With the budget speech having passed Minister Gordhan surprised few with tax raises. What did surprise was where these taxes have been raised: Mainly in a new tax bracket for high earners and a corresponding increase in the dividend tax rate. The usual culprits were there – Fuel Levy, Sin Taxes and there are some new proposed taxes that will come through in the following year in the form of a carbon tax and a tax on sugary beverages.
As of 1 March 2017 the effective tax rate for profits increases from 38.8% to 42.4%. Furthermore with the further proposed taxes on the horizon the Tax to GDP ratio looks set to balloon to over 30% placing us firmly in the top ten worldwide on this measure.
Through the current tax increases the fiscus stands to raise an additional R28.4bn, however, it’s worth noting that the increase in unlawful expenditure (ie irregular, unapproved and wasteful expenditure) has escalated by 80% placing this at a R20bn increase to R48bn. The Minister could very well have funded two thirds of the required increase by bringing this under control or have funded the entire deficit by reducing this figure significantly. While this is no easy task it will become increasingly difficult to convince South Africans to continue contributing more to the fiscus when close to 4% of the budget is irregularly spent each year.
With a small concentration of South African taxpayers contributing more than 50% of total taxes collected one can only wonder whether moral apprehension will increase or whether high earning individuals will look to greener, less taxed pastures, to earn their income. If this is the case, the intended increase in collections may very well decrease overall tax collections.
What does this mean for you as as a business owner?
- Following today, were you to be a high income earner (more than R1.5m per annum), your marginal tax rate has increased to 45% from 41% previously.
- The Dividends Tax rate increased to 20% – to avoid any arbitrage.
- The general fuel levy has increased by 30 cents per litre and 9 cents per litre on the road accident fund.
- A 6% to 10% increase in sin taxes.
In the coming months, the effect of these increases will be felt in every business, especially as fuel increases often have a knock on effect on the inflationary indexes. The coming months will also be as good a time as any to watch costs and try reduce the growth in these numbers in your business as far as possible.
As with any increases in tax this may also be a good time to consider reinvesting funds within your business or group to delay taxes as far as possible down the line.
Lastly, it is also a good idea to ensure your salary does not increase above R1.5m. Past this point it’s advisable to rather declare your income in the form of dividends as your marginal tax rate could be 42.4% rather than 45%. There is also a further saving of 1% in your business on SDL bringing the potential saving on dividends above this level to 3.6%.
If you have any question on the latest 2017 budget please send them our way and we’ll be happy to answer them.