BUDGET SPEECH President Cyril Ramaphosa SONA 2018.

Transcription

1 BUDGET SPEECH 2018 In celebrating the centenary of Nelson Mandela we are not merely honouring the past, we are building the future - President Cyril Ramaphosa SONA 2018.

2 CONTENTS KERRIN LAND LAYING A TOUGH FOUNDATION FOR A HOPEFUL FUTURE IZAK ODENDAAL & DAVE MOHR FISCAL CONSOLIDATION ON TRACK, FRIENDLY FOR INVESTORS ELIZE BOTHA INVEST TODAY TO FUEL ECONOMIC GROWTH TOMORROW CHRIS POTGIETER & MANDY DIX-PEEK TAXING THE WEALTHY, BUT NO WEALTH TAXES TAX TABLES RETIREMENT REFORMS BUDGET PROPOSALS BOTTOM LINE

3 LAYING A TOUGH FOUNDATION FOR A HOPEFUL FUTURE KERRIN LAND CEO: OLD MUTUAL WEALTH When we think about the long term, we often do so in terms of the consequences our actions today will have on the next generation, our children. However, research by Britannica concluded recently that the lifespan for humans is now some 114 years, up from the 20 years you could expect to live 2000 years ago. This increase can be attributed to many factors, including a better understanding of diseases, improvements in medicine, cleaner water and technological advancements. With ongoing development in all areas of human life, rising life expectancy is a trend unlikely to reverse anytime soon. So as we, as a nation, brace ourselves for the tough years ahead, of trying to restore balance to the budget, discipline to the fiscus and efficient service delivery to government sectors, uppermost in our minds is whether this will set us on a path for growth, for prosperity and a more hopeful future for all. THE NEED FOR EDUCATION No one can argue against the need to ensure we have an education system that equips our youth with the skills they ll need to constantly learn, adapt and thrive in the rapidly changing world of today. For an emerging economy such as South Africa, with 47% of our population in the 15 years or younger age band, it's even more critical. According to minister Gigaba, the largest reallocation of resources towards government s priorities was on higher education and training, amounting to additional funding of R57 billion over the medium term. As a result, this is the fastest-growing spending category, with an annual average growth of 13.7 percent. This allocation will be administered under the reinvigorated National Student Financial Aid Scheme (NSFAS). The objective of the increased provision of funds for education, tertiary or otherwise, is to ultimately reduce youth unemployment and the number of young people committed to a life of dependency on state social grants or worse. Education is also key in building the confidence of our youth to be innovative in tackling our country s challenges with fresh ideas. MONEY CAN T BUY EVERYTHING While increased funding is a great start, effective education will also require improved government delivery. Even if both of these are in place, delivering graduates with fresh ideas and solid book learning are not on their own sufficient to rapidly change our current reality of youth unemployment (>50%) and the alarming number of our economically active population that is unskilled (34%). It is clear that while a long-term focus on quality education will benefit us, in the short term our economy is missing a critical pillar. President Ramaphosa committed to a Jobs Summit in the 2018 State of the Nation address: One of the initiatives will be to convene a Jobs Summit within the next few months to align the efforts of every sector and every stakeholder behind the imperative of job creation. The summit will look at what we need to do to ensure our economy grows and becomes more productive, that companies invest on a far greater scale,

4 that workers are better equipped, and that our economic infrastructure is expanded. I am sure corporate South Africa and labour movements will rise to the call certainly for us as Old Mutual, socially responsible business is about ensuring future sustainability of our country and the billions of rands of investments we ve already made in quality education and infrastructure have been with that in mind. But the real power of successful economies lies not in big business, but in the thousands of small businesses at the heart of driving growth. And real power for change, of a problem this vast, will not come from the plans of a few but from many of us as individuals, who are in a position to do so, stepping forward. As successful business people, entrepreneurs, retirees after long careers, we have skills, experience, wisdom and sometimes the financial means to lend a hand we merely need the will to do so. Can you create even just one internship role or learnership in your small business? Can you make some time to offer yourself a mentor for young students? Are you able to invest a small portion of your capital into a promising start-up business, along with active involvement in providing input to the young entrepreneur who s launching it? Newly elected South African president Cyril Ramaphosa's State of the Nation Address ended with quoting late music icon Hugh Masekela's "Thuma Mina" (Send Me). "I WANNA BE THERE WHEN THE PEOPLE START TO TURN IT AROUND WHEN THEY TRIUMPH OVER POVERTY I WANNA LEND A HAND SEND ME" - HUGH MASEKELA CAN WE AS INDIVIDUALS RISE TO THAT CALL?

