Budget 2004 Revenue trends and tax proposals

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Budget 2004Revenue trends and tax proposals

• 18 February 2004

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Content

• Tax Policy over the last 10 years
• 2004/05 tax relief proposals
• Direct tax
• Personal income tax rate bracket adjustments
• Income tax payable by individuals below age 65
• Income tax payable by individuals age 65 and over
• Transfer duty relief
• Incentivising share ownership by employees

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Content

• Direct tax policy reform agenda for 2004/05
• Royalty mining tax review
• Retirement fund tax reform
• Motor vehicle allowance review
• Indirect tax changes
• Excises on tobacco products
• Excises on alcoholic beverages
• General fuel levy
• Road Accident Fund levy
• Ad valorem customs excise duties
• VAT transfer duty
• Enhancement of tax administration

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Tax policy over the last 10 years
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Key elements of tax policy over the last 10 years

• Significant improvement in efficiency of tax
  system and broadening of tax base
• Ensured a more equitable tax system by allowing
  significant relief, particularly for lower income
  groups
• Tax to GDP ratio has remained relatively stable
  at 24,6
• Fiscal policy reform to broaden tax base
• Introduction of capital gains tax
• World wide taxation base
• Administrative reforms to improve efficiency
• Enhanced simplicity of the tax system has
  resulted in increased compliance improved
  taxpayer morality
• Improved investor sentiments

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SAs tax/GDP ratio

• Since 1994 it has been Governments stated policy
  to limit the taxation to GDP ratio to approx.
  25.
• 2003 MTBPS - Total Budget Revenue estimates
• 1999/00 24,2 of GDP
• 2000/01 24,1 of GDP
• 2001/02 23,6 of GDP
• 2002/03 24,6 of GDP
• 2003/04 24,6 of GDP
• 2004/05 24,6 of GDP
• 2005/06 24,7 of GDP

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SA tax mix as of GDP
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SA tax mix as of total tax revenue
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Tax base broadening

• Tax base broadening has allowed reduction of tax
  rates
• Reduction in corporate income tax rates
• Total PIT relief close to R63 billion
• Accelerated depreciation allowances
• Introduction of learnership deductions
• Reduction of taxes on property
• Reduction in consumption taxes

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Evolution of tax rates since 1980
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Tax relief announced since 1994/95
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Tax to GDP ratio

• Tax to GDP ratio has been on an upward path.
• Need to stabilize ratio to make taxes a flexible
  policy tool
• Long run expectations have to remain unaltered
• Deficit reduction over the years has ensured
  flexibility in applying fiscal policy tools tax
  relief increases in real expenditure (fixed
  investment, health, skills).
• Challenge is to ensure the same for tax policy.

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SAs tax/GDP ratio

• Since 1994 it has been Governments stated policy
  to limit the taxation to GDP ratio to approx.
  25.
• 2004 BR - Total Budget Revenue estimates
• 1999/00 24,2 of GDP
• 2000/01 24,1 of GDP
• 2001/02 24,5 of GDP
• 2002/03 24,8 of GDP
• 2003/04 24,8 of GDP
• 2004/05 24,8 of GDP
• 2005/06 24,8 of GDP
• The current tax/GDP ratio indicates a gradual
  increase from the 21,1 level in 1984.

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Tax revenue as a percentage of GDP 10 years

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Distribution of revenue
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Tax as of GDP
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Revenue trends and 2004/05 tax proposals
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Main budget revenue
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Summary of tax proposals
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Personal income tax rate and bracket adjustments
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Transfer duty
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Review of share schemes

• Current share schemes favour top management.
• Tax-free share grant to employees.
• Employer issuing shares to employees triggers
  fringe benefit tax.
• Proposed changes will allow a tax-free share
  transfer to employees (capped amount).
• Proposed restrictions to encourage long-term
  ownership.
• Amend current legislation relating to
  equity-based incentives to prohibit executives
  from converting ordinary salary into capital gain
  for tax purposes.

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Tax treatment of hybrid instruments

• Debt and equity are treated differently for tax
  purposes.
• Taxpayers use hybrid instruments that can be
  treated as either debt or equity to provide
  optimal tax savings.
• Proposed anti-avoidance measures are aimed at
  treating these instruments according to their
  substance and not their form.
• These measures will encourage taxpayers to
  classify debt and equity according to its true
  form.

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Deferred payment schemes

• In the basic deferred payment scheme the selling
  price is fixed but payment is over several years.
• CGT is immediately triggered on all gains before
  the seller has received all the payments.
• In more complex situations, the selling price is
  variable with payment over several years i.e.
• a basic fixed sum including a percentage of
  future profits, or
• based on future profits alone
• The selling price is not readily determinable, no
  gain can easily be calculated.
• It is proposed to accommodate these issues.

