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The Reality of Tax Relief in the 2014 Budget

27 February 2014, 14:50

Yesterday was one of the more important days in the parliamentary calendar – the budget speech.  The annual changes in the national budget impact all of our lives in some way, shape or form.

Of course, we followed the speech by Mr Gordhan closely, as well as the commentary which followed.  What we found quite interesting was commentary stating that the tax relief granted in this year’s budget does not cover, or even meet, inflation.  One article, which appeared on Fin24 itself (here), made these conclusions. 

It is hardly surprising that the finance minister should make the most of what amounted to a significant tax relief figure this year - R9.3bn  in fact.  On the face of it, this does seem generous.  However, as is often the case, this relief is not really relief at all.  In actual fact this tax relief is simply an inflationary adjustment to the tax brackets to ensure that the individual is not taxed at more than they were last year. 

Let us explain, with the following assumptions in place:

  • Your taxable income is R20,000 per month
  • Inflation this year will be approximately 5%
  • You will receive an inflationary income increase at some point over the this year and your taxable income will therefore increase R21,000 per month from that point

In the past financial year, using the now old tax brackets, your monthly tax would have amounted to R3,027 per month.  This would give you an effective tax rate of 15.1%. 

After your salary increase, and using the new tax brackets, your monthly tax will become R3,171 per month.  Dividing this figure by your new taxable income gives you an effective tax rate of 15.1%. 

In other words, after allowing for an inflationary income increase, the government will be taking exactly the same proportion of money in tax as they did last year.  Your Rand tax bill will go up, but in line with inflation.  In most instances, this is exactly the aim of tax relief and this year it is a job well done. 

The South African government have done exactly what they should be doing.  To illustrate the point, assume that the government did not provide this tax relief.  If your monthly income became R21,000 and the old tax brackets still applied, your total tax bill would be R3,277 per month, resulting in an effective tax rate of 15.6%.  In this case your tax bill would be growing faster than your income increase, which would be unfair. 

Given that most people will not necessarily enjoy income increases that coincide with the new tax year (starting on 1 March) there is often an illusion of tax relief.  For the months between 1 March and your income increase, your Rand tax will bill will decrease.  But over the long term this all evens out and the premise highlighted in our example prevails.

As a note, you should be measuring your tax increase on a year to year basis (compare March 2014 with March 2013) rather than a month to month basis.  Using this comparison you will see that tax relief is indeed often a myth. 

As a caveat – there are times when genuine tax relief is given.  If your effective tax rate, after an inflationary income increase, decreases, then the government really is doing you a favour with real tax relief as a lower proportion of your income is going to government.

For 2014, we think treasury has done a good job to ensure that our personal income tax rates remain stable.  The conclusion reached in the Fin24 article linked at the top of this comment - that tax relief afforded by the 2014 budget does not meet inflation - is simply not true.  The purpose of the tax relief offered for 2014 is to result in a stable effective tax rate after you have received an inflationary salary increase.  In this case, Gordhan has achieved that goal.

All our calculations were done using the tax calculator on futureguidefinance.com.  We have tested a variety of incomes and our conclusion remains true.

Try it out for yourself.

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