Comentary provided by Sage Pastel Payroll & HR

 

Finance Minister Pravin Gordhan delivered no surprises in his Budget Speech on 26 February, favouring consistency and steadiness over change and fireworks ahead of the national election on 7 May. His Budget Speech once again put job creation, infrastructure development, social spending and education right on top of the nation’s list of priorities.

 

Taxpayers will benefit from R9,25 billion in personal income tax relief in the new tax year, though this relief hardly caters for the effects of inflation, says Madelein van der Watt, Development Manager at Sage Pastel Payroll & HR. 40% of the tax relief was allocated to those who earn up to R250,000 per annum, meaning individuals earning more than R250,000 per annum will receive a little less of the allocated tax relief pool.

 

Personal income tax brackets and rebates

Personal income tax brackets and rebates have been slightly adjusted. The amount an individual can earn before being required to pay income tax has been increased for the 2014/15 tax year:

• Increase from R67,111 to R70, 700 for individuals below the age of 65
• Increase from R104,611 to R110, 200 for individuals between the ages of 65 to below 75
• Increase from R117,111 to R123, 350 for individuals over 75 years

 

Individuals aged 65 and older will pay less tax due to an increase in the secondary rebate. The tertiary rebate for individuals aged 75 or older has also been increased which means less tax payable by the elderly from 01 March 2014.

The annual tax rebates for individuals have been increased as follows:

• Under the age of 65 increased from R12,080 to R12, 726
• Aged 65 to 75 increased from R6,750 to R7, 110
• Aged 75 and older increased from R2,250 to R2, 367

 

Though some commentators had speculated that high earners would need to pay higher income tax, the Minister left income tax rates untouched, says Van der Watt. The lowest tax bracket remains at a tax rate of 18% (annual taxable income up to R174, 550) and the highest tax bracket remains taxable at 40% (annual taxable income of more than R673, 100).

Taxpayers breathed a collective sigh of relief on Wednesday, as Finance Minister, Pravin Gordhan, took to the podium in parliament to allay fears of a tax hike. The government’s proposed R7 billion personal income tax relief initiative was one of the few surprises of a relatively conservative Budget Speech, which addressed a number of broader issues such as government spending and infrastructure development.

 

Yet whilst the adjustment of income tax brackets will see some consumers pocketing marginally more come month-end, increased fuel levies and rises in sin taxes look set to make 2013 a costly year for many South Africans.

 

According to Carel Steenkamp, Director of C2M Chartered Accountants, taxpayers should exercise caution when budgeting for the upcoming financial year.

 

“While many consumers will end up paying a smaller percentage of their monthly salaries to the tax man, there are a number of other factors that are likely to put an even greater strain on disposable income levels,” explains Steenkamp. “For instance, while individuals earning R200,000 per annum will owe R1,032 less in taxes over the course of the year, they’ll need to take into consideration the impact of a significant increase in fuel levies and a raise in so-called ‘sin taxes’ of between 5.5 and 10%.”

 

The general fuel levy will rise by 15% on 03 April to R2.13/l. This, combined with an 8c/l Road Accident Fund levy, rising oil costs and a weakening Rand, could end up having an enormous impact on consumers’ expenses.

 

“The rapidly increasing price of fuel is likely to hit consumers’ pockets hard, and will severely diminish the impact of any proposed income tax relief,” says Steenkamp. “Additional taxation on alcohol and cigarettes, as well as rising electricity costs, will further contract these income tax gains, meaning that consumers are in fact likely to experience greater financial strain over the course of the upcoming financial year.”

 

Another significant development addressed in Minister Gordhan’s speech is a new tax set to be applied to trusts, which could severely curtail the benefits currently enjoyed by trustees and beneficiaries.

 

According to Carel Bester, Director of the C2M Group, it is now even more important for trust owners to ensure that their trust deeds are up to date, and that they follow correct procedural guidelines.

 

“Under the new proposed trust tax initiative, any beneficiary distributions that are claimed as deductible in the trust will be taxed as ordinary revenue in the hands of the beneficiary,” explains Bester. “What this means is that any type of distributed income stream from which beneficiaries previously derived benefit will now fall away, and be subject to current income tax legislation.”

 

“Trusts, which are often used to protect and manage assets, will now find themselves under increased scrutiny, and the onus is on trust owners to ensure that they follow protocol, something that includes holding annual meetings with all trustees present,” continues Bester. “Trust owners and beneficiaries would be well advised to consult with a financial advisor in order to ensure compliance.”

While Finance Minister, Pravin Gordhan’s, 2013/2014 budget speech presentation held no real surprises from a tax perspective, Zweli Mabhoza, Head of Tax Services at SizweNtsalubaGobodo, South Africa’s largest black-owned audit firm, believes it did reveal some interesting developments around how Tax Authorities intend to deal with corruption and tax avoidance transactions. “In addressing these areas of concerns Tax Authorities will be able to increase collections without having to introduce any major changes in the tax legislation,” he says.