5 WHAT SHOULD INVESTORS MAKE OF THE BUDGET SPEECH? DAVE MOHR & IZAK ODENDAAL, OLD MUTUAL MULTI-MANAGERS The dramatic political developments of the past few weeks provided a very unusual backdrop to the 2018 Budget Speech. What does this mean for investors? FISCAL CONSOLIDATION APPEARS TO BE BACK ON TRACK Years of running budget deficits have resulted in rapid growth of the overall debt-to-gdp ratio. Fiscal consolidation is the process of reducing the deficit (the shortfall of tax revenue relative to spending which has to be made up by borrowing). Investors were looking for a credible and sensible approach to consolidation. By credible we mean a plan that markets and ratings agencies find convincing, based on realistic assumptions with a high likelihood of being implemented. Sensible refers to reducing the deficit without imposing crippling austerity (squeezing the last drop from taxpayers and slashing essential spending) that can trip the economy s nascent recovery. The deficit for the current fiscal year is likely to be 4.3% of GDP, in line with the October Medium-Term Budget s revised projection. But unlike October, there is a plan to narrow the deficit over time by cutting R85bn on the spending side over the next three years and raising additional revenue. VAT INCREASE DEMONSTRATES COMMITMENT TO SUSTAINABILITY An additional R36bn in revenue will be raised, mostly by hiking the Value-Added Tax (VAT) rate to 15% from 14%, the first such increase in 25 years. The VAT increase will raise an additional R22bn. Other indirect taxes such as the fuel levy and excise duties will add around R2bn. On the direct personal tax side, there is some fiscal drag relief (R7.3bn) but government will still get R6.8bn from fiscal drag. However, there are no further increases in direct individual taxes. The budget deficit is therefore projected to decline to 3.6% in the subsequent two years, eventually settling at 3.5%. If this is achieved, the debt-to-gdp ratio can stabilise at 56% in 2022, an acceptable level in the global context, and much better than the almost 60% ratio predicted in October. By taking the politically unpopular, but pragmatic step of hiking VAT, government demonstrates its commitment to stabilising its finances and to achieving a more sustainable footing. This, together with the stronger global economy and improved domestic growth outlook, should convince Moody s to maintain our investment grade credit rating. If there is a weakness in the Budget, it is probably the failure to meaningfully address the funding crisis at State Owned Enterprises (SOEs). Many SOEs (in particular Eskom, the largest and most geared entity) are running out of cash and are unable to fund themselves due to the extreme reluctance of institutional lenders (banks, pension funds and

6 asset managers) to lend them money. Government cannot afford further bail-outs and the Budget emphasised that any further bail-outs will have to be deficit neutral, i.e. funded by selling assets, but still aimed at reducing exposure to guarantees. Unfortunately, there is no detail as yet. Private sector participation is still on the cards, but only over the medium term. However, the change to Eskom s Board is an important step (and something that falls outside the purview of the Treasury). AN INVESTOR-FRIENDLY BUDGET The global backdrop to this Budget is far more favourable than in recent years. Global economic activity is expanding at the fastest pace in a decade and is spread across virtually all the major economies. This in itself should support South Africa s modest economic upswing, especially with commodity prices firming up. However, it also means that companies can generate decent profit growth, which is reflected in rising share prices. Despite the wobble in equity markets in early February, inflation and interest rates remain low after gradual increases. The macroeconomic environment therefore remains favourable. From the point of view of individual investors, the Budget is positive. For one thing, there are no additional taxes on investment returns (including dividend withholding tax and capital gains tax). By putting state finances on a more sustainable path, government should create a more accommodative overall investment climate. The 2018 Budget is probably enough to secure South Africa s current Moody s credit rating, reducing the risk of index exclusion and a forced selling by foreign investors. It also makes it easier for the Reserve Bank to focus on the inflation outlook instead of risk management. This leaves scope for interest rate cuts. Longer-term borrowing costs (bond yields) should also decline further due to the renewed focus on fiscal consolidation, supporting bonds and other asset classes. The increases in indirect taxes should not materially change the positive inflation outlook, and this is a further positive for bonds. A NICE SURPRISE FOR OFFSHORE INVESTING With the offshore allocation of balanced funds lifted to 30% from 25%, fund managers will have more freedom in allocation based on expected return and valuation. Institutional investors can also increase African exposure to 10% from 5%. This is probably the biggest surprise for local investors. The further easing of capital controls demonstrates confidence in the local economy and local assets on the part of government. Offshore exposure (currently at the maximum of 25% for most balanced funds, including ours) will be carefully reconsidered. For one thing, the rand is probably in fair to slightly overvalued territory on a purchasing power parity (PPP) basis after the strong appreciation of the past two years.

