budget 2004 revenue trends and tax proposals 18 february 2004

Budget 2004

Revenue trends and tax proposals

18 February 2004

Content

• Tax Policy over the last 10 years• 2004/05 tax relief proposals• Direct tax:

– Personal income tax rate & bracket adjustments– Income tax payable by individuals below age 65– Income tax payable by individuals age 65 and over– Transfer duty relief– Incentivising share ownership by employees

Content

• Direct tax policy reform agenda for 2004/05:– Royalty & mining tax review– Retirement fund tax reform – Motor vehicle allowance review

• Indirect tax changes:– Excises on tobacco products– Excises on alcoholic beverages– General fuel levy– Road Accident Fund levy– Ad valorem customs & excise duties– VAT & transfer duty

• Enhancement of tax administration

Tax policy over the last 10 years

Key elements of tax policy over the last 10 years

• Significant improvement in efficiency of tax system and broadening of tax base:– Ensured a more equitable tax system by allowing significant

relief, particularly for lower income groups – Tax to GDP ratio has remained relatively stable at 24,6%

• Fiscal policy reform to broaden tax base:– Introduction of capital gains tax– World wide taxation base

• Administrative reforms to improve efficiency:– Enhanced simplicity of the tax system has resulted in increased

compliance & improved taxpayer morality

– Improved investor sentiments

SA’s tax/GDP ratio

• Since 1994 it has been Government’s stated policy to limit the taxation to GDP ratio to approx. 25%.

• 2003 MTBPS - Total Budget Revenue estimates:– 1999/00 = 24,2% of GDP– 2000/01 = 24,1% of GDP– 2001/02 = 23,6% of GDP– 2002/03 = 24,6% of GDP– 2003/04 = 24,6% of GDP– 2004/05 = 24,6% of GDP– 2005/06 = 24,7% of GDP

SA tax mix as % of GDP

As a % of GDP

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

1985

/86

1986

/87

1987

/88

1988

/89

1989

/90

1990

/91

1991

/92

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

PIT CIT VAT Specific excise Fuel levy Customs

SA tax mix as % of total tax revenue

As a % of gross tax revenue

0%

10%

20%

30%

40%

1985

/86

1986

/87

1987

/88

1988

/89

1989

/90

1990

/91

1991

/92

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

PIT CIT VAT Specific excise Fuel levy Customs

Tax base broadening

• Tax base broadening has allowed reduction of tax rates– Reduction in corporate income tax rates – Total PIT relief close to R63 billion– Accelerated depreciation allowances – Introduction of learnership deductions – Reduction of taxes on property – Reduction in consumption taxes

Evolution of tax rates since 1980

Year Company STC Max PIT Sales tax VAT Fuel levy % % % % % c/l

1980 40 - 55 4 - - 1981 40 - 50 4 - - 1982 40 - 50 5 - - 1983 42 - 50 6 - - 1984 42 - 50 10 - - 1985 50 - 50 10 - - 1986 50 - 50 12 - - 1987 50 - 50 12 - 23,5 1988 50 - 45 12 - 22,9 1989 50 - 45 13 - 31,9 1990 50 - 45 13 - 31,9 1991 50 - 44 13 - 46,9 1992 48 - 43 - 10 54,9 1993 48 15 43 - 14 60,9 1994 40 15 43 - 14 60,9 1995 35 25 43 - 14 62,9 1996 35 12,5 45 - 14 71,6 1997 35 12,5 45 - 14 76,6 1998 35 12,5 45 - 14 86,6 1999 30 12,5 45 - 14 90,6 2000 30 12,5 42 - 14 95,6 2001 30 12,5 42 - 14 98,0

