23 Feb Countdown to the 2022 Budget Speech : Budget Predictions
As we edge closer to the upcoming National Budget to be tabled in Parliament on 23 February 2022 we look at possible predictions, amendments or reforms to be introduced.
The 2022/23 National Budget takes place at a time when South Africa, and indeed the world, is emerging from two years of being battered by a pandemic, which has left the country reeling with low growth and high unemployment. In addition lack of infrastructure, the failure of State Owned Entities and the crippling Health Service has only added to the burdens that the country faces. Thus the budget needs to respond to several critical issues to foster a sense of confidence.
Tax revenue estimates
In terms of Tax Revenue the 2021/22 fiscal year has seen a remarkable recovery in tax revenues after falling drastically short of the original budget estimate in the 2020/21 fiscal year as a result of the COVID-19 pandemic. The National Treasury understandably took a conservative view on its revenue estimates for 2021/22 in Budget 2021.
After forecasting total tax revenues of R1.365 trillion in Budget 2021, National Treasury made a significant upward revision to this figure in the Mid Term Budget, increasing it to R1.485 trillion. This revised estimate is still conservative and it’s expected that the actual tax revenues could come up much higher than the original Budget 2021 estimate, assuming the strong performance in tax collections continues through March.
Revenue collections in Corporate and Personal income tax as well as VAT are at the forefront of this collection drive which is estimated to exceed the original budget estimate.
Generally the better-than-expected performance in revenues, would see a significant uptake and even possible tax reductions however the economic climate in South Africa at present is far from the road of sustainability or growth. Numerous factors which include :
- Rising debt
- High Public sector wage bill
- State-owned company (SOC) support
- High Unemployment – Basic Income Grant
- Infrastructure Spending
are all elements that have to be addressed thus even though the revenue collection estimates seem to exceed expectations, the need to increase revenue exponentially still remains. Thus the Finance Minister is in a precarious position and has to make decisions that strike a balance.
Our predictions in this regard are set our below:
Personal Income Tax
It is highly unlikely that there will be a further increase to the rate of 45% however, expect that once again, the fiscal drag across all brackets and rebates will be below inflation, if none at all. This will not only provide additional revenue but also lessen the burden to low income earners. However with factors mentioned above there is an imperative need to increase the tax base.
The taxpayer base on which Personal Income Tax is collected has narrowed, resulting in an increased tax burden being borne by a small proportion of the Personal Income Tax taxpayer base. It must be noted that South Africa has the highest Personal Income Tax burden among upper middle-income countries, alongside one of the highest top personal income tax rates. High net-wealth individuals are likely to face increased scrutiny as SARS
enforces its collection drive, however such a drive may have a negative effect on the economy as it contributes to the migration of high net-wealth and skilled professionals to low-tax jurisdictions.
*Compliance , SARS Audits
The primary objective of the South African Revenue Service (SARS), is to collect taxes from taxpayers to fund the fiscus. To be effective, this needs to be done in a manner that encourages, maintains and improves economic growth. In South Africa, the biggest challenge is to gather all applicable tax from all eligible taxpayers to offset the growing budget deficit. With substantial amounts being invested to improve the technological resources and their skills at SARS, stricter penalties will be imposed on individuals who remain “Non – Compliant”. The imposing of harsher penalties will see an increase in additional revenue generated and also a faster return on taxes due as taxpayers will ensure returns and payments are effected well before the prescribed due dates.
*Medical Tax Credits
The Covid Pandemic highlighted the shortfalls in the Health Sector and as we all learn to live with Covid around us, talks of the NHI fund will once again gain momentum. However for 2022/23 an inflationary adjustment to the medical tax credit is expected.
*Capital Gains Tax (CGT)
No change is expected with the inclusion rate to remain at 40%.
Despite calls from some quarters for the introduction of wealth taxes (of which estate duty and donations tax are a form), it is unlikely that any changes will be made in this regard in Budget 2022. Nor is it likely that the introduction of any new wealth taxes will be considered at this time.
Any increase in the estate duty tax rate is unlikely to raise any substantial additional revenue thus no changes are expected.
Measures have been taken to address interest-free loans to trusts by deeming the interest foregone to be subject to donations tax at a rate of 20%. This was applicable from 1 March 2017 therefore attention will be focused on the interest free loan account and the application of Section 7C instead of an increase in the Donations tax rate.
No increase in the Donations tax rate is expected.
There is currently a proposal to introduce a two-pot system for retirement contributions, i.e. a retirement pot (two-thirds) that will not be accessible prior to retirement, while the other (savings pot) would allow pre-retirement access (one-third). This is in an effort to encourage individuals into saving for retirement. The proposal explores options for the tax treatment of the savings pot and whether changes to the tax treatment of retirement savings should be made in this regard. A possible announcement or mention ofthe two-pot retirement system can be expected in Budget 2022.
“Exit tax” – retirement funds
In Budget 2021, a proposal was made to introduce an exit tax on retirement savings when an individual ceases to be a South African tax resident. The proposal was widely opposed by industry stakeholders after hearing submissions in parliament. It is expected that this proposal will be scrapped however should there be an influx of residents leaving the country expect for this proposal to be discussed again at a later stage.
