The National Development Plan (NDP) once again provided the backdrop for the 2014 budget speech on 26 February 2014. The Minister spoke at length about the NDP, which will be implemented by the next administration. The speech was thus devoid of details on economic reforms, even as the Minister stressed the need to boost the economy, specifically small businesses. However, the budget was also devoid of populist rhetoric in this, an election year.
Narrowing the budget deficit
Government non-interest expenditure is expected to be R1.05 trillion in 2013/14, rising to R1.31 trillion in 2016/17. Having increased sharply over the past decade, spending in the course of the next three years is projected to show an increase of only 1.9% per year above inflation (on average). This is slightly lower than the figure given in the October mini-budget.
Spending will be about R3 billion lower than predicted by the Minister three years ago. It will also be slower than the overall economic growth, therefore the Government will be a drag on the medium-term economic performance. Over the longer term, however, it is crucial to get spending under control in order to ensure both the sustainability of the Government’s finances and credibility in the eyes of the market and ratings agencies.
Spending on infrastructure will grow at 4% above inflation over the budget period, suggesting an important shift from current to capital spending.
In further committing to sound finances, Government has introduced an “expenditure ceiling”. This means government non-interest spending cannot breach R1.03 trillion in 2014/15, R1.11 trillion in 2015/16 and R1.18 trillion in 2016/17. Any new spending plans will have to be offset by cuts in other areas.
The budget deficit is projected at 4% of gross domestic product (GDP) in the 2014/15 fiscal year. This is lower than the October mini-budget forecast. The deficit is expected to fall to 3.6% in the next fiscal year, and to 2.8% in 2016/17. The ratio of total government debt to GDP is expected to peak at 45% (compared to 29% in 2009).
Income tax highlights
Corporate tax rates
The flat corporate tax rate of 28% has been retained. It is hoped that the recent recovery in growth rates will increase corporate tax revenues by R22 billion in the next year.
Dividend tax collections are well short of target, presumably due to the exemption granted to retirement funds. Fortunately neither the rate nor the exemptions have been changed.
The annual fiscal drag adjustment to the amount of R9 billion has been granted to personal income taxpayers – a surprising development seeing that additional personal tax could easily have been collected by limiting the fiscal drag adjustment to below the 2013 level of R7 billion. There was no increase in the super-tax marginal rate (40%) despite predictions to the contrary.
Carbon emissions tax (CET), fuel and electricity levies
The implementation of CET, previously scheduled for 1 January 2015, has been postponed to 2016 to allow time to resolve numerous technical difficulties. There is no indication that the forfeited revenues will be recovered from fuel or electricity levies.
The fuel levy increase is a modest 12 cents per litre. Together with the increased Road Accident Fund levy of 8 cents per litre, the total comes to 20 cents per litre. This is below last year’s increase and will take effect early in April 2014.
The electricity levy has not been increased.
The unavoidable annual increase in sin tax is more or less what was anticipated: an extra 9 cents per beer, R4.80 for a bottle of spirits and 68 cents per pack of 20 cigarettes.
There is no change in the rates and thresholds of capital gains tax, donations tax and estate duty. The Davis Tax Committee will investigate these taxes during 2014.
The Finance Minister indicated that Government will seek to improve coverage and preservation of retirement funds, while lowering costs in the system. There are many South Africans who do not enjoy access to an employer-sponsored retirement plan. Government intends to move towards a mandatory system of retirement provision for all employed workers.
A document in which retirement reform changes to date are described, and anticipated future reforms set out, will soon be released by Government.
The formula used to estimate the amount of taxable contribution in defined benefit funds was legislated in 2013. The methodology of calculating the formula will be detailed by way of regulation in 2014.
In addition, the policy approach for the timing of accrual of retirement fund benefits will be reviewed to provide certainty and ease practical application. It appears as if the Finance Minister is considering a review of the requirement that taxpayers must annuitise (start taking income from an annuity) when they retire, even if they embark on a second career and do not need a pension at the time.
Agreement has been reached with the Association of Savings and Investment of South Africa (ASISA) on a way forward to reduce the level of charges for retirement savings products. Draft regulatory reforms will be published shortly.
Retirement fund lump sum tax tables
The Finance Minister announced adjustments to the retirement fund tax tables from 1 March 2014. With the exception of the retirement tax table, which had been adjusted by 5% in 2011, the tax tables have not been adjusted since their introduction in 2007.
It is proposed that the lump sum brackets be increased by about 10%. The single biggest adjustment is the increase of the tax-free amount in the retirement tax table, from R315 000 to R500 000. The tax-free amount in the withdrawal tax table has also been increased from R22 500 to R25 000. The large increase in the bottom bracket of the retirement tax table is to avoid instances where low-income workers may be required to pay tax on their lump sum, even though they had not benefitted from a deduction due to their taxable income falling below the tax-free threshold.
The 2014 budget was a credible but unexciting budget. It represents a practical and measured step towards fiscal consolidation. The Treasury did well to contain spending and grow revenue in a difficult economic environment.
• Please see the tax tables below.
The source of all tables below is the 2014 SARS Budget pocket guide
Article writtend by Andre Strydom of Exceed Assett Management (021 852 0382)