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Individual tax ceiling in danger

24 February 2014   (0 Comments)
Posted by: Author: Ettiene Retief
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Author: Ettiene Retief (SAIPA)

This year has already seen two petrol price hikes and an interest rate hike and tax experts expect even more increases to be put into effect after Finance Minister Pravin Gordhan delivers his 2014 budget speech.

If the minister could manage to allocate budget to all necessary areas without increasing the deficit too much, he is a super hero.

Super heroes, however, exist only in fiction. South Africans must face the harsh reality that taxes will sooner or later have to be increased, because the country can’t borrow much more without a further negative impact.

The cause of the current economic situation in South Africa is complex.

The country’s income has reduced due to increased inflation, decreased foreign stimulus, trade deficits and the weakening currency.

This results in reductions in consumer spend, which lead to reduced income from VAT on purchases, as well as a reduction in production which in turn leads to job losses and labour unrest.

We have recently seen record levels of retrenchments and job losses, a standstill in platinum production (although South Africa is responsible for 77% of the global platinum production) and the construction industry is still only just managing to stay afloat.

Costs

Although the country’s income has reduced, costs cannot be cut in line with the loss.

Borrowing becomes increasingly risky as increasing the deficit impacts negatively on the strength of the rand, inflation and foreign investment.

South African taxpayers should expect tax increases in the short to medium future.

While corporate tax would be more to the liking of individual taxpayers, this type of tax only has an impact on the fiscus after a year of trading, making changes to consumption and individual income taxes a lot more feasible for short term impact.

This is further exacerbated by possible under collection of taxes.

Value Added Tax

International trends dictate that VAT of 14% is relatively low and Gordhan would not be far off if he increases it to 15%.

Together with this increase, the list of items that are VAT exempt should also be changed in order to minimise the impact on mandatory purchases such as staple foods, school uniforms and books.

Individual tax ceiling in danger

Individual tax in South Africa is currently capped at 40%, but taxpayers should not expect this to be the case for very much longer.

Increased government lending will affect inflation and economic stability, just delaying the inevitable increased tax pressure on individuals.

An increase in the individual income tax ceiling might seem like the least desired change, but this increase will actually only affect a small portion of the population.

This being the high income earners, whose spending habits have historically not been significantly affected by tax changes the past few years.

Instant gratification

Even if none of these predictions realise, recent increases in living costs dictate that consumers have no choice but to change their instant gratification spending habits.

The delayed gratification of sufficient savings has a lot more longevity and offers more security than the fleeting satisfaction of "keeping up with the Jones” by spending money you don’t have on status items. 

Consumers are urged to spend in ways that are sustainable. It is most probably not the last time that rates and fuel costs will increase.

Every individual must take responsibility for their own spending habits. That is not the job of government, despite the various consumer protection laws.

This article first appeared on fin24.com.


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