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POWERED BY BizNews.com Budget 2018 THE YEAR OF VAT AND WEALTH The year of VAT and wealth #Budget2018
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INDEX
Ramaphosa wasn’t mentioned but his fingerprints all over #Budget2018 3
In a nutshell: Executive summary of 2018 National Budget 6
Latest 2018/19 tax tables: Just 3.7% of taxpayers footing 40% of SA’s bill 9
Tipping point: Treasury at upper limits of taxing South Africans – expert 11
Wealth and VAT: Two tax factors to watch in 2018 as Ramaphosa takes control 14
#Budget2018: Curbing tax avoidance and clamping down on corporate covenants 16
Here’s what the analysts said on #Budget2018 – a mixed bag 17
Clever tax planning: Using the retirement annuity as the new trust vehicle 29
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Ramaphosa wasn’t mentioned but his fingerprints
all over #Budget2018
By Alec Hogg
South Africans are today counting
the cost of Jacob Zuma’s disastrous
leadership. But while they curse a 1%
higher VAT rate; no inflation-rated
adjustments for “bracket creep”; a
52c/litre fuel price rise; a jump from
7% to 9% in luxury import duties, and
higher sin taxes, they might also allow
themselves a sigh of relief.
After years of contracting GDP per
capita (in US Dollar terms South
Africans have been getting poorer
since 2011) some rationality is finally
returning to those who determine
the priorities of national finances.
It is obvious from today’s Budget R1m a year now paying 38.5% of total education system lie a lot further down
allocations and tax adjustments that, personal income tax while earning 22% the chain. And Gigaba’s VAT argument
although it’s barely two months of the declared taxable income. is very definitely a minority among
since he won a razor thin majority in economic theorists who explain that
the vote for the ANC’s presidency, Economically illiterate Jacob Zuma broader collection vehicles are the
business-savvy Cyril Ramaphosa is handed his successor a political antithesis of progressive tax systems.
already having an impact where it poison chalice by promising fee-free
matters. tertiary education to the children of But all of that is now water under the
all but around a million households. Zuma bridge.
It is hard to believe his predecessor With the sweep of his populist hand,
would have directed the Zuma landed National Treasury with There was zero room or time for
implementation of a non-populist a headache now quantified as R57bn creativity on stimulating economic
VAT increase rather than the populist over three years. growth this time. Ramaphosa didn’t
alternative of jacking up the top have much time to get his hands
marginal income rate. As it happens, At the traditional “lock-up” press around the national bookkeeping
after last year’s three percentage point conference, Zuma’s finmin Malusi exercise. But he was helped by the
hike in the top marginal income tax Gigaba and his emotional deputy excellent team at National Treasury
rate (to 45%) and higher dividend tax, Sifiso Buthelezi offered a spirited whose leader, new DG Dondo
both were left untouched this time. defence of the decision to make Mogajane, said that he and his 1,200
university education free. Gigaba also colleagues have learnt that finance
Top income earners are still carrying argued that VAT doesn’t hurt the poor. ministers have tended to come and go
a disproportionate burden, however, – so they focus on just getting on with
with the 270,000 (3.7% of the total) Sensible educationalists have long the job.
who report taxable income of over told us the real blockages in a broken
The year of VAT and wealth #Budget2018 3
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They kept it simple: Treasury needed year ago, to a distressing 4.3%. That
to fill a R36bn hole and find tens of dropped SA from a place among
billions to meet Zuma’s free university respectable global company next to
pledge. They did so by raising VAT and the likes of Malaysia and France, into
using the automatic revenue boost the league of recovering basket cases
that inflation provides to tax scales like Argentina and Pakistan.
(aka fiscal drag).
Ramaphosa needs to get that
There were a few bits and bobs at the corrected – and fast – or risk further
extremities. In essence, however, that’s downgrades by ratings agencies. His
the story of this Budget. renowned negotiating skills and trade
union background must have been put
But in truth, these are little better to good effect in convincing organised
than stop gaps. Ramaphosa’s labour to bend a cornerstone “no-
Administration has been dealt a weak VAT-increase-ever” position.
hand. And its priority is to get the
economy growing again. Without a Gigaba ducked a question about
significant improvement in economic whether there had been any
growth – and the projected rise from negotiating on VAT with trade unions,
1% to 1.5% won’t cut it – Treasury will claiming that it is senseless to engage
be facing an even greater challenge ahead of any tax increases. But given
next year. their vociferous opposition in the
past and their obvious potential to
This year there was a R48.2bn revenue do damage, it is naïve to believe this
hole that pushed the 2017/18 Budget particular balloon wasn’t floated ahead
deficit from the modest, healthy of time.
3.1% projected by Pravin Gordhan a
The year of VAT and wealth #Budget2018 4
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In a nutshell: Executive summary
of 2018 National Budget
Deputy President Cyril Ramaphosa with Minister of Finance Malusi Gigaba at the 2018 World Economic Forum annual meeting in Davos.
CAPE TOWN — South Africa’s new mid-term address, is around 1,000
president Cyril Ramaphosa might words shorter. Also, instead of the
not have been directly responsible for emotive rhetoric that punctuated the
the deployment of the person who Zuma era, this one is on point, rational,
delivered today’s Budget Speech, professional.
but his fingerprints are all over the
document. The text comes from a As heartening, there are only two
different universe to the flowery waffle oblique mentions to Radical Economic
Zuma-appointed finance minister Transformation – one in reference
Malusi Gigaba indulged in during his to “deconcentrating the economy”
October mini-Budget address. through greater competition, and
the other relating to the creation of
Like Donald Trump in Davos, Gigaba’s opportunities for black agricultural
address was tightly scripted – this producers. A new age has truly
speech is all business. That’s reflected dawned. Here’s the executive
by its length – 8,800 words – which, summary. – Alec Hogg
despite it dealing with far more
substantive issues than October’s
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• New taxes will be introduced to raise • A total of R1.2.bn in new revenue • A total of R3bn will have been
R36bn. On the other side of the will be raised through a higher fuel collected by end March from over
bookkeeping statement, the annual tax. The price of petrol and diesel 2 000 applicants for off-shore
cost cutting programme introduced will rise by 52c a litre; 30c/l for the wealth amnesty through the Special
by Pravin Gordhan in 2016 to Road Accident Fund and 22c/l for Voluntary Disclosure Programme.
