Budget 2005 Revenue trends and tax proposals – Chapter 4 & Annexure C of Budget Review National Treasury Presentation to Parliament Wednesday, 2 March 2005
Overview of the 2005 Budget Programme of Action: cares for its people, socially just choices, and committed to service delivery • Supporting economic growth and opportunities • Strong increases in non-interest expenditure within a framework that is sustainable • Tax relief to encourage economic opportunities
Major socio-economic challenges • Reducing poverty through social wage • Dependence giving way to self-reliance • Halving unemployment rate by 2014 • particularly among youth • Countering vulnerability • Narrowing inequalities • Developing skills • HIV and Aids • Bridging ‘two economies’ divide
Budget for a season of hope • Sustaining higher growth • Economy growing faster… • …but to sustain this higher growth, we need… • Rising infrastructure investment • Lowering the cost of doing business, especially for small business • Producing more skilled people • Improving the quality of public services, especially to the poor. • Advancing social development • Higher growth to invest in people… • Means-tested social grants • Clean water and electricity • Quality education, health and municipal services • Community housing • Reduce crime and insecurity • Equity and redistribution • To bridge the divide between rich and poor… • Pro-poor budget reflects spending shift towards the poor • Extension of social wage to poor households • Broad-based black economic empowerment • Transport linkages between cities and townships, rural and urban • Renewed investment in small, emerging farmers
Fiscal policy • 2004/05 deficit estimate 2,3% of GDP • Expansionary stance from 2001 continues • Strong real growth in non-interest spending, averaging 5,5% a year • Stable tax burden around 24,1% of GDP • Debt service costs decline from 3,5% of GDP in 2004/05 to 3,2% in 2007/08 • Deficit of 3,1% in 2005/06 declining to 2,7% by 2007/08 • Significant surpluses in social security funds
Tax Policy Overview – since 1995 • Since 1995 tax policy emphasis on: • Efficiency enhancement of tax system • Tax base broadening – limited use of tax incentives • Thereby affording rate reductions • Highlights of tax base broadening reform agenda: • Introduction of capital gains tax • Converting to the residence-based income tax system • Introduction of enhanced anti-avoidance & administrative measures that resulted in narrower compliance gap • Enabling Government to grant tax relief of R78 bn by 2004/05
Tax base broadening • Tax base broadening has allowed reduction of tax rates • Reduction in corporate income tax rates • Total PIT relief close to R66 billion • Accelerated depreciation allowances in lieu of special capital allowances • Introduction of learnership deductions • Reduction of taxes on property • Reduction in consumption taxes • Scrapping/reduction of financial transaction taxes (stamp duties)
Overview – forward looking • Maintaining stable & predictable revenue mix – sound budgeting & confident business planning • Principal reliance on the taxation of: • employment income • business income • capital income • moderate reliance on consumption taxes • Gradual elimination/reduction of financial transaction taxes • Contributing to broader participation, economic growth & small business development • Reducing complexity & compliance costs
Tax policy preference for limited use of tax incentives • Contrary to expectations, sectors with existing attractive tax privileges evidence long-term declining contribution to GDP
Progress on implementation of tax reform initiatives • Exchange Control Amnesty: • More than 42 000 amnesty applications received by 29 February 2004 - total assets disclosed currently at R65b • It is estimated that Amnesty Unit will collect at least R2,4 billion in amnesty levies • Retirement Fund Tax Reform: • At the end of 2004 National Treasury released retirement fund reform discussion paper outlining regulatory policy objectives • Careful synchronisation of tax reform needed to fully take account of wider retirement fund reform priorities that seek to enhance & facilitate adequate retirement savings
Progress on implementation of tax reform initiatives • Redrafting of Mineral and Petroleum Royalty Bill to be available for comment during first half of 2005 • Holistic review of mining income tax system ongoing – including evaluation of appropriateness of current tax allowance schemes that result in tax deferral benefit with full recognition of high capital requirements & risks attaching to mining investment • Accelerated tax depreciation for urban development zones - demarcations for qualifying inner city areas have been approved and gazetted for 9 Municipalities • Tax legislation to accommodate FIFA world cup commitments
