In the media you will have heard much about how Finance Minister Pravin Gordhan gave households “tax relief of R9.3 billion”, but this announcement is misleading and “does not constitute real relief”, Piet le Roux, senior economics researcher at Solidarity Research Institute, says.
The question you should be asking yourself is: Did the minister adjust my tax bracket enough to compensate for inflation-linked salary increases? Le Roux says the answer is no.
If your salary increases this year in line with or by more than the rise in the consumer price index (CPI), a measure of consumer inflation, you will forfeit a larger portion of your taxable income to tax than in the 2013/2014 tax year, Le Roux says.
Only taxpayers receiving an increase of less than 5.4 percent this year – therefore, those becoming poorer in real terms – will cede a smaller part of their income to tax, he says.
“For the 2014/15 tax year, the tax threshold and all income tax brackets have been increased by approximately 5.4 percent. This is significantly lower than the Reserve Bank’s expected increase in the consumer price index of 6.3 percent for 2014. These adjustments will, in fact, result in a heavier tax burden, not tax relief,” he says.
“The tax relief announced this year is illusory,” Le Roux says.
According to Gordhan, most of the “tax relief” goes to those receiving an income of less than R250 000 a year.
Says Le Roux: “During the 2013/14 tax year, someone who earned a taxable income of R250 000 a year would have ceded almost R38 800, or 15.5 percent of it, to tax. If his income remains constant from the 2013/14 tax year to the current tax year, he will pay around R37 600 or 15 percent of his taxable income in tax in the 2014/15 tax year. It is this decline that is called ‘tax relief’. In this example, the taxpayer’s income does not keep pace with CPI. In other words, to receive the benefit of the tax relief, he would have to become poorer.
“If his taxable income only just keeps pace with CPI inflation, increasing by 6.3 percent to R265 750, he would pay around R41 500 – or 15.6 percent – of his taxable income for personal income tax in 2014/15. This is more than the 15.5 percent he paid in 2013/14 – his tax burden has, therefore, become heavier and has not been alleviated.”
Mike Dingley, the national head of tax at Mazars, says if you had a salary increase in line with inflation, you’ll pay approximately the same average rate of tax.
For example, if you had a taxable income of R300 000 last year, you would have been taxed at a rate of 17.79 percent. If your salary went up by six percent this year, you will pay tax at 18.07 percent.
At a budget event hosted by the South African Institute of Tax Practitioners and the Financial Planning Institute this week, Professor Jackie Arendse, the head of the School of Accountancy at the University of the Witwatersrand, said the adjustments to the tax brackets are “absolutely minimal” and that with all the other increases, such as the sin taxes and the 20c a litre increase in the fuel levy, “people will be feeling the pinch”.
To compensate for the effects of inflation, the government adjusts the income tax brackets and rebate thresholds every year. These adjustments apply to your taxable income, which is your gross income (any amount you received or that accrued to you) less exempt income (such as exempt interest income) and allowable deductions (such as retirement fund contributions or expenses incurred in the production of income).
*Click on link for tax tables.