By Anthea Scholtz, Tax Partner, Deloitte
Both the president and the Minister of Finance (in his 2014 Medium Term Budget Policy Statement (MTBPS) set out an ambitious expenditure mandate for South Africa.
In the MTBPS (which communicates to parliament and the broader South African public, the economic context within which the 2015 Budget will be presented next year), it was noted that government will spend R4.4 trillion over the next three years.
The main source of funding for this expenditure, will as always, be tax revenues.
It was thus no surprise when the Minister noted in the 2014 MTBPS (which was given against a backdrop of low economic growth, tax revenue collections being below the budgeted projections, government debt continuing to increase as a percentage of GDP and a budget deficit), that it will require both “spending” and “revenue-generating” changes to restore fiscal sustainability in the country while at the same time, protecting our social and economic programmes.
Slight hints were also given as to “how” and “from where” these tax revenues would be generated. Specifically, it was noted that tax policy and administrative reforms would generate at least R27 billion additional tax revenue over the next two years (while moderated expenditure growth and the implementation of tax measures to increase revenue, were expected to improve the fiscal position by R22 billion in 2015/16 and by R30 billion in 2016/17).
While the Minister did not specifically state where this additional revenue would come from, he did indicate that the recommendations of the Davis Tax Committee would inform the tax proposals and would balance several policy objectives, including:
· Enhancing the progressive character of the fiscal system;
· Improving tax efficiency; and
· Realising structural improvement in revenue.
What does this mean for the man on the street?
Over the last few years, tax collections have increased from R598.7 billion in 2009/10 to R900 billion in 2013/14. Approximately 34.4% of this R900 billion revenue came from personal income taxes. The challenge now is for SARS to sustain these revenue collection levels in the current economic climate and by so doing, to enable National Treasury to maintain a healthy fiscal framework.
To do this, various legislative changes have already been introduced to improve collections and broaden the tax base (e.g. the manner in which provisional tax payments are calculated, the voluntary disclosure programme, higher administrative penalties which have been introduced, some of which are now imposed automatically etc.).
The question now though is whether further measures will be introduced by the Minster in the 2015 Budget Speech to generate the required additional revenue.
Increase in the maximum marginal tax rate?
Over the past years, the maximum marginal tax rate has remained unchanged and tax relief to lower income earners was instead granted by adjusting the tax brackets upwards to compensate for the effect of inflation (so-called fiscal drag).
However, the reference in the MTBPS to the “enhancement of the progressive character of the fiscal system” certainly suggests that higher-income earners may pay higher taxes, come 1 March 2015.
This is further underscored by the statement in the MTBPS that the proposed measures may have a dampening effect on economic growth in the short-term (the latter normally, being one of the short-term effects of an increase in taxes).
Introduction of a wealth tax for high net worth individuals?
An alternative option to increasing the marginal tax rate, is the possibility of introducing a wealth tax in South Africa. This issue has been mooted on various occasions over the last few years and one of the main issues underlying the wealth tax debate in South Africa is the inequality in the income levels between the rich and the poor.
The South African debate is further fuelled by the perception that there are a number of very wealthy individuals in South Africa and the question is: Are these individuals paying their fair share of taxes?
It is estimated that there are approximately 2 900 individuals in South Africa who fits into the category of high net worth individuals (i.e. individuals whose annual gross income is R7 million or more and/or whose gross wealth is R75-million or more).
It is important to the fiscus for these individuals to bring all their income (local and offshore) into the South African tax net and that they pay their fair share of taxes. That said, it has previously been noted that the level of filing compliance by high net worth individuals in South Africa was very high.
The question is whether the minister will in anyway refer to wealth taxes in his speech? The advantages are that it will obviously increase fiscal revenue and, at the same time, it would be seen as a measure to reduce the inequality in income levels between the rich and the poor (which is a key issue currently in South Africa).
However the disadvantages are that South Africa already has wealth taxes in the form of capital gains tax (CGT) and estate duty. It would be quite a unique situation if, in addition to CGT and estate duty, a wealth tax is now also introduced.
Nonetheless, this group of taxpayers remain a focus area (examples of which are the new tax returns for trusts, which require additional disclosure, and the Davis committee’s focus on base erosion and profit shifting).
Broadening the tax base? – Number of registered taxpayers has tripled over the last four years!
Over the past few years, SARS has been very successful and has made much progress in broadening the tax base. In this regard, in the “2014 Tax Statistics” report published by National Treasury and SARS during November 2014, it was noted that the number of registered individual taxpayers increased from approximately 5.9 million as at 31 March 2010 to R16.8 million as at 31 March 2014 – i.e. the number of registered taxpayers has tripled over the last four years.
The main reason for the growth in this number was the new requirement introduced during 2011, which obliged employers to register all their employees and issue them with IRP5/IT3(a) certificates, regardless of the amount of income they earn.
Not all these taxpayers were however required to submit tax returns as taxpayers who earned below a certain income threshold (up until 2012, R120 000 and from 2013, R250 000) – and who met certain other conditions, were not required to submit tax returns. Thus, for example of the 15.4 million registered taxpayers as at 31 March 2013 only 6.4 million was required to submit tax returns in terms of SARS’ rules.
That said, the tax base is steadily being broadened and in particular, SARS, through the IRP5/IT3(a) system, now has the ability to ascertain the total income earned by an individual during the tax year where that individual works for more than one employer during a tax year.
A demographic and geographic analysis of the 2013 assessments at the time of the release of the publications shows:
· Income from salaries, wages and remuneration, pension, overtime and annuities accounted for 75.5% of total taxable income;
· The travel allowance of R26.3 billion at 28.7% was the largest of the total allowances assessed;
· Medical aid paid on behalf of employees was the largest fringe benefit at R41.1 billion – 75.3% of the total fringe benefits assessed; and
· Contributions to retirement funding (pension and retirement annuity funds) amounting to R46.4 billion (48.8%) constituted the largest deduction.
The above statistics do provide Treasury with guidance on what the “high” ticket items are, in our personal tax system and hence, where collection efforts should be focused.
Inclusion of the informal sector in the tax base – While SARS has achieved steady successes in broadening the tax base in the formal employment sector, the inclusion of the informal sector into the tax net could also play an important role in broadening the base and generating extra revenue.
However, in South Africa and globally, it is extremely difficult to broaden the tax base in the informal sector and a large part of this sector continues to slip through the noose of tax authorities – even as governments continue to grapple with the complex problem of how to avoid this.
It will therefore be interesting to see whether the Minister announces any regulatory changes as a first step to bringing a greater percentage of the informal sector into the tax net, given that the main difference between the formal and informal sector is mainly the lack of “regulation” in the latter sector.
The employment tax incentive could also significantly contribute to the broadening of the tax base through the additional revenue acquired (through the consumer spending of these individuals in the economy), provided of course these jobs can be sustained for a reasonable period. The incentive is estimated to have created about 209 000 jobs and is currently used by about 23 500 employers.