save 5% a year (R25bn) through the general fuel levy. Sin taxes will
consolidating State procurement, be increased between 6% and 10% • Online sales to South Africans by
has been written in concrete this raising R420m (tobacco) and R910m foreign businesses will in future be
year. As a result, the 2018/19 Budget (alcohol) respectively. liable to VAT.
deficit is projected to fall from 4.3% • Six Special Economic Zones have
to 3.6%. • Estate duty tax is raised to 25% for
estates of greater than R30m. This been approved where companies will
• The largest reallocation of State will raise R150m in fresh taxes.3 be enjoy reduced corporate tax rates
resources is R57bn to fund fee-free and employment tax incentives.
higher education over the next • The excise duty on luxury goods is
raised from 7% to 9%. This will raise • Carbon Tax will be implemented on
three years. It will be phased in, 1 January 2019, based on a principle
starting this year with free tertiary an additional R1bn for the fiscus.
of polluter-must-pay.
education for first year students • Spending on education is the fastest
from households that earn less than growing spending category, rising • Overall government spending will
R350 000pa (75% of taxpayers). 13.7% annually. Over the next increase from R1.56 trn to R1.67trn
three years R32bn will be invested in the year ahead. It is projected to
• The lion’s share of the coming year’s rise at a real rate of 2.1% in the next
additional tax of R36bn will be in building and upgrading schools;
R22bn in feeding 9m learners at 19 three years.
generated by an increase from 14%
to 15% in VAT, which will generate 800 schools; and R3.8bn will go into • South Africa’s economy is
R22.9bn. This is the first time in the providing water and sanitation for anticipated to grow by 1.5% in 2018
democratic South Africa that VAT 325 and 286 schools respectively. after 1% in 2017 (raised from the
has been raised, the last increase • Over the medium term, the 0.7% anticipated in October’s Mini
coming in 1993. VAT’s share of total National Health Insurance project Budget.)
revenue rises to 25.9% from last will receive an additional R4.2bn
year’s 24.7%. Personal income tax • The consolidated Budget deficit for
funded through a reduction in tax 2017/18 was 4.3%. This is slightly
remains the biggest contributor at benefits on medical expenses.
37.6% with corporate tax kicking in lower than what was expected in
17.2%. • New country-by-country reporting, October as higher economic growth
in line with G20 recommendations, led to a R2.6bn improvement in
• The impact of fiscal drag or are being introduced which will revenues, narrowing the revenue gap
bracket creep, where income rises help to address tax base erosion by to R48.2bn from October’s expected
automatically because of inflation, is multinational companies through R50.8bn.
now R21bn a year. An equitable tax transfer pricing.
policy would kick this back through • Old age grants will increase by R90
adjusting the bands. This year only • Treasury is investigating ways in to R1 690 in April and to R1 700 in
the bottom three income levels will which companies reduce their tax October. The child support grant
enjoy the usual adjustment, kicking liability through excessive interest rises to by R20 to R400 in April and
back only a third of the hit. As a deductions. to R410 in October. This will cost a
result, an effective R14bn extra tax total of R2,6bn.
burden will fall on those earning over
R410 000 a year.
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• Social spending will increase 7.9% a • The finmin welcomed back Old
year. Mutual, which is shifting its primary
stock exchange listing from London
• The Department of Agriculture is to Johannesburg. He added his
re-prioritising R581m of its Budget voice to calls for retribution for
allocation over five years to support the Steinhoff accounting fraud,
a black producer commercialisation saying SA regulators are working
programme for 450 farmers. with foreign counterparts to ensure
• The Department of Rural “those at fault are made to account
Development and Land Reform for their crimes.”
will accelerate restitution claims • Offshore allocation limits for
with plans to settle 2 851 of these institutional investors are increased
worth R10.bn. A further R4.2bn has by five percentage points across all
been set aside to acquire R4.2bn for categories.
291 000ha of “strategically located
land.” • The Financial Services Board has
been directed to “proceed with
• An allocation of R6bn has been measured to modernise and improve
set aside for provincial and local the governance” of all retirement
government to assit with drought funds, including the requirement
relief. that they must now submit financial
• A property audit conducted by the statements every year.
Department of Public Works shows • Government will be reviewing all
that national government owns 195 of its open-ended, “evergreen”
000 properties worth over R40bn. contracts to open up opportunities
A programme will be implemented for SMMEs and black owned
to “better utilise of dispose of” the companies to participate; and
properties. It will also review all next week all departments will
rental and property leases in an be instructed to pay suppliers on
effort to cut costs. time “or be charged with financial
• The new Twin Peaks authorities will misconduct.”
be established “on or soon after” 1 • South Africa’s Budget remains one
April 2018. of the most transparent on earth
and was ranked joint first (with New
Zealand) in the 2017 Open Budget
Survey.
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Latest 2018/19 tax tables: Just 3.7% of taxpayers
footing 40% of SA’s bill
JOHANNESBURG — National Treasury notes that this year there will be no fiscal drag relief. As a result, an effective R14bn
extra tax burden will fall on those earning over R410 000 a year. Subsequently, 270 000 people will generate 40% of SA’s
personal income tax. Below are the latest tax details for the year. – Gareth van Zyl
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Medical tax credits
Over the next three years, below-
inflation increases in medical
tax credits will help government
to fund the rollout of national
health insurance. Government will
increase the medical tax credit
from R303 to R310 per month for
the first two beneficiaries, and
from R204 to R209 per month for
the remaining beneficiaries. The
medical tax credit will be reviewed
after the Davis Tax Committee
presents its recommendations.