2002 30 12,5 40 - 14 98,0

2003 30 12,5 40 - 14 101,0

2004 30 12,5 40 - 14 111,0

Tax relief announced since 1994/95

R million

Income tax on persons and individuals -62 763

Adjustments to personal income tax rate structure -61 993

Adjustments to interest income exemptions -770

Tax on corporate income -6 020

Reduction in corporate income tax rates -4 780

Introduction of deduction for learnerships -600

Extension of deductible donations to PBOs -160

Accelerated depreciation for assets and general business tax stimulus measures

-480

Taxes on property -1 176

Reduction in donations and estate duties -81

Reduction in marketable securities tax rate -300

Adjustments to transfer duty rates and thresholds -795

Domestic taxes on goods and services -2 821

VAT- zero rating of illuminating paraff in -400

Reduction of ad valorem excise duties -1 175

Abolishment of excise duties on soft drinks -318

Introduction of diesel fuel concession and rebates -323

Abolishment of certain stamp duties -605

Total -72 781

Tax to GDP ratio

• Tax to GDP ratio has been on an upward path.

• Need to stabilize ratio to make taxes a flexible policy tool:– Long run expectations have to remain unaltered

• Deficit reduction over the years has ensured flexibility in applying fiscal policy tools – tax relief; increases in real expenditure (fixed investment, health, skills).

• Challenge is to ensure the same for tax policy.

SA’s tax/GDP ratio

• Since 1994 it has been Government’s stated policy to limit the taxation to GDP ratio to approx. 25%.

• 2004 BR - Total Budget Revenue estimates:– 1999/00 = 24,2% of GDP

– 2000/01 = 24,1% of GDP

– 2001/02 = 24,5% of GDP

– 2002/03 = 24,8% of GDP

– 2003/04 = 24,8% of GDP

– 2004/05 = 24,8% of GDP

– 2005/06 = 24,8% of GDP

• The current tax/GDP ratio indicates a gradual increase from the 21,1 % level in 1984.

Tax revenue as a percentage of GDP – 10 years

%

22.0

22.5

23.0

23.5

24.0

24.5

25.0

25.5

26.0

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

Distribution of revenue

Tax revenue as a % of Total tax revenue(Gross)

0%10%

20%30%40%50%

60%70%80%

90%100%

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

Persons and individuals Companies Value-added tax/sales tax

Levies on fuel Other

Tax as % of GDP

Tax as a % of GDP

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

Personal income tax Corporate income tax Value-added tax Levies on fuel

Revenue trends and 2004/05 tax proposals

Main budget revenue

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

Revised Medium-term estimates

R million estimate

Taxes on income and profits 126 145 147 310 164 566 171 990 189 198 209 456 226 708

Taxes on payroll and w orkforce 1 257 2 717 3 352 4 000 4 300 4 500 4 700

Taxes on property 3 979 4 628 5 085 6 520 6 870 7 645 8 576

Domestic taxes on goods and services 79 093 86 888 97 582 110 558 121 549 130 142 145 184 Taxes on international trade and transactions 8 227 8 680 9 620 8 800 10 476 10 906 11 570

Stamp duties and fees 1 562 1 767 1 572 1 450 1 300 1 800 1 870

State miscellaneous revenue1 72 307 433 – – – –

Total tax revenue 220 334 252 298 282 210 303 318 333 693 364 449 398 608

Departmental revenue 3 498 4 088 4 074 6 068 5 944 6 314 6 581

Transactions in assets and liabilities 156 81 366 570 646 709 761

Foreign grants (RPD Fund) – – 117 67 – – –

Less: SACU payments -8 396 -8 205 -8 259 -9 723 -13 328 -11 206 -11 948

Main budget revenue 215 592 248 262 278 508 300 300 326 956 360 266 394 002

Percentage of GDP 23,6% 24,6% 24,2% 24,6% 24,6% 24,7% 24,7%

Gross domestic product 914 634 1 010 921 1 149 890 1 223 198 1 331 796 1 455 626 1 592 571

