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Insight: The South African National Budget Speech 2017 promises to be more important than ever

Press release   •   Feb 20, 2017 10:56 GMT

Harry Joffe, head of Legal, Discovery Limited

With government needing to raise an extra R28 billion in taxes, it is a foregone conclusion that taxes will rise. The only questions are, which taxes will go up, and by how much? 

Estate Duty

The budget is expected to discuss the 2nd Davis Committee report. That report recommended the scrapping of the paragraph 4q deduction, which is the deduction for any bequests made to a surviving spouse. It also recommended the scrapping of roll overs between spouses for Capital Gains Tax and donations tax. Finally, it recommended raising the estate duty rate up to 25% on all estates with a value above R30 million. The quid pro-quo was that it further recommended raising the primary abatement from R3.5 million to R15 million, which would take the middle class out of the estate duty net entirely. It is doubtful that government will accept all of this, as together it won’t raise much extra revenue and could cause much hardship. It is more likely that government will adopt some piecemeal suggestions, like that of raising the rate of duty on estates with a value above R30 million to 25%.

Capital Gains Tax

Investors are nervously watching this one. The inclusion rates were already raised in last year’s budget, resulting in the effective rate for individuals increasing to 16.4%, to 22.4% for companies and to 32.8% for trusts. Surely, it can’t go any higher now? Any increase for companies and trusts would push their rates ever closer to their income tax rates. It would be hard to justify, given that there is no inflation indexing in our capital gains tax system.

Marginal rates and dividends tax are the most likely increases

The most likely increase will be to marginal rates. Last year all the marginal rates, bar the lowest one, were increased by one percent. There was minimal relief for fiscal drag, apart from the lower three bands. It is expected that there will be similar measures adopted this year, which would take the top marginal rate to 42%.

The second tax likely to be increased is dividends tax. The rate has not been increased since dividends tax was implemented in April 2012. Raising the rate from 15% to 20% will reportedly raise R7 billion in taxes. This seems like a relatively soft target, which is unlikely to raise too many objections.

The Minister of Finance has little choice but to raise taxes. It is hoped that there will not be any radical changes, like the scrapping of spousal relief. In addition, it is hoped that there will be an update on the progression in talks on forced annuitisation of provident funds on retirement, planned to be introduced in 2018. That is now only a year away, and time is short to tackle all the legislative amendments that will need to happen in this area. 

Discovery information

About Discovery Limited

Discovery Limited is a South African-founded financial services organisation that operates in the healthcare, life assurance, short-term insurance, savings and investment products and wellness markets. Founded in 1992, Discovery was guided by a clear core purpose – to make people healthier and to enhance and protect their lives. Underpinning this core purpose is the belief that through innovation, Discovery can be a powerful market disruptor.

The company, with headquarters in Johannesburg, South Africa, has expanded its operations globally and currently serves over 5 million clients across South Africa, the United Kingdom, the United States, China, Singapore and Australia. Discovery recently partnered with Generali, a leading insurer in Europe, and has partnered with John Hancock in the US. These new partnerships will bring Discovery’s shared-value business model to protection industries in Europe and the US.

Vitality, Discovery’s wellness programme, is the world’s largest scientific, incentive-based wellness solution for individuals and corporates. The global Vitality membership base now exceeds three million lives in five markets.

Discovery is an authorised financial services provider and trades under the code “DSY” on the Johannesburg Securities Exchange. 

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