7 INVEST TODAY TO FUEL ECONOMIC GROWTH TOMORROW ELIZE BOTHA MANAGING DIRECTOR OLD MUTUAL UNIT TRUSTS According to the National Development Plan (NDP), South Africa needs a capital injection to the value of 25% of its GDP to achieve the targeted economic growth of 5.4% by While the Finance Minister focused on his plan for fiscal consolidation and economic growth in the 2018 National Budget Speech as a solution to this problem, the shortfall can be partly funded by improved savings levels of both the public and private sector. South Africans, we have seen are notoriously bad savers. The 2017 Old Mutual Savings and Investment Monitor reported that while South African households allocate 16% of their income to servicing debt, a poor 3% goes towards savings. Comparative with other BRICS Nations, in 2016 South Africa showed a saving to GDP rate of 16.16%; 0.35% higher than Brazil. China, on the other hand, saved over 46.05%, followed by India at 30.8% and Russia at 25.36%. Higher savings reserves mean that consumers can absorb unexpected expenses without going further into debt or turning to the State or family for social assistance. Current low rates of savings and high levels of debt means that South African households are essentially dissaving in that they are spending and borrowing more than they are able to save which has the potential to seriously hinder our chances of achieving the growth necessary to bring about real change for investors financial future. IT ALL STARTS WITH A CHANGE OF CULTURE Whilst it may appear challenging for South African households to save due to hindering economic factors we currently have low inflation, coupled with stagnant salaries, as well as historically low employment rates which result in higher dependency ratios. It is important to note that the key determinant of increased savings is a change in culture. In South Africa, our growing poverty rate despite a recent increase in government grants and continuous new job creation can be eliminated by wealth creation. Creating wealth requires some discipline and a move away from instant gratification to invest for the future. It also requires a general realisation with regards to the actual costs involved in funding retirement, so that people are able to plan sufficiently. There is a great opportunity for us, as a country, to grow our wealth by changing the culture of spending to a culture of saving and investment. We have reason to be encouraged when considering that other developing countries, such as Singapore and Thailand, were in the same position 30 years ago, and have managed to grow their economies in large part due to improved household savings and investments. For example, the share of China s population living in extreme poverty in 1980 was over 88%, this number had dropped to just under 2%. While

8 we understand that in the low income bracket access to disposable income for saving might be a challenge, a market of almost R58bn in informal savings tells us that we might be missing an opportunity to bring further savings into the economy. A PROMISING PERSPECTIVE It is encouraging however, that the research findings of the 2017 Old Mutual Savings and Investment Monitor showed a slight improvement in South Africans confidence in their own ability to make responsible financial decisions. While this positive shift in perception is no doubt a step in the right direction, as it shows a growing awareness of the serious implications and vicious financial consequences of bad debt and frivolous spending, strained economic conditions have prevented this new perspective from resulting in tangible change when it comes to saving for the future. A NEW DAWN Arguably most highly anticipated in President Ramaphosa s maiden State of the Nation Address, was how we are going to improve our economy. He used the word economy 18 times in his hour and a half speech and spoke passionately from a macro perspective about the importance of fuelling economic growth through the increased investment into the economy, which will in turn create employment and trigger a great level of economic transformation. While some people may have listened to this portion of the address and assumed that the call of duty for increased investment was aimed at government and businesses, the truth is that individuals are just as responsible for changing their individual circumstances. REMEMBER THE BUTTERFLY EFFECT There is an interesting saying that a butterfly can flap its wings in New Mexico and cause a hurricane in China. The idea that small actions can have a far-reaching and long-lasting effect is a useful concept that can be applied to both life and finances. Similarly, individual investors tend to underestimate their impact in the bigger picture and don t realise the far reaching effects of their own behaviour. Rather than allow yourself to get caught up in the market noise, focus on allowing the Butterfly Effect to set in motion over time. It is never too late to start making little changes to your spending and saving habits to ensure a more secure financial future for yourself and the broader economy. Economic realities continue to put downward pressure on South Africans ability to conserve money for the future, but it is up to us to make the cultural change necessary to increase household savings and, ultimately, fuel the kind of GDP growth that our country requires.

