It is madness to stunt capital growth for 21%
01 February 2013
Posted by: SAIT Technical
By Prof Mathhew Lester (Tax Talk)
Prof Matthew Lester discusses Finance Minster Pravin Ghordan's upcoming budhet speech.
FINANCE Minister Pravin Gordhan's budget speech for the 2012-13 fiscal year is scheduled for February 27 — only a day before the close of the 2013 tax year for individual taxpayers.
We could see taxpayers scuttling around desperately on February 28 trying to avoid tax hikes in 2013-14.
This budget is based on an economic growth rate of 2.5%, which will increase to about 4% by 2015. This may well not be achieved, which means there is a good possibility of tax increases for 2013/14.
If Gordhan is desperately short, there is little prospect of a VAT or corporate tax hike for 2013/14. This leaves personal tax increases the only option.
The Treasury will be reluctant to reverse the fiscal drag (bracket creep) adjustments granted since 2000. This means that the only alternative would be to increase the maximum marginal rate of personal tax, which is 40% on taxable income exceeding R617,000 a year.
So, what can be done to contain the damage?
February may be a good month for executives to take advantage of record highs on the JSE, exercise share options, pay tax at 40% and enjoy the lower capital-gains tax rate on gains in future.
An executive exercising R10m in share options in February will pay tax at 40%, leaving R6m to be invested.
Now, would the investor prefer R10m capital growing but taxed at full rate, or R6m capital growing but taxed at the lower capital-gains tax rate?
If the maximum marginal tax rate is increased to 42% and the capital-gains inclusion rate is increased to 50%, then the tax arbitrage (difference) between a share option and other investments would be, at most, 21%.
To stunt capital growth by 40% in the hope of scoring an arbitrage of 21% on future income just seems bonkers.
However, for those with little faith in their employer's future, or who wish to diversify the risk of having a large chunk of wealth dependent on one company's fortunes, the answer may be different.
The legislation capping contributions to retirement annuity funds is already at R250,000 for taxpayers under 45 and R300,000 for taxpayers over 45.
February 2013 is the last chance to exercise share options and contribute 15% thereof to a retirement annuity, thus reducing the maximum tax rate on a share option from 40% to 34%.