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23 February 2023
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.
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:
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.
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.
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.
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.
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.
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:
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.
The latter three items are disappointing; in our view, there was room for some of these to be addressed in this Budget.
The tax incentive available for businesses to promote renewable energy will be temporarily expanded to encourage rapid private investment to alleviate the energy crisis.
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.
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.
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).
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.
The 2023/24 tax brackets will be adjusted in line with the expected inflation rate of 4.9%.
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.
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.
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.
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.
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.