Discipline reduces tax from now on
18 February 2013
Posted by: SAIT Technical
By Prof Matthew Lester (TaxTalk)
Prof Matthew Lester reflects on the inherent tax rates of South Africans whichincludes normal tax, VAT, fuel levy and sin tax.
THE South African Revenue Service claims that the average rate of personal income tax for South Africans has been reduced to 18%. If it were as simple as that, I would be out of a job.
Taxpayers who live below the tax threshold are not exempt from tax unless they spend it all on zero-rated food. But everyone needs warmth. So all pay VAT and the electricity levy, combining to give an 18% inherent tax rate, or, with the fuel levy, about 24%.
Even a social grant recipient who blows it all on smokes and booze has a 50% inherent tax rate. Yes, all 52-million South Africans pay tax.
Some say that wealthy South Africans have an average all-in tax rate exceeding 70%. To achieve that, the taxpayer would have to earn millions and spend the lot on smokes and booze.
The average rate of tax on a R1.5m employment package, after taking into account a 10% pension contribution, is 31%.
Presume that 20% of the remainder is invested or applied to repaying debt and interest. Then the rest is spent on a shopping basket with an all-in transaction tax rate of 20% (covering VAT, fuel levy, sin tax and so forth). Result: the average all-in tax rate rises to about 37%.
Any tax study curriculum starts with extensive analysis of the great cases concerning capital and revenue income. It would seem that tax nerds enjoy reciting judgments, instead of limericks. But what does this achieve?
Today the corporate tax rates for companies, dividend tax included, is 33% on capital income and 38% on revenue income. It is hardly worth scrapping over the difference all the way to the Supreme Court of Appeal, especially if one considers the legal fees, cost awards and accumulated interest charges if the dispute is lost.
Of far greater relevance are the new rules in the Tax Administration Act. Get on the wrong side and the taxpayer will never even get to court. Make an innocent mistake on a tax return and pay a 25% penalty minimum.
The discipline of tax is now keeping on the right side of the law. And, for those who want to reduce their tax, the planning opportunities lie in reducing the exposure to VAT, sin tax and energy levies not through tax planning structures, but rather by the pursuit of efficiency in all aspects of daily life.