Key take-outs from the Budget announcement

Government finances deteriorated during 2023, with tax collections growing by only 2.6%, which is less than the official inflation rate. As a result, Treasury aims to raise an additional R15 billion in tax in the 2024/25 tax year, primarily by not adjusting their tax tables and tax deduction limits for inflation. However, no new taxes impacting investors were announced, and all the key tax rates were left unchanged.

As tax brackets were not adjusted for inflation, effective tax rates have increased across the income spectrum (see the table below for more detail).

PERTINENT TAX RATE CHANGES

Source: National Treasury and Coronation

A QUICK RECAP OF HISTORICAL TAX RATE CHANGES

Up until the 2014/15 Budget, relatively healthy economic performance resulted in several budgets that brought real relief for taxpayers. However, the effect of the state capture years and significant underinvestment in our infrastructure over many years, resulted in much weaker economic performance since. To alleviate this pressure on government’s fiscal balance, material tax hikes were announced in five consecutive budgets since 2015/16. This was then followed by four budgets without major changes, but also without adequate relief for the impact of inflation. The table below shows the cumulative effect of these tax increases and bracket creep. Cumulatively, effective tax rates have increased significantly over the past decade. In addition, none of the investment-related tax breaks mentioned below have been adequately adjusted for inflation since 2014.

IMPACT OF BRACKET CREEP (2014/15 vs 2024/25)

Source: National Treasury and Coronation

The table summarises the most pertinent tax rates as well as the change in the effective tax rate applicable to a taxpayer with the stated level of taxable income in 2014/15 rands, assuming that a 6% annual salary increase was received until 2019, a 4.5% increase in 2020, 3.5% in 2021, 4.5% in 2022, 7% in 2023 and 5.3% in 2024.

Two-pot retirement system

Treasury confirmed that the two-pot retirement system will be implemented later this year. This system has the dual objectives of allowing some early access to retirement savings to be used in times of financial distress while gradually phasing out access to retirement assets when changing jobs. We will provide more detail on the implications of this system in future articles.

TAX ALLOWANCES FOR INVESTORS

As a reminder, investors qualify for the following investment-related tax breaks:

• Marginal tax
  Individuals pay a lower marginal tax rate on capital gains (maximum 18%) and dividend income (20%) compared to interest, property rental income and salary income (45%). This means that investors not using tax-advantaged vehicles are, all other things being equal, better off holding equities in their portfolios than other assets.
• Tax-free investments
  Tax-advantaged contributions to tax-free investment accounts remain unchanged at R36 000 per year. This arguably remains the best tax break available to individual investors with long time horizons. While you use after-tax money to invest in a tax-free investment, all income and growth earned from the underlying funds are not subject to local tax, and all proceeds at the time of withdrawal will also not be taxed. There are no investment restrictions for tax-free investments, allowing a full allocation to growth and/or offshore assets. Just do not over-contribute – contributions that exceed the annual limit are taxed very punitively (40%).
• Retirement funds
  Tax-deductible contributions to retirement funds remain at the lower of 27.5% of taxable income (excluding retirement benefits and capital gains) or R350 000 annually. Your capital and reinvested income will grow tax free while it remains in the retirement fund, and you will only pay tax on the way out when you start to withdraw from your retirement fund (at the then-prevailing tax rate). Your underlying investments must comply with Regulation 28 of the Pension Funds Act, which sets a limit on the level of exposure you can have to equity, property and offshore assets.
  The first R550 000 of any lump sum withdrawn at retirement is tax free, and the balance of any lump sum taken at retirement is taxed at preferential rates.
• Interest exemption
  The general interest exemption remains R23 800 for investors younger than 65 and R34 500 for investors older than 65. At the current yield of around 8.8% on managed income funds such as Coronation Strategic Income, this means that you can invest approximately R260 000 if you are under 65 or R380 000 if you are over 65 before starting to pay tax on interest earned.
• Capital gains
  The annual capital gains exclusion of the first R40 000 of realised gain is unchanged. This exclusion makes it more efficient to stagger the realisation of capital gains over different tax years.
• Endowments
  Endowment policies also remain attractive for certain long-term investors. Individual investors in these investment policies currently pay effective tax rates of 30% on interest and property rental income, 20% on dividend income and 12% on capital gains.
• Offshore funds
  Investors in offshore funds only pay capital gains tax on the foreign currency gain realised when withdrawing from their fund. During periods of rand weakness, this will decrease the tax liability compared to an equivalent rand-denominated investment. Conversely, during periods of rand strength, the relative tax liability due on realisation of a foreign-currency denominated investment will increase.

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