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The Budget in Brief With SRA Law Services

The Budget in Brief With SRA Law Services

23 February 2023

“Fiscal restraint, tough trade-offs in the interests of the country’s prosperity.”

These were some of the themes emerging from the Finance Minister’s 2023-24 Budget Speech on 22 February 2023. He also spoke about the need to put the fear of failure aside and execute the difficult trade-offs needed to get from where we are now, to where we want to be in the future, and to act boldly. In our view, it’s perhaps questionable whether sufficiently bold measures emerged from this Budget Speech.

Eradicating poverty, inequality and unemployment were identified as priorities, and a growing economy was identified as key to achieving these objectives.

law-services law-services

Against the backdrop of slowing global recovery and high economic risks such as the Russian-Ukraine war that could impede growth domestically, South African households are under increasing pressure from the rising costs of living, and unemployment. Persistent and prolonged loadshedding is impacting service delivery and threatening the survival of many businesses.

The pursuit of higher growth remains anchored on three pillars:

  1. Ensuring a stable macroeconomic framework to create a conducive environment for savings, investment and growth.
  2. Implementing growth-enhancing reforms in key sectors, particularly in energy and transport.
  3. Strengthening the capacity of the state to deliver quality public services, invest in infrastructure and fight crime and corruption.

Good news

The fiscal consolidation strategy adopted several years ago has restrained growth in consumption expenditure and made it possible to use part of higher-than-expected revenues to reduce the deficit. As a result, it was not necessary to resort to tax increases or cut social wages and infrastructure, to bring the fiscal deficit down.

  • The glimmer of good news was the overall growth of South Africa’s economy by an estimated 2.5% in 2022 (an upward revision from 1.9% projection in the 2022 MTBPS)
  • The size of the economy in 2022 was bigger than the pre-pandemic levels in real terms, evidence of a robust economic recovery even in the face of lingering COVID-19 scarring, at R4.6 trillion
  • However, the medium-term growth outlook has deteriorated. Real GDP growth is projected to average 1.4% from 2023 to 2025, compared with 1.6% estimated in October 2022.

Other reforms included:

  • Debt relief for municipalities (which included substantial debts to Eskom) subject to conditions
  • Debt relief arrangement for Eskom of R254 billion, accompanied by strict conditions to safeguard public funds
  • Spending R903 billion on infrastructure over the medium term, for transport and logistics and SANRAL to improve the road infrastructure network (R351.1 billion) and water and sanitation (R132.5 billion) over the next three years
  • Assistance to South African Airways (R1 billion) and the South African Post Office is allocated (R2.4 billion)
  • Social development (R66 billion) and COVID-19 distress grant until 31 March 2024 (R36 billion)

Energy

As part of the initiatives to transform the electricity sector and achieve energy security in the long term, two tax measures were announced to encourage businesses and individuals to invest in renewable energy and increase electricity generation.

  • From 1 March 2023, businesses will be able to reduce their taxable income by 125% of the cost of an investment in renewables. There will be no thresholds on the size of the projects that qualify, and the incentive will be available for two years to stimulate investment in the short term.
  • A new tax incentive for individuals will be introduced to install rooftop solar panels to reduce pressure on the grid and help ease loadshedding. Individuals who install rooftop solar panels from 1 March 2023 will be able to claim a rebate of 25% of the cost of the panels, up to a maximum of R15,000. This can be used to reduce their tax liability in the 2023/24 tax year. This incentive will be available for one year.

The country will also make significant investments over the next five years, in terms of the ‘Just Energy Transition Plan’ and the ‘Just Energy Transition Investment Plan’ to enable innovation to address climate challenges.

Revenue and tax proposals

Government announced tax relief to the tune of R13 billion, due to improvement in revenue collection in corporate and personal income taxes, as well as customs duties. As a result, there are no significant tax changes in this budget.