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Tax exempt interest for CMA residents

• South African sourced interest paid to foreign
  residents normally tax exempt.
• This exemption does not apply to CMA residents.
• This provision became obsolete with introduction
  of worldwide tax system.
• It is proposed that South African sourced
  interest paid to CMA residents be tax-free
  subject to possible exchange of information rules.

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Government grants and exempt entities

• In 2003 Government grants for infrastructure
  development on Government-owned property became
  tax-exempt for certain PPPs.
• This preferential treatment may be extended to
  select group of public entities related capital
  expenditure.
• It has come to Governments attention that some
  unresolved issues require consideration. These
  are
• Tax depreciation allowances on money expended by
  the private party on infrastructure
• Clarifying the VAT treatment of these transfers.

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Stamp duty

• Stamp duty on mortgage loans abolished to
  encourage first-time home ownership.
• Closing arbitrage opportunities between Stamp
  Duties and Transfer Duty
• Stamp duty on long-term leases vastly lower
  amounts than transfer duty on actual transfer of
  real property.
• Hence, stamp duty increased for LT leases if
  nature of transaction is similar to property
  transfer.
• Enhancing enforcement measures
• Penalty for late stamping of lease documents will
  no longer be limited to R4000
• Late stamping for leasing documents will no
  longer be allowed retrospectively
• Alignment of penalties structure with other Acts.
  

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2004/05 agenda for reviewing some key tax
instruments
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Mineral royalty bill

• Refinement of bill after extensive consultation
  with stakeholders.
• Refinement includes
• Delay of introduction of royalty by five years -
  2009
• Removal of fiscal stabilisation clause to ensure
  certainty regarding royalty rates
• Marginal mines and potential double royalties
  need to be addressed.
• Issue of marginal mines potentially overstated
• Nature of marginality matters
• Procedures to accommodate communities for
  potential loss of royalty income over time
• Unequal distribution of mineral deposits and
  fiscal devolution

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Impact of royalty stories versus substance

• Econometric model suggests that
• Royalty will have limited impact on employment
  and output
• Different royalty rates will have to apply to
  various mining sectors due to different tax
  incidences
• Rate differentiation informed by diverse economic
  and distributional impacts.
• Revenue-based royalty remains
• Royalty is nothing but a marginal change in
  commodity prices
• Econometric work suggest that economic
  consequences are limited
• Time series analysis shows that severity of
  revenue based tax versus profit tax is overstated
  for most sectors

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Mining tax review

• Mineral Royalty Bill necessitates a holistic
  reassessment of current fiscal regime for mining
  sectors, including additional allowance
  ring-fencing provision rate differentiation for
  diverse mineral sectors gold mining tax formula
  STC exemption, etc.
• Gold mining tax formula provides for
• Income tax exemption and
• STC relief
• Relief for marginal mines more appropriate for a
  royalty regime than the corporate profit tax.
• Propose review of 40 per cent surcharge rate for
  oil extracting companies.
• Review aimed at attracting investment in oil and
  gas industry.

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Pension fund reform

• Completion expected during 2004/05.
• Holistic approach requires modeling of all saving
  and tax instruments.
• International literature suggest limited impact
  of tax policy on aggregate saving
• Primary impact lies with saving portfolio
• Need to assess interaction between compulsory
  saving and tax policy
• In light of complex dynamics between different
  savings instruments and entities, apparent
  obvious solutions become questionable.

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Pension fund reform - its not that simple

• Do contractual savings increase aggregate
  savings?
• Can saving be enforced in the presence of
  financial liberalization?
• Do higher returns on savings increase savings?
• Income and substitution effects (international
  evidence does not indicate that higher returns on
  S do indeed increase S)
• Are savings for retirement purposes really
  statistically that low in SA?
• Not so stats ignore returns by pension funds,
  capital gains on property and overestimate impact
  of durable consumption
• Is the saver aware of the different returns on
  his/her saving portfolio?
• Need to improve information flow to promote
  optimal choices (see Sunday Times of 22 February)

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Pension fund reform - its not that simple

• Does tax policy discriminate against pension
  funds?
• Propensity to save differs for different savings
  instruments e.g. income earned from house price
  appreciation could have higher propensity to save
  than income from wages
• To increase aggregate savings there may be need
  for certain trade-offs in respect of tax
  neutrality principle for different savings
  instruments
• International evidence suggests limited impact of
  tax policy changes on savings dynamics
• Further complications
• If returns have positive impact on level of
  savings, then increasing returns on contractual
  savings would improve households position. But no
  transparency in respect of returns, high
  commissions hence, is there income security
  post retirement?