9 TAXING THE WEALTHY, BUT NO WEALTH TAXES CHRIS POTGIETER & MANDY DIX-PEEK DIRECTORS: OLD MUTUAL WEALTH TRUST COMPANY The 2018 Budget has spared high net worth individuals from threatened wealth taxes to a large extent. It was a fine balancing act between introducing an increase in VAT which has been argued to be regressive i.e. mostly impacting the poor, while also taking a larger amount from the more affluent portion of SA society. There were no changes to the inclusion rate and annual exclusion amount for Capital Gains Tax for individuals, trusts and companies. No changes were made to Dividends Withholding Tax, the top marginal individual income tax rate and the flat tax rate on trusts. However, there are a number of other notable increases in tax and tax thresholds impacting high income earners and high net worth individuals. Firstly, there was again no adjustment to the top four tax brackets for individuals. There has been no increase in these income tax brackets for two years which, when inflation is taken into account, means that high income earners are paying more tax. Below inflation adjustments were made to the bottom three brackets for individuals. Secondly, Donations Tax has been increased from 20% to 25% for donations in excess of R30m made in a tax year and Estate Duty has similarly been increased from 20% to 25% on dutiable estates in excess of R30m. This is significant for high net worth individuals with dutiable estates over R30m as a 25% increase in estate duty is a hard pill to swallow but there are estate planning opportunities to assist in minimizing the estate duty liability for example, the use of trusts. While Trusts have been the subject of much debate regarding their usefulness/viability after the introduction of section 7C of the Income Tax Act, we still believe that they have an important role in effective estate planning. The ability to diversify wealth overseas has also been supported by this Budget. While individual offshore allowances remain as they were, institutional offshore allowances have increased by 5%. This is enlightened thinking from Treasury as it gives investors greater investment freedom and reduces the risk of overexposure to a single market and geography. Finally, when it comes to spending wealth one would have to pay significantly more in duties and levies on a number of goods, ranging from the basic such as fuel to luxury items. The most notable of these are: - An increase of 52c/litre for fuel (22c/litre in the general fuel levy; 30c/litre in the Road Accident Fund levy) - Increases in alcohol and tobacco excise duties of between 6% and 10% - An increase in ad valorem excise duties for luxury goods from 7% to 9 MORE ON TRUSTS In summary, Trusts were spared in this Budget in that no significant changes were made to the taxation of these useful estate planning vehicles. Distributions made by Trusts to beneficiaries, the so-called conduit principle, was not attacked as it has been in the US and UK. The taxation of Trusts remains unchanged in that a trust s taxable income will continue to be taxed at a flat rate of 45% but if income is distributed it will be taxed in the beneficiary s hands. Trusts capital gains inclusion rate also remains unchanged at 80% but if the gains are distributed to capital beneficiaries they will pay the capital gains tax at the rate for individuals. Because the conduit principle remains intact the benefit of income splitting and the taxation of Trust income and gains in the hands of beneficiaries is still a valuable tax-saving tool. The question is how do we continue to use Trusts as an effective estate planning tool going forward even in the light of the introduction of Section 7C last year. Section 7C effectively made the introduction of funds into Trusts problematic. However, there are ways to mitigate against the problem in certain instances. For example, by correctly wording one s Last Will and Testament, one can afford the appropriate discretion to executors to limit the impact of Section 7C on any part of an estate being paid to a Trust rather than directly to the heir. Thorough consideration of the implications of Section 7C of the Income Tax Act becomes even more important when one considers the Budget Speech proposal that the official rate of interest in the Income Tax Act be adjusted. The official rate of interest is the current repurchase rate plus 100 basis points (currently 7.75%). This rate is used in terms of section 7C to calculate the annual donation amount on low interest or interest-free loans to Trusts and Companies for donations tax purposes. The proposal is for this rate to be increased to a level closer to the prime rate of interest. The annual donations on these types of loans will have to be reviewed to avoid underpayment issues.

10 BUDGET SPEECH 2018: BUDGET TAX CHANGES 1. PERSONAL INCOME TAX In acknowledgment of the financially constrained taxpayer, the 2018 Budget brings about no adjustments to the top four income tax brackets and below inflation adjustments to the bottom three brackets. The table below illustrates the adjusted tax rates applicable to individual taxpayers and special trusts for the 2018/2019 tax year: TAX RATES FOR NATURAL PERSONS AND SPECIAL TRUSTS 2018/2019 TAX YEAR Taxable Income R0 - R R R R R R R R R R R R and above Rate of tax 18% of each R1 R % of taxable income above R R % of taxable income above R R % of taxable income above R R % of taxable income above R R % of taxable income above R R % of taxable income above R With effect from 1 March 2018, all trusts excluding special trusts are taxed at a flat rate of 45%. TAX REBATES 2017/2018 Tax Year 2018/2019 Tax Year Primary rebate R R Secondary rebate (Age 65 to below 75) Tertiary rebate (Age 75 and older) TAX THRESHOLDS R7 479 R7 713 R2 493 R /2018 Tax Year 2018/2019 Tax Year Below age 65 R R Age 65 to below 75 R R Age 75 and older R R This means that a taxpayer earning less than these thresholds will pay no income tax in the 2018/2019 tax year. The examples below demonstrate the impact of the proposed changes on individuals younger than 65: TAX IMPACT FOR INDIVIDUALS YOUNGER THAN 65 Taxable income (R) 2. ESTATE DUTY AND DONATIONS TAX The table below illustrates the taxation of the dutiable estate after allowance for the deductions and abatement: ESTATE DUTY RATES FOR PERSONS DYING ON OR AFTER 1 MARCH 2018 Dutiable Estate R0 - R /18 rates (R) R and above Rate of Estate Duty 20% of each R1 R % of dutiable estate above R The table below illustrates the taxation of donations after the above mentioned exemptions: Donations Tax Rates Taxable Donation R0 - R R and above Proposed 2018/19 rates (R) Tax change (R) % change % % % % % % % Rate of Donations Tax 20% of each R1 R % of taxable donation above R INTEREST EXEMPTION The interest exemption thresholds remain as follows: R per annum for taxpayers under the age of 65, R per annum for taxpayers aged 65 years and older. It is expected that these amounts will remain unchanged in future. 4. DIVIDEND WITHHOLDING TAX The local dividend withholding tax rate remains unchanged at 20%. 5. TAXATION OF SMALL BUSINESSES The tax rates for small business corporations (gross income not exceeding R20 million) for financial years ending on any date