2005 main tax proposals -tax relief • Total tax relief for individuals & companies: R10,9 billion • Personal income tax reduced by R6,8 billion • Interest exemption raised to R15 000 for taxpayers under 65 and to R22 000 for tax payers 65 & over • Abolishment of stamp duties on all banking debit entries & installment credit agreements
2005 main tax proposals -tax relief • Total corporate & small business corporation tax relief – R3,8 billion • Exemption from Skills Development Levy (SDL) for small busineses with payroll bill of R500 000 & drop requirement that businesses must account for the SDL if at least one their employees is registered for PAYE • Exemption from tax for the first R35 000 of taxable income for small businesses • Imposition of a simplified tax depreciation regime of 50:30:20 for all assets (excl. manufacturing)
2005 main tax proposals -tax relief • Introduction of a tonnage tax regime for the shipping industry – effective 2006 • Increasing of property transfer duty thresholds • Abolishing excise duties on sun protection products & professional digital cameras
2005 main tax proposals -tax increases • Adjustment of the deemed business cost against car allowance • Taxes on tobacco are raised to maintain a tax incidence level of 52 % • Taxes on alcoholic beverages are increased between 9,4 & 20 % • General fuel levy increased by 5 c/l on petrol & diesel • Road Accident Fund levy is increased by 3c/l
Distribution of PIT relief • Tax threshold up to R60 000 – 12% • R60 000 to R150 000 – 32,3% • R150 000 to R250 000 – 22,4% • R250 000 and above – 33,4% • Proposed relief for taxpayers over 65: • Together with further increase in interest exemption level constitutes major tax burden relief for retired persons • Retired couple with income only from interest-bearing deposits can invest almost R2 million tax free (8% interest assumption) • Maximum tax-free income of couple taking full advantage of interest income exemption rises from R132 000 to R164 000
PIT relief’s redistributive & stimulatory in nature • Tax reduction in respect of employment income does not only benefit wage earners but also individual entrepreneurs (constituting almost 20% of all PIT taxpayers) – e.g., Irish tax reform targeted sharp rate reductions for PIT, thereby giving huge boost to sole proprietorships & economic growth • BUT consider PIT relief distribution together with higher tax burden for taxpayers benefiting from motor vehicle allowance: • Income cohort R300 000 and up: annual tax reduction of R4 570 • Assume use of vehicle valued at R120 000: new travel allowance deemed costs translates into additional tax of R4 110: hence, still net tax relief of R460 • Assume use of vehicle valued at R360 000: new travel allowance deemed costs translates into additional tax of R11 224: hence, overall increase in tax burden of annual R6 654
Medical aid reform • Reform of tax treatment of medical aid cover to achieve more equitable coverage • Monetary cap to replace 2/3rds scheme deductions • Details of the reform will be released this year – implementation commences in March 2006
Tax policy objectives • Extending effective medical aid coverage to all economically active individuals & their dependents • Making medical aid coverage more affordable to low income families. • Eliminating tax implications of a specific medical aid package & employer provided medical treatment. • Providing more tax relief for the average South African family. • Driving down seemingly excessive costs and fees charged by the medical aid industry. • Extending beneficial tax treatment to self employed persons, i.e incentivising small businesses.
Current tax treatment of medical aid contributions ineffective • Affordability - The current regime does not go far enough in lowering cost of medical aid membership for low-income earners, i.e. low income earners cannot afford the tax on one-third of employer provided medical aid coverage. • Inequality – It provides a bigger benefit for high income earners, i.e. tax subsidy for low income earners is 18% and 40% for high income earners. • No downward pressure on high cost medical aid packages – In terms of the current regime, the higher the contribution, the bigger the tax saving. • Discrimination - No tax incentive for: • Self employed persons • Employed persons where the employer does not provide medical aid coverage but the employee pays his own medical aid contributions • Employer provided medical treatment for low-income employees.
Which income groups need assistance? • In the Council for Medical Schemes Annual Report 2003/04 the number of principal members of medical aid schemes during 2003 were 2,8 million. • National Treasury calculated the coverage rate per income group (based on data from SARS and SARB).