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Tipping point: Treasury at upper limits of taxing
South Africans – expert
JOHANNESBURG — Amid the 2018 Budget Speech, South African taxpayers, especially the middle-to-higher income
earners, are fast approaching the maximum levels of being taxed. This is according to Ferdie Schneider who is the National
Head of Tax at BDO in SA. He says the country is already at a tipping point when it comes to personal income tax and that the
risk to tax morality is growing. Here is the full interview with Schneider. – Gareth van Zyl
I’m Ferdie Schneider and I’m the
National Head of Tax at BDO in SA.
Ferdie, thanks for chatting to
me. We’ve just had the first VAT
increase in 25 years, announced in
last week’s budget. VAT is regarded
as a regressive tax – so how will
this increase impact the everyday
South African, from the poor to the
stretched middle-classes?
Gareth, if we were to believe Minister
Gigaba when he read the Budget
Speech, it will have a very small
impact because there’s 19 food items
that are subject to the zero-rating
that’s supposedly covering the poor.
In addition, there’s an increase in the
grants to low income level people in
SA as well. That’s the official message
out there from the ministry. I think
it is a bit more complicated than Ferdie Schneider, National Head of Tax at BDO South Africa.
that. The zero-rated food items have
been more or less static since the
Exactly, we needed about R51bn and But it left us at this point, as a result
inception of VAT about 28 years ago.
then it got reduced to about R36bn. of those various factors that I’ve just
So, whether zero-rated items are really
The VAT hike of one percentage point briefly mentioned.
scientifically proven to assist the poor
raises about R22.9bn. So, that brought
is a big question mark. I think there will It’s interesting if one looks at it
us about two-thirds to closing the
be a very strong impact on the poor. because in terms of the breakdown
gap. I think the stress on the personal
However, I’m also not saying that the in revenue, personal income taxes
income tax and the high corporate tax
increase was wrong or the incorrect and VAT are going to be the two
rate left only VAT to be considered. If
thing to do at the time. biggest revenue drivers, while
we had an efficient government — in
the sense of State-Owned Enterprises corporate taxes are in a distant
Gigaba, then, was essentially
(SOEs) and no waste — I think we third. Are South Africans at risk of
between a rock and a hard place, in
wouldn’t have reached this point. being over-taxed here, especially as
terms of that VAT increase.
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the unemployment rate is at record the moment. We’ve seen the fuel
levels? levy increase now yet again. And last
year, when we still had a different
Yes, definitely. So, I’ve looked at some Minister of Finance (it seems like we
of the studies out there, specifically can say that every year), we heard an
on the Laffer curve and whether announcement that they will standard-
we’ve reached that tipping point. rate fuel, whereas at the moment it’s
Now, the Laffer Curve, as you would zero-rated. So, I think there’s definitely if growth expectations in GDP are not
know, measures exactly the point a trend or shift away from direct taxes realised by this time next year. I think
where increases in tax rates actually to indirect taxes, and I don’t think it’s believing all things in the Budget – the
decreases the tax take. My personal necessarily a thought-through policy GDP forecast as well, I don’t think we
view is that we’ve reached that tipping redirection. I think that’s all that’s left. would need it next year.
point at the moment, and I would hope
that the newly appointed Minister of Just on that topic of the standard- Just on the topic of fiscal drag. So,
Finance, Nhlanhla Nene will tackle rating of fuel. Can you explain what that now only applies to the bottom
the reduction and the overall tax that involves exactly, and how it three income levels. This seems
burden in the next five years or so. could impact SA? like another form of stealth tax or
indirect tax, especially for those
What about inflation? The inflation Sure, so if you look at the current
earning, I think over R420 000 a
rate has been cooling off in recent landscape, fuel is zero-rated. What that
year?
times but could VAT risk pushing it means to the average consumer is that
up again? the suppliers of fuel charge 0%, which Yes, I think that’s a fairly new concept
is a theoretical VAT rate on the supply and it’s more prevalent in developing
Gareth, I don’t think so. I think it’s of fuel, which enables them to claim economies like SA with relatively
a very popular conception that import tax reductions. So, by doing the high inflation rates. I think that’s
an increase in the VAT rate raises 0% on fuel you’re actually removing all become an instrument that National
inflation. I don’t personally think so. traces of VAT in the final consumption Treasury has been using to raise
If you look at just the makeup or the price. If you charge VAT at 14% on taxes. It’s almost like a VAT where
calculation of inflation, it involves a fuels however, my rough calculation you pay R114, now R115 almost,
consumer price index change from showed that may increase revenues by for an item, but you actually don’t
day one to day 366, over a 12-month about R1.8bn or R2bn perhaps. But my realise there’s tip inside there, there’s
period. So, if you increase VAT on day initial indication calculations show that VAT, and that’s the same with the
one, 1st April 2018, to 15% there’s no that would raise an additional R18bn bracket-creep type of adjustments,
inflation technically, theoretically for for the fiscus. They will not completely, where they don’t adjust for inflation.
the 12 months, even though the prices I believe, remove the fuel levy but they I believe that they’re raising about
increase. The moment that you come will probably reduce it to the extent R6bn this year on bracket-creep; this
to a point where you can actually that there would be a tax expenditure is after they’ve given away money in
calculate inflation, that inflation is of about R3bn, which leaves an the first three or four brackets, the
gone. additional R15bn. But I think with the lower income brackets. But they’re
Yes, and just looking at stealth taxes. shock now put on the general public taking it effectively from the top guys.
It’s quite a popular phrase that has by the increase in the VAT rate, they’re What happens is that, of course, you
come up in financial media over not going to repeat that statement of get an inflationary increase if you’re in
recent days. It does look as if the last year for a while. that grouping and then you just raise
trend in SA is that indirect taxes are more tax. If you don’t adjust that for
So, do you think that it could be off
on the rise. Do you think that that’s inflation there’s effectively that stealth
the table?
a fair thing to say? tax in there.
Yes, I would guess it’s off the table for
Definitely. I think we’re raising Looking forward, you’ve spoken a
now. Gareth. And I think the only way
roughly about 25% just on VAT at little bit about Nhlanhla Nene, who
that it can come back to the table is
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of course was named as SA’s new in the next three years. I don’t think
Finance Minister this week. Do you it will be easy in the next three years,
think that going forward taxpayers because that would be part of a
will bear more pain or do you think turnaround, in my view. But I would
that things will get easier for them think we’ll turn in the next three years
in the years to come? or so and we’ll see a favourable change
in the next five years.