11 BUDGET SPEECH 2018: BUDGET TAX CHANGES CONTINUED between 1 April 2018 and 31 March 2019: Tax table applicable to small business corporations Taxable Income (R) R0 R R R R R R and above Rate of Tax (R) 0% of taxable income 7% of taxable income above R R % of taxable income above R R % of taxable income above R The tax rates for micro businesses (turnover not exceeding R1 million per year) for financial years ending on any date between 1 March 2018 and 28 February 2019: Tax table applicable to turnover for micro businesses Taxable Turnover (R) R0 - R R R R R R and above Rate of Tax (R) 0% of taxable turnover 1% of taxable turnover above R R % of taxable turnover above R R % of taxable turnover above R TRANSFER DUTY The rates of transfer duty remains unchanged at: RATE OF TRANSFER DUTY Property Value (R) R0 R R R R R R R R R R and above Rate of Tax (R) 0% of property value 3% of property value above R R % of property value above R R % of property value above R R % of property value above R R % of property value above R additional monthly credit of R209 is afforded to each additional dependent. This is a below- inflation increase to the medical tax credits. For taxpayers younger than the age of 65 an additional tax credit will be given of an amount equal to 25% of the aggregate of: the amount by which their contribution exceeds four times their tax credit (for contributions), plus their out of pocket expenses that exceeds 7.5% of their taxable income (excluding any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit). For taxpayers 65 years of age or older, or taxpayers who are disabled or who have disabled dependents, an additional tax credit will be given of an amount equal to the aggregate of: 33.3% of the amount by which their contribution exceeds three times their tax credit (for contributions), plus 33.3% of their out of pocket expenses. The additional tax credit afforded to employees who are 65 years and older with respect to their contributions to medical schemes may also be accounted for in the monthly PAYE calculations. This facility is also afforded to provisional tax payers who are 65 years of age and older. Where multiple taxpayers contribute towards the medical scheme or medical expenses of a third party (for example, adult children jointly contributing to a parent s medical scheme), they may excessively be benefitting from this rebate. It is thus proposed that the medical tax credit should be apportioned between the contributing taxpayers where they carry a share of the medical scheme contribution or medical expenses. The medical tax credit regime will be reviewed once the Davis Tax Committee presents its recommendations. 10. TAX-FREE SAVINGS ACCOUNTS TFSA remains unchanged: Contributions are currently subject to an annual limit of R and a lifetime limit of R Investment returns, growth and payouts in respect thereof are tax free. 9. MEDICAL TAX CREDITS With effect from 1 March 2018, the initial monthly tax credit (for contributions to medical schemes) for all tax payers is R310 and for a taxpayer and his or her first dependent is R620. An

