The squeeze on individual taxpayers continued in this year’s budget with increased Vat and fuel levies, almost no fiscal-drag relief and a below-inflation increase in the medical tax credit that whittled away this benefit.
This year’s additional burden comes on the back of a steady increase in income tax and indirect taxes over the past few years.
South Africans’ personal income tax burden has risen from 8.3% of GDP seven years ago to 9.8% in the 2018 tax year, the Budget Review notes.
Add to this consumption taxes such as Vat increasing the price of many purchases by another percentage point, the fuel levy and road accident fund levy increasing the tax on fuel from 35.6% to 38.4%, and a two-percentage-point increase in ad valorem excise duty pushing up the cost of goods such as vehicles and cellphones.
Following an income tax rate increase in 2016 and the introduction of a 45% marginal tax bracket for high earners last year, personal income tax rates were not increased this year.
However, the screws will tighten on all taxpayers as national treasury chose, once again, not to fully address tax-bracket creep. This occurs when a salary increase pushes a taxpayer into a higher tax bracket.
This year even the lower income brackets were granted only partial bracket-creep relief — the bottom three income brackets were raised by a below-inflation 3.1%, while the four higher tax brackets were not adjusted at all.
This will cost personal taxpayers an additional R6.8bn in the 2019 tax year.
Individual taxpayers will also be squeezed for an additional R700m because medical tax credits rose by less than inflation.
They increased by a mere 2.31% (for the first two beneficiaries) and 2.45% (for remaining beneficiaries) — well below the increases in contributions that medical scheme members face, which are typically two to three percentage points above inflation (which was 4.4% for the year to the end of January).
The increases in contributions average 7.75% for nine large medical schemes, according to Grant Thornton Healthcare.
Middle-income earners were spared investment tax and estate duty increases this year, but high earners with estates exceeding R30m will face a higher estate duty rate of 25% — or should they try to donate assets exceeding this amount, they will pay donations tax.
Dividends tax was increased last year from 15% to 20% and the inclusion rate on capital gains tax increased in 2016.
The tax burden on individuals is often measured in terms of the number of days in the year the average taxpayer works to pay his or her tax obligation — known as tax freedom day.
Last year tax freedom day was on May 25 — five days later than it was in 2015 and six weeks later than it was in 1994, the Free Market Foundation reported last year.
Tax freedom day is calculated by taking total government tax revenue and dividing it by GDP.
But Ferdie Schneider, the national head of tax at BDO, says the calculation is misleading because it only considers an average effective tax rate, and these rates vary sharply.
Just in income tax, the Budget Review shows the 2019 average income tax rates will vary from 0% to 36.8%.
Tax freedom day also fails to take into account public services provided by the state.
If government fails to provide benefits such as health care, education, retirement savings and security, taxpayers need to fund these themselves.
Health care is not the only one of these costs rising at above-inflation rates. Recently Old Mutual warned parents to expect education costs to rise by 9%/year.
This means public school costs of R32,000/year last year could amount to R50,000 in five years, and private high school costs of R125,000 could rise to R197,000 by 2021. University costs of R54,000 last year would increase to R85,000 by 2021 and R176,000 by 2030, Old Mutual says.
Eugene du Plessis, director of tax at Grant Thornton, says a taxpayer earning R1m/year in the past tax year and paying R7,500/month in medical scheme contributions, R10,000 in private schooling costs, R5,000 in retirement savings and R1,360 for security had an annual income tax burden of R275,918.
Such a taxpayer would have needed to work 224 days out of 365 — or until August 13 — to cover tax, medical, security, retirement and education costs.
In the tax year that starts on March 1, assuming this taxpayer’s income and costs increase by 4.8%, his or her annual income tax liability will rise to R294,417, which means working an extra two days until August 15 to meet expenses.
Rhodes Business School tax professor Matthew Lester says last year’s tax statistics released by the SA Revenue Service show that just over 1m taxpayers earning more than R500,000/year pay 62% of personal tax, which amounts to 23% of total tax revenue, before they spend a cent on anything else.
The tax burden on these individuals could therefore be close to reaching a tipping point.
Schneider says too heavy a burden on taxpayers leads to an emigration brain drain, tax avoidance mechanisms, and capital or income-generating potential being moved to tax jurisdictions with lower rates.