Budget 2021: What It Means to You
“Hope is being able to see that there is light despite all of the darkness.” (Archbishop Emeritus Desmond Tutu)
It was with a sense of trepidation that South Africans awaited the 2021 Budget Speech by Finance Minister Tito Mboweni.
Still confronted with all the challenges that existed before COVID-19 – massive debt, lacklustre growth, unemployment, the public service wage bill and rampant corruption – Treasury also faced the seemingly insurmountable challenge of funding the rollout of COVID-19 responses along with muted tax revenue collection impacted by lockdowns, record job losses and business closures.
Reminding South Africans of Archbishop Emeritus Desmond Tutu’s advice that hope is being able to see light despite all the darkness, the Minister presented what has been called a “positive”, “balanced” and “sustainable” framework to address these challenges, announcing some unexpected but welcome short-term tax relief.
The main story: funding COVID-19 responses without tax increases
The two main stories in the 2021 Budget proposals are the funding of the country’s COVID-19 response and the welcome absence of new and/or higher taxes.
Despite talk of a possible ‘vaccine tax’ and new and increased taxes to fund South Africa’s COVID-19 response – including a massive vaccine roll-out that will save lives and support the economic recovery – no new or increased taxes have been introduced to fund vaccines.
Instead, the majority of funding for new and urgent priorities is provided through reprioritisation and reallocation of existing baselines, budget allocations, emergency withdrawals and – if needed – the contingency reserve.
Government has set aside R19.3 billion to fund Covid-19 vaccines, with more than R10 billion allocated for the purchase and delivery of vaccines over the next two years. The contingency reserve has increased from R5 billion to R12 billion for the further purchase of vaccines and other emergencies.
Let’s look at what will change according to the proposals, and what it all means for us on a practical level…
Tax increase proposal withdrawn
In addition to the fact that the Budget review proposals included no new taxes nor any increase in personal and company taxes, government has also withdrawn the proposal announced in the October 2020 Medium Term Budget Policy Statement (MTBPS) to introduce tax measures to raise revenue by R40 billion over the next four years.
This is due to improvements in tax revenue collections in recent months, with tax revenue estimates R99.6 billion higher than projected in October, reducing the tax revenue shortfall to R213 billion.
This will provide welcome relief in the coming year as companies are still reeling from the economic devastation of COVID-19.
Lower corporate tax rate from 2022
It is proposed that the corporate income tax rate will be lowered to 27% for companies with years of assessment commencing on or after 1 April 2022. This is a move in the right direction as SA’s corporate income tax rate at 28% is among the highest in the world. According to Treasury, reducing the rate will have “a positive effect on wages and employment, while promoting additional investment”. The Minister also said that consideration will be given to “further rate decreases to make our tax system more attractive”.
However, this will be accompanied by “a broadening of the corporate income tax base by limiting interest deductions and assessed losses”.
Good news on personal income tax
Personal income tax brackets will be increased by 5%, an above-inflation increase, to provide R2.2 billion in tax relief for lower and middle-income households. This will eliminate “bracket creep”, effectively decreasing personal income tax rates.
It means that if you are earning above the new tax-free threshold of R87,300, you will have at least an extra R756 in your pocket after 1 March 2021.
Government is aiming to reduce the personal income tax rate over time by increasing the tax base through focusing on economic growth which will trigger job creation.
Higher “sin” and other indirect taxes
Unsurprisingly, the excise duties on alcohol and tobacco products were increased by 8% with immediate effect. It means a 750ml bottle of wine will cost an extra 26c while the price of a bottle of 750 ml spirits has increased by R5.50, and a packet of 20 cigarettes will be R1.39 more expensive. Excise duty on electronic nicotine and non-nicotine delivery systems are to be introduced later this year – following public consultations.
From 7 April, the fuel levies will also be increased by 27 cents per litre, comprising 15 cents per litre for the general fuel levy, 11 cents per litre for the Road Accident Fund levy and 1 cent per litre for the carbon fuel levy. This will have a negative effect on the cost of living for South Africans and businesses across all industries.
Other changes
- The June 2021 sunset clause for the so-called Section 12J tax breaks was not extended. The tax rebate could be claimed on investments through an approved venture-capital company and was meant to encourage investments in small businesses and riskier ventures that can help to create jobs and economic growth. Some analysts commented that the absence of this attraction offered to venture capital investment companies, will negatively impact job growth in the country.
- The UIF contribution ceiling will be set at R17,711.58 per month from 1 March 2021.
- An inflationary adjustment to medical tax credits – which will increase from R319 to R332 for the first two members, and from R215 to R224 for all subsequent members.
- Financial sector levies – Bill to be tabled early 2021.
- The carbon tax rate increased by 5.2%, from R127 to R134 per tonne of carbon dioxide equivalent, along with an increase of 1c to 8cents/l for petrol and 9cents/l for diesel from 7 April 2021, and 12.5cents/bag for bio-based plastic bags.
Taxpayers under greater scrutiny
An additional spending allocation to SARS of R3 billion over the medium term has been requested to fund tax collection efforts. As the Minister warned in his speech: “SARS has started to deepen its technology, data and machine learning capability. It is also expanding specialised audit and investigative skills in the tax and customs areas to renew its focus on the abuse of transfer pricing, tax base erosion and tax crime. In this coming fiscal year, SARS will establish a dedicated unit to improve compliance of individuals with wealth and complex financial arrangements. This first group of taxpayers have been identified and will receive communication during April 2021.”
