On the 24th of February 2021, the South Africa’s Minister of Finance, Mr Tito Mboweni delivered what has been termed a historical and surprising budget. The budget is said to be surprising because over the last five years the government has been reducing deficit through tax increases, whereas the focus of this budget is to decrease expenditure. The budget is also contrary to the October 2019 Medium Term Budget announcement, which indicated that additional tax measures were under consideration. This budget also responds to the effects of the COVID-19 pandemic which negatively affected the economy. As a result of the effects caused by the COVID-19 pandemic the South African economy suffered the highest budget deficit in its history in the face of a rapidly growing public debt.
The article discusses key highlights of the budget speech that citizens, business owners, youth and companies must be conversant with. There are as follow:
The Minister announced that the government will remove a planned a 40 billion rand in tax increases and instead raise the tax revenues by closing corporate sector loopholes and broadening the tax base. The following are the notable tax changes:
- Income tax: Contrary to expectations, government will adjust tax brackets above inflation, which will see taxpayers paying 5.2% less income tax. There will be an above-inflation increase in the personal income tax brackets and rebates.
- Corporate tax; This will decline from 28% to 27%.
- Tax free savings: There is an increase the annual contribution limit to tax-free savings accounts by R3,000 from 1 March 2020.
- Sin tax: There shall be an increase in excise duties on alcohol and tobacco by between 4.4 and 7.5%. Also, government will introduce a new excise duty on heated tobacco products, to be taxed at a rate of 75 per cent of the cigarette excise rate with immediate effect.
- Expat tax: Government will increase the cap on the exemption of foreign remuneration earned by South African tax residents to R1.25 million per year from 1 March 2020.
- Green tax: The carbon tax rate will increase by 5.6% for the 2020 calendar year. Accordingly, the carbon tax rate will increase from R120 per tonne of carbon dioxide equivalent to R127 per tonne of carbon dioxide equivalent. The plastic bag levy will go up 25 cents.
- Medical aid tax credits: After a freeze last year, tax credits will increase from R310 to R319 per month for the first two beneficiaries, and from R209 to R215 per month for remaining beneficiaries.
- Exchange Control
A development worth celebrating is the modernisation of the foreign exchange system, that is, the Excon regime. Over the next 12 months, a new capital flow management system will be put in place wherein all foreign-currency transactions will be allowed, except for a risk-based list of capital flow measures. This development will undoubtedly increase transparency, reduce burdensome and unnecessary administrative approvals, and promote certainty. The risk-based list of capital flow measures includes the following;
- South African corporates will not be allowed to shift their primary domicile, except under exceptional circumstances approved by the Minister.
- Approval conditions granted by the Minister for corporates with a primary listing offshore, including dual-listed structures, will be aligned to the current foreign direct investment criteria and/or conditions to level the playing field.
- Cross-border foreign-exchange activities will continue to be conducted through dealers authorised and regulated by the South African Reserve Bank (SARB).
- Prudential limits on South African banks and institutional investors will remain, but the limits will be reviewed regularly.
- Banks’ unhedged foreign-currency exposures will remain limited to 10% of liabilities (known as the net open foreign exchange position) and will remain regulated by the Prudential Authority of the SARB.
- The domestic treasury management company policy, which allows South African companies to establish one subsidiary as a holding company for African and offshore operations without being subject to exchange control restrictions, will remain in place, as will the international headquarter company regime.
- The export of intellectual property for fair value to non-related parties will not be subject to approval.
- The current policy of certain loop structures, which relates to the acquisition by private individuals of equity and/or voting rights in a foreign company, will remain until tax amendments are implemented to address the risks.
As regards to individuals, the budget speech referred to transfers in excess of R 10 million which transactions will come with a more stringent verification process by the South African Revenue Service (SARS). It therefore seems that there will be no limits on individuals externalising funds provided the necessary tax clearance has been obtained. Notably, natural person residents and natural person emigrants will be treated identically, and the current exchange control emigration concept will be phased out and be replaced by a SARS verification process. This will also affect withdrawal of retirement funds on emigration and transferring dual listed shares abroad.
- Business and Trade
One of the main objectives of the budget which the government emphasized is its central role in turning South Africa into a competitive economy. Signalling the corporate tax cut in the future makes South Africa’s tax system more competitive. It also helps business to grow whilst the economy recovers and promotes the broader call that South Africa is open for business, investment and trade. The budget enhances immediate prospects for economic recovery and the economy’s long-term growth prospects which is a necessary, credible path to fiscal and monetary balance. The budget is thus good for both individuals and companies in business.
South Africa already has a relatively high tax-to-Gross Domestic Product (GDP) ratio compared with other African countries. Further, South Africa’s corporate tax rate has not changed for more than a decade at 28% which is high compared to some of its largest trading partners who are on the mid to low 20%’s. Reducing the corporate income tax rate will thus encourage new investment, expand production and assist growth. Additionally, with trading having commenced under the African Free Trade Area (the AfCFTA), South Africa is well positioned to take full advantage of the benefits offered by the Free Trade Area. From the looks of it, it seems that there will be a gradual rate reduction in corporate tax over probably the next 5 years to put South Africa on par with its trading partners. This will inevitably promote businesses and trade.