How the new tax regime will benefit taxpayers • Persons earning below income tax threshold (R35 000 pa) but attracting possible tax charge if employer provides medical cover – approx. 1,2 million individuals: • No fringe benefit tax on employer provided medical aid coverage for employee and dependents. • Tax incentives for low cost/high benefit packages. • No fringe benefit tax on employer provided medical treatment for employee & dependents. • Beneficial tax treatment for families. • Extend beneficial tax treatment for medical aid coverage to self-employed persons.
How the new tax regime will benefit taxpayers • Persons earning between R35 000 & R200 000 pa – approx. 3 million individuals: • No fringe benefit tax on employer provided medical aid coverage for employee and dependents. • Tax incentives for low cost/high benefit packages. • Reduced tax incentive for high cost luxury packages. • Beneficial tax treatment for families. • Extend beneficial tax treatment for medical aid coverage to self-employed persons.
Other income tax adjustments • Curtailing subsistence allowances by structuring subsistence allowances into salary packages: • Introducing more stringent control measures to arrest excessive claims for travel expenses • Subsistence allowance only permitted where fixed date of travel in immediate future has been identified • Withholding tax on visiting entertainers and sportspeople – following international practice • Introduction of a 5 (from Africa) & 15% (from rest of the world) final withholding tax • Promoting visiting skilled expatriates • Alleviating the capital gains tax burden for visiting skilled expatriates as foreign assets appreciate in value • Changing tax resident definition to allow for extended visitation of expatriates with scarce skills
Net cost of tax relief • In terms of macroeconomic policy objectives tax relief is aimed at increasing economic growth, employment & equity • Tax relief packaged to stimulate demand side of economy (primarily PIT) & supply side of economy (CIT & small business tax adjustments) • Supply side theory of tax policy states that economy should grow from tax cut, thereby increasing once again tax bases, translating into future rise in tax collections • Hence, R1 of tax relief would lead to less than R1 revenue loss over long run • NT estimated economic effect of 2005/06 tax relief package within adopted macroeconomic framework as follows (based on macro econometric modeling): • Will probably not experience stated total revenue loss • Elasticity of tax collections iro tax relief not equal to one – only 0,85 • PIT collection elasticity is 0,75 implying that given PIT relief package tax loss will only be 0,75%, while corp tax collection elasticity is 0,80 • Less than unity elasticity comes from increased economic activity • Nominal & real GDP growth increase by 1,9% and 0,4% respectively
Reduction in corporate tax rates • Corporate income tax rate to be reduced from 30% to 29% • Tax rate for SA branches or agencies of foreign companies to be reduced from 35% to 34% • Rates for company policyholder funds & corporate funds to be reduced from 30% to 29% • New formula for gold mining income • Tax rate for an employment company to be reduced from 35% to 34%
International CIT rates & taxation of company profits • Combined effective company profit tax rate in OECD countries, including 15 European countries (2003): • Top marginal tax rate (CIT & PIT) on distribution of domestic source profits to resident individual shareholders • OECD average in 2000 (=50,1%) down to 46,4% in 2003 • EU average in 2000 (=51,7%) down to 47,9% in 2003 • SA with 1/3 profit distribution and new CIT rate & current STC rate would be 33 to 34% • That is from economic theory the correct comparison
Other business income related relief measures • Facilitating company restructurings • Introduction of tonnage tax regime • Refining film incentives • Government grants and income tax exemptions • Financial transaction tax for issue of new shares • Removal of financial transaction taxes (stamp duty) on all banking debit entries & installment credit sales • Public benefit organisations engaged in business activities • Accelerate depreciation allowance (50:30:20 per cent over 3 years) for renewable energy investments.
Graduated tax rate structure & accelerated depreciation • Under the new regime, qualifying small businesses will be subject to the following rate structure • R0 to R35 000 of taxable income - 0% • R35 001 to R250 000 of taxable income - 10% • R250 001+ of taxable income - 29%
Graduated tax rate structure & accelerated depreciation • Small business tax relief extended to personal services as long these businesses maintain at least 4 full-time employees • Turnover limit for eligible companies to be increased from R5 million to R6 million • Small businesses to be eligible for a depreciation write-off at a 50:30:20 per cent over a 3 year period • 100% expensing provision for manufacturing assets remains • Current R20 000 double deduction for expenditure and losses incurred in first year of trading (start-ups) will be removed