Unpacking the budget 2019
Eskom has been granted a R69bn bailout package – however there is widespread concern around exactly how this bail out will be used – and what, if any, measures will be put in place to ensure that the funds do not go to waste into what has become known as the “black hole of funding”.
While Eskom and general cost-cutting was the primary focus of Tito Mboweni’s budget speech, there were also some interesting points raised from a financial planning perspective. The budget is a first indication of some of the tax proposals that Treasury intends on introducing.
Lack of incentives to save is disappointing
Disappointingly, this budget has not highlighted any significant attempts to further encourage savings. There is no mention of any increases to the limits on tax-free investments or incentives to promote retirement fund savings, which seems mismatched to the president’s approach to growth and savings.
No further introduction of wealth taxes
Another interesting observation is the absence of any notable attempts to further introduce what is often referred to as wealth taxes (example: transfer duty, estate duty, CGT, donations tax etc.).
Tax brackets not adjusted for inflation
South Africans should be aware that even though there wasn’t any movement in the tax brackets - the table certainly has not been adjusted for inflation. This could catch people off guard from a personal finance point of view if they assume that their position is unchanged.
Many South Africans will receive inflationary-linked salary increases. This will result in a higher effective rate of tax which in turn means more tax payable. Some people could end up in a higher tax bracket without any tax relief.
Some key changes to taxation of annuities from provident funds, foreign employment and spousal pensions
Refining the foreign employment income tax exemption for South African residents: From 1 March 2020, South Africa residents who spend more than 183 days in employment outside the country, will be taxed on foreign employment income of more than R1 million. This is an important point for any South Africans working abroad to keep in mind when planning their finances in the medium to long term.
Reviewing the tax treatment of surviving spouse pensions: Treasury has recognised the hardships caused for surviving spouses who are often liable for tax on income in their personal capacity as well as any spousal pension received. Often this can push the surviving spouse into a new tax bracket which one has not accounted for. To address this, Treasury is aiming to introduce a flat rate on spousal income which should make the system fairer. However, the exact mechanisms through which this will be achieved is yet to be clarified so we will watch developments closely here.
Exemption relating to annuities from a provident or provident preservation fund: It has been proposed that non-deductible provident fund contributions can be used against income received. Currently, any non-deductible contributions for members of retirement funds are tax-exempt against any lump sum or income derived from the retirement fund so this proposal is aimed at extending the exemption to members of provident funds as well. We welcome this development for members of provident funds who choose to take an income.
Change in approach to taxation of collective investment schemes
Taxation for Collective investment schemes: The previously suggested taxation of collective investment schemes has been re-looked at and will be re-considered. Following feedback from industry based on last year’s proposals, Treasury has acknowledged industry’s concerns that introducing the taxation for collective investment schemes as previously proposed would cause more hardship than positives. After reviewing the comments government has proposed that they will need to work with industry. This is an encouraging development for the financial industry indicating that the taxation will be introduced in a constructive and collaborative way.
We usually see the first draft of taxation amendment bill towards the middle of the year and, after vigorous consultation with industry, we see these proposals come to life towards the end of the year/beginning of the next year in the Taxation Laws Amendment Act. As always, we will update our investors accordingly.