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“Hope is being able to see that there is light despite all of the darkness.”

Archbishop Emeritus Desmond Tutu

It was with a sense of trepidation that South Africans awaited the 2021 Budget Speech by Finance Minister Tito Mboweni.

Still confronted with all the challenges that existed before COVID-19 – massive debt, lackluster growth, unemployment, the public service wage bill and rampant corruption – Treasury also faced the seemingly insurmountable challenge of funding the rollout of COVID-19 responses along with muted tax revenue collection impacted by lockdowns, record job losses and business closures.

Reminding South Africans of Archbishop Emeritus Desmond Tutu’s advice that hope is being able to see light despite all the darkness, the Minister presented what has been called a “positive”, “balanced” and “sustainable” framework to address these challenges, announcing some unexpected but welcome short-term tax relief.

The main story: funding COVID-19 responses without tax increases

The two main stories in the 2021 Budget proposals are the funding of the country’s COVID-19 response and the welcome absence of new and/or higher taxes.

Despite talk of a possible ‘vaccine tax’ and new and increased taxes to fund South Africa’s COVID-19 response – including a massive vaccine roll-out that will save lives and support the economic recovery – no new or increased taxes have been introduced to fund vaccines.

Instead, the majority of funding for new and urgent priorities is provided through reprioritisation and reallocation of existing baselines, budget allocations, emergency withdrawals and – if needed – the contingency reserve.

Government has set aside R19.3 billion to fund Covid-19 vaccines, with more than R10 billion allocated for the purchase and delivery of vaccines over the next two years. The contingency reserve has increased from R5 billion to R12 billion for the further purchase of vaccines and other emergencies.

Let’s look at what will change according to the proposals, and what it all means for us on a practical level…

Good news on personal income tax

Personal income tax brackets will be increased by 5%, an above-inflation increase, to provide R2.2 billion in tax relief for lower and middle-income households. This will eliminate “bracket creep”, effectively decreasing personal income tax rates.

It means that if you are earning above the new tax-free threshold of R87,300, you will have at least an extra R756 in your pocket after 1 March 2021.

Government is aiming to reduce the personal income tax rate over time by increasing the tax base through focusing on economic growth which will trigger job creation.

Tax increase proposal withdrawn

In addition to the fact that the Budget review proposals included no new taxes nor any increase in personal and company taxes, government has also withdrawn the proposal announced in the October 2020 Medium Term Budget Policy Statement (MTBPS) to introduce tax measures to raise revenue by R40 billion over the next four years.

This is due to improvements in tax revenue collections in recent months, with tax revenue estimates R99.6 billion higher than projected in October, reducing the tax revenue shortfall to R213 billion.

This will provide welcome relief in the coming year as companies are still reeling from the economic devastation of COVID-19.

Good news on personal income tax

Personal income tax brackets will be increased by 5%, an above-inflation increase, to provide R2.2 billion in tax relief for lower and middle-income households. This will eliminate “bracket creep”, effectively decreasing personal income tax rates.

It means that if you are earning above the new tax-free threshold of R87,300, you will have at least an extra R756 in your pocket after 1 March 2021.

Government is aiming to reduce the personal income tax rate over time by increasing the tax base through focusing on economic growth which will trigger job creation.

Tax increase proposal withdrawn

In addition to the fact that the Budget review proposals included no new taxes nor any increase in personal and company taxes, government has also withdrawn the proposal announced in the October 2020 Medium Term Budget Policy Statement (MTBPS) to introduce tax measures to raise revenue by R40 billion over the next four years.

This is due to improvements in tax revenue collections in recent months, with tax revenue estimates R99.6 billion higher than projected in October, reducing the tax revenue shortfall to R213 billion.

This will provide welcome relief in the coming year as companies are still reeling from the economic devastation of COVID-19.

Other changes

  • The June 2021 sunset clause for the so-called Section 12J tax breaks was not extended. The tax rebate could be claimed on investments through an approved venture-capital company and was meant to encourage investments in small businesses and riskier ventures that can help to create jobs and economic growth. Some analysts commented that the absence of this attraction offered to venture capital investment companies, will negatively impact job growth in the country.
  • The UIF contribution ceiling will be set at R17,711.58 per month from 1 March 2021.
  • An inflationary adjustment to medical tax credits – which will increase from R319 to R332 for the first two members, and from R215 to R224 for all subsequent members.
  • Financial sector levies – Bill to be tabled early 2021.
  • The carbon tax rate increased by 5.2%, from R127 to R134 per tonne of carbon dioxide equivalent, along with an increase of 1c to 8cents/l for petrol and 9cents/l for diesel from 7 April 2021, and 12.5cents/bag for bio-based plastic bags.

Taxpayers under greater scrutiny

An additional spending allocation to SARS of R3 billion over the medium term has been requested to fund tax collection efforts. As the Minister warned in his speech: “SARS has started to deepen its technology, data and machine learning capability. It is also expanding specialised audit and investigative skills in the tax and customs areas to renew its focus on the abuse of transfer pricing, tax base erosion and tax crime. In this coming fiscal year, SARS will establish a dedicated unit to improve compliance of individuals with wealth and complex financial arrangements. This first group of taxpayers have been identified and will receive communication during April 2021.”

This means that taxpayers with complex financial arrangements should engage a CA(SA) tax specialist to assist them in preparing and/or reviewing their tax returns prior to submission. Similarly, where SARS have selected a taxpayer for verification or audit, or where penalties and interest have already been imposed and levied, taxpayers will need expert assistance.

Have a look at the Tax Tables and Calculators for more on how this will all impact on you and your business.

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