The Implications Of The Budget For Investors

In Wednesday’s National Budget speech, as our investment economist, Arthur Kamp, pointed out, minister Gordhan showed that he has a full arsenal of options to increase revenue. This year he opted to not increase top marginal tax rates or VAT. Instead the minister used a combination of increases in excise duties, the fuel levy and other green taxes, capital gains tax and transfer duty, and provided only limited relief for fiscal drag this year by adjusting the upper tax brackets by less than inflation.

Yesterday we published Arthur’s economic commentary on the Budget. Today we comment from an investor’s viewpoint.

When analysing minister Gordhan’s National Budget for 2016/17, there are two questions that investors in particular need to ask:

• Does the Budget support economic growth?
• How will the Budget affect my net (after-tax) returns?

Without growth there are no investment returns

Over the long term, investment returns, specifically equity returns, are a function of inflation, gross domestic growth and the outperformance (or underperformance) of the individual companies in which you’re invested. Without economic growth it would be hard for your portfolio to keep up with inflation.

Minister Gordhan did deliver a Budget that was highly mindful of not stifling growth, avoiding any increases in personal income tax or company tax – for now. The announcement of government collaborating closely with the private sector in several sectors, such as energy, and ports and railways, do appear promising for future development and growth.

We are of the opinion, though, that Treasury’s GDP growth projections – 7.8% in 2016 and increases in excess of 8% in the following two calendar years – are optimistic. Investors need to prepare instead for very low real GDP growth in the coming years – and for lower investment returns than that delivered over the past few years.

Without growth, the threat of a sovereign debt downgrade remains

At yesterday’s Financial Planning Institute Budget Breakfast Konrad Reus, managing director of Standard & Poor’s for SA and sub-Saharan Africa, indicated that minister Gordhan presented a good budget. It does not guarantee an uptick in growth though, which is what Standard & Poor’s is monitoring closely currently, among other things, and it will continue to do so over the coming months. As far as investors are concerned, asset prices are already largely pricing in the possibility of a downgrade.

This brings us to the second question that investors need to ask themselves: How will the Budget affect my after-tax returns?

Capital gains tax is inching upwards

In 2013 the minister of finance increased the capital gains tax (CGT) inclusion rate from 25% to 33.3%. This year it will be increased further to 40%. In other words, from 1 March 2016 40% of the gain (profit) that you make on the sale of an investment (on withdrawal or switch between unit trust funds, for example) will be added to your taxable income and taxed at your marginal income tax rate. (The annual CGT threshold will increase from R30 000 to R40 000, though.) This makes investment products with tax benefits, such as a retirement annuity and a tax-free savings account, even more attractive. No CGT is payable on these two products.

Remember to declare offshore assets

From 2017 international agreements on information sharing will enable SARS to act more effectively against tax evasion by wealthy individuals. Minister Gordhan therefore urged taxpayers to report undisclosed assets in the amnesty period running for the six months from 1 October 2016.

Expect more taxes on the wealthy in future

Although minister Gordhan did not raise estate duty or donations tax this year, and did not introduce an additional tax bracket to tax top income earners at an even higher personal income tax rate, he did mention that Treasury is looking at the Davis Tax Committee’s recommendations on these matters. Investors need to remain cognisant of the possibility of an increase in these taxes in the near future.

All in all, the minister delivered a good Budget, supportive of growth, and our tax system is now even more progressive than before, satisfying the principles of simplicity and fairness.