Unlike public sector entities, most private sector companies have been forced to reduce their salary bills in order to keep the doors open during the Covid-19 national lockdown.

What effect will a salary cut have on the amount of personal income tax paid by an individual?

An example prepared for Moneyweb shows that someone with taxable income of R300 000 can expect to pay 50% less tax after suffering a 30% cut in salary. This is on the assumption that the taxpayer is entitled to the normal tax rebate but has no other deductions.

Conversely, a person with taxable income of R1 million who is subjected to a 30% pay cut will find their tax liability reduced by a margin of only 40%, says independent tax practitioner Pieter Botha.

“On a net income basis the taxpayer earning R1 million and the person earning R300 000 will both find their income reducing by 26%,” says Botha.

While this indicates that tax-bracket scales have a way of balancing things out somewhat, one can safely assume that taxpayers in lower income brackets will be more severely affected by income reductions than those in higher income brackets.

Source: Pieter Botha Financial Services

Finance Minister Tito Mboweni adjusted the expected revenue collection figures during his June supplementary budget. An under-collection of R300 billion in revenue is expected for the current tax year (2020/21).

Read: What the budget didn’t say

Many consider this figure “over-optimistic.”

David Warneke, national tax committee chair at the South African Institute of Chartered Accountants (Saica), says National Treasury’s track record in terms of tax revenue estimates has worsened over the last decade. It remains “overly optimistic” in its tax revenue estimates, he says in a submission on the 2020 Supplementary Budget.

Source: National Treasury, Sars

Warneke also notes that Treasury expects the tax-to-GDP ratio to fall by a similar margin to that during the global financial crisis, and that there will be a steeper recovery thereafter.

“However, this fails to take into account that there was almost a total shutdown of the economy during the national lockdown, which was not the case with the global financial crisis.”

The value of accurate revenue estimates

In light of the trend of underestimations, Warneke urges Treasury to review “thoroughly” the data that underpins its tax revenue estimates and GDP ratios.

“If these estimates are inaccurate, there is a knock-on effect on the budgeted expenditure levels in each year.”

Read: Tax collections worse than expected

Warneke says SA no longer has the luxury of basing revenue (and expenditure) forecasts on best-case scenarios. “Living within our means requires realistic estimations, even if that paints a bleaker picture.”

The South African Revenue Service (Sars) finds itself in an incredibly difficult position given past overestimations and the great uncertainty that still awaits the country as it fights the Covid-19 pandemic.

Read: Mboweni says income, corporate tax unlikely to rise

Filing changes

Sars has announced a fundamentally different approach to the annual filing season, which in the past kicked off on July 1. It has now been pushed out to September 1.

Read: Fundamental change to tax filing season

Sars has indicated that a significant number of taxpayers will be auto-assessed this year. This means Sars will use data collected from employers, financial institutions, medical schemes, retirement funds and other third party data providers to generate assessments automatically.

Auto-assessment pros and cons

The auto-assessments will enable Sars to reduce the number of visitors to its branches, and thus reduce Covid-19 transmission risks. “Although eFiling has been with us for some years there are still a large number of taxpayers who will visit a Sars branch for assistance,” says Botha. “These may well be the taxpayers that Sars is targeting for auto-assessments.”

It would seem from the announcement that the pool of taxpayers targeted will be typically those with one IRP5, some interest earnings, medical deductions, and contributions to a retirement fund. Data not supplied by third parties will be omitted from the auto-assessment, he says.

“The risk is of course that not all sources of income and deductions are supplied by third parties. Income from trusts, interest on loans outside of the regulated third parties, and donations to qualifying organisations are but a few examples,” says Botha.

Online tax return service Tax Tim advises taxpayers not to accept the auto-assessment.

“We think there are risks involved. Your auto-assessment may be inaccurate, and accepting it could result in you paying more tax than necessary.”

Deductions that may be omitted include donations to charities, home office expenses and wear and tear. “Filing a tax return means that you can include all of your possible deductions so as to pay less tax and maximise your chance of a refund,” advises Tax Tim on its website.

Botha says a taxpayer’s right to the dispute and resolution process should not be affected by the auto-assessment arrangement. If a taxpayer accepts an auto-assessment and later discovers that income or deductions have been omitted from the original assessment, they will be able to file a revised return.

According to Tax Tim, taxpayers who reject the auto-assessment will be able to file their return when the filing season opens on September 1.