This means that taxpayers with complex financial arrangements should engage a CA(SA) tax specialist to assist them in preparing and/or reviewing their tax returns prior to submission. Similarly, where SARS have selected a taxpayer for verification or audit, or where penalties and interest have already been imposed and levied, taxpayers will need expert assistance.
Have a look at the Tax Tables and Calculators below for more on how this will all impact on you and your business.
Five Mistakes to Avoid When Investing Offshore
“An investment in knowledge pays the best interest” (Benjamin Franklin)
It can be tempting to look at South Africa and the bad news that seems to hit us like freight trains one after another, and immediately consider moving all your money offshore. There is however far more to consider than simply your gut feel, and predictions of woe as investing offshore comes with a lot of difficulties and more than a few unique problems.
Here we look at some of the most common errors people make, to steer you clear of losing your investments.
- A bank account is not an investment
Perhaps the largest mistake that new offshore investors make is panicking. In their emotional state they open an offshore bank account and start moving money overseas, but this is a mistake.
Bank accounts, particularly in Europe, often pay less than 1% interest and any money that is sitting in one is certainly not even keeping up with South African inflation. As with local investments offshore investors should be looking to craft a diverse portfolio that includes quality global equities to ensure they aren’t just throwing money away.
- Understand the market
Before leaping into an offshore investment, it’s important to have a clear picture of the currencies, returns, fees and taxes associated with the different options, and the respective risks that might need to be managed from the outset.
In many jurisdictions fees can end up being a significant player in the profitability of the investment, to the point where they may result in an ongoing shrinkage of offshore assets. This is particularly true if an investment is held in the name of a company, trust or pension, where director or trustee fees will usually be charged on top of the advisory fees.
On top of this, investors in many European countries often pay significantly more in fees for absolutely no added benefits, compared to local investors.
- Rental properties aren’t simple
Many people consider buying a rental property in a foreign country the ideal investment, especially if they are considering emigrating there at some stage. A number of countries also offer passports to investors provided they purchase property in those countries, which can also lead to this kind of investment.
There are, however, a number of ways that a rental property can end up becoming a money sinkhole instead of offering the expected stable returns.
International property investors should not simply buy into whichever development the internet or sales agents are suggesting. Do your homework and fully understand the laws, taxes and unique conditions around the country, city and suburb you hope to invest in. Even if the property you are about to buy seems like a good deal, if it is in an area where there is too much rental housing and you struggle to find a tenant, it will end up costing you a small fortune instead.
Investors need to also make sure they do their research on the companies they are working with to ensure they are not uncertified or unscrupulous. Fortunately for investors there is the Association of International Property Professionals (AIPP), an international body that is committed to regulating the industry. If you partner with an AIPP member, you are assured that they have been vetted and approved.
Arranging finance in a foreign country is possible, but again comes with a need for caution. What is the track record of the company offering the finance and just what are the terms they are offering in their contracts? Laws in other countries may not be the same when it comes to finance, and there may not be the same protections that are on offer in SA relating to allowable interest rates and what happens in the event of a default.
Applicable laws need to be checked regarding tenancy too. Are there protections in place if your tenant does not pay the rent? What happens if someone refuses to move out or damages the property? The best solution is to team up with a reputable letting agent who knows the laws, and who has your best interests at heart to ensure you don’t fall foul of some trick of local law. Of course, using an agent results in additional costs, but in the scheme of things this is likely to be money well spent.
In short, research and research again. This is not something to rush into because you saw a flashy Power-point presentation.
- Double Taxation
With the laws around taxation of foreign income recently changing there is a lot of uncertainty, and numerous rumours have arisen as to just when tax is applicable, whether disclosure is necessary and just how much is due. The basic rule is that South African tax residents are subject to tax on their worldwide income regardless of where that income derives or whether it has already been subject to tax in the country where it was earned.
It gets more complicated though, because the South African government has numerous Double Tax Agreements (DTA) with various countries, which seek to prevent double taxation. These are not always helpful however as they don’t always protect the investor from paying two sets of taxes.
The DTA signed with the UK for example clearly outlines in Article 6(1) and 6(3) that where a South African receives rental income from letting immovable property in the UK, such income may be taxed by the UK. It does not however say that South Africa is then not allowed to also tax the income. Article 21 tries to provide protection from double taxation, but there are numerous limitations.
This is then further complicated by the fact that there are some domestic laws which seek to help prevent double taxation in some circumstances, but these laws don’t always apply and come with onerous documentary requirements. Basically, consult an accountant to go through the particulars of your case to determine if any tax is owed and what to do about previously undisclosed income to avoid falling foul of the law.
- Waiting for the right time to invest
Perhaps the simplest error to correct is the one where, having already decided to invest offshore, the investor decides to hold onto their money, waiting for the right time to jump into the foreign market.
It may seem wise to wait for the Rand to strengthen or the global equity markets to offer up some value, but this is advised against. Commonly, when people are waiting to move funds, they place large sums of money in money market funds, sometimes for years, looking for the right time to jump in, all the while accruing local income taxes at the marginal rate. This more than undoes all the good that a small strengthening of the Rand could present.
If you are going to do it, there is no better time than the present.