12 BUDGET SPEECH 2018: BUDGET TAX CHANGES CONTINUED CONCLUSION As was the case with the last two budgets, this budget again attempts to address various divergent agendas and economic realities. Faced with a flat lining tax take, dismal growth and even more financial commitments (viz; worsening budget deficit, SOE bail-outs, NHI and higher education), Minister Gigaba decided to take the plunge and increase the VAT rate. In arriving at this decision it was assessed that our current company tax rate is comparable to peer nations, and that individual taxpayers can bear no further tax hikes. The transformation of the South African economic landscape both the nature of the economy and who own and control it remains an important focus. However education and job creation remains the key focus and this has been emphasised in both President Ramaphosa s SONA and Minister Gigaba s Budget address. It is self-evident that individual taxpayers need to invest their hardearned money in a tax-efficient way. In this regard, the tax-efficient benefits of retirement funds and TFSAs appear ever sweeter. It would be foolhardy to attempt to navigate the complex regulatory and investment environment without financial advice. Government has undertaken to facilitate a more investor friendly environment while pursuing a radical transformation of the South African economic landscape. The Minister called on all South Africans to find in ourselves the ethical leadership of Madiba, the selflessness of Albertina Sisulu and the humanity of Hugh Masekela and that this should be the year of renewal, revitalisation and a step change in progress in fostering inclusive economic growth which rolls back unemployment, poverty and inequality. He also welcomed the return of Old Mutual stating that this is a major vote of confidence in South Africa. INCOME TAX CALCULATOR If you want to calculate your monthly income tax and compare it to that of last year, you can make use of Old Mutual s Income Tax Calculator, which has been updated to also include the tax changes applicable to retirement funds. You will therefore be able to see the benefits of retirement reform where your income tax is concerned. This calculator takes your monthly income, retirement contributions, medical expense amounts and your employer s contribution to risk benefits and retirement funds into account and can be found via the following link: income-tax-calculator PLEASE NOTE THAT THE INFORMATION PROVIDED IN THIS CIRCULAR IS BASED ON PROPOSALS MADE IN THE NATIONAL BUDGET SPEECH DELIVERED ON THE 21st OF FEBRUARY 2018 IN PARLIAMENT. UNTIL THE PROPOSALS HAVE FORMALLY BEEN PROMULGATED IN LEGISLATION IT WILL ONLY BE VIEWED AS PROPOSALS. INCOME TAX CALCULATOR If you want to calculate your monthly income tax and compare it to that of last year, you can make use of Old Mutual s Income Tax Calculator, which has been updated to also include the tax changes applicable to retirement funds. You will therefore be able to see the benefits of retirement reform where your income tax is concerned. This calculator takes your monthly income, retirement contributions, medical expense amounts and your employer s contribution to risk benefits and retirement funds into account and can be found via the following link: income-tax-calculator Compiled by: Personal Finance Legal & Product Legal Date: 21 February 2018

13 BUDGET SPEECH 2018: RETIREMENT REFORM Taxation of contributions Since 1 March 2016 as per the T Day tax reforms: Contributions by employers to all retirement funds became taxed as a fringe benefit in the hands of the employee member. The full employer contribution is deductible by the employer. The tax deductions for member contributions were simplified and improved with a uniform deduction of 27.5% of the higher of remuneration or taxable income (inclusive of taxable capital gains), with a yearly deduction cap of R The Taxation Laws Amendment Act (2017) clarified that the deduction may only be applied against the amount of taxable income before the addition of taxable capital gains, and also reiterated that non-trade income (like compulsory annuity income) is included as taxable income for purposes of the deduction. Contributions that exceed the allowable deduction are deemed to have been made in the following year and will be deductible subject to the limits applicable in that year. This rollover will also apply to excess contributions made to retirement annuity funds and pension funds prior to 1 March 2016, but not to contributions made to provident funds prior to 1 March Only contributions made to provident funds from 1 March 2016 that exceed the limit will enjoy the roll-over relief. Any contributions that remain unapplied as deductions upon the member s exit from the fund, may be applied against that member s retirement benefits at retirement, firstly against the lump sum and then against the annuity income. Provident funds annuitisation The T Day reforms and especially the improved tax deduction was premised on compelling certain provident fund and provident preservation fund members to purchase an annuity at retirement. The 2017 Taxation Laws Amendment Act has again postponed this requirement this time to March However, there may be a further delay and this matter is presently being deliberated within NEDLAC. A further paper on comprehensive social security is soon to be released and this should assist in bringing finality to this debate. retirement benefits be allowed from these funds to a retirement annuity fund, provided that the fund rules make provision for this. In this regard, it is proposed to also allow transfers to preservation funds, provided that in these cases, the member s once off withdrawal will not be allowed. Aligning the access provisions upon emigration between RA and Preservation Funds Currently RA Fund members may be paid out their full RA fund benefits upon emigration. It is proposed, that this concession is to be afforded to preservation fund members. Other Retirement Sector Reforms Some further reforms in the pipeline are:- Broadening coverage to low income workers, possibly via requiring auto enrolment of employees into retirement funds; Bringing all public retirement funds within the same regulatory framework as private funds (i.e. having to register with the registrar of pension funds and being subject to the Pension Funds Act); Further rationalising the number of funds so that only the cost effective funds remain (the regulator appears to be targeting an end-game of less than 200 funds remaining out of the current 1651); Simplifying and reducing the costs of retirement fund products; Ensuring effective intermediation; Modernising and improving governance to King IV standards (The King IV corporate governance standard was issued recently it contains specific practice standards for Boards of retirement funds); The introduction of specific enforcement measures to deal with criminal and unethical practices Introducing the concept of an umbrella fund into the Pension Funds Act so that these funds may be regulated more appropriately; and National Treasury and the FSB to develop more efficient measures to find the beneficiaries of unclaimed benefits. Preservation of benefits after reaching normal retirement age In 2014, changes to the Income Tax Act allowed individuals to elect when to retire. This meant that the lump sum benefit accrued to the individual on the date on which the member elected to retire and not at normal retirement age. Therefore, a member can elect to retire after reaching normal retirement age if the rules of the fund provides for this. The 2017 Taxation Laws Amendment Act introduced further flexibility to retiring members of pension and provident funds by providing that, with effect from 1 March 2018, transfers of

