On 24 February 2021, Finance Minister Tito Mboweni will deliver the annual budget address shortly on the heels of the State of the Nation Address a week earlier by President Cyril Ramaphosa. Given the expected R700 billion budget shortfall for the current cycle, Minister Mboweni will be forced to make some drastic decisions around taxation. We consider some of the potential areas that he might look to below.
For many years, there have been discussions around imposing a wealth tax in South Africa on a certain income bracket. Commentators have recently indicated that should such a wealth tax be imposed on persons with a net asset value higher than R3.2 million, the fiscus could expect as much as R56 billion to be recovered. Many people consider wealth taxes to be a double tax since South African tax residents are already subject to capital gains tax on the disposal of assets, as well as estate duty. Accordingly, there will be severe push-back from the already over-taxed higher income bracket. The imposition of such a wealth tax might also be premature, since the basis on which it is done as well as the collection mechanisms have not been considered in detail, which could lead to an administrative nightmare. Therefore, our view is that wealth taxes are currently not on the cards for 2021.
Increasing the VAT Rate
VAT is a consumption tax. With a subdued economy and many sectors of the said economy currently unable to fully operate, an increase in the VAT rate is unlikely to contribute significantly to the fiscus in the current year. There will also be considerable push-back from Unions and the general public should there be an increase in VAT rates, and we do not see this as a source of government revenue for 2021.
Limitation of Losses and Interest Deduction Restrictions
Both these matters were already highlighted during the previous Budget and Legislative Amendment Cycle. Presumably, since National Treasury had many other complex issues to deal with during 2020 (including COVID-19 relief mechanisms), these items did not receive the attention they should have during 2020. In our view, both these matters will result in legislative amendments in 2021.
Increase in CGT Rate
It is unlikely that an increase in the inclusion rate of capital gains tax (CGT) will contribute significantly to the fiscus — as such, we do not foresee any increases in this regard.
In 1994, South African taxpayers were subject to a once-off transitional levy to accommodate for the increased expenditure from the changeover to a democratic country. Not since 1994 have we had another single event that has led to such a substantial outflow from the fiscus as has been the case with COVID-19. Although the implementation mechanisms and expected revenues from such a solidarity tax or once-off levy is uncertain, we would not be surprised at all come 24 February 2021 to see such a levy to accommodate for the budget shortfall.
The 2021 Budget Address will likely be the most challenging in South Africa’s recorded history, given the considerable budget shortfall that we face and the current subdued global economy. We wish Minister Mboweni and his colleagues at National Treasury all the best in their preparation for a very difficult task.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)