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Reducing SA’s widening revenue deficit

Government is likely to increase individual taxation, agrees Sait’s Piet Nel.

WARREN THOMPSON:  Following the medium-term budget policy statement it has become highly probable that the government may seek to raise taxes to counter the burgeoning gap between revenue and taxes. Let’s just say the implications look dire, so you will want to sharpen your pencil when it comes to your tax affairs. Here to discuss how to do this is Piet Nel from the South African Institute of Tax Professionals. Good evening, Piet.

PIET NEL:  Good evening, Warren.

WARREN THOMPSON:  Did that massive shortfall surprise you when Minister Gigaba announced it on Wednesday?

PIET NEL:  Yes, it did. A couple of weeks before there was still talk of about R50 billion for the whole year. But now he acknowledges that they are already at R40 billion. So I think it may even become bigger. Really, it was a big surprise.

But what was even more frightening was how they are already incurring additional borrowings to meet the shortfall. So they are realising that they are not getting the money from the revenue and they are already looking at incurring debt to pay that.

WARREN THOMPSON:  Piet, no indication of how they are going to attempt to rein in government expenditure to try and meet that, so that you can meet in the middle somewhere. What do you think is going to happen come February with Minister Gigaba if we continue to see this huge shortfall in revenue collection? Is it a certainty that we’ll see higher taxes in one form or another?

PIET NEL:  I think so. If you look at that, just look at your own budget and if you say look, I’m not getting an increase next year, then you are going to cut down on expenses. So absolutely – there is no indication given that they are going to cut down on expenses. And, having already incurred a lot of debt, that option is also diminishing and it will be difficult to get that.

The only other resort is to increase taxes. Now he mentioned something about the carbon tax. For us that’s not a big revenue spinner. It really is a big cost to big business and it’s not going to be a source of income, definitely not to the tune that we are looking at.

We are not hearing anything about the sugar tax that they meant to implement, but again that’s not a big thing.

So I would think the easiest source for National Treasury would be to look at individuals, people like us. It’s an easy source to tap into. At the beginning of the year they increased the marginal rate from 41 to 45% for people over the R1.5 million bracket. They’ve increased the dividends tax, they’ve increased the tax essentially on capital gains. So getting their taxes from individuals is a likely source.

And then there is a lot of talk of VAT on fuel. It was a suggestion that was made earlier in the year, that maybe instead of zero-rating fuel we must bring in the 14% VAT on fuel. That would hit really hard on the lower-income earners – on everybody, but particularly on the lower-income earners.

So I don’t think he’s got many options and probably he will end up getting the money from us. We are going to chip in for this one.

WARREN THOMPSON:  Are you suggesting that there may be even higher marginal tax rates, or we might see that 45% tick up even further? Or do you think there would be a bit of what we call the bracket creep, where he doesn’t adjust the increase at inflation rate, he moves the brackets up by like 3 or 4% a year, so that people who do get inflation-linked increases tend to pay more tax?

PIET NEL:  Definitely on the bracket creep – they did that in February and we may see more of that. So we may again not see any increase – I’m absolutely certain of that. Although, at the beginning of the year they indicated that for the lower income [earners] – so we may see that again. The guys earning about R70 000-odd per year or less will probably get some relief, but definitely they will not make no adjustment on that.

But I think 45% – for people paying that percentage it’s very high, compared to other sections. And as for people who are already under stress, tapping into those people, I think we will see some things there. I do hope they won’t increase the capital gains rate but there is a real chance that they could increase the tax on that.

Anyway, they are looking at broadening the base, including foreign incomes, people working abroad, who are currently exempt from tax. There was a lot of push-back on that. They are building a million-rand exemption for that, but they postponed that introduction date to 2020. I think that was an easy source of income and it’s turned out not to be.

So the only other option then, apart from playing around with the fuel levy, is VAT, which I don’t think they will increase. I think politics is the reason, but it’s also hitting hard on the man in the street. Everybody is paying their taxes and that doesn’t go down well.

WARREN THOMPSON:  Piet, without getting you into too much hot water here, what are some basic steps that we can take to make sure we pay the tax we owe the state in the spirit and intent of the law, but also make sure that we cross our t’s and dot our i’s with respect to the amount of overall tax liability we have?

PIET NEL:  A couple of years ago or probably even ten years ago, it was really a big game to try and salary-structure, and make sure that you get amounts paid that are a lot more tax-efficient, where the benefit is much more than you would have received if you were to pay for the whole thing. Most of those things have been closed down, and the law has become very difficult to plan around in employment things. So really there one would think that you must make effective use of the deductions and exemptions available to you. I’ll give some of those.

A big risk is that people shouldn’t go and claim deductions that they are not entitled to, because that would lead to penalties, which somehow would be an additional source of income to Sars but cost you dearly.

So look [at having] at your portion of retirement annuity contributions, which are tax deductible, increased. You now have a 27.5% free on R15 000 overall… so that would reduce your tax bill.

The travel allowance, the use of a company or employer-owned vehicle, is still an opportunity. There are some private expenses, in the sense that you treat it more tax-beneficially. But that requires meticulous record-keeping of business and travel for business purposes, etc.

And then on the medical. I think most people lose out on the medical rebate, not keeping proper records, not being able to substantiate your medical [claims].So remember that that is available.

And then of course making use of tax -friendly investments. So one would rather invest in the tax-free savings account, which is totally tax free. Make sure that you use your other tax-free interest exemptions. And one could consider investing in shares, dividend-building shares, where the tax on the dividends is much lower.

From the business point of view, again that’s difficult. There you run the risk if you claim something that you are not entitled to, or get involved in some aggressive deduction for things, you may end up with penalties. But there are some allowances for when you purchase capital assets and things like that. So make sure that you use the things that are available.

And on the exemption side as well, the employment tax incentive is one of the examples in terms of new staff. Make sure that you get that employment tax incentive, where you get money back from Sars to pay out wages and it’s tax-friendly, because it’s tax-free.

And then I think on the value-added tax side, that’s the tax that I think one must manage. Value-added tax is essentially a cash-flow problem. If you get it wrong, you don’t have the proper documents and you claim for the documents that you are not entitled to, you have penalties. So on the value-added tax side make sure that you account for the deductions in the correct period and that you claim the deductions that you are entitled to as quickly as possible, because that could reduce your overall VAT monthly or bi-monthly bill.

WARREN THOMPSON:  Alright, those are some great suggestions there. If I’ve heard you correctly, Piet, a lot of it is largely administrative. We must obviously keep everyone in line there and make sure that we get all our documents in place.

So thank you very much for your time.

PIET NEL:  Pleasure.

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