Finance Minister Enoch Godongwana's recent MTBPS has significant implications for South African taxpayers across all income brackets. Delivered on October 30, 2024, the speech outlined the government's fiscal strategy amidst economic challenges, including lower-than-expected tax revenues and rising debt levels.

Tax Revenue Shortfall and Fiscal Adjustments

The National Treasury anticipates a tax collection shortfall of R22.3 billion for the 2024/25 fiscal year compared to earlier estimates. This decline is attributed to subdued economic growth and reduced revenue from fuel levies and import value-added tax collections. Consequently, the government projects a consolidated budget deficit of 5.0% of GDP for the fiscal year ending March 2025.

Personal Income Tax and Bracket Creep

Notably, the MTBPS did not propose increases in personal income tax rates. However, the government also refrained from adjusting tax brackets for inflation for the 2024/2025 budget in February this year, a practice known as "bracket creep." This means that as taxpayers receive inflation-related salary increases, they may be pushed into higher tax brackets, resulting in a higher effective tax rate without an actual increase in real income. This approach is expected to generate an additional R16 billion in tax revenue during the 2024/25 fiscal year.

Impact on Different Income Tiers

While top-tier taxpayers are not facing new tax rate hikes, the lack of inflation adjustments to tax brackets means they could experience increased tax liabilities due to bracket creep. This situation may exacerbate concerns about the emigration of high-income individuals seeking more favourable tax environments, potentially reducing the country's tax base.

Middle-tier taxpayers, including salaried professionals and small business owners, are particularly vulnerable to bracket creep. Without adjustments for inflation, their effective tax rates may rise, reducing disposable income and potentially dampening consumer spending, which is vital for economic growth.

Lower-income taxpayers, who typically benefit from inflationary adjustments to tax thresholds, will also feel the impact of bracket creep. Additionally, the modest increases in social grants, which are below the current inflation rate may not sufficiently offset the rising cost of living, further straining this demographic.

Indirect Taxes and Sin Taxes

The MTBPS announced increases in excise duties on alcoholic beverages and tobacco products, commonly referred to as sin taxes. These hikes exceed inflation rates and are part of the government's strategy to boost revenue while discouraging consumption of these products.

Corporate Tax and Incentives

Section 12B of the South African Income Tax Act provides for accelerated depreciation allowances on renewable energy investments. Notably, a temporary enhancement under Section 12BA allows for a 125% deduction of the cost of qualifying new and unused renewable energy assets brought into use before February 28, 2025.

This enhanced allowance is set to expire on February 28, 2025 and is expected to revert to the standard 100% allowance under Section 12B.

Debt and Public Spending

The MTBPS highlighted concerns over rising public debt, projected to stabilise at 75.5% of GDP by 2025/26. Debt-service costs are expected to reach R388.9 billion in the current financial year, meaning that for every rand of revenue, 22 cents are allocated to servicing debt. This situation underscores the need for fiscal consolidation and prudent public spending to ensure long-term economic stability.

Conclusion

The 2024 MTBPS presents a mixed outlook for South African taxpayers. While there are no direct increases in personal income tax rates, the absence of inflation adjustments to tax brackets effectively raises tax burdens through bracket creep. Combined with higher indirect taxes and a challenging economic environment, taxpayers across all income levels may experience reduced disposable income. The government's focus on fiscal consolidation and debt stabilisation is crucial, but it must be balanced with measures that protect taxpayers' purchasing power and support economic growth.

Please note that the above is for information purposes only and does not constitute tax/financial advice. As everyone’s personal circumstances vary, we recommend they seek advice on the matter. While every effort is made to ensure accuracy, Nexia SAB&T does not accept responsibility for any inaccuracies or errors contained herein.

Article prepared by: Stefan Diederiks CA(SA)

Entrepreneurial Business Services Director, Registered Tax Practitioner

For any queries or further information, please contact:

• Mansoor Salee

External Audit  Director

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• Yousuf Hassen

Entrepreneurial Business Services Director

M: (+27) 82 333 3376 | E: yhassen@nexia-sabt.co.za