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Every year, when our Finance Minister delivers the annual budget speech, we listen to find out how it will affect our pockets in the short term… and how much more we will pay for petrol and beer!
While these are good reasons to pay attention to it, there are many more components to the budget speech that we need to consider. Karin Muller, Head of Sanlam Growth Market Solutions, shares some insights.
When we look at the budget speech, there are two areas to which we need to pay attention: The ‘income’ section, which talks to where our government gets its money from, and the ‘expenses’ section, which relates to what government will spend this money on.
The budget speech, therefore, deals with income and expenses over the next year, but also talks to medium-term spending, as well as some very long-term implications for the financial situation of consumers. Some of the longer-term implications relate to certain benefits, like medical and retirement benefits.
How, then, will the budget speech affect our pockets/wallets in the short term?
Impact on different taxes
The changes to the different tax components will affect how much you receive of your salary every month (income tax and deductions), how much you pay for certain things (VAT and sin taxes), and how much you need to pay when you sell certain assets (capital gains tax).
Income tax
Minister Gordhan spoke about personal income tax relief of R9,5 billion. How much of this will reach your pocket depends on how much you earn. The bulk of this benefit will go to lower income earners. For example, someone earning R65 000 will pay R260 tax compared to R945 in the previous years – a saving of 73%, while someone that earns R250 000 would pay R2 135 less tax – a saving of 5,1%.
The primary rebate for people over the ages of 65 and 75 has also increased, which means that these tax payers will have a little extra money in their pockets.
This relief is intended to combat “bracket creep”. Bracket creep refers to a situation where you receive a salary increase (which should help you keep up with increases in living expenses) and where this increase then pushes you into a higher tax bracket. When the Minister, therefore, slightly adjusts the different income brackets, he does this to make sure that we do not pay more tax because of inflation.
Medical deductions converted to medical credits
The change from medical deductions to medical credits was previously communicated by the Minister. Now it will be implemented from 1 March 2012.
There are different ways in which the government can provide us with tax relief. One way is when it grants taxpayers a deduction. This means that we are able to deduct certain expenses from our income and pay tax on the remainder. For high income earners who pay tax at a higher rate, this basically means that if you deduct R100 from your income and you pay tax at a rate of 40%, you will get tax relief of R40. Someone who pays tax at a rate of 18%, will only get tax relief of R18.
A move to tax credits means that everyone gets the same tax relief, and it means that higher income earners will not benefit more from the same medical expenses.
Sin taxes
This is probably the most talked about item every year in the budget speech – probably because it is one of the most visible areas of our everyday lives.
As has been the pattern over the last number of years, this year once again sees an increase in most of the sin taxes. The duties on tobacco products will increase by between 5% and 8%. A 750 ml bottle of spirits will cost you R6 more (20% increase in the duty) and a 340 ml can of beer will cost 9 cents more (a 10% increase in the duty).
Last year the Minister proposed a gambling tax. How to impose such a tax was, however, problematic, but this budget has simplified the tax to a 1% levy on gross gambling revenue effective from 1 April 2013 – this will include the national lottery.
Capital gains tax
The inclusion rate for individuals and special trusts increases from 25% to 33,3%. But let’s consider how capital gains tax works in full:
We pay capital gains tax on assets when we sell an asset and we have made a capital gain. In a very simple example, if you bought a flat to rent out for R500 000 and sell it for R600 000 then you have made a capital gain of R100 000.
The tax that you pay on this R100 000 depends on your income tax bracket. So if your marginal rate is 40% it means that you would previously have paid tax on 25% or a quarter of the gain at 40%, i.e. an effective rate of 10%. Now you will pay on 33,3% or a third of the gain at that 40% i.e. 13,3% (instead of 10%).
To limit the impact on middle-income households, there are certain exemptions. The annual general exclusion of R20 000 has been increased to R30 000.
Also, if the asset that you are selling is your primary residence, you do not have to pay capital gains tax on the first R2 million gain. Previously this was R1,5 million.
Dividend withholding tax
An unexpected surprise was the increase in the rate from 10% to 15% when this new tax is implemented on 1 April 2012 to replace secondary tax on companies that was levied at 10%. Although this tax is not applicable to retirement funds, individuals’ savings in equity investments will result in slightly lower dividend returns.
Fuel levy
Petrol and diesel will cost you 28c more for every litre of petrol or diesel you put into your car. The fuel levy goes up with 20c and you will contribute an additional 8c per litre to the Road Accident Fund.
Tolling of roads
Government noted the outcry over the tolling of roads in Gauteng and the Minister made reference to lower tolls for public transport (no tolls for taxis) and frequent users, as well as a monthly cap for frequent users.
