South African Budget Hikes Personal Income Tax
On February 25, South Africa’s Minister of Finance, Nhlanhla Nene, presented a 2015 Budget that was said to be constrained by a slowing economy and lower-than-expected tax revenues.
Nene indicated that the Government now has to rebalance its fiscal policy to reduce the “structural gap” that exists between spending on investment and economic development and the amount of tax it expects to collect.
South African economic growth for 2015 is projected to total only two percent, down from indications of 2.5 percent growth in October last year. The Government is aiming for three percent growth in 2017, Nene said, and so “it is now clear that we can no longer postpone consideration of additional revenue measures.”
The main tax proposals include a one percent increase to PIT rates for all taxpayers earning more than ZAR181,900 (USD15,900) a year. Under the changes, the rates above this threshold will range from 26 percent rate, for taxable incomes between ZAR181,901 and ZAR284,100, to 41 percent rate, on annual earnings above ZAR701,300.
However, with tax brackets, rebates, and medical scheme contribution credits also being adjusted for inflation, the net effect is that there will be tax relief for those earning below ZAR450,000 a year. Those with higher incomes will pay more tax.
There will also be an increase in the general fuel levy and excise duties on alcoholic beverages and tobacco products from April. The rates and brackets for transfer duties on the sale of property will be adjusted to provide relief to middle-income households. Transfer duty will be eliminated on properties below ZAR750,000, and the rate on properties worth more than ZAR2.2m will increase.
Based on the recommendations of the Davis Tax Committee, a more generous tax regime is proposed for businesses whose annual turnover is below ZAR1m. Qualifying businesses with a turnover below ZAR335,000 a year will pay no tax, and the maximum rate is to be reduced from six percent to three percent.
Nene also added that the Government is to take further steps to combat revenue leakages “through erosion of the tax base, profit shifting, and illicit money flows. … Drawing on advice of the Davis Tax Committee, amendments will be proposed to improve transfer pricing documentation and revise the rules for controlled foreign companies and the digital economy.”
It was stressed that these proposals will be in line with the work of the Organisation for Economic Co-operation and Development on base erosion and profit shifting (BEPS). Tax returns may also be changed to allow the collection of more information to help better identify BEPS risks.
The measures are expected to reduce the consolidated deficit to 3.9 percent of gross domestic product for 2015/16, and to 2.5 percent in 2017/18.
