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Budget 2005

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  1. Budget 2005 Revenue trends and tax proposals – Chapter 4 & Annexure C of Budget Review National Treasury Presentation to Parliament Wednesday, 2 March 2005

  2. 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

  3. 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

  4. 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

  5. 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

  6. Debt service costs as per cent of GDP

  7. Fiscal framework

  8. 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

  9. 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)

  10. 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

  11. SA tax mix as % of GDP

  12. SA tax mix as % of total tax revenue

  13. 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

  14. 2005 Budget: GDP by sector

  15. 2005 Budget: GDP by sector

  16. 2005 Budget: GDP by sector

  17. Tax revenue as a percentage of GDP

  18. Implementation of 2003 & 2004 budget tax proposals

  19. 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

  20. 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

  21. Tax Relief Measures in 2005/06

  22. Main budget revenue

  23. Summary of tax proposals

  24. 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

  25. 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)

  26. 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

  27. 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

  28. Personal income tax rate & bracket adjustments

  29. 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

  30. Comparison of annual tax payable

  31. 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

  32. Transfer duty

  33. Tax policy design agenda –2005/06

  34. 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

  35. 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.

  36. 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.

  37. 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).

  38. Which income groups need assistance?

  39. 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.

  40. 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.

  41. 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

  42. Relief measures favouring business income

  43. Evolution of tax rates since 1980

  44. 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

  45. 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%

  46. 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

  47. 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.

  48. Tax relief measures for small businesses

  49. 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%

  50. 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