The big question as we approached the 2017 Budget proposals, was how the Minister of Finance would raise the additional 28 billion Rand needed to balance the Budget.
1. Additional sources of revenue
The main sources of additional income proposed are:
- A new top personal income tax bracket of 45 per cent for those with taxable incomes above R1.5 million;
- An increase in the dividend withholding tax rate from 15 per cent to 20 per cent;
- Limited bracket creep relief, increasing the tax free threshold from R75 000 to R75 750 (the biggest contributor);
- An increase of 30c/litre in the general fuel levy and 9c/litre in the road accident fund levy; and
- Increases in the excise duties for alcohol and tobacco, of between 6 per cent and 10 percent.
Relief will however be provided in the following ways in the affordable housing market an increase will be provided in the threshold above which transfer duty is paid from R750 000 to R900 000.
- The annual allowance for tax free savings accounts will be increased to R33 000.
- The medical tax credit will be increased in line with inflation.
In addition, the proposed tax on sugary beverages has been revised to include both intrinsic and added sugars. The tax will be implemented at a later date.
The proposed carbon tax and its date of implementation will also be considered further in Parliament this year.
2. Proposed retirement reforms for 2017
2.1 Preservation of benefits after retirement
During 2014, amendments were made to the Income Tax Act to allow individuals to elect when to retire – with the date on which the lump sum benefit accrued to the individual depending on the date on which the individual elected to retire and not on the normal retirement age.
Currently, once the individual elects to retire, the Income Tax Act does not cater for the transfer of lump sum benefits from one retirement fund to another. National Treasury proposes that transfers of retirement interests be allowed from a retirement fund to a retirement annuity fund, subject to fund rules.
Comment: while the consolidation of retirement benefits should be encouraged it is unclear why National Treasury chose only mentioned transfers to a retirement annuity fund and not any retirement fund. This may be a drafting error.
2.2 Tax-exempt status of pre-March 1998 build-up in public-sector funds
The Income Tax Act currently makes provision for the tax-free transfer of pre-March 1998 lump sum benefits from a public-sector fund to a pension fund. It is proposed that subsequent transfers of these lump sum benefits to another pension fund also be tax free.
Comment: currently only the first transfer from the public-sector pension fund retains the tax-free status and not any subsequent transfers. The change is welcomed.
2.3 Removing time limit to join an employer umbrella fund
Existing employees who do not join a newly established employer umbrella fund have 12 months within which to join the fund, after which they are unable to join. To encourage employees to contribute towards their retirement and remove practical difficulties, National Treasury proposes that the 12-month limit be removed and that employees be allowed to join without time restriction, subject to the rules of the fund.
Comment: there seems to be no reason why the change should be limited to umbrella funds and not to free-standing funds as well.
The Budget Review also highlighted the following retirement reforms:
2.4 Default regulations to improve market conduct
The second revised draft of the default regulations were released for public comment in December 2016. The aim of the default strategies (investment, preservation and annuities) is to ensure that the retirement savings of members are better protected through lower charges and provide better value for money, especially to members who do not exercise any choice. The default annuity strategy section has been considerably simplified, given the difficulty of automatically defaulting members into annuity products that could be irreversible. While concerns on the blanket ban of performance fees and guaranteed products have been addressed, these may be reviewed in the final regulations published later this year. Further steps to lower charges will follow.
Comment: further additional steps to lower charges has not previously been expressed as a goal in such specific terms.
2.5 Pension Funds Act amendment
In 2017, amendments to the Pension Funds Act will be considered to introduce the concept of an umbrella fund, and to clarify the extent, purpose and interpretation of the powers of the Registrar of Retirement Funds to deal with funds that do not have properly constituted boards. National Treasury will also engage with the Financial Services Board to find a sustainable policy solution to the challenge of unclaimed benefits.