Gareth, I also saw last night that they
quoted a term ‘Ramaphoria’. So, I Well, at least there’s something
think whilst we’re in this ‘Ramaphoria’ to look forward to. There seems
we must capitalise on it. And with like there’s light at the end of the
Nene there in Finance, I think the tunnel. Thanks for chatting to me
general feeling is that he is a very today, Ferdie.
capable and able Minister of Finance.
Then with Pravin going to Public Gareth, thanks a mill. It was nice and I
Enterprises, I think South Africans can appreciated it.
actually look forward to a turnaround
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Wealth and VAT: Two tax factors to watch in
2018 as Ramaphosa takes control
JOHANNESBURG — This Q&A with Stellenbosch Business School lecturer Lee-Ann Steenkamp provides a great explanation
on how Finance Minister Malusi Gigaba’s tax changes will impact South Africa in the coming months. But with Gigaba
potentially facing the chop from President Cyril Ramaphosa, the focus will also shift to how aggressively the country’s new
finance minister will help drive home tax changes and even handle possible reforms. It truly is all hands on deck if there’s any
hope of steering South Africa Inc. on the correct course again. – Gareth van Zyl
By Lee-Ann Steenkamp*
South Africa’s 2018 national budget
came with a raft of tax increases
indicating the country’s desperation
to address a growing gap in its public
finances. These include a hike in Value
Added Tax from 14% to 15%. Sibonelo
Radebe asked Lee-Ann Steenkamp to
highlight the key tax developments.
What is your general impression of
the budget speech?
I’m cautiously optimistic. In his own
words, the minister of finance Malusi
Gigaba noted this was a tough but
hopeful budget. The budget speech
echoed the theme of rebuilding and
restoration set out in President Cyril South Africa’s finance minister Malusi Gigaba. Photographer: Dean Hutton/Bloomberg
Ramaphosa’s state of the nation
address.
from 20% to 25% (with certain What are the main drivers of the tax
What is your impression around the thresholds applying). And the VAT rate developments?
key tax announcements? was increased from 14% to 15%. This
won’t be a popular choice for the trade The tax proposals are designed to
Given the increases in personal increase revenue collection. And the
income taxes in previous years major unions. But the Davis Tax Committee,
set up by government to assess ways impending sugar tax (now called a
tax instruments have reached their health promotion levy) and carbon tax
limit in being used to raise revenue of improving the country’s tax policy,
showed that a VAT adjustment would show that environmental and health
sustainably. As a result the minister considerations have begun to play a
only had two options to work with – have the least detrimental effect on
economic growth and employment role in tax policy.
focusing on wealth transfer taxes and
Value Added Tax (VAT). over the medium term. In addition, the Overall, the tax policy measures
negative impact on poor households are designed to raise R36 billion in
The result was that estate duty and is mitigated by the zero-rating of basic additional revenue in the 2018/19
donations tax rates were increased foodstuffs. financial year. These measures are
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An annual wealth tax would also
be extremely complex and would
probably lead to increased compliance
and enforcement costs for the South
African Revenue Services. This raises
the question: would the cost be worth
the additional tax revenue? We don’t
know. What’s clear is that further in-
depth research is required by the Davis
Tax Committee, followed by a broad
public consultation process.
At the very least the finance minister
should have highlighted the issue in
aimed at reducing the budget deficit
his speech. Policy transparency goes
and funding fee free higher education
a long way in assuring investors (and
and training for students from poor
taxpayers) that their money is in safe
households.
hands.
Were there any missed opportunities
Any other thoughts?
from a tax perspective?
The minister admitted that corrupt
To create more certainty for tax
and wasteful expenditure by the
planning it would have been helpful
government had eroded taxpayers’
if the minister had explicitly said
trust in the state. This is a good
something about the introduction of
starting point. But we’ve heard
a wealth tax. The Davis Committee
acknowledgements like this before,
looked into the efficacy of a wealth
with very little (if any) progress
tax. The options would be charging it
afterwards.
as a land tax, as an annual net wealth
tax or as a national tax on the value of The ConversationThe next few months
property (over and above municipal will be crucial to see how the promises
rates). made by Ramaphosa will play out.
Hopefully the governance and
A wealth tax raised on the value of
accountability of the South African
land would be complex. For example,
Revenue Services will get immediate
it can’t be assumed that all private
attention.
land owners are wealthy individuals.
In the same vein, a national tax on the
value of property would suffer similar Lee-Ann Steenkamp is Senior lecturer,
shortcomings to an annual land tax. University of Stellenbosch Business
Thresholds would have to be used as School (USB), Stellenbosch University.
well otherwise ownership would be This article was originally published on
used as a proxy for wealth. The Conversation. Read the original
article.
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#Budget2018: Curbing tax avoidance and
clamping down on corporate covenants
By Marcus Botha and • Country-by-country reporting
Sumayyah Pahad enhancements that will ensure the
fair share of tax is paid on South
The 2018 Budget Speech delivered African source income.
by Minister of Finance, Malusi Gigaba
on 21 February 2018 confirmed South • Investigating options to curb
Africa’s commitment to ending tax excessive interest deductions to
avoidance and its impact on economies reduce company tax liabilities.
and societies worldwide.
In addition to the above, a clamp down
It was announced that the National on the following domestic corporate
Treasury, in close cooperation with the covenants has been announced
Reserve Bank, the Financial Intelligence to support the fight against tax
Centre and the South African Revenue avoidance:
Service, are taking several steps to
detect, disrupt and deter illicit financial • Debt relief rules in terms of section
flows including: 19 and paragraph 12A.
• Increasing capacity, coordinating • Share buybacks.
a national risk assessment and • Dividend stripping.
improving information sharing
between various agencies. • Allowances granted to companies on
debt funding to acquire qualifying
• The implementation and tightening controlling interest in operating
of policy measures to deal with companies in terms of section 24O.
transfer pricing and base erosion by
multinational companies in line with These proposals have been left open
G20 recommendations. ended and certainty is expected
later in the year when the Tax Law
Amendments Bill is promulgated.