14 BUDGET SPEECH 2018: BUDGET PROPOSALS Value-added tax (VAT) It is proposed that as from 1 April 2018 VAT will be increased from 14% to 15%. VAT was last adjusted in 1993, and is lower than the global and African averages. This proposal aims to meet new spending commitments and prevent further erosion of the public finances. The VAT proposal will increase the cost of living of all households. However, the zero-rating on basic food items and paraffin will reduce the impact on the poor, who will receive further assistance through an above-inflation increase in social grants. The wealthiest 30% of households contribute 85% of the VAT revenue. As from 1 April 2018, government proposes to amend the VAT Act to reflect the original policy intent, that only brown bread and wholewheat brown bread will be zero-rated. Products such as rye and low GI bread, which tend to be consumed by richer households, will not be zero-rated. 2. Estate Duty and Donations Tax In line with the Davis Tax Committee recommendations, and in keeping with the progressive structure of the tax system, the 2018 Budget proposes to increase estate duty as follows (with effect from 1 March 2018): 20% on the first R30 million dutiable estate; and 25% on the dutiable estate above R30 million. A basic deduction of R3.5 million is still allowed as an abatement in determining the dutiable estate after the deduction of liabilities, bequests to public benefit organisations and bequests to spouses. Any donations above R30 million per tax year will also be taxed at 25% as from 1 March The first R donation made by a natural person and the first R donation made by a donor other than a natural person per tax year remains exempt from donations tax. 3. Capital Gains Tax (CGT) Inclusion rates remain the same and are as follows: Individuals and Special Trusts: 40% Companies: 80% Trusts (other than Special Trusts): 80% The effective capital gains tax rates are as follows: Individuals and Special Trusts: 18% Trusts: 36% Companies: 22.4% The annual exclusion for individuals remains at R and R in the year of death. 4. Sin Taxes and Levies The following increases are proposed:- Tax on a packet of 20 cigarettes increases by R1.22 Tax on a 340ml can of beer increases by 14.66c Tax on 750ml of wine increases by 27.75c Tax on a 750ml bottle of spirits increases by R4.80 Government proposes to increase the general fuel levy by 22c p/l with effect from 4 April It is proposed that the RAF Levy will be increased by 30c/l. This will push up the general fuel levy to R5.34 p/l of petrol and R5.19 p/l of diesel. The health promotion levy, which taxes sugary beverages, will be implemented from 1 April The tax rate will be 2.1c/gram for sugar content in excess of 4g/100ml. 5. Trusts and Loan Accounts Where a trust incurs no interest or interest at a rate lower than the official rate of interest, an amount equal to the difference between the interest incurred by the trust (if any) and the interest that would have been incurred at the official rate of interest, would be treated as a donation made to the trust thus potentially triggering donations tax. This section is applicable to loans, credit or advances made to trusts before, on and after 1 March The official rate of interest was decreased from 8% to 7.75% in July The official rate of interest is currently calculated as the repo rate plus 1%. It is proposed that the official rate of interest be increased to a level closer to the prime rate of interest. 6. Social Security Reform In 2016 government released a paper for comment setting out their plans for a comprehensive social security reform programme and a further paper is set to be released soon. Government s further utterances have indicated that this initiative is still firmly on the agenda. 7. National Health Insurance (NHI) A follow-up to the 2011 paper was released in Government has undertaken to release a paper setting out further detail. Various funding options are being considered by the Davis Tax Committee-the proposed end game is to eventually withdraw the medical tax credit regime. Until such time, below inflation increases to the medical tax credits will be effected. 8. Financial Sector Reforms The Twin Peaks reforms for prudential and market conduct regulations are on track with the recent enactment of the Financial Sector Regulations and Insurance Bill. In the short term the FSB is focusing on certain specific market conduct concerns such as mitigating illicit financial flows, financial soundness of insurers, increasing competition, financial inclusion, addressing over indebtedness and financial illiteracy, financial inclusion and transformation and dealing with consumer credit insurance abuses. 9. Environmental taxes In addition to raising revenue, tax policy support to protect the natural environment and promote sustainable use of limited resources with the following: The Carbon Tax Bill was adopted in August 2017 and is expected to be enacted by the end of December Government proposes to implement the tax from 1 January 2019 to meet its nationally determined contributions under the 2015 Paris Agreement of the United Nations Framework Convention on Climate Change. To reduce the litter and dissuade consumers from buying plastic bags, the plastic bag levy is to be increased by 50% to 12c per bag with effect from 1 April The environmental levy on incandescent light bulbs will be increased from R6 to R8 to incentivise more energy-efficient behaviour. This measure will take effect on 1 April The vehicle emission tax will increase for every gram above 120 gco2/km for passenger vehicles and R150 for every gram above R175 gco2/km for double cab vehicles, effective 1 April Cryptocurrency Cryptocurrency is a digital asset that is used as a medium of exchange. It poses a risk to the income tax system as cryptocurrency is extremely volatile and its sustainability is uncertain. At the same time, the supply of cryptocurrency can cause administrative difficulties in the VAT system. To address these issues, it is proposed that the income tax and VAT legislation be amended. In 2018, the Reserve Bank, together with other domestic financial sector regulators, will publish a position paper on the evolving of the private cryptocurrencies. This information was taken from the Old Mutual Budget Stop Press 2018