1. Revenue received by SARS in respect of taxation which could not be allocated to a specific tax instrument.

Actual collections

Summary of tax proposalsEffect of tax

R million proposals

Tax revenue 335 993

Non-tax revenue 6 590

Less: SACU payments -13 328

Main budget revenue, before tax proposals 329 256

Budget 2004/05 proposals -2 300

Direct tax proposals -4 432

Personal income tax: -4 062

Adjust personal income tax rate structure -4 000

Increase interest and dividend exemption under 65 years -50

Increase interest and dividend exemption age 65 years and over -12

Financial transaction taxes -370

Adjust table for transfer duties -100

Remove stamp duty on mortgage loans -250

Remove stamp duty on NCD -20

Indirect tax proposals 2 132

Specif ic excise taxes: Net Impact 1 453

- Increase in duties on beer 303

- Increase in duties on fortif ied w ine 11

- Increase in duties on sparkling w ine 6

- Increased duties on unfortif ied w ine 98

- Increase in duties on cider 21

- Increase in duties on spirits 220

- Increase in duties on tobacco products (52% incidence) 794

Increase in fuel levy 909

Remove ad valorem duties on certain products -230

Main budget revenue (after tax proposals) 326 956

Personal income tax rate and bracket adjustments

Taxable incom e (R) Rates of tax Taxable incom e (R) Rates of tax

0 – 70 000 18% of each R1 0 – 74 000 18% of each R1

70 001 – 110 000 R12 600 + 25% of the amount 74 001 – 115 000 R13 320 + 25% of the amount

above R70 000 above R74 000







255 001 and above R74 100 + 40% of the amount 270 001 and above R78 070 + 40% of the amount


Rebates Rebates

Primary R5 400 Primary R5 800

Secondary R3 100 Secondary R3 200

Tax threshold Tax threshold

Below age 65 R30 000 Below age 65 R32 222

Age 65 and over R47 222 Age 65 and over R50 000

2003/04 2004/05

Transfer duty

Property valueCurrent

duty% of value

Proposed duty

% of value

R150 000 R500 0,3% – 0,0%

R200 000 R3 000 1,5% R2 500 1,3%

R250 000 R5 500 2,2% R5 000 2,0%

R300 000 R8 000 2,7% R7 500 2,5%

R500 000 R23 400 4,7% R22 900 4,6%

R750 000 R43 400 5,8% R42 900 5,7%

R1 000 000 R63 400 6,3% R62 900 6,3%

Property value Rates of tax

R0 – R150 000 0%

R150 001 – R320 000 5% on the value above R150 000

R320 001 and above R8 500 plus 8% on the value above R320 000

Review of share schemes

• Current share schemes favour top management.

• Tax-free share grant to employees.– Employer issuing shares to employees triggers fringe benefit

tax.

– Proposed changes will allow a tax-free share transfer to employees (capped amount).

– Proposed restrictions to encourage long-term ownership.

• Amend current legislation relating to equity-based incentives to prohibit executives from converting ordinary salary into capital gain for tax purposes.

Tax treatment of hybrid instruments

• Debt and equity are treated differently for tax purposes.

• Taxpayers use hybrid instruments that can be treated as either debt or equity to provide optimal tax savings.

• Proposed anti-avoidance measures are aimed at treating these instruments according to their “substance” and not their “form”.

• These measures will encourage taxpayers to classify debt and equity according to its true form.

Deferred payment schemes

• In the basic deferred payment scheme the selling price is fixed but payment is over several years.

• CGT is immediately triggered on all gains before the seller has received all the payments.

• In more complex situations, the selling price is variable with payment over several years i.e.:– a basic fixed sum including a percentage of future profits, or

– based on future profits alone

• The selling price is not readily determinable, no gain can easily be calculated.

• It is proposed to accommodate these issues.

Tax exempt interest for CMA residents

• South African sourced interest paid to foreign

residents normally tax exempt.

• This exemption does not apply to CMA residents.

• This provision became obsolete with introduction

of worldwide tax system.

• It is proposed that South African sourced interest

paid to CMA residents be tax-free subject to

possible exchange of information rules.

Government grants and exempt entities

• In 2003 Government grants for infrastructure

development on Government-owned property

became tax-exempt for certain PPPs.

• This preferential treatment may be extended to

select group of public entities & related capital

expenditure.