2.6 Annuitisation for provident fund members
The Revenue Laws Amendment Act (2016) postponed the annuitisation of retirement benefits for provident funds to 1 March 2018 to allow for further consultation with the National Economic
Development and Labour Council (NEDLAC) and others on retirement reforms. Discussions in the council and with other interested parties will continue, with the aim of reaching consensus on the need to annuitise at retirement.
Should no agreement on annuitisation be reached, government will review the continuation of the tax deduction for funds that do not annuitise part of their retirement savings, to ensure the tax system is equitable across all retirement funds.
Comment: it seems that if no agreement is reached the current tax deduction of member contributions to provident funds will be withdrawn.
The National Treasury will engage with the industry to provide appropriate annuity products that take better account of the needs of low- and middle-income members of retirement funds.
Comment: the development of annuities for the low- and middle-income market will also require attention in complying with the proposed default regulations.
2.7 Automatic enrolment in retirement funds
South Africa has a well‐developed occupational pension system, but there is limited coverage and a large number of funds. In November 2016, government tabled a discussion paper on social security reform at NEDLAC. While NEDLAC engagement is expected to take some time to conclude, a parallel process is expected to consider more urgent retirement reforms that can be implemented. For example, government is considering automatic enrolment as a key and urgent initiative to ensure more workers save for their retirement. This initiative would encourage or require employers to automatically enrol their workers into a retirement fund, which could be sponsored by the employer or sourced from a third party.
Comment: auto enrolment will require all employers to enrol their employees in a retirement fund from a future date. This proposal aligns with the objectives set out in the social security paper.
2.8 Application of the cap on deductible retirement fund contributions
It is currently not clear how the overall annual cap of R350 000 on contributions to pension, provident and retirement annuity funds should be applied when determining monthly employees’ tax. It is proposed that the amount of R350 000 be spread over the tax year, which is a more prudent approach.
Comment: this may better facilitate payroll processes and procedures.
3. Personal Income Tax
3.1 New tax bracket
Government proposes a new top personal income tax bracket of 45 per cent for taxable incomes above R1.5 million per year. The previous top bracket of 41 per cent was set at R701 301. The primary, secondary and tertiary rebates, and the levels of all the taxable income brackets, will be increased by 1 per cent from 1 March 2017. The tax-free threshold will increase from R75 000 to R75 750. However, since the increase is below the expected level of inflation, taxpayers will face a real increase in the effective personal income tax rate in 2017/18.
In combination, amendments to the personal income tax tables are expected to provide additional revenues of R16.5 billion. Table 4.5 shows how much tax is expected to be paid by individuals at different levels of taxable income for 2017/18. This is contrasted with what would have been paid had no adjustments been made to the personal income tax tables. The budget review claims that the budget proposals increase the proportion of tax paid by those earning R1.5 million and above from 25.5 per cent to 26.3 per cent, strengthening the progressivity of the personal income tax system.
Table 4.4 provides an overview of the proposed personal income tax schedule for 2017/18:
3.2 Tax-free savings accounts
Tax-free savings accounts were introduced on 1 March 2015 with an annual allowance of R30 000. The 2014 Budget stated that the allowance would be increased in line with inflation. Government proposes increasing the annual allowance to R33 000.
3.3 Retirement fund lump sum tax tables
Regrettably, the tax tables for retirement fund lump sum benefits have yet again not been adjusted to compensate for inflation this year.
3.4 Medical scheme contributions
To counter the effect of inflation, the medical tax credit will be increased for the first two beneficiaries from R286 to R303 per month, and for the remaining beneficiaries from R192 to R204 per month. Future adjustments will be balanced with the funding requirements of national health insurance.
3.5 Social grants
From 1 April 2017, the state old age grant is expected to increase by R95 per month in 2017/18, while the foster care and child support grants will increase by R30 and R25 respectively.
- State Old Age over 75 will increase by 6.2% to R1 620.
- Disability grant will increase by 6.3% to R1 600.
- Foster care will increase by 3.4% to R920.
- Care dependency will increase by 6.3% to R1 600.