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Pension fund reform - its not that simple

• Poor households face budget constraints since
  their contractual saving commitments cannot be
  countered by borrowings hence, contractual
  savings are very limiting. It is here that tax
  policy changes may be needed against the revenue
  neutrality requirement.
• Tax policy must change dynamics of savings
  instruments to provide poor households with more
  choices to earn optimal returns with low risk
  (e.g. retail bond) lowering RFT may be
  inefficient way unless pension funds can prove
  strong relationship between returns and
  additional savings.
• In case of higher income households contractual
  savings are less limiting as they face fewer
  limits on credit. However, they face risk as they
  face interest rate risk on their borrowings to
  counter long run savings commitments the
  greater the degree of financial liberalisation,
  the weaker policymakers ability to increase
  saving rate

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Car allowance

• Use of deemed motor expense schedule has
  escalated significantly
• Concern over revenue losses
• Need to reconcile actual with deemed expenses
• Income versus consumption tax
• In an environment of limited room for tax relief,
  trade-offs become inevitable
• Intended changes not only aimed at revenue
  collection but primarily at changing behaviour
• Government intends to continue its support for
  income tax relief

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Indirect Tax Proposal 2004

• Increases in general fuel levy and Road Accident
  Fund fuel levy.
• Increase excise duties on alcoholic beverages.
• Increase excise duties on tobacco products.
• Abolish ad valorem customs and excise duties on
  certain cosmetic products, computer printers,
  recorded music, clocks, and photographic film
  rolls.
• Increase diesel fuel concession / refund to
  Agriculture, Forestry and Mining.

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Fuel taxes

• 10 c/litre increase in general fuel levy on
  petrol and diesel to R1,11 and R0,95
  respectively.
• 5 c/litre increase in Road Accident Fund levy on
  petrol and diesel to 26,5 c/litre.
• Total fuel taxes as percentage of pump price
  increase from 35 on petrol and diesel in 2003/04
  to approximately 37,4 and 36,4 respectively for
  2004/05.

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Diesel fuel tax concession / refund

• Increase in refund of general fuel levy on diesel
  for primary producers (agriculture, forestry,
  mining) from 31,6 to 38,8 (or from 26.86 c/l to
  36.86 c/l).
• Nominal increase of 15 c/litre in total diesel
  refund for primary producers
• General Fuel levy refund increased by 10 c/litre
• RAF levy refund increased by 5 c/litre
• Refunds for all other beneficiaries increased by
  nominal increase in fuel taxes to maintain
  current levels of benefit.

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Taxes as of fuel price 1999 40
2002/03 93 octane petrol 2002/03 diesel 2003/04 93 octane petrol 2003/04 diesel 2004/05 93 octane petrol 2004/05 Diesel
General fuel levy, RAF levy, CE levy, equalisa-tion fund levy, IP marker 28,8 27,0 35,0 35,0 37,4 36,4
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Excise duties on tobacco products

• Tax incidence (excise duties VAT as a of
  retail selling prices) on tobacco products
  increased from 50 to 52.
• This increase translates into the following
  excise duty increases for 2004/05
• Cigarettes 16.55 to R4,53 per 20
• Cigarette Tobacco 11.7 to R139,03 per kg
• Pipe Tobacco 17.3 to R68,31 per kg
• Cigars 15.67 to R1 233,04 per kg

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Excise duties on alcoholic beverages

• Proposed total tax incidence of 23, 33 and 43 per
  cent for wine, beer and spirits respectively.
• Tax burden benchmark will be phased in over three
  years.
• Excise duty increases for 2004/05
• Natural wine 30,7 to R0.88 per 750 ml
• Sparkling wine 28,0 to R2.43 per 750 ml
• Fortified Wine 16,0 to R1.75 per 750 ml
• Clear Beer 9,0 to R1.15 per 750 ml
• AFBs Ciders 7,1 to R1.15 per 750 ml
• Spirits 13,51 to R14.78 per 750 ml
• No increases in excise duties on sorghum beer /
  Traditional African beer

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Ad valorem customs and excise duties

• Abolish ad valorem customs and excise duties on
  the following products
• Some cosmetic products preparations used for
  hair, shampoos, deodorants, bath preparations,
  etc.
• Recorder and unrecorded music (CDs magnetic
  tapes)
• Computer printing machines and photo copying
  machines
• Clocks
• Photographic film rolls