Rhodes professor Matthew Lester takes a close look at the tax changes in the 2016 Budget, answering the key questions on the steps Finance Minister Pravin Gordhan took to balance the country’s books and avoid the potential ratings downgrade. As always, the Davis Tax Commission member offers some unique insights into the thinking behind the changes – and explains how the new dispensation will affect each of us.
This special podcast is brought to you by BrightRock. Professor Matthew Lester from Rhodes University and member of The Davis Tax Commission is having one of his big days of the year. Matthew joins us now on the line from Cape Town. Good, bad, or indifferent budget this year?
It was very interesting to listen to National Treasuryâs Michaelâs Sachs on the whole issue of the downgrade and the figures and it appears that what they call the slip in the national debt that occurred and was identified in September 2014 and led to Neneâs austerity measures was not as big as they anticipated and people are saying has Gordhan done enough? Heâs done enough if you look at revised figures on where we were on the debt projection and itâs not as bad as it was. Thatâs the big thing that you have to take away and understand on this, that the prediction of the national debt is not an easy task and we have had some good news on that front, surprises and yes, if the rating agencies will look and listen on this, I think it has some good news.
Thatâs good. So far thereâs a bit of a mixed reaction. Obviously the DA feels that he could have done more. There will be people on the left who are concerned about the way that Gordhan has gone about things. Did you anticipate that there would have been maybe more harsh tax increases?
No. If you look at Gordhan as a minister, he has never been known for making major changes in course of that. In the previous five that he did before Nene, he didnât make a huge move and I wasnât anticipating too much today. The tax increase out of fiscal drag adjustment at the top end is quite a lot of tax. Thatâs quite a bit and there are good [decisions? 00:02:05] here and there as well that are going to make a difference. I wasnât expecting more but there are subtleties in this that you have to work with all the time to get to understand them.
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Firstly, those subtleties would be this new Sugar Tax, the tax on soft drinks? Is that something that has been implemented elsewhere in the world?
Thatâs only scheduled for next year. Letâs see what happens in the debate because Iâm anticipating a lot of backlash from the poorer sector, basic foods, and carbohydrates, obviously Tim Noakes would love that, to tax them, but the question is… sugar is in everything. Itâs even in bread. How far are you going to take that and so weâre going to have to see whatâs in the proposal. Itâs all very well to say this but to do it is another thing as youâve seen with Carbon Tax which has been kicked down the road again.
When we asked him to outline, this was during lockup, we had a press conference for about an hour with Pravin Gordhan which was really interesting, he said that from October heâs done some radical things, reduced expenditure by R15bn a year and increase taxes by R18bn. Now thatâs a R33bn turnaround if you think about it, which couldnât have been that easy.
Alec that R33bn has been on the cards since the Medium Term Budget Framework Speech 2014. If last yearâs measures were not a one-off, it had to be that every year. They had to find the extra R30bn to R40bn. Itâs slightly less than last year. Last year they trimmed off state expenditure by a little bit more, by R5bn or R25bn and the tax contribution of R18bn is about the same, so thatâs not a surprise to me. Thatâs been there, thatâs been on the cards and identified from back in Nena days.
I donât think itâs too much and they are saying and Michael Sachs would speak about this today. We are going to contain the wage bill within the public sector. Theyâve brought in a lot of new measures and theyâre going to do it more from a point of view of not retrenching anybody, but a point of view of attrition. As people leave, they will disseminate that work within the public sector and itâs not going to grow. Itâs not like weâre going to bash into the basic child grant or something like that.
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How realistic is that, that the government will not hire more people? Governments like to employ more.
They are putting it into the very structure of the legislation that in holding their departments to their budgets, that they will not exceed their budgets in terms of the Public Finance Management Act. You could actually have a criminal charge for that if it was crazy enough and I think that National Treasury are being very strong on this. Weâve put in not only a budget, but legislation to ensure that you will meet your budget and you will not exceed it and that implicates the attrition and a formal policy for hiring people thatâs going to be a difficult thing for people to simply run away with it willy nilly.
Pravin also did refer to your committee or the committee that you sit on, the Davis Tax Committee. Was there much of what you deliberated, which we saw in the budget this time?