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Here’s what the analysts said on #Budget2018
– a mixed bag
JOHANNESBURG — Analysts have provided differing views on Finance Minister Malusi Gigaba’s Budget Speech on
Wednesday. On the whole, many experts have welcomed government’s tough choices on VAT and other cost-cutting
measures. However, concerns exist about where the growth will come from. Ultimately, it’s economic growth that will help
solve many of the country’s woes, but, at the moment, faster growth is proving elusive. President Cyril Ramaphosa has a huge
task on his hands in years to come. Below is a wide compilation of several analysts’ reaction to Budget 2018. – Gareth van Zyl
By Nazmeera Moola, co-Head inflation in the top four tax brackets,
of Fixed Income, Investec Asset expected to bring in a further R6.8bn.
Management
In terms of the growth forecasts, the
By raising South Africa’s VAT rate National Treasury’s assumption
from 14% to 15%, the South African of growth at 1.5% for 2018 is at the
government indicated a willingness bottom of the consensus range, and
to take difficult (and unpopular) there is definite room for upside if half
decisions in order to stabilise the the structural measures announced in
fiscus. Coupled with the recent change President Ramaphosa’s State of the
in the President, this Budget should Nation Address materialise.
be enough to keep Moody’s on hold
when they release their South Africa The main budget forecasts remain
sovereign review on March 22nd. If higher than we would have preferred,
Nazmeera Moola
a good cabinet is appointed in the with the primary balance, which
coming week, it may even be enough excludes interest payments, only
for Moody’s also to move the outlook moving to zero in the 2020/21 fiscal Contrary to our expectations, there
to stable from negative. However, year. Nevertheless, the improvements were virtually no cuts to overall
there are two concerns – firstly, that are still substantial. The 2018/19 expenditure over the medium
the debt-to-GDP profile does not forecast falls from 4.5% to 3.8% of term. Instead, there is a significant
stabilise for five years, and secondly, GDP, while the 2020/21 forecast reprioritisation of spending in order
the public sector wage settlement declines from 4.6% to 3.7% of GDP. to accommodate the R66bn needed
that is still being negotiated. However, if growth of 3% materialises in the next three years to fund free
by late 2020, this alone would move tertiary education. This leaves
Overall, Finance Minister Malusi the main budget deficit to 3.4% of considerable room to cut spending
Gigaba presented a plausible, GDP in that year. if President Ramaphosa’s planned
conservative budget with reasonable merger of government departments
growth assumptions that focuses on The improvement in the debt profile, proceeds. However, the wage increases
what it is delivering this year rather driven by the higher revenue forecasts currently being negotiated with public
than making promises of future due to the VAT hike and higher servants is critical – any slippage from
consolidation. Revenue hikes totalling growth forecasts, is encouraging. the budgeted wage bills will derail this
R36bn are planned for the 2018/2019 However, with the debt-to-GDP ratio budget.
fiscal year, anchored by the VAT only peaking in the 2022/23 financial
increase, which will add a projected year, we need to see further progress
R22.9bn, and the zero relief for at the Medium Term Budget Policy
Statement in October this year.
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President Jacob Zuma releases Heher report on tertiary education fees. More of Zapiro’s magic
available at www.zapiro.com.
Ultimately, all our budget woes would The Budget was always going to be a helpful if this takes place in the context
be resolved if we could get growth necessary, but not sufficient condition of a competitive currency. In 2017,
going. For example, if we could achieve to shoring up South Africa’s one emerging markets experienced inflows
a growth rate of 3% in SA the 2020/21 remaining investment grade credit of US$100bn into dedicated equity and
fiscal year, it would push up the rating and restoring the confidence of bond funds. While flows in 2018 have
primary main budget balance by 0.4 households, investors and businesses been more volatile, the expectation
percentage points. Indeed, it should in the economy. This Budget is good. is that they continue. Therefore it is
not be out of reach and the Budget In light of the political flux it was very clever of the National Treasury
Review sets out a breakdown of how produced within, it is excellent. It and Reserve Bank to loosen exchange
GDP growth of 4% could achieved. demonstrates the depth of the skills controls for institutional funds. The
Assuming baseline GDP growth of and commitment of the Treasury staff. Budget Review noted that offshore
1.5% currently, the following factors limit for institutional funds is
could push it to 4%: The key now is whether the widely increased by 5 percentage points for
expected cabinet reshuffle puts all categories, including the African
• Improved confidence: +0.5% people in charge of key Ministries that allowance. Therefore the African
produce a regulatory environment that allowance goes from 5% to 10%
• Telecoms reforms: +0.6% pragmatically encourages investment and the Rest of World category for
• Lower barriers to entry for small while taking into account South institutional funds goes from 25% to
business: +0.6% Africa’s social context. As the Treasury 30%. Total ex-SA allowance is raised
noted, a boost to confidence alone will to 40%. This allows savers to continue
• Transport reforms: +0.3% raise growth by 0.5%. Sectoral reforms to diversify their holdings, while likely
will do much more. providing some offset to the likely
• Promotion of agriculture & tourism:
+0.2% Structural reforms are the key to inflows as South Africa’s potential
improving South Africa’s growth growth rate rises.
outlook. However, it is far more
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PWC’S TAX COMMENTS Clarification on brown bread
ON THE 2018 BUDGET Following recent uncertainty regarding
REVIEW: INDIRECT TAX the zero-rating of basic food items,
government proposes an amendment
Charles de Wet, Head of Indirect Tax, to reflect the original policy intent that
PwC Africa only brown bread and whole wheat
Increase in VAT rate brown bread will be zero-rated, and
will not extend to rye or low GI bread.
