job.

The area that I’m involved in is around personal income taxes. So there is a very real danger that, just like last year, they are going to increase the personal income tax rates, just to say that personal income tax is one of the two low-hanging fruits as far as bringing in additional tax revenue is concerned in a quick and simple way. The other one is the fuel levy. If they adjust the fuel levy, they just change the meters on the pumps and the money flows into Treasury. And personal income tax rates – they just adjust the scales and the payroll systems of the country calculate the tax every month and it flows into Sars. So those are two very easy ways of getting in money quickly and painlessly.

I hope they don’t take the big step that they took last year with the increase to 45%. I think it’s starting to get to a position where they might be killing the goose that lays the golden eggs.

But we could see changes. For example, they adjust the tax tables to cater for inflation so that, if you have only an inflation-adjusted increase to your salary, it doesn’t push you into a higher tax bracket and you actually get taxed more than what your increase is. So what they can do – and they’ve done it in the past – is to adjust those inflation increases for lower-income individuals, that’s up to middle of middle income, and then for the higher-income people they don’t adjust it, so that as a result of inflation all the higher-income people will be paying not only the inflation but the extra taxes.

NASTASSIA ARENDSE:  Then there is a tax that is very sensitive – and that’s VAT. A lot of people have been talking about it every other budget presentation – will they hike it, will they not? What do you think might happen with VAT? Could this be the year they hike?

ROB COOPER:  I think a VAT hike is going to depend on whether they are going to be able to cut expenditure sufficiently to make up for what they could have gained by increasing VAT. As you said, a VAT hike has been on the cards for a couple of years. They’ve held off because of social sensitivities. But according to economists, a 1% increase in the VAT rate is roughly an extra R20 billion. So if they are looking for at least R50 billion and they can’t find it very easily elsewhere, then it arguably points towards a 2% VAT increase, which then is about R40 billion. So it does seem as though this could be the time for a VAT increase. Our VAT rate in South Africa is arguably low in comparison to other countries, so that also tends to move towards a VAT increase.

But the sensitivities are traumatic. It will affect lower-income people who aren’t taxed as we are, as employees that have to pay VAT on everything. So they would have to take steps to counter the increase in VAT. And that would obviously be perhaps extending the zero-rated foodstuffs and other items for lower-income people. It could possibly be an increase to social grants to cater for the higher VAT, but that’s a double-edged sword because by paying more for social grants a bigger amount of expenditure is going out, and then the budget has to cater for that extra expenditure. 

NASTASSIA ARENDSE:  There are also other things that we are going to be looking out for, especially when it comes to the NHI, the direction it will take, how it will funded and there were talks of scrapping tax credits. What effects do you see happening if that’s the route we go in order for us to fund NHI?

ROB COOPER:  Well, again a very sensitive area. I don’t think that anybody can argue that the principles and the intention of the National Health Insurance is not good. To increase the standards of the public healthcare system and to increase its outreach into rural areas is obviously very, very necessary. You can’t have babies dying because the incubator is broken. So we must have it, there must be an improvement of the public healthcare system.

But there are two aspects to it. The one I’m not really qualified to talk on, but it seems that the direction they are going in is to almost replace the private medical assistance scheme with medical aid schemes, and force everyone onto the public health credit system. But that doesn’t seem like a good plan to me.

And then the second aspect of it is the medical tax credits that you mentioned. For many, many years we’ve had either a deduction or the medical tax credit to assist employees by virtue of tax relief to be able to afford their contributions to a private medical scheme. Now in last year’s budget there was a one-line mention that they are looking at scaling back or removing a medical tax credit. There has been more and more talk of it.

There are two aspects of this which are problematical. The one is that about 1.8 million is the estimate of lower- to medium-income individuals who will not be able to afford their contributions to the medical-aid scheme unless a tax relief is there. So, if it’s taken away, they will have to make an affordability choice to leave their medical scheme and go onto the public healthcare system, which will mean a lot of extra people going onto the public healthcare system and putting more pressure on the public healthcare system, which at this stage is not a good thing.

And then the second point on this is just that it seems like it’s putting the cart before the horse. If the public healthcare system was at a good standard and countrywide, then people would have a choice. You could decide whether you want pay the money and belong to a private medical scheme, or whether you are going to go onto the public healthcare system. Then it’s a choice that can be made and every individual has the right to make the choice.

So I would hope that they hold back on that medical tax credit for another year or two, try and find the money elsewhere for the National Health Insurance system and at least get the standards up before they take that step.

NASTASSIA ARENDSE:  What everyone has always talked about – and perhaps we might even see it go further – is the employment tax incentive. What’s your view on that one?

ROB COOPER:  My view in general is that I would very sincerely like it to succeed – not saying that it hasn’t succeeded up to now. But I think it could perform better than it has. The employment tax incentive was brought into being in January 2014 for a three-year period, which was due to expire at the end of December 2016. Treasury did a review of its success with dubious results, in my opinion. They extended its life for two years until February 2019. So in this coming budget tomorrow I don’t expect there to be any radical changes to the employment tax incentive Act.

But if they do take it further, in my opinion what’s needed is a fairly radical simplification of the employment tax incentive requirements. There are provisions at the moment which make it cumbersome and expensive for employers to administer and do all of the requirements, and there are also some requirements which are cumbersome and difficult for Sars to perform. So I would like to see the ETI being extended. Our youth unemployment situation is desperate and we must do whatever we can in the country to rectify it.

But I would like to see in the future a simplification. Simplification of tax rules always leads to better results, better compliance, better results.



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