This budget puts very little back into the pocket of ordinary South Africans and indirect taxes such as the fuel levy and sin taxes will add pressure to our pockets. We take a look at two hypothetical South Africans and what the budget means to their bottom line.

Jabulani: Those “unseen” taxes add up

Jabulani is 23 years old earning and earns R5500 a month. He doesn’t have a family and entertainment is high on list of priorities.

“Well I am going to pay R685 less income tax a year, in fact I will only pay something like R20 tax a month so I am happy,” laughs Jabulani. What Jabulani may not realise is how much tax he is paying indirectly.

Jabulani will pay 54c more for a six-pack of beer and in fact for every beer he buys R1 goes to tax. On his pack of cigarettes he is paying R10.32 in tax. His pack a day habit is adding R309 a month to the government’s revenue.

“I need to work it out, but I don’t think these taxes will stop me from partying, I am more worried about the petrol price”.

The budget announced a massive 20c per litre increase in the fuel levy and a further 8c increase per litre for the Road Accident Fund. Add this to recent petrol price increase and transport costs are going to rise.

“I catch a taxi to work and I am worried they are going to increase my fares again. That is a big part of my budget”.

Jabulani is going to benefit from the change in tax treatments for medical contributions.

From 1 March 2012 tax deductions for medical schemes will be converted to a tax credit. The reason for this change is that tax deductions favour higher income earners whilst a tax credit is more equitable.

Under the previous system of a tax deduction a person who pays tax at the marginal rate of 40% receives a tax deduction of 40% on their medical scheme premium (to a capped amount) while a person with a marginal rate of 18% receives only an 18% deduction.

The monthly tax credit rate for members of medical schemes for the 2012/2013 tax year will be R230 for the first two beneficiaries and R154 for each further dependent. As Jabulani pays R300 a month for his medical scheme, he will receive a tax credit of R230 which is equal to 77% of his medical aid contribution.

“I do feel though that my taxes work for me especially with for my unemployed family,” says Jabulani about what the Minister called “the social wage”. In his budget speech Finance Minister Gordhan said that the “social wage”, which is how much of the budget government spends on social grants, education, health care and free electricity to poorer households, works out at R3 940 per month for a family of four.

Jabulani is however disappointed that there was no mention on the youth wage subsidy. “Government needs to find ways to help young people to find jobs. I am fortunate to have a job but my young brother is still unemployed and it is very difficult for him to find work”.

Jabulani’s direct contribution to taxes this year: R7383

• Personal tax:      R260
• VAT:                      R2719 (30% of his after-tax income is spent on Vat-able items)
• Sin taxes:             R4404 (a pack of cigarettes and two beers a day)

 

Julia: This Budget is really going to hurt me

Julia is a 45 year old professional with two children. She has worked and studied hard to develop her career and earns R33 000 a month.

“This Budget did not impress me. I have paid for my education and I work really hard and yet each year I seem to have less to pay my bills. Everything just seems to get more expensive,” complains Julia.

Unlike Jabulani who will see a real decrease in the tax he will pay, Julia will be no better off despite the R9.6bn in personal income tax relief.

The tax relief was exactly 6.3%, in line with the inflation figure, therefore if Julia receives a salary increase in line with inflation she will pay the same amount of tax as in the previous tax year, therefore it does not equate to an actual tax saving.

But for Julia the worst news out of the Budget was the 20c increase in fuel levy and the 30c per kilometre toll fee on the Gauteng Freeway.

“My transport costs are going up all the time with higher petrol prices, and now they are adding more tax to my petrol – and how am I supposed to pay for these new toll roads?”

Julia drives 40km to work and back every day along the freeway. From next month her tank of petrol will cost her R26 more as a result of the additional taxes and petrol price hike and she will spend R264 in tolls.

“I have calculated that my petrol will cost me 91c for every kilometre I drive and the tolls an extra 30c per kilometre. So just going to work and back costs me R1064 a month before I even think of maintenance on my car,” says Julia.

Unlike Jabulani, Julia will be negatively affected by the medical tax credit. The new tax credit is in line with a taxpayer with a marginal tax rate of 32%, so people with a higher marginal tax rate like Julia’s rate of 36%, will lose some of the benefit of a tax deduction.

For her family of four she spends R4000 per month on her medical scheme. Previously she received a tax deduction of R835 per month but now she will receive a tax credit of R768.

Although her budget is getting tighter every month, there was some good news on the savings side. “Apparently there are discussions to allow me to save more into my pension fund tax-free which is great as I did not save enough when I was younger and I am getting a bit worried about my retirement ,” says Julia who cashed in her pension fund when she changed jobs and is now regretting it.

From 1 March 2014 taxpayers over the age of 45 will be allowed to contribute 27.5% of their salary to a maximum of R300 000 per year in recognition that many people need to accelerate their retirement savings if they have under saved in previous years.

Taxpayers under the age of 45 will be able to contribute 22.5% of their total income into a retirement product up to a maximum of R250 000 a year from 1 March 2014.

“I was also interested in the plans to create a savings vehicle that will allow me to save tax-free outside my pension,” says Julia.

Government proposes to introduce tax-preferred savings and investment vehicles by 2014. The proposal is that individuals should be permitted to save up to R30 000 a year in a registered savings or investment products that would be free of tax on interest, dividends or capital gains. This would represent a R2500 per month savings. However there is a R500 000 lifetime limit proposed which currently means an individual saving R30 000 a year would reach that cap within 16 years. However Treasury says this cap will be reviewed and may be increased over time.

Currently only savings in designated retirement funds are exempt from CGT, dividend tax and interest income which has made them attractive investment options.

Although Julia could benefit from these changes, she is very concerned about the effect of the new dividend withholding tax of 15% on her mother’s investments.

The government announced a 15% tax on dividends which replaces the 10% secondary tax on companies (STC). This moves the tax burden from the company to the investor. Most financial experts were expecting the dividend tax to remain at the same rate at the STC (10%) so this higher rate came as a shock. Although savings in retirement funds will not have to pay this tax, investors with savings outside of retirement funds will be affected.

“My mother is a pensioner but because she was a housewife she never saved into a retirement fund. All her savings are in unit trusts and she lives off the interest and dividends she earns from that,” explains Julia.

Capital gains tax was also increased and a person with a 40% tax rate will pay 13.3% tax on any capital gains. However Treasury has increased the amount of profit you can make before paying capital gains tax from R20 000 to R30 000. The capital gains tax exclusion for primary residence has risen from R1.5 mil to R2 million.

Julia’s direct contribution to taxes this year: R108 031

• Personal tax: R87 560
• VAT:  R17 500 (40% of her after-tax income is spent on Vat-able items)
• Fuel taxes: R2784 (R2.90 per litre)
• Sin taxes: R187 (assuming two bottles of wine a week)

 

Sin taxes

• Smokers will pay 58c more for a pack of 20. Total tax on pack of cigarettes R10.32
• Drinkers will pay R6 more, for a bottle of hard spirits like Vodka. Total tax per bottle is R36
• A six- pack of beer will cost 54c more. Total tax R1.01 per can
• A bottle of wine 18c more. Total tax R1.80 per bottle

Over the next two years government aims to reach a tax burden benchmark on all alcohol and tobacco products, in other words the percentage of the purchase price which is made up of taxes.

Targeted total tax burden as % of retail price

Wine 23%

Beer 35%

Spirits 48%

Tobacco 52%

This article by Maya Fisher-French was first published in City Press