We have all recently heard about African Bank’s demise. In two days, the value of ABIL shares dropped by almost 90% and subsequently, The South African Reserve Bank placed African Bank under curatorship.
20 February 2015
According to experts, tax revenue growth has been tracking marginally below expectations over the past year. Whilst there are various revenue options available, it is vital that the National Treasury choose one that is not only efficient and least detrimental to the fragile South African economy, but equitable. According to CEO of DebtBusters, Ian Wason, “Wealthy individuals are in for a shock as we anticipate major tax changes targeting these consumers this year.”
Hike in income tax for high-income earners
Enforcing a progressive tax structure, suggests that the overall tax burden on middle and upper income earning individuals will increase.
Wason states, “Middle and upper income earning consumers are some of the most financially constrained South African’s. They have houses, cars and ample monetary commitments, such as school fees, mobile contracts, etc. Though, these consumers have these possessions because they have borrowed money to make purchases and have not paid in cash. ANY tax increases will directly impact their level of disposable income and will only make it harder for them to service their debt.”
There is no income tax relief on the horizon for higher earning consumers. Circumstances will only make these individuals more financially vulnerable. As access to debt becomes increasingly difficult, consumers spending more than they earn will no longer be able to obtain credit as a crutch for survival. Wason further states, “Before debt counselling, DebtBusters’ clients spend more than 109% of their net income servicing their debt. The business has experienced over 50% year-on-year growth in new debt counselling applications and has more than 20,000 clients under debt counselling. Cash strapped consumers will need to change their debt repayment behaviour and take the responsible steps necessary to pay back what they have borrowed.”
Increase in capital gains tax
The wealthy are expected to be impacted through capital gains tax, which extends to individuals, trusts and companies. “This will consequently take away a huge incentive for South African consumers to invest and become entrepreneurs,” states Wason.
Wason goes on to say, “If the National Treasury are going to increase capital gains tax, they need to enforce a simpler tax relief model for entrepreneurs, one which is similar to ‘Entrepreneurs Tax Relief’ that has been enforced in The United Kingdom.”
Entrepreneurs Tax Relief allows entrepreneurs who wish to sell their businesses, which meet specific qualifying requirements, to claim a lifetime allowance of 10 million Pounds of gain that will be taxed a rate of 10%, a much lower rate than normal.
“Government needs to propose amendments for existing stringent and limiting requirements for tax relief qualifications for entrepreneurs,” says Wason.
Consumers need to be financially prepared for supplementary expected increases.
Whilst increasing income tax for high-income earners and hiking capital gains tax are equitable options, they only form part of the solution, as they are highly unlikely to generate a substantial amount of revenue to address the National Treasury’s needs.
Expected hikes in electricity tariffs, due to the current energy problem in South Africa, is bound to further compromise consumer finances.
Furthermore, another anticipated source of additional tax revenue will be an increase in fuel prices, due to the efficiency of collection through the existing mechanism in place to collect tax in the form of fuel levies. The recent abrupt drop in fuel prices have provided consumers with financial relief, making the increase palatable for some, but detrimental for those already cash strapped.
Author: Kelli Knutsen (Marketing Manager)