Each year, Chartered Employee Benefits’ CEO, John Campbell, provides comment on the annual Budget Speech, highlighting those aspects of particular relevance to us as South African consumers.  You will find his insights a useful reference point in your personal financial planning … and, as always, you are welcome to contact us for advice or with any queries.

Your Quick Guide to the toughest budget in years

We’re not even two months into the year and we’ve already seen some game-changing political events.

Our new President was sworn in on Thursday, 15 February – almost 18 months sooner than expected – and we wish Mr. Cyril Ramaphosa every success in returning South Africa to an all-important economic growth path. A growing economy makes our lives that much easier in that it improves the outlook for investment returns and reduces the pressure on government to raise income tax. And that brings me to the topic of today’s communication: the 2018 Budget Speech.

There has been so much political noise over the past two months that we were left wondering whether the Budget Speech would even take place today – and as recently as yesterday we weren’t even sure whether the current Minister of Finance, Mr. Malusi Gigaba, would take to the podium. But sanity prevailed, and the speech went ahead at 2pm as planned.
 
Budget day is an important ‘marker’ in the financial planning year. It is held near the tax year-end of 28 February and is a great time for you to focus on getting your tax planning right and to take advantage of any ‘tools’ to save tax efficiently, in line with your holistic financial plan, of course.
 
What did we expect from the Budget?
 
Most analysts quoted in the media in the past two weeks predicted a tough budget. You need only look at some of the key issues to appreciate National Treasury’s problem … They are struggling with slow economic growth; a R50.8bn shortfall in revenue collection for the current tax year; and rising expenses due to the funding demands of free education and National Health Insurance. These projects are consistent with Government’s focus on socioeconomic transformation as they strive to overcome the inequalities and divisions so apparent in our society.

What did the Budget Speech reveal?
 
At the outset I should say that the 2018 Budget Speech is one of the toughest that we’ve seen in many years, but this wasn’t unexpected. Chartered Employee Benefits predicted that the 2018 Budget would be extremely tough on High Net Worth (HNW) clients, difficult for the middle class and largely neutral for the rest. And we had it spot on!
 
Our expectations were confirmed early in the speech. An additional R36 billion is being raised through a combination of tax increase, mainly through a higher VAT rate and below-inflation adjustments to personal income tax brackets. 

We summarise the main tax proposals as follows:

• An increase in VAT from 14% to 15%;
• A below inflation increase in the personal income tax rebates and brackets, with greater relief for those in the lower income tax brackets;
• An increase in the ad-valorem (proportional) excise duty rate on luxury goods from 7% to 9%;
• Estate Duty will be levied on the dutiable value of an estate at a rate of 20% on the first R30 million, and at a rate of 25% on the value above R30 million;
• A 52c per litre increase in the levies on fuel (22c for the general fuel levy and 30c for the Road Accident Fund); and
• Increases in the alcohol and tobacco excise duties of between 6% and 10%.

There were no changes to the marginal rates of individual income tax, the rate of tax on trusts (45%) or the rate of tax on companies (28%). Transfer duties on the sale of properties remained unchanged too, with a 13% tax on the portion of the transaction exceeding R10 million.
 
The feared removal of medical-schemes tax credits did not materialise either; but the increases were minimal – from R303.00 to R310.00 for the main member and first dependent, and from R204.00 to R209.00 for each additional beneficiary. Other good news is that there were no changes to the tax treatment of retirement fund lump sum benefits or severance benefits.
 
What does it mean for you?
 
The range of announced tax changes will significantly impact the household budgets of high and mid-income families. We suggest that you take a close look at your income and expenses post-budget and review the impact of an expected reduction in post-tax income against your financial plan.
 
It is also good practice for those saving toward retirement to consider lump-sum top up payments to your retirement annuities as well as making the maximum allowable contribution to Tax Free Savings (TFS) accounts, if this suits your circumstances.
 
We were a bit disappointed on two fronts:  firstly, the R500,000 tax-free portion of the retirement lump-sum benefit was not increased); and secondly, there was no increase in the maximum contribution in either Retirement Annuities or Tax-Free Savings, being 27.5% of Retirement Annuity contributions capped to R350,000 and R33,000 for Tax-Free Savings contributions per annum respectively. Nevertheless, we recommend that you continue to take advantage of the tax efficiencies associated with retirement funds and Tax-Free Savings accounts.
 
The changes in Estate Duty apply to estates worth more than R30 million and will affect High Net Worth individuals who will have to review their financial plans and estate plans accordingly. We note that the basic deduction allowed under this tax heading was left unchanged, at R3.5 million.
 
What happens next …
 
You should not make hasty financial decisions based on the changes announced in today’s Budget Speech. Your best approach is to stick to your holistic financial plan and make considered changes to your portfolio over time based on the advice of your financial planner, thus continuing your journey towards a secure retirement based on your lifetime goals and dreams.
 
We invite you to contact us if you have any concerns about the Budget Speech and what the various changes to taxation rates mean to you.

Warm regards

John