Click here to read the long-term implications of the 2012 Budget Speech.
While these are good reasons to pay attention to it, there are many more components to the budget speech that we need to consider. Karin Muller, Head of Sanlam Growth Market Solutions, shares some insights.
When we look at the budget speech, there are two areas to which we need to pay attention: The ‘income’ section, which talks to where our government gets its money from, and the ‘expenses’ section, which relates to what government will spend this money on.
The budget speech, therefore, deals with income and expenses over the next year, but also talks to medium-term spending, as well as some very long-term implications for the financial situation of consumers. Some of the longer-term implications relate to certain benefits, like medical and retirement benefits.
How, then, will the budget speech affect our pockets/wallets in the short term?
Impact on different taxes
The changes to the different tax components will affect how much you receive of your salary every month (income tax and deductions), how much you pay for certain things (VAT and sin taxes), and how much you need to pay when you sell certain assets (capital gains tax).
Income tax
Minister Gordhan spoke about personal income tax relief of R9,5 billion. How much of this will reach your pocket depends on how much you earn. The bulk of this benefit will go to lower income earners. For example, someone earning R65 000 will pay R260 tax compared to R945 in the previous years – a saving of 73%, while someone that earns R250 000 would pay R2 135 less tax – a saving of 5,1%.
The primary rebate for people over the ages of 65 and 75 has also increased, which means that these tax payers will have a little extra money in their pockets.
This relief is intended to combat “bracket creep”. Bracket creep refers to a situation where you receive a salary increase (which should help you keep up with increases in living expenses) and where this increase then pushes you into a higher tax bracket. When the Minister, therefore, slightly adjusts the different income brackets, he does this to make sure that we do not pay more tax because of inflation.
Medical deductions converted to medical credits
The change from medical deductions to medical credits was previously communicated by the Minister. Now it will be implemented from 1 March 2012.
There are different ways in which the government can provide us with tax relief. One way is when it grants taxpayers a deduction. This means that we are able to deduct certain expenses from our income and pay tax on the remainder. For high income earners who pay tax at a higher rate, this basically means that if you deduct R100 from your income and you pay tax at a rate of 40%, you will get tax relief of R40. Someone who pays tax at a rate of 18%, will only get tax relief of R18.
A move to tax credits means that everyone gets the same tax relief, and it means that higher income earners will not benefit more from the same medical expenses.
Sin taxes
This is probably the most talked about item every year in the budget speech – probably because it is one of the most visible areas of our everyday lives.
As has been the pattern over the last number of years, this year once again sees an increase in most of the sin taxes. The duties on tobacco products will increase by between 5% and 8%. A 750 ml bottle of spirits will cost you R6 more (20% increase in the duty) and a 340 ml can of beer will cost 9 cents more (a 10% increase in the duty).
Last year the Minister proposed a gambling tax. How to impose such a tax was, however, problematic, but this budget has simplified the tax to a 1% levy on gross gambling revenue effective from 1 April 2013 – this will include the national lottery.
Capital gains tax
The inclusion rate for individuals and special trusts increases from 25% to 33,3%. But let’s consider how capital gains tax works in full:
We pay capital gains tax on assets when we sell an asset and we have made a capital gain. In a very simple example, if you bought a flat to rent out for R500 000 and sell it for R600 000 then you have made a capital gain of R100 000.
The tax that you pay on this R100 000 depends on your income tax bracket. So if your marginal rate is 40% it means that you would previously have paid tax on 25% or a quarter of the gain at 40%, i.e. an effective rate of 10%. Now you will pay on 33,3% or a third of the gain at that 40% i.e. 13,3% (instead of 10%).
To limit the impact on middle-income households, there are certain exemptions. The annual general exclusion of R20 000 has been increased to R30 000.
Also, if the asset that you are selling is your primary residence, you do not have to pay capital gains tax on the first R2 million gain. Previously this was R1,5 million.
Dividend withholding tax
An unexpected surprise was the increase in the rate from 10% to 15% when this new tax is implemented on 1 April 2012 to replace secondary tax on companies that was levied at 10%. Although this tax is not applicable to retirement funds, individuals’ savings in equity investments will result in slightly lower dividend returns.
Fuel levy
Petrol and diesel will cost you 28c more for every litre of petrol or diesel you put into your car. The fuel levy goes up with 20c and you will contribute an additional 8c per litre to the Road Accident Fund.
Tolling of roads
Government noted the outcry over the tolling of roads in Gauteng and the Minister made reference to lower tolls for public transport (no tolls for taxis) and frequent users, as well as a monthly cap for frequent users.
Click here to read the long-term implications of the 2012 Budget Speech.