The Minister of Finance announced in
his Budget speech that the VAT rate Cryptocurrency
will be increased by 1 % to 15% with The VAT and Income tax treatment of
Updated regulation for foreign
effect from 1 April 2018. This increase cryptocurrencies will be clarified.
electronic services
is expected to raise additional revenue
of R22.9 billion. The 2017 Budget Review announced Insertion of the definition of “face
that regulations prescribing foreign value of a debt transferred”
The result of the aforementioned
electronic services subject to VAT
increase, is that consumers will now A VAT-registered vendor is permitted
would be broadened to include cloud
pay an additional 1% tax on any to claim a deduction for VAT on
computing and other online services.
purchases of goods or services from taxable supplies that have to be
VAT vendors. This will have a major Updated draft regulations prescribing written off. If the vendor cedes or sells
impact on households’ already tight foreign electronic services and the debt that has been written off on a
budget. The implementation of the supporting amendments to the VAT non-recourse basis for an amount that
VAT increase for businesses may be legislation are to be published on is less than the amount owing, then
complex, and the implementation date Budget Day for public comment. It the sale of the debt is exempt from
of 1 April 2018 does not leave much is disappointing that the regulations VAT and the vendor is not required to
time to allow businesses to effect dealing with foreign electronic services make any adjustments to the previous
the necessary system changes and have not kept up with international VAT deduction. Certain vendors that
enhancements. best practice. buy book debt then attempt to claim
a further VAT deduction if they write
off all or part of this debt in future.
This results in a double VAT deduction,
which is against the intention of the
legislation.
To prevent this double VAT deduction,
it is proposed that the term “face value
of a debt transferred” be defined in the
VAT Act to take into account the policy
rationale explained in the explanatory
memorandum.
Postponing the abolishment of the
zero-rating of the supply of goods
and services for the national housing
programme
In 2015, amendments were made to
the VAT Act to abolish the zero-rating
of the supply of goods and services
for government’s national housing
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programme, with effect from 1 April
2017. In 2017, the legislation was
amended to postpone the abolishment
date for a further two years to 1 April
2019.
Due to budgetary constraints, it is now
proposed to postpone the effective
date for this amendment indefinitely.
CEO INITIATIVE REACTION
TO BUDGET SPEECH
The CEO Initiative is encouraged
by the steps taken in the Budget Malusi Gigaba gestures as he speaks during a news conference after presenting his first budget
presented yesterday, aimed at to parliament on May 23, 2017. Photographer: Halden Krog/Bloomberg
achieving fiscal consolidation, balanced
with the need to redress our country’s
severe socio-economic shortcomings
amid a low-growth economic the unsustainable accumulation of finances. This has been softened by an
environment. debt, closing in on the fiscal gap and increase in social welfare spending and
accelerating growth. more inflation-adjusted tax relief for
“We realise the trade-offs and those taxpayers in the lower earnings
decisions could not have been easy “In this regard we welcome the plans brackets,” says Mabuza.
with so many competing priorities, towards the stabilisation of debt-
but given the severity of our to-GDP to 56.2% by 2022/’23 fiscal The CEO Initiative also commends
challenges, we all need to sacrifice in year, as well as the lowering of the the ongoing measures against
some way to ensure the long-term consolidated deficit over the next corruption and wasteful expenditure
stability of our fiscal position and avert three years to 3.5%. While there in government departments and
further credit rating downgrades,” is room to reduce these elements municipalities, such as supply chain
further, we believe it is a positive start management strengthening.
to improving our long-term fiscal
outlook,” says Mabuza. Commitment to enhancing growth
The downward revision of the Over the past two years the CEO
expenditure ceiling is encouraging, Initiative has been engaging labour and
and we particularly welcome the government on measures to improve
comments by the Minister of Finance economic growth in a sustainable
regarding the need to rein in public and inclusive manner. In this regard,
sector borrowing, as well as the higher we welcome the prioritisation
projections for GDP to 1.5% for this of expenditure towards growth-
Jabu Mabuza enhancing and employment-creating
year.
measures, such as small business
says Jabu Mabuza, Convenor of the “We acknowledge that the decision development and infrastructure
CEO Initiative. to increase VAT would not have growth.
been an easy one for any emerging
Fiscal consolidation economy in a time of low economic “The work on the SA SME Fund to
growth, but we commend the National support high-potential SMEs is in an
Going into this budget, South Africa’s advanced stage, and this aligns well
Treasury for the bravery in taking the
most pressing crisis was to achieve with the government’s establishment
difficult decisions necessary for the
fiscal consolidation, by addressing of a R2.1bn fund aimed at supporting
long-term health of our country’s
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small and medium enterprises during
the early start-up phase.”
We also welcome the approval of
six special economic zones which
should enable greater investment
and employment creation in the
manufacturing sector.
“In addition to this, the CEO Initiative
has engaged extensively with labour
and government on measures to revive
the manufacturing capacity in the Vaal SOC reform The government had to make a set
Triangle,” says Mabuza. of tough choices on fiscal policy,
We welcome the Minister’s comments and while the tax policy measures
Clarity on funding mechanisms of on the reforms required at state-
social programmes announced today may be painful, the
owned enterprises, in order for these Chamber is of the view that these
“We are well aware of our country’s organisations to become self-sufficient are necessary to stabilise investment
significant social challenges, and and not dependent on the government ratings in order to encourage
as such business supports the for financial support and rescue. investment going forward. In due
government’s objectives of expanding “It is encouraging that the proposed course government will have to take
access to tertiary education, quality measures go beyond mere bail- steps to incentivise higher levels
healthcare and comprehensive social outs, but include equity investment, of investment through greater tax
security. However, we have always disposing of non-core assets and competitiveness compared with South
maintained that this has to be done in strategic equity partners,” says Africa’s peers.
a responsible manner,” says Mabuza. Mabuza. The Chamber welcomes the
The CEO Initiative remains committed diagnosis on the difficult state of the
to working with labour and the mining industry, and the Minister’s
government in achieving sustainable reinforcement of the commitment
and inclusive growth that benefits all expressed by President Ramaphosa
who live in South Africa. We echo the in his State of the Nation address
comment by the president last week last week to allow parties the space
in the State of the Nation Address, as to engage as part of a co-operative,
The CEO Initiative welcomes the
well as by the Minister in yesterday’s multi-stakeholder effort to address
clarity from the National Treasury
speech, that now is the time for the policy and regulatory uncertainty
regarding the extra funding for the
everyone to lend a hand in rebuilding that has afflicted the industry in recent
National Health Insurance over the
and strengthening our economy. years.