  • The personal income tax brackets will be fully adjusted for inflation, which will increase the tax-free threshold from R91,250 to R95,750
  • Medical tax credits will also be increased by inflation, to R364 per month for the first two members, and to R246 per month for additional members
  • The retirement tax tables for lump sums withdrawn before retirement, and for lump sums withdrawn at retirement, will be adjusted upwards by 10%. This means that the tax-free amount that can be withdrawn at retirement increases to R550,000.
  • The brackets of the transfer duty table will also be increased by 10%, allowing properties below R1.1 million to avoid any transfer duty payments

After further consultations, the government intends to publish draft legislation on the ‘two-pot retirement system.’ This will include details on the amount that could be immediately available when the system is implemented from 1 March 2024.

Any withdrawals from the accessible ‘savings pot’ would be taxed as income in the year of withdrawal.

Greylisting

A total of R14 billion was allocated over the medium term to enhance the fight against crime and corruption, in addition to the legislative amendments, specifically:

  • The Financial Intelligence Centre is allocated an additional R265.3 million to tackle organised and financial crime
  • The Special Investigating Unit is allocated R100 million to initiate civil litigation in the special tribunal, flowing from proclamations linked to the recommendations of the State Capture Commission
  • The Department of Defence is allocated an additional R3.1 billion to enhance security on South Africa’s borders

This is to aid South Africa’s fight against corruption and money laundering, in particular 15 of the 20 legislative deficiencies identified by FATF, in fighting organised and sophisticated crimes. The FATF Plenary will make its decision later this week on whether or not to greylist South Africa.

The measures implemented to bolster such institutions are welcomed.

Further

Unchanged

  • VAT rate
  • Corporate tax rate
  • General fuel levy and the Road Accident Fund levy will not be increased this year. To ease the impact of the electricity crisis on food prices, the refund on the Road Accident Fund levy for diesel used in the manufacturing process, such as for generators, will be extended to manufacturers of foodstuffs. This takes effect from 1 April 2023 for two years.
  • Deductions in respect of retirement fund contributions
  • Estate duty
  • Donations tax
  • Dividend tax
  • Company tax

Increase

  • Excise duties on alcohol and tobacco of 4.9%

No mention

  • National Health Insurance
  • Minister of Electricity or related plans
  • Exchange control
  • Expropriation without compensation
  • Further cryptocurrency regulations

The latter three items are disappointing; in our view, there was room for some of these to be addressed in this Budget.

Revenue trends

  • A strong revenue performance in 2022/23 was driven by an increase in commodity prices, and a continued recovery from the pandemic among manufacturing and financial firms
  • Over the next three years, revenue is expected to grow by R351 billion, reaching R2.04 trillion in 2025/26
  • The tax-to-GDP ratio increases from 25.4% to 25.75 over this period
  • The 2023 Budget provides tax relief amounting to R13 billion in 2023/24. Of this amount, R9 billion is provided to encourage households and businesses to invest in renewable energy, supporting the clean energy transition and addressing the electricity crisis.

For business owners: Expansion of the renewable energy tax incentive

The tax incentive available for businesses to promote renewable energy will be temporarily expanded to encourage rapid private investment to alleviate the energy crisis.

electricity-relief electricity-relief

The current incentive allows businesses to deduct the costs of qualifying investments over a one-or three-year period, which creates a cash flow benefit in the early years of a project. Businesses may deduct 50% of the costs in the first year, 30% in the second and 20% in the third for qualifying investments in wind, concentrated solar, hydropower below 30 megawatts (MW), and biomass and photovoltaic (PV) projects above 1 MW. Investors in PV projects below 1 MW may deduct 100% of the cost in the first year.

Under the expanded incentive, businesses may claim a 125% deduction in the first year for all renewable energy projects with no thresholds on generation capacity. The adjusted incentive will only be available for renewable energy investments brought into use for the first time between 1 March 2023 and 28 February 2025. For a business with positive taxable income, the deduction will reduce its tax liability. For example, a renewable energy investment of R1 million would qualify for a deduction of R1.25 million. Using the current corporate tax rate, this deduction could reduce the corporate income tax liability of a company by R337,500 in the first year of operation.

Two-pot retirement system

The first phase is expected to take effect on 1 March 2024 with the aim being to enable pre-retirement access to a portion of an individual’s retirement assets, while preserving the remainder for retirement.

Retirement fund contributions will remain deductible up to R350,000 per year (or 27.5% of taxable income per year) whichever is lower.

two-pot-retirement two-pot-retirement

Permissible withdrawals from funds accrued before 1 March 2024 will be taxed according to the lump sum tables.