15 BUDGET SPEECH 2018: BOTTOM LINE Taking into consideration, the volatile circumstances facing South Africa currently, the nation s relentless spirit to prosper to a new path of growth and transformation is evident. A sense of optimism has taken hold of the nation within the first two months of Minister Malusi Gigaba, emphasised the fact that debt remains robust, despite two sovereign credit rating downgrades during the year The budget proposes major spending adjustments, and strategic tax measures in response to the unsustainable debt outlook presented in October 2017, by: a minor adjustment in the taxation of small businesses, no adjustments to the top four income tax brackets and below inflation adjustments to the bottom three brackets, an increase in VAT from 14% to 15% and an increase in estate duty and donations tax. Together, with faster economic growth these measures serve to reduce the budget deficit and stabilise national debt. Fee-free education and job creation was emphasised, in both the State of the Nation Address and the Budget Speech in order to enhance our financial environment. Government is working with municipalities to secure investments that can reshape the cities and accelerate growth. Eskom and the Road Accident Fund account for the majority of the government s contingent liabilities. Despite the difficulties, government is beginning to address fundamental issues such as corruption and poor governance within state There is an active move to create economic confidence, as well as rebuild a financial service sector that serves all South Africans. The commitment to improve political certainty boosts investments and strengthens the rand. Government will implement reforms to promote investment by reducing policy uncertainty and act in a decisive manner to strengthen governance and sound financial practices. This is an encouraging platform to take advantage of and enhance the savings culture, as well as for taxpayers to invest in the most tax efficient vehicles. In these complex and financially trying times, one should always look to a trusted financial planner for guidance to ensure their financial needs are met. Notably, Minister Gigaba welcomed the decision to move Old Mutual s primary listing to the Johannesburg Stock Exchange. The Minister further said we see this as a major vote of confidence in the attractiveness and growth potential of South Africa as a market in its own right, as well as a headquarter for African operations The country s success in realising transformation and ensuring a financial environment that is beneficial for everyone is dependent on us all. We are at a moment in the history of our nation when the people, through their determination, have started to turn the country around Now is the time for all of us to work together, in honour of Nelson Mandela, to build a new, better South Africa for all - President Ramaphosa at SONA. owned organisations. IMPORTANT INFORMATION Old Mutual Wealth (OMW) is an elite service offering brought to you by several licenced Financial Services Providers in the Old Mutual Group ( the Old Mutual Group ). This document is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. OMW, the Old Mutual Group and its directors, officers and employees shall not be responsible and disclaim all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of, or which may be attributable directly or indirectly to, the use of, or reliance upon, any information contained on the Old Mutual Wealth website. The information is compiled in good faith and based on sources believed to be reliable, accurate and up to date, but no representations are made as to the accuracy, completeness or suitability of the information and no responsibility is accepted by OMW and/or the Old Mutual Group for any damages which may flow from the use of any information. Old Mutual Unit Trust Managers (RF) (Pty) Ltd is a registered manager in terms of the Collective Investment Schemes Control Act 45 of The fund fees and costs that we charge for managing your investment are set out in the relevant fund's Minimum Disclosure Document (MDD) or table of fees and charges, both available on our public website, or from our contact centre. Old Mutual is a member of the Association for Savings & Investment South Africa (ASISA).