A total R28 billion in tax hikes were announced in the 2017/18 Budget, with personal income taxes for South Africa’s wealthy making up the bulk of these increases. In combination, amendments to the personal income tax tables are expected to provide additional revenues of R16.5 billion.
Notably, a new top personal income tax bracket of 45% for taxable incomes above R1.5 million per year, following an increase in the top marginal rate of tax from 40% to 41% in 2015/16. The budget proposals increase the proportion of tax paid by those earning R1.5 million and above from 25.5% to 26.3%.
Who will be impacted by the new tax bracket?
“About 100,000 taxpayers will be affected by the new bracket – contributing 26.3% of total personal income tax and just 1.4% of registered taxpaying individuals - but Treasury has also announced an increase in the dividend withholding tax from 15% to 20% to prevent any arbitrage opportunity that would have been created for some individuals to pay themselves with dividends rather than salaries,” says Phillip Faure, Global Head: Wealth Advisory at Standard Bank Wealth and Investment.
Related: Tax 101 for small businesses
The combined effective rate on the distribution of dividends is 38.8% - company tax plus dividends tax - with Treasury saying in the Budget that South Africa’s combined statutory tax rate on dividend income is below the OECD average. This effective rate increases in line with the higher dividends withholding tax.
How tax will impact foreign investors
“Furthermore, the exemption and rates for inbound foreign dividends will also be adjusted in line with the new rate, effective for years of assessment commencing on or after 1 March 2017,” says Faure.
Another important change is the withholding tax on immovable property sales by non-residents is being increased. Rates will be increased from 5 per cent to 7.5 per cent for individuals, 7.5 per cent to 10 per cent for companies and 10 per cent to 15 per cent for trusts.
Adjustment of property related tax
While in 2016/17 the capital gains tax inclusion rate for individuals increased to 40% and transfer duty for immovable property over R10 million was increased to 13% in to support middle-income households, the duty-free threshold for residential property transfers was raised to R900 000 in 2017/18.
Increases in personal income tax rate
“Taxpayers will face a real increase in their effective personal income tax rate in 2017/18 because of the limited relief in the tax brackets,” says Faure.
According to Treasury, these increases also requires a four percentage point increase in the tax rate for trusts.
Retirement fund tax alterations
Following the 2016/17 tax deduction for contributions to all retirement funds (including provident funds) increasing to 27.5% of the greater of taxable income or remuneration, up to a cap of R350,000 per year, a notable change now for those looking to invest more over the long term is the annual allowance for tax free savings accounts which will be increased to R33 000. Tax-free savings accounts were introduced on 1 March 2015 with an annual allowance of R30 000.
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.
Related: Overview of small business tax
How the Treasury will combat tax avoidance
The Treasury, is however, also focusing on combating tax avoidance. Applications to the Special Voluntary Disclosure Programme have begun and it was reported in the Budget that disclosures of R3.8 billion in foreign assets have been made, which will yield revenue of about R600 million. The programme will be open until the end of August this year.
“This is a Budget that will hit the pockets of taxpayers quite hard. However, it is important to stick to a long-term wealth plan and to increase the focus on savings by harnessing a structured, disciplined plan that promotes savings and investment. The need for structuring suitable financial plans is emphasised in this new super tax environment,” says Faure.