THE South African economy has pneumonia, and the best medicine would be relaxation from some stifling laws and regulations and perhaps a few drops of tax relief.
However, speculations about what medicine Finance Minister Pravin Gordhan is going to apply seems to indicate none of this.
Keith Engel, CEO of the South African Institute of Tax Professionals (SAIT), says to make matters more difficult, tax increases can easily constrain growth even further.
"This in turn comes at a price with additional taxes hindering future tax revenue itself as a slowdown in growth leads to a slowdown in growth of tax revenue. South African consumers are already under pressure from increased interest rates, low growth, rising food costs and rising electricity costs, to name a few."
A persistent guess is the inclusion of a new tax bracket for individual taxpayers who earn more than R1m in taxable income a year — in other words a wealth tax.
Tertius Troost, tax consultant from Mazars, says this new bracket can "easily" be subject to a tax rate of 45% with minimal legislative change. People currently pay 41% of taxable income above R701,300.
This will place SA in the same league as China, the UK, Australia and the Republic of Congo.
The government might argue that countries such as Chad, Côte d’Ivoire, Sweden, Portugal, Spain, Denmark, Finland and Zimbabwe all have top tax brackets in excess of 50%.
Mr Engel says the minister will be forced into a mixture of tax increases falling largely within the personal income tax arena, given the Treasury’s prior history.
"The overall charges will most likely have a solidarity feel with the pain reasonably spread across all classes," he said.
In terms of this approach, one can expect to see only partial marginal bracket relief, with a further increase in the top rate of at least another percentage point.
The wealthy may also expect an increase in the inclusion rates for capital gains tax. Mr Troost said it could be increased to 50% for individuals and 75% for companies.
This will be in line with Australia’s regime, where capital gains are included at 50% for individuals and 100% for companies. The inclusion rate refers to the rate at which capital gains are included in a taxpayer’s taxable income. The inclusion rates are currently 33.3% (individuals) and 66.6% (companies).
The effective rates refer to the amount of tax that is paid on capital gains. The current effective rates are 13.65% for individuals and 18.65% for companies.
Mr Troost said given the fact that companies were paying 28% on their income, many were tempted to declare some of their income as capital gains, which is taxed at 18.65%.
If the inclusion rate were increased to 75%, the effective rate would be 21%. "By decreasing the gap between the taxing of income and capital, it is less likely that taxpayers will take the risk of classifying receipts (income) as capital in nature because the reward for this would be less," said Mr Troost.
He added that an increase in "wealth taxes" was not an international trend, but SA required ways to obtain additional tax revenue, without excessively taxing the poor, but at the same time not alienating the rich.
Mr Troost suggested that undistributed dividends held by private investment holding companies could attract a 15% withholding tax in the future. "This tax will be specifically aimed at private investment holding companies. These companies are usually just holders of financial instruments that derive passive income."
The legislation will not be aimed at operational holding companies that have expansion plans, Troost said.
The Treasury proposed a similar amendment in 2008 and Mr Troost thinks it may be re-considered to increase tax collections.
Mr Engel said it may be a good idea in theory, but it gave rise to many unintended practical difficulties. "Too many exceptions and deviations had to be created, rendering the tax useless."
Mr Engel cautioned that there was a limit to what the South African economy could bear. "I believe any tax increase needs to be accompanied with meaningful spending cuts."
• What is the inclusion rate?
A company sells an asset for R1m, which it originally bought for R600,000. The taxpayer thus derives a capital gain of R400,000. The amount that must be included in the taxpayer’s taxable income is the capital gain multiplied by the inclusion rate. This is R266,400 (R400,000 x 66.6%).
• What is the effective rate?
The effective rate refers to the amount of tax that is paid on capital gains. If the sale is the taxpayer’s only income the company will pay tax of R74,592 (R266,400 x 28%). The effective rate is therefore 18.648% (R74,592/R400,000). A simple way of calculating the effective rate is to take the tax rate multiplied by the inclusion rate (28% x 66.6%).
Source: Tertius Troost, tax consultant at Mazars.