• It has come to Government’s attention that some

unresolved issues require consideration. These are: – Tax depreciation allowances on money expended by the private

party on infrastructure

– Clarifying the VAT treatment of these transfers.

Stamp duty

• Stamp duty on mortgage loans abolished to encourage first-time home ownership.

• Closing arbitrage opportunities between Stamp Duties and Transfer Duty: – Stamp duty on long-term leases vastly lower amounts than

transfer duty on actual transfer of real property. – Hence, stamp duty increased for LT leases if nature of

transaction is similar to property transfer.

• Enhancing enforcement measures: – Penalty for late stamping of lease documents will no longer be

limited to R4000 – Late stamping for leasing documents will no longer be allowed

retrospectively

– Alignment of penalties structure with other Acts.

2004/05 agenda for reviewing some key tax instruments

Mineral royalty bill

• Refinement of bill after extensive consultation with stakeholders.

• Refinement includes:– Delay of introduction of royalty by five years - 2009

– Removal of fiscal stabilisation clause to ensure certainty regarding royalty rates

• Marginal mines and potential double royalties need to be addressed.– Issue of marginal mines potentially overstated

– Nature of marginality matters

– Procedures to accommodate communities for potential loss of royalty income over time

– Unequal distribution of mineral deposits and fiscal devolution

Impact of royalty – stories versus substance

• Econometric model suggests that – Royalty will have limited impact on employment and output

– Different royalty rates will have to apply to various mining sectors due to different tax incidences

– Rate differentiation informed by diverse economic and distributional impacts.

• Revenue-based royalty remains:– Royalty is nothing but a marginal change in commodity prices

– Econometric work suggest that economic consequences are limited

– Time series analysis shows that severity of revenue based tax versus profit tax is overstated for most sectors

Mining tax review

• Mineral Royalty Bill necessitates a holistic reassessment of current fiscal regime for mining sectors, including additional allowance; ring-fencing provision; rate differentiation for diverse mineral sectors; gold mining tax formula; STC exemption, etc.

• Gold mining tax formula provides for:– Income tax exemption and

– STC relief

• Relief for marginal mines more appropriate for a royalty regime than the corporate profit tax.

• Propose review of 40 per cent surcharge rate for oil extracting companies.

• Review aimed at attracting investment in oil and gas industry.

Pension fund reform

• Completion expected during 2004/05.• Holistic approach requires modeling of all

saving and tax instruments.• International literature suggest limited

impact of tax policy on aggregate saving:– Primary impact lies with saving portfolio– Need to assess interaction between compulsory

saving and tax policy

• In light of complex dynamics between different savings instruments and entities, apparent obvious solutions become questionable.

• Do contractual savings increase aggregate savings?– Can saving be enforced in the presence of financial

liberalization?

• Do higher returns on savings increase savings?– Income and substitution effects (international evidence does

not indicate that higher returns on S do indeed increase S)

• Are savings for retirement purposes really statistically that low in SA?– Not so – stats ignore returns by pension funds, capital gains on

property and overestimate impact of durable consumption

• Is the saver aware of the different returns on his/her saving portfolio?– Need to improve information flow to promote optimal choices

(see Sunday Times of 22 February)

Pension fund reform - it’s not that simple


• Does tax policy discriminate against pension funds?– Propensity to save differs for different savings instruments; e.g.

income earned from house price appreciation could have higher propensity to save than income from wages

– To increase aggregate savings there may be need for certain trade-offs in respect of tax neutrality principle for different savings instruments

– International evidence suggests limited impact of tax policy changes on savings dynamics

• Further complications:– If returns have positive impact on level of savings, then

increasing returns on contractual savings would improve households position. But no transparency in respect of returns, high commissions – hence, is there income security post retirement?


– Poor households face budget constraints since their contractual saving commitments cannot be countered by borrowings – hence, contractual savings are very limiting. It is here that tax policy changes may be needed against the revenue neutrality requirement.

– Tax policy must change dynamics of savings instruments to provide poor households with more choices to earn optimal returns with low risk (e.g. retail bond); lowering RFT may be inefficient way unless pension funds can prove strong relationship between returns and additional savings.

