Key take-outs from the Budget announcement

Government finances benefited from an 8.2% increase in taxes collected compared to the previous fiscal year. As a result, no new taxes impacting investors were announced and all the key tax rates were left unchanged.

Unfortunately, only partial fiscal drag relief of 4.9% was granted after a year of high inflation (near 7%). This has resulted in small increases in effective tax rates across the income spectrum (see the table below for more detail). In addition, individuals can claim a tax break of up to R15 000 on new solar panels (but not inverters or batteries) installed at their homes during the next tax year.

PERTINENT TAX RATE CHANGES

Sources: National Treasury, Coronation.

A quick recap of historical tax rate changes

Up until the 2014/15 Budget, Government finances benefited from a significant amount of stability in the system, resulting in several budgets that brought real relief for taxpayers. However, the effect of the state capture years was a fiscus that came under pressure, resulting in material tax hikes announced in five consecutive budgets since 2015/16. This was then followed by three budgets without major changes. The table below shows the cumulative effect of these tax increases. While we welcome the relatively good news in this year’s budget, the past increases still leave most taxpayers with an effective tax rate around 10% higher than in 2014. In addition, most of the other investment-related tax breaks mentioned below have not been adequately adjusted for inflation since 2014.

IMPACT OF BRACKET CREEP (2014/15 vs 2023/24)

Sources: National Treasury, Coronation

The table summarises the most pertinent tax rates as well as the change in the effective tax rate applicable to a taxpayer with the stated level of taxable income in 2014/5 rands, assuming that a 6% annual salary increase was received until 2019, a 4.5% increase in 2020, 3.5% in 2021, 4.5% in 2022 and 7% in 2023.

Two-pot retirement system

Treasury still intends to implement a new system to allow some pre-retirement access to a portion of retirement savings from 1 March 2024. This will further normalise the regulations that govern personal pensions such as retirement annuities and employer-sponsored retirement funds. We will provide more details to our retirement investors as these become available.

TAX ALLOWANCES FOR INVESTORS

As a reminder, investors qualify for the following investment-related tax breaks:

• Marginal tax
  Individuals pay a lower marginal tax rate on capital gains (maximum 18%) and dividend income (20%) compared to interest, property rental income and salary income (45%). This means that investors not using tax-advantaged vehicles are, all other things being equal, better off holding equities in their portfolios than other assets.
• Tax-free investments
  Tax-advantaged contributions to tax-free investment accounts remain unchanged at R36 000 per year. This arguably remains the best tax break available to individual investors with long time horizons. While you use after-tax money to invest in a tax-free investment, all income and growth earned from the underlying funds are not subject to local tax, and all proceeds at the time of withdrawal will also not be taxed. There are no investment restrictions for tax-free investments, allowing a full allocation to growth and/or offshore assets. Just do not over-contribute – contributions that exceed the annual limit are automatically taxed very punitively (40%).
• Retirement funds
  Tax-deductible contributions to retirement funds remain at the lower of 27.5% of taxable income (excluding retirement benefits and capital gains) or R350 000 annually. Your capital and reinvested income will grow tax free while it remains in the retirement fund, and you will only pay tax on the way out when you start to withdraw from your retirement fund (at the then-prevailing tax rate). Your underlying investments must comply with Regulation 28 of the Pension Funds Act, which sets a limit on the level of exposure you can have to equity, property and offshore assets.
• The first R550 000 of any lump sum withdrawn at retirement is tax free, and the balance of any lump sum taken at retirement is taxed at preferential rates. While we welcome the 10% increase in the tax-free portion in this year’s budget, we also note that if full inflation relief was granted since 2015, the tax-free component should by now have been around R800 000.
• Interest exemption
  The general interest exemption remains R23 800 for investors younger than 65, and R34 500 for investors older than 65. At the current yield of around 8.8% on managed income funds such as Coronation Strategic Income, this means that you can invest approximately R270 000 if you are under 65 or R390 000 if you are over 65 before starting to pay tax on interest earned.
• Capital gains
  The annual capital gains exclusion of the first R40 000 of realised gain is unchanged. This exclusion makes it more efficient to stagger the realisation of capital gains over different tax years.
• Endowments
  Endowment policies also remain attractive for certain long-term investors. Individual investors in these investment policies currently pay effective tax rates of 30% on interest and property rental income, 20% on dividend income and 12% on capital gains.

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