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Buffett rule the South African way

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23 Feb 2012. There's an economic debate raging in the United States, which was sparked off by Warren Buffett (one of the richest people in the world) saying that he pays a lower rate of tax than his secretary (what happens is that Buffett receives most of his income in the form of dividends and capital gains which attracts a lower rate of taxation than the wages his secretary receives). The Buffett Rule proposes a tax hitting people earning more than $1m to take care of this anomaly.

No debate, no public engagement in South Africa

Meanwhile in South Africa, with absolutely ZERO debate on the topic, no public engagement, the government sommer implements. "Everybody thought the dividend tax was 10% – it was even telegraphed that way in the mini budget, and today the minister came out with 15%." said Alec Hogg last night. Also, with no debate on the matter Capital Gains Taxes are increased. Is this the South African way of doing things?

SA's dividend tax is regressive

As there's no minimum income of $1m like that proposed by Buffett, the South African dividend tax hits everybody who wants to buy stocks, from the poor to the rich - talk about a regressive tax. The Capital Gains Tax is implemented in a smarter way, as there's an exclusion for the first R30,000 of capital gains in a year, so if you're a relatively small player making small gains you're exempt.

Budget 2012

The 2012 budget increases the attractiveness of saving through formal retirement fund vehicles & other formal products rather than doing it on your own. I understand that the Minister's aim is to nail high income individuals who receive most of their income through dividends and capital gains, and I appreciate the increase in the Capital Gains Tax exclusion to R30,000 - this helps those of us who aren't that wealthy but want to play the markets ourselves, instead of enriching the asset management industry. It would have been great if the Minister could have also put in place an exclusion on dividends tax. I think this would have struck the right balance between the aim of ensuring a sufficiently high tax on the high income earners, and those of us who're poorer but want to invest ourselves.

As things stand, it's become relatively more attractive to invest in retirement funds rather than on your own speed.

Doing it yourself vs retirement funds

 

Individuals

Retirement Funds

Capital Gains Tax

Increases to 33.3%
Exclusion increases to R30,000

0%

Dividends tax

Increase from 10% to 15%

Reduces from 10% to 0%

Tax-free income thresholds

To be reviewed

0% on all income

So instead of investing your money yourself and paying no fees to asset managers, because of of the increasing tax burden of this option, more people are going to invest with retirement funds (e.g. those managed by Allan Gray) and have to pay all the fees that come with that. Nice present for the asset management industry, not so great for citizens of South Africa.

Increase in CGT

"In order to reduce the scope for tax arbitrage and broaden the tax base further, the CGT inclusion rate for individuals and special trusts will be increased with effect from 1 March 2012 from 25 to 33.3 per cent, and for companies and other trusts from 50 to 66.6 per cent. To mitigate the impact on middle-income earners, the various exclusion thresholds are increased."

Dividends tax at 15%

The secondary tax on companies will be terminated on 31 March 2012 and a withholding tax on dividends will be implemented on 1 April 2012. This will align South Africa’s tax treatment of dividends with that in most other countries. Pension funds will benefit from this transition as they will receive dividends tax free. The dividend tax will be introduced at 15 per cent.

Tax-preferred savings products

"To encourage voluntary savings, consideration is being given to the introduction of tax-exempt short and medium-term savings products. The proposal is that individuals should be permitted to save up to R30 000 a year, with a lifetime limit of R500 000, in registered savings or investment products that would be free of tax on interest, dividends or capital gains."

Yet more plans to pigeonhole us into formalised products!

Tax free interest income thresholds to be reviewed

The current tax free interest income thresholds will be reviewed and possibly phased out as part of this reform."

Retirement fund contributions

Individual taxpayer deductinos will be set at 22.5% and 27.5%, for those below 45 years & 45 and above, of the higher of employment or taxable income. Annual deductions will be limited to R250,000 & R300,000, for those 45 years and above 45 years respectively. A minimum monetary threshold of R20,000 will apply. These amendments will come into effect on 1 March 2014.

Pigeonholed into formal savings products

It seems to be the strategy of government to make the playing field so uneven (between doing things on your own versus using formalised products), that there's little choice but to use savings vehicles in the formal financial services sector. As a lover of freedom & liberty, these actions grind me into a direction I don't want to be going in. Our constitution also encourages "the advancement of human rights and freedoms", but like with his regulation 28 changes, the Minister seems far keener on pigeonholing us into his way of doing things, than to regulate in a way which evens the playing field between options.

Corporate tax

Mainly sensible steps are being taken with corporate taxes, although these reforms don't go far enough, or sufficiently in the right direction to encourage employment (which is the burning need of the country):

Carbon tax

A revised policy paper on a carbon tax will be published for a 2nd round of public comment.

Tax on gambling

"The 2011 Budget proposed a withholding tax on gambling winnings above R25 000. After broader consultation, a national gambling tax based on gross gambling revenue will be introduced. This tax, effective from 1 April 2013, will take the form of an additional 1 per cent national levy on a uniform provincial gambling tax base. A similar tax base will be used to tax the national lottery." The way the tax has been restructured is negative for the casinos, and Sun International was up 0.4% on the day. My calculations show fair value for Sun International dropping by 6%, but offset by the impact of the withholding tax on gambling winnings over R25,000 presumably falling away (although my feel is that the impact of that would have been far smaller).

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