Budget 2018: the impact on investors

By Carl Roothman, CE of Retail at Sanlam Investments

The stand-out item of the 2018 Budget Speech delivered by Minister Gigaba must be the VAT adjustment. On 21 February the minister announced new tax measures to raise an additional R36 billion in 2018/19 – mainly through a higher VAT rate and below-inflation adjustments to personal income tax brackets.

What does higher VAT mean for investors?

In his pre-Budget commentary our investment economist, Arthur Kamp, argued that our tax structure should be aligned with South Africa’s growth objective. If so, Treasury should increase taxes on consumption, for example VAT, but limit tax increases on savings, for example dividends and capital gains tax, and tax on the income of individuals. He also argues that VAT need not punish low-income earners if the base of zero-rated and exempt products are broad enough.

In choosing to raise the bulk of his additional income for 2018/19 from VAT, Gigaba is encouraging South African citizens to continue working hard and to save and invest. If personal income tax, capital gains tax or dividends tax were raised, these measures would have been discouraging. This year can therefore be seen as as victory for investors.

CGT and dividends tax unchanged

Against expectations, the capital gains tax (CGT) inclusion rate remained at 40% of gains above the R40 000 annual CGT threshold. In 2013 the Minister of Finance increased the CGT inclusion rate from 25% to 33.3%. Only in 2016 was it increased to 40%. No CGT is payable on tax-free savings accounts (TFSAs) and retirement products.

Last year Treasury raised the dividends withholding tax (DWT) rate from 15% to 20%. While private share portfolios (which generate dividends) are associated with the wealthy, the reality is that middle-class unit trust investors were also hit by this increase, which will erode even more of their net investment income. It is encouraging that this rate was left unchanged this year. Again, no DWT is payable on TFSAs and retirement products.

These taxes mean there’s less of your salary left to save

Following a similar tactic as with last year’s Budget, the minister announced more ‘bracket creep’ – in other words upwardly adjusting the existing personal income tax brackets by less than inflation. This means that employees receiving a salary increase equal to inflation in the new tax year will in effect be worse off in terms of what they can buy with their new net of tax salary. This puts pressure on the amount of disposable income and therefore available annual savings to channel into investments. Investors might battle to increase their investment contributions along with inflation this year.

The fuel levy plus Road Accident Fund tax will also be raised by 52c per litre, further reducing disposable income. And the so-called ‘sin taxes’ will predictably rise again.

On top of that, high net worth earners will be forking out more for luxury goods, such as smart phones, as excise taxes are raised. The maximum ad valorem excise duty for luxury cars, for example, will increase from 25% to 30%.

Use the tax breaks that Treasury provided

In the light of ever increasing taxes and bracket creep, it is crucial for investors to make use of the two main tax-efficient investment vehicles, retirement funds and TFSAs. The annual contribution limit for TFSAs is still R33 000 per tax year and R500 000 over your lifetime. Any contribution above these limits will be taxed at 40%.

In addition, investors can invest 27.5% of their total income (salary plus other income) in retirement products every tax year and receive tax relief from SARS on those contributions.

Taxes are unavoidable, but TFSAs and retirement products are a sure way for investors to minimise their tax and maximise their investment returns.

Carl joined the Sanlam Investments team in November 2013 as Chief Executive of Sanlam Investments Retail. He is responsible for ensuring Sanlam Investments’ retail clients are serviced by professionals who have keen insight into both their business and investment needs and are able to offer the best investment solutions.

Before joining Sanlam, Carl was Managing Director of the Barclays Capital and Absa Capital divisions of Barclays PLC and Head of Coverage at Absa Wealth. He started his career at Absa Bank in 1995 and during his tenure with the bank worked at Absa Bank London for two years.

After returning to SA in 1999, Carl held various dealmaking and senior leadership roles with Citibank, Investec and RMB Private Bank, where he gained extensive investment banking and wealth management experience.

In 1994 Carl was accepted as the first South African to attend the Postgraduate Programme in International Banking and Financial Law at Boston University in the US where he obtained the LLM degree in International Banking and Financial Law. Carl also holds LLB and B.Comm. (Law) degrees from the University of Pretoria.