– In case of higher income households contractual savings are less limiting as they face fewer limits on credit. However, they face risk as they face interest rate risk on their borrowings to counter long run savings commitments – the greater the degree of financial liberalisation, the weaker policymakers’ ability to increase saving rate

Car allowance

• Use of deemed motor expense schedule has escalated significantly:– Concern over revenue losses– Need to reconcile actual with deemed expenses

• Income versus consumption tax:– In an environment of limited room for tax relief,

trade-offs become inevitable– Intended changes not only aimed at revenue

collection but primarily at changing behaviour– Government intends to continue its support for

income tax relief

Indirect Tax Proposal 2004

• Increases in general fuel levy and Road Accident Fund fuel levy.

• Increase excise duties on alcoholic beverages.

• Increase excise duties on tobacco products.• Abolish ad valorem customs and excise

duties on certain cosmetic products, computer printers, recorded music, clocks, and photographic film rolls.

• Increase diesel fuel concession / refund to Agriculture, Forestry and Mining.

Fuel taxes

• 10 c/litre increase in general fuel levy on petrol and diesel to R1,11 and R0,95 respectively.

• 5 c/litre increase in Road Accident Fund levy on petrol and diesel to 26,5 c/litre.

• Total fuel taxes as percentage of pump price increase from 35% on petrol and diesel in 2003/04 to approximately 37,4% and 36,4% respectively for 2004/05.

Diesel fuel tax concession / refund

• Increase in refund of general fuel levy on diesel for primary producers (agriculture, forestry, mining) from 31,6% to 38,8% (or from 26.86 c/l to 36.86 c/l).

• Nominal increase of 15 c/litre in total diesel refund for primary producers:– General Fuel levy refund increased by 10 c/litre – RAF levy refund increased by 5 c/litre

• Refunds for all other beneficiaries increased by nominal increase in fuel taxes to maintain current levels of benefit.

Taxes as % of fuel price –1999 = 40%

2002/03

93 octane petrol

2002/03

diesel

2003/04

93 octane petrol

2003/04

diesel

2004/05

93 octane petrol

2004/05

Diesel

General fuel levy, RAF levy,

C&E levy, equalisa-tion fund levy, IP marker

28,8% 27,0% 35,0% 35,0% 37,4% 36,4%

Excise duties on tobacco products

• Tax incidence (excise duties + VAT as a % of retail selling prices) on tobacco products increased from 50% to 52%.

• This increase translates into the following excise duty increases for 2004/05:

– Cigarettes 16.55% to R4,53 per 20 – Cigarette Tobacco 11.7% to R139,03 per kg– Pipe Tobacco 17.3% to R68,31 per kg– Cigars 15.67% to R1 233,04 per kg

Excise duties on alcoholic beverages

• Proposed total tax incidence of 23, 33 and 43 per cent for wine, beer and spirits respectively.

• Tax burden benchmark will be phased in over three years.

• Excise duty increases for 2004/05:– Natural wine 30,7% to R0.88 per 750 ml– Sparkling wine 28,0% to R2.43 per 750 ml– Fortified Wine 16,0% to R1.75 per 750 ml– Clear Beer 9,0% to R1.15 per 750 ml– AFBs & Ciders 7,1% to R1.15 per 750 ml– Spirits 13,51% to R14.78 per 750 ml– No increases in excise duties on sorghum beer / Traditional

African beer

Ad valorem customs and excise duties

• Abolish ad valorem customs and excise duties on the following products:

– Some cosmetic products: preparations used for hair, shampoos, deodorants, bath preparations, etc.

– Recorder and unrecorded music (CDs & magnetic tapes)

– Computer printing machines and photo copying machines

– Clocks– Photographic film rolls

budget 2004 revenue trends and tax proposals 18 february 2004

Documents

gdp ratio tax

gdp slide

total tax revenue slide

content tax policy

summary of tax proposals

efficiency of tax system

evolution of tax rates

equitable tax system