next three years, as well as the funding
to be provided for fee-free higher The Chamber is looking forward to
education. CHAMBER OF MINES working with all stakeholders including
NOTES BUDGET SPEECH government, organised labour and
Revenue-collection strengthening
representatives of mining communities
The Chamber of Mines welcomes the
We look forward to the proposed in formulating a social compact that
2018/19 national Budget delivered
response to the recommendations of will ensure the future sustainability of
today by Finance Minister Malusi
the Davis Tax Commission, but we the industry and will allow the mining
Gigaba as a tough but necessary
await further clarity on the timelines industry to achieve its full economic
one that reinforces President Cyril
for the Commission of Inquiry into and transformational potential.
Ramaphosa’s drive to stabilise the
tax administration and governance economy and get crucial sectors of the
at SARS, as communicated by the economy back on track.
president last week.
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suppressed by various institution, we
are now silenced by Baleka Mbete as a
Speaker by defying the wishes of the
PAC to have our own representative in
the legislature and not her favourite
Luthando Mbinda.
The PAC notes the Budget speech as
presented by Minister Malusi Gigaba
in the National Assembly yesterday.
The speech lacks an element of hope
for the majority of poor landlessness
African people in occupied Azania (SA).
The 1 percent increase of Value-Added-
Tax (VAT) as proposed by the Minister
File photo of a general view of Driefontein Gold Mine shaft, near Carletonville, South Africa.
is a sign of a war waged towards
the poor citizens of our country. We
are finding it absurd and laughable
that the poor should be held liable
for irresponsible, reckless corruption
committed by the filthy rich politicians
and tenderpreneurs.
It is a public knowledge that our
state-owned-enterprises (SOEs)
are ICU (Intensive Care Unit) with
suggestion of other liberal opportunist
to commercialise and privatize power
supply, Eskom. Those opportunist
The budget speech also reinforced the creation of 150,000 new direct
liberal want the SAA also to be sold to
President Ramaphosa’s commitments and indirect jobs. All stakeholders
private hands, PRASA is in a rubbish
to reviving the state-owned must work together to develop a
state that it is incapacitated to
enterprises, whose decline due to vision of what good looks like for the
transport people to their workplace
poor governance and deep corruption mining sector and agree to a social
or students to their institutions. We
have had serious impacts on the compact which will form the necessary
are now told that government must
sustainability of the economy in foundation towards reviving and
general and our industry in particular. building a growing, vibrant and more
transformed South African mining
Chamber members have indicated industrY.
that should South Africa succeed in
returning to the top 25% of mining PAC COMMENT ON
jurisdictions in terms of regulatory
BUDGET 2018
attractiveness as outlined by the
Fraser Institute, the country is likely to The Budget speech confirms that the
see an almost doubling of investment poor/landlessness are in need of a
in the sector over the next four years. friend and that friend have been there
for many decades, its PAC. That is why
This would have profound positive
since its inception, the PAC has always Credit ratings downgrade. More magic
economic consequences, including
been oppressed and available at jerm.co.za
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anti-poor budget. We are not going
to allow a situation when the poor
are continuously attacked through
capitalist-oriented policies which seeks
to take away everything from our
people.
It is still clear to the PAC that that
Budget was drafted and codified
for the rich, it never talked even a
sentence to the poor. There is no
logic to say that you increase social
welfare by less than R90.00 and yet
sell its Telkom stake so that they are The rich continue to be protected and you still increase their daily basic needs
able to save other entities, you rob prevented to pay for tax while our commodities, it is hooliganism.
Paul to pay Peter? The rapid decline of government have taken an anti-poor
entities such as Steinhoff signals that policy to tax and outstrip the poor OUTA: WHERE’S THE
greedy is at it’s highest point. every cent they happen to have. We PLAN IN #BUDGET2018,
are in a situation in the country where
While we partially agree that President the employees are working for peanuts
MINISTER GIGABA?
Ramaphosa’s State of the Nation which only allows them to buy food Taxes are up again, but clear plans
Address was inspiring and promising and ticket for fare to work, our people and interventions for the recovery of
a new country but the Budget speech are subjected to that for all their lives state-owned entities are missing.
negates and contradicts all that and they die poor.
happened last week Friday. Ramaphosa Budget 2018
promised the poor a better South The PAC is calling for the parliament
Africa while Ramaphosa counter that to conduct a thorough investigation “The last few weeks have brought
by blowing the poor in the face. before they could adopt or bless this a new sense of hope to the country
with the change in leadership and
clear actions that signal the address
of corruption and maladministration.
However, Budget 2018 leaves OUTA
concerned about the practical
implementation of the promises,” says
Ben Theron, OUTA’s COO.
OUTA is concerned that there is a
significant increase in state spending
— including an increase in the cost of
the executive — but Minister Gigaba
hasn’t given us a comprehensive plan
to eliminate systematic corruption
or even costed a budget yet for the
already running commission of inquiry
into state capture.
“Minister Gigaba is still trying to
mislead society by conveniently
spouting vague promises without
giving clear action to implement
The coffers are still running dry. More magic available at www.zapiro.com.
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them. The extension of guarantees in of South Africa’s local debt to junk
SOEs such as Transnet, Eskom and status?