Withdrawals from the “savings pot” before retirement will be taxed at marginal tax rates. On retirement, any remaining amounts in the savings pot will be taxed according to the retirement lump sum table (for example, R550,000 is a tax-free lump sum on retirement).

Four areas required additional work: a proposal for seed capital, legislative mechanisms to include defined benefit funds in an equitable manner, legacy retirement annuity funds (to be addressed by upcoming draft legislation), and withdrawals from the retirement portion if one is retrenched and has no alternative source of income (which will be reviewed as a second phase of implementation).

Adjustment of transfer duty and retirement tax tables

As part of the periodic reviews of monetary values in tax tables, the brackets for transfer duties, retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits will all be adjusted upwards by 10% to compensate for inflation. Tax rates remain unchanged. The rates shown in the retirement fund tables below are effective from 1 March 2023.


Withdrawals from retirement funds

retirement-lump-sum retirement-lump-sum

Retirement and severance benefits from retirement funds

retirement-and-severance retirement-and-severance

Transfer duty rate adjustments

transfer-duty transfer-duty

Personal income tax thresholds

The 2023/24 tax brackets will be adjusted in line with the expected inflation rate of 4.9%.

income-tax income-tax
rebates rebates

The annual tax-free threshold for a person under the age of 65 will increase to R95,750. Had the brackets not been adjusted, revenue would have increased by about R15.7 billion. Relief mainly benefits middle-income households.

taxpayers-under-65 taxpayers-under-65
taxpayers-65 taxpayers-65
taxpayers-over-74 taxpayers-over-74

Medical credits

Medical tax credits will increase from R347 to R364 per month for the first two members, and from R234 to R246 per month for additional members.

Corporate income tax

small-business-tax small-business-tax
micro-income-tax micro-income-tax

Excise duties on alcoholic beverages and tobacco products

The guideline excise tax burdens for wine, beer and spirits are 11%, 23% and 36% respectively, of the weighted average retail price. Excise duties have increased more than inflation in recent years, resulting in a higher tax incidence. Government proposes to increase excise duties on alcohol in line with the expected inflation of 4.9% for 2023/24. Further, the rate for sparkling wine is realigned to the policy decision taken in 2016 to peg it at 3.2 times that of natural unfortified wine.

Third-party data and personal income tax administration reform

The pay-as-you-earn (PAYE) and personal income tax administration reform announced in the 2020 Budget has given pensioners the option to agree to more accurate PAYE withholding rates to take account of multiple sources of income, as well as enabling 2.9 million individual taxpayers to be automatically assessed without the need to file personal income tax returns. The reform will continue over the medium term with a view to reducing the administrative burden for employers, payroll administrators and SARS, as well as individual salaried taxpayers. Work has commenced, in consultation with employers and representative organisations, to provide employer and employee data on a monthly basis in a fully automated fashion. Over time, the need for employer PAYE annual reconciliation is expected to fall away, and the reform will be extended to third-party data providers.

Broadening the personal income tax base

As part of exploring the effect of remote work on the personal income tax regime, the National Treasury and SARS committed to a multiyear review of allowances. A discussion document will be released this year to outline workplace practices and policies, changes in the current environment, and how different workplaces are affected by home office and travel allowance policies.

Contributors: Nisha Ramnath, Hein Daffue, Michael Jackson, Bevin Gajoo, Anne-Marie van Dyk and Naresh Tulsie.

The purpose of this document is to provide clients & intermediaries with information applicable to their work. This document is accompanied by the SARS pocket tax guide for the 2023 - 2024 tax year, for your information. /em>

The budget proposals in this document by the Minister of Finance, are subject to ratification by Parliament. The information herein incorporates commentary from the National Budget Speech but the legislation finally enacted may differ. All information herein is believed to be correct at the time of publication. While we have utmost care in compiling this document, we accept no responsibility for any inaccuracies, errors or omissions.

This document is not intended to give advice, consequently, the contents hereof should not be used as a basis for action without seeking your own professional advice. Tax rate changes proposed in the Budget Speech only become effective once Parliament enacts legislation. No part of this work may be altered or reproduced without the consent of SRA Law Services.