The way we work has changed significantly since the onset of the COVID-19 pandemic, with many employers opting to adopt a hybrid working model. As such, as an employee, you may
have had to work from home, or will work from home, more regularly and may have incurred (or will incur) additional expenses to run your home office. The Income Tax Act, 58 of 1962 (Income Tax Act), sets out rigid requirements that must be met before employees can claim a tax deduction for home office expenses, and there will be no relaxation of these tax rules because of COVID-19. The provisions in the Income Tax Act that allow employees to claim a tax deduction for home office expenses are not new in our law, nor are they COVID-19 tax relief measures. Many employees have simply not previously made use of these provisions as they mainly worked from their employers’ premises. It was announced in Budget 2021, that National Treasury would commence with a review of the tax provisions for travel and working from home as part of a multi-year project.
National Treasury has informally asked for public comments on the topic. It is expected that the review will continue this year and that no policy changes are likely in Budget 2022.
Post the Davis Tax Committee’s recommendations on the taxation of Trusts, there has been limited if no, communication or further discussions in this regard. As such we do not expect any drastic changes in the taxation of Trusts to be mentioned at the budget speech. However it must be noted that if this was looked into closer by the Committee, there is a possibility of the fiscal receiving significant revenue dependent on the manner of taxation on Trusts.
Corporate tax is currently levied at 28%.As announced in the February 2021 National Budget Speech, the corporate income tax rate will be lowered to 27% with years of assessment commencing on or after 1 April 2022. This will give relief to taxpayers, however, it comes with limitations on interest deductions, assessed losses and write down values. This move was an investment drive by the government with the aim of making our tax system more attractive. It also makes sense that they wanted to do it in a tax neutral manner. A reversal of this decision is unlikely as the government needs to attract more investment.
Assessed losses will be restricted. The TLAA enacts the proposal to restrict the offset of the balance of assessed losses carried forward to 80% of taxable income. To cater for all sectors and recognise that not all companies have sufficient cash flow to face an additional tax burden in the first year they become profitable, the TLAA imposes a R1 million threshold beyond which the restriction applies. Therefore, the company will be able to set off the higher of R1 million or 80% of taxable income.
The amendment takes effect on the day when the Minister of Finance announces the reduction in the corporate tax rate in the annual Budget Speech.
In Budget 2021, it was announced that the tax incentive regime will be reviewed with a view to reduce incentives so as to create an environment that is conducive to broad-based economic growth and that avoids complicated incentives for specific sectors or groups of taxpayers.
The review will likely continue in 2022/23. However, the Research and Development incentive (with a 1 October 2022 sunset date) is expected to be extended, with some amendments to the current provisions to improve its effectiveness.
A redesigned energy efficiency incentive may also be introduced.
*Capital Gains Tax (CGT) for companies
It is unlikely that this rate can be increased any further, as this would effectively result in the taxation of gains arising from inflation. However, it is possible that we could see the announcement of reforms to limit certain Exemptions and Roll over Relief options and this would result in a substantial increase in revenues derived from corporate income tax.
We do not expect further changes to this rate which remains at 20%.
Indirect taxes – VAT
Although increases in tax, in particular direct taxes, are generally regarded as anti-growth, one could argue that, at this juncture, they will contribute indirectly to higher economic growth by helping to maintain South Africa’s credit ratings and in that way prevent an increase in the cost of capital. The choice of taxes through which to raise the required additional revenue will nevertheless have to be exercised carefully to minimise any anti-growth bias. The current mix suggests that there may be greater room to increase indirect taxes.
Although the increase in the VAT rate in the 2018 budget resulted in a significant public outcry on the basis of the perceived regressivity of VAT, the significant pressure on the fiscus does prompt the suggestion of an increase in the VAT rate. However any such decision would be deemed catastrophic to any recovery plan or any public sentiment. Thus we don’t expect that there will be any change in the Vat rate at this stage.
It is worth noting that the extension of the Social relief grant is expected to be funded out of the tax revenue collection which is expected to be over and above what was estimated from the Mid Term Budget. The introduction of a permanent basic income grant, is something that may be looked at in the future and if brought into effect it could see a change in the VAT rate so as to generate more revenue.
Fuel levies and Road Accident Fund
The general fuel levy is slightly progressive and seemingly less sensitive than VAT. The current volatile environment has caused massive increases in fuel pricing with further increases expected in the future. As such in an ideal world there would be no increase, however the fuel levy generates substantial additional tax revenues thus unfortunately we still expect an inflationary increase in the RAF levy.
Given the state of the economy and the residential property market, no increases in transfer duties are anticipated.
An increase in Excise Duties or “Sin Taxes” should be seen as a mandatory obligation as this is constant every year. Smokers and drinkers can expect to see above inflation increases.
Budget 2020 announced a proposal to implement an excise duty for heated tobacco products. It is expected that Budget 2022 will introduce a specific excise duty for vaping products.
The Health Promotion Levy (HPL), also known as the sugar tax, is an excise tax that is levied on sugar-sweetened beverages. We expect an inflationary increase in this regard.
Other Environmental taxes
In Budget 2020, Government announced that an environmental fiscal reform review paper would be published. It was stated that this paper would explore the potential for new environmental taxes and reforms to existing instruments. This paper has yet to be published by National Treasury.
It is anticipated that Government will continue to review environmental taxes and increasing developments in this area are likely. National Treasury is keeping its cards close to its chest on how it envisions the rollout of Phase 2 of the carbon tax, commencing on 1 January 2023. However, announcements in this regard can be expected in Budget 2022.
In addition to the predictions above, we envisage a mention of the “Digital Economy” once again. There have been recent discussions globally around the taxation of the digital economy. Some countries are implementing a specific tax for taxing the digital economy in order to increase tax revenue. The budget may provide some clarity as to South Africa’s position on potentially introducing this type of tax.
Tough but interesting times ahead as we make our way to the 2022 National Budget Speech.
Senior Tax Manager