- Property industry
The property industry has a lot to celebrate as the threshold for transfer duties has been adjusted. As of now property costing R1 million or less will no longer be subject to transfer duty. This is welcoming news for all because it makes buying property more accessible for South African citizens. Even for citizens who wish to purchase property for more than R1 million because they will save money, for instance, R17,000 in transfer fees on a R2.5 million home. This has a huge positive impact for the youth as they become more financially independent, they will be able to qualify for home loans and in turn, become property owners.
- Bailouts for State Owned Entities (SOEs)
Over the past 12 years, the government has allocated R162 billion to financially distressed state-owned companies. ‘’These allocations generally provide short-term support, but cannot substitute for the far-reaching structural reforms needed to return them to operational and financial stability,” Treasury said. In 2019/20, government allocated R49 billion to Eskom and committed R112 billion in medium-term funding. This is the funding allocated to state owned companies over the next three years.;Eskom R112 billion (R56 billion in 2020/21) SAA: R16.4 billion (R10.3 billion in 2020/21) Denel: R600 million. South African Express: R200 million.SABC: Cash bailout of R1.1 billion.
The Land Bank was the only SOE to be bailed out to the tune of R9-billion over three years. However, the budget makes provision for an amount of R41 million to set up the Presidential State-owned Enterprise Council, a new advisory body that will help government “reposition” state-owned companies.
- Fuel sector
The Automobile Association (AA) was not pleased with the increases of the General Fuel and Road Accident Fund levies. The Minister announced a combined 25 cents increase to the two main fuel levies: 16 cents will be added to the General Fuel Levy bringing it to R3.63 on every litre of fuel, and nine cents will be added to the Road Accident Fund levy bringing it to R2.07 on every litre of fuel.
This means consumers will pay R5.70 towards these two taxes alone, or around 35% to 40%on every litre of fuel. The increases to the fuel levies are significant and will affect the poorest people the most as it will make their public transport costs and taxi fares more. The financial impacts of the fuel increases are concerning and will result in a lot of dissatisfaction in most South African citizens.
- Cutting the wage bill
The government wage bill is still the biggest expense in the budget, an issue which the Minister intends to tackle over the next three years. “Between 2006/07 and 2011/12, we were able to add about 190,000 employees. However, at the same time government wages also increased significantly. We cannot go on like this,” said the Minister.
The aim is to cut R160 billion in the wage bill over the next three years, with the aim to save R37.8 billion in the next financial year. The cut in the wage bill has the risk of widespread contention by the 1.3 million-strong public-sector workforce as government spends around a third of its budget on the salaries of its civil servants, including national and provincial officials, doctors, teachers, and police. Some experts are of the opinion that even if the cuts materialise, the budget deficit will remain high at 10.1% of GDP in the next fiscal year, from 15.7% in the current year. The debt-to-GDP ratio will still exceed 92% in 2023/24.
- R100 billion allocation for jobs
In 2020, Treasury made R83.2 billion available for the public employment programmes, this year another R11 billion will be allocated for the Presidential Youth Employment Initiative, taking the total funding for employment creation to nearly R100 billion. By the end of January 2021, more than 430,000 jobs of “various duration” including as temporary teaching assistants and in programmes to reduce landfill have been created as part of a public employment initiative. An additional 180,000 jobs are in the recruitment process and more than R65 billion has also been allocated to help an estimated 89,000 artisans to register for training and to create more than 320,000 work-based learning opportunities. This is a positive development which should witness a decrease in unemployment rate of youth.
- Social grants
It is estimated that more than 18 million people receive a social grant in South Africa, which will be increased in the new financial year. Those dependent on social grants were not granted much relief in this year’s budget, as social grants increased by less than inflation. Old age grants increase from R1,860 to R1,890 – an increase of 1.6%. For those over the age of 75, and war veterans, grants increase from R1,880 to R1,910 (+1.6%). Disability grants increase from R1,860 to R1,890 (+1.6%) while foster care grants increase from R1,040 to R1,050 (+1%). Care dependence grants increase from R1,860 to R,1890 (+1.6%) while child support grants from 445 to 460, increase of 3.4%. The social grants budget has been cut by more than 2% which put a financial strain on the dependents solely relying on the same.
- COVID-19 Vaccine
Government intends to vaccinate 67% of the population in a year and Treasury has therefore allocated an initial amount of R9 billion for the vaccines – which can increase to closer to R20 billion. This will boost youth employment, to counter economic setbacks caused by the effects of the COVID-19 pandemic.
In conclusion, while the new national budget paints a very gloomy and depressing picture of South Africa’s debt crisis, with a fifth of all tax income now going to creditors, treasury is expectant that debt will stabilise at below 90% of GDP by 2025/2026. The budget however gives South Africans some hope in the form of a R791.2 billion investment in driving infrastructure and the allocation of a further R10 billion to help small and township businesses establish themselves. However, recovery will take time, effort and commitment.