Thereâs a bit mentioned there on the Offshore Amnesty that was a particular favourite of Dennis Davis. There was a bit mentioned on that somethingâs going to be done about Trust and those were the two big ones. Weâll have to see what happens with Trust when the legislation becomes available, when we go in to register the cycle. This is one of the things Gordhan does is he says, âIâm not making the law. This is whatâs going to come up in the Tax Amendment Act this year and then weâll have the debate when we go to alleged sort of cycleâ.
As far as the individual tax issues are concerned, first of all Capital Gains Tax, R1bn roughly from individuals and another R1bn from companies. How does that work particularly on the company side?
At present, youâre getting about R12bn. a year from Capital Gains Tax. Itâs a nice, useful piece of revenue. The thinking is today, to reduce the arbitrage between Capital and revenue, which are more or less taxed the same and weâre almost at that point now with companies.
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Matthew, what do mean by that, weâre almost at that point now with companies?
We already had a two-thirds inclusion rate on capital income for companies, 66 percent. Thatâs now moved up to 80 percent. Iâm sure in years to come it will move to 100 percent which is the worldwide trend on Capital Gains Tax. Why would, for companies, there be a differential between capital and revenue income? What you should rather strive to do is to keep your headline rate as low as possible but then not differentiate between different types of income.
Iâve got it. Try and keep that 28 percent static if you can.
Yes, and try and get a contribution in another form.
There was a R100m that is being budgeted to be brought in through Property Transfer Tax. He did make mention in the budget that would be going in the top end from R10m houses from 11 percent to 13 percent.
Yes.
Is it across the board though or are there other increases too?
No, theyâve brought in an additional band right at the top end. What you have to understand here is that transfer duty is a form of Wealth Tax. Last year they brought in the new band at R2.25m and now theyâve put another band in at plus R11m so it is a mild form of Wealth Tax, which is another debate that we have to get into now but itâs already here.
He also did say that the millionaires amongst us are not going to feel too bad after this budget. They havenât been targeted yet. Does that mean they are going to be targeted next time?
I think that worldwide we know that there is this issue of the Wealth Tax? Worldwide the wealthy are going to get a bit more injured, not only in South Africa.
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The offshore Amnesty that you touched on a moment ago, you say itâs one of Dennis Davisâ favourites. How much do you think might be sitting there that hasnât been recognised by the government yet?
Everybody is asking that question. Last time round it was R67bn brought in with R7bn are collected on levies, it was marvellous. This time the issue is whoâs going to own up? What appears to have happened, Alec, is that in the last amnesty people didnât disclose their trust holdings abroad and this is what is going to come out this time. Whatâs there, some say itâs billions, some say itâs nothing. Some say that the really wealthy have left South Africa. Weâll have to wait and see. I think thereâs more there than meets the eye.
The British do have a particular advantage of being a non-resident. If youâre a non-resident in the UK and youâre a South African taxpayer presumably, this would bring you into the net.
It would bring you into the net if you became a South African resident taxpayer in South Africa, yes. What is more relevant in offshore matters is non-resident Trust that canât be taxed because theyâre not residents here, they donât live here but their beneficiaries are here and something has to be done about that.
All right so thatâs going to be the big one. It could be billions of Rands.
It could be. Weâll have to wait and see.
Matthew, just to close off with, the relationship with business has certainly been a lot stronger now than probably for at least over a decade. Do you think that business is going to come to the party that theyâre going to assist Pravin Gordhanâs growth objectives?
My thought on it today is can you imagine if we had been here this afternoon with what happened in December? At least we have a business leader that people are confident with. Itâs now the ball is in the business communityâs court to say, come on letâs see if all of us can get behind this and make it work.
What would have happened in your estimation if we had Des van Rooyen delivering the budget today?
I think we would have been downgraded already. It wouldnât have worked. That just was never going to happen. All communities told him that it wouldnât and very fortunately, quick moves were made and we have back a guy who is very confident and extremely able and well-respected on the international stage. Yes, Iâm feeling a lot better than I did last year.
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Yes youâre going to sleep well tonight relative to what you might have been.
Yes I think it did help me.
When you go back to Rhodes and talk to your students there and go around the country and talk to the various people who are coming to listen to you in the next few days, are you going to be able to give them an optimistic picture?
I always do Alec; otherwise I would have left here years ago. Yes I think itâs a positive message. Iâm better off than I was yesterday.
This special podcast was brought to you by BrightRock.