SAA, whilst necessary for stability,
fails to address the plans to rebuild Kemp Munnik, Head of Structured
these institutions and stop future Solutions at Bravura, an independent
guarantees. The hints of privatisation investment banking firm specialising
of SOEs is encouraging and, in this in corporate finance and structured
regard, SAA should be disposed of as solutions, comments that this
soon as possible.” Budget was keenly watched by
local and international investors
Minister Gigaba has missed an given the political change that took
opportunity to shed light on plans to place recently, especially against
get our economy growing again. The Wayne Duvenage
the backdrop of the allegations of
vague statements on the stabilisation state capture. The 2018 Budget was
of balance sheets of SOEs provide no essential to restore the credibility of
certainty or confidence that further seriously and reduce corruption. the Annual Budget and the medium-
bailouts will be avoided. SANRAL is to As such, we see the Budget and tax term expenditure framework (MTEF).
be recapitalised, which underlines the increases as a necessary bitter pill to
failure of e-tolls. The MTEF is significant because
swallow, courtesy of Jacob Zuma and
it provides insight into planned
his ineffective Cabinet,” says Wayne
OUTA is disappointed at the lack of government expenditure and indicates
Duvenage, OUTA CEO.
clarity on Government’s commitment expected tax increases that South
to reduce waste and eliminate “We trust that government will now African taxpayers have to face. It also
underperforming programmes to be put to task to reduce spending and informs decisions of the credit rating
address the deficit. OUTA is pleased waste, in order to ensure there are no agencies about South Africa’s fiscal
to see that the Minister managed to further increase in taxes in 2019.” stability.
find the money to get the free higher
education promise started, but he OUTA intends to keep watch on the Revision of growth forecast
seems to have forgotten that those Budget promises and spending.
The South African economy has
students will soon need jobs. slowed down significantly in recent
“Minister Gigaba, in your speech by
The constant increase in personal saying we must fight corruption and years. During the last quarter of 2016
income tax puts more strain on maladministration. Lead by example and the first quarter of 2017 it even
overburdened taxpayers. The plan to and resign,” says Theron. retracted into negative territory.
adjust medical aid tax credits to fund a Gross domestic product growth of
BRAVURA HOLDINGS LIMITED:
very vague National Health Insurance 1% is now expected for 2017, up from
2018 BUDGET RELIES ON
plan will place taxpayers in a worse
INCREASED GROWTH PROSPECTS
position.
TO BALANCE THE BOOKS
“Taxpayers are sick and tired of seeing
Current Finance Minister Malusi
taxes increase year after year without
Gigaba delivered South Africa’s 2018
material improvement in governance.
Budget in a more positive atmosphere
Any increase in the tax burden on
given that Cyril Ramaphosa has been
society is extremely frustrating
sworn in as State President last week.
against the backdrop of rampant
However, was he able to address
maladministration and corruption,”
the glaring revenue shortfalls, ever-
says Theron.
increasing debt to GDP and threat of
“We’re positive that President Cyril Moody’s following in the steps of Fitch
Ramaphosa will take state capture and S&P Global with a downgrade Flag map of South Africa
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0.7% projected in October 2017. The China’s corporate income tax rate is
National Treasury projects real GDP 25%. While some African countries
growth of 1.5% in 2018, 1.8% in 2019 have similar or slightly higher tax
and 2.1% in 2020. rates, these are often effectively
reduced with incentives and/or tax
The economy has benefited from holidays.
strong growth in agriculture, higher
commodity prices and, in recent The Budget Review recognises that
months, improving investor sentiment South Africa is becoming an outlier,
and a stronger rand. providing an unintended incentive for
companies to shift profits abroad and
The global economy continues to pay lower taxes elsewhere. In recent
provide a supportive environment years, government has taken steps
for expanded trade and investment. to avoid erosion of the corporate tax
World economic growth is at its base and prevent profit shifting, and
highest level since 2014 and continues The 2018 Budget proposals will
to remove or redesign wasteful tax
to gather pace. GDP growth is rising increase the gross tax-to-GDP ratio
incentives. In addition to effective anti-
across all major economies. The from 25.9% in 2017/18 to 27.2% in
avoidance legislation and adequate
global economic recovery provides 2020/21. Social grant payments will
enforcement capacity, this requires
a supportive environment for South increase faster than inflation to offset
policy decisions that do not undermine
Africa to expand trade and investment, the effect of higher taxes on poor
investment and competitiveness.
but domestic constraints that have households.
reduced business confidence stand in Government debt
Recognition that corporate tax rate
the way of accelerated growth.
cannot be increased further If government expenditure exceeds
Revenue shortfall and increase in revenue, the difference must be
In a significant step, the 2018 Budget
taxes borrowed, which adds to the level
recognises that a corporate tax rate
of government debt. This implies
There have been revenue shortfalIs in of 28% is affecting South Africa’s
that the government’s burden on the
four out of the past five fiscal years, global competitiveness. The world
economy (total government debt as
mainly as a result of disappointing experiences falling corporate income
percentage of gross domestic product)
economic growth. The cumulative tax rates in advanced and middle-
will increase. Certain economists have
shortfall is about R60bn. The income countries. This trend limits the
commented that SA has entered an
2016/2017 shortfall was R30bn — the room to increase (or even maintain)
unsustainable debt spiral.
worst revenue performance since the the corporate tax rate. Corporate
global financial crisis. income tax contributes more as a The Budget Review recognises that
share of GDP in South Africa than increasing taxes in a low-growth
Minister Gigaba has now announced in most other countries. Within context, when many South Africans are
a projected revenue shortfall of R48.2 the Organisation for Economic struggling to make ends meet, is not
billion in 2017/18, which is R2.6 billion Cooperation and Development desirable. However, the fiscal position
less than the October 2017 estimate. (OECD), only companies in Chile is substantially weaker than it was at
He has therefore announced an contribute a higher share. the time of the 2008 financial crisis,
increase in value-added tax from 14% when South Africa had a gross debt-
to 15%. He will also maintain the top The global trend to reduce corporate
to-GDP ratio that was just above 26%.
four personal income tax brackets income tax rates includes countries
That ratio now stands at 53.3%. A
with no inflationary adjustment that maintain strong investment
failure to act now would lead to more
to eliminate fiscal drag. These two and trading ties with South Africa.
drastic spending cuts and tax increases
measures will raise an additional The United States, for example has
in future.
R36 billion in 2018/19, enabling reduced its rate from 35% to 21%, the
government to narrow the revenue Netherlands from 26% to 21%, and Gross loan debt, which in the October
gap. the United Kingdom from 30% to 19%. 2017 projections was set to breach
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