 

Mabhoza says that the announcement by the Minister that National Treasury intends announcing the name of a Chief Procurement Officer is informed by the need for the government to increase the value on the money it spends.  “The Minister reported that National Treasury is scrutinising 76 business entities with contracts worth R8,4 billion which are likely to have infringed the procurement rules. 

 

“The South African Revenue Services (SARS) is also performing an audit of over 300 entities and scrutinising additional 700 entities.  SARS has managed to raise tax of R480 million on 216 cases concluded.  If one takes a simplistic view and extrapolates this R480 million to 1 000 potential cases, it seems SARS can collect approximately R2,2 billion by simply working on government’s procurement processes,” he comments. 

 

Also notable for Mabhoza is the announcement that SARS, following several years of work to trace transactions through multiple jurisdictions and entities, is currently pursuing several schemes identified under the revised general anti-avoidance rules. “This announcement interestingly comes within weeks of a local listed company reporting via its SENS document that SARS has raised an assessment of more R1 billion in respect of its funding transaction using general anti-avoidance rules.  It is certainly an interesting development as Tax Authorities have in the past been reluctant to invoke general anti-avoidance rules, instead opting to introduce additional specific provisions in the Income Tax Act, 1962, further complicating tax legislation,” he says. 

 

Mabhoza believes the Minister is of the view that the benefits of some of these schemes accrue to advisors and pre-existing shareholders rather than new shareholders who were introduced as the ostensible beneficiaries of the transactions.  “The point made by the Minister is, to some extent, true in particular where BEE partners are introduced using corporate rules.  These transactions often result in BEE partners carrying a deferred tax liability that may have not been factored in their purchase price,” he explains.

 

Encouraging for Mabhoza is the introduction of the permanent voluntary disclosure programme as from 1 October 2012. “Following the success of the initial voluntary disclosure programme in 2010 which has now been reported to have generated more than R3 billion in undeclared taxes, it makes sense to have introduced a permanent voluntary disclosure programme. The programme included in the Tax Administration Act, 2011, has already generated more than R200 million in taxes to date. Another positive is SARS’ intention to introduce a link between tax clearance certificates issued and tax revenue collected from people who tendered for work from the state. This is certainly long overdue,” he comments.

 

Mabhoza regards the Minister’s proposal in favour of discretionary trusts no longer acting as flow-through vehicles as pertinent. “Instead of discretionary trusts only paying tax on amounts not distributed, the income received by these trusts will be taxed at a trust level with beneficiaries receiving a tax free distribution.  This prevents beneficiaries of these discretionary trusts off-setting income against tax losses while avoiding tax in the hands of the trust,” he explains.

 

Although the Minister announced his intention for the Tax Authorities to work with the Department of Home Affairs and other agencies in registering small and micro businesses (including those operated by foreigners), Mabhoza believes this will be a challenge.  “Although this will also work towards widening the tax net, the challenge here is that some of the small businesses that SARS is targeting operate in remote rural areas. These locations are without SARS offices. This raises the question as to where these taxpayers will go if they need guidance,” he concludes. 

With deterioration in the state of the public finances expected in the year ahead, Zweli Mabhoza, Head of Tax Services at SizweNtsalubaGobodo, South Africa’s largest black-owned audit firm, believes Finance Minister, Pravin Gordhan, will be looking to rein in expenditure while placating the electorate ahead of next year’s elections following his 2013/2014 budget speech presentation due to take place on 27 February.

 

“It seems the Minister is running out of options to balance the books and it’s possible that despite his best intentions, we may have to settle for a higher budget deficit. He’s definitely going to try and extract more efficiency out of the management of public funds so I wouldn’t be surprised to see him attempt to link spending with some kind of more tangible output,” says Mabhoza.

 

As part of his mandate to try and stimulate the economy, Mabhoza expects there might be some revisions to the tax regime for small and medium enterprises. “Although measures such as Turnover tax have been introduced to simplify tax compliance and stimulate economic activity in the small company space, it has not been as successful as the Minister would have liked.

 

“This is largely due to small businesses running losses, or crossing the revenue threshold temporarily being disqualified from Turnover tax. However, government will most certainly continue to display its commitment to stimulating the sector as over the longer-term, it is this sector that will create the most jobs within the local economy,” he comments.

 

Other notable subjects Mabhoza expects to be addressed in this year’s budget include how government intends to finance the National Health Insurance programme. “By creating a programme that could potentially introduce an open-ended liability that could run into  billions of Rands over the next few decades, investors buying our government bonds are more than a little interested in when they plan to introduce this and how it is going to be financed” adds Mabhoza.

 

In addition Mabhoza believes there is scope for the Minister to clarify how the carbon tax might be imposed. “First mentioned in the 2008/09 Budget speech, National Treasury last year indicated that a carbon tax of R120/ton of carbon dioxide equivalent would come into effect from the 2013/14 tax year.

 

However, it is doubtful how much this tax could raise for the fiscus, considering that Eskom, the biggest emitter of carbon dioxide,  is definitely in no position to accept this obligation at present. It seems the pressure to deliver more for less is very much on the shoulders of the Finance Minister in 2013,” he concludes.

The debt industry portal, theDCI recently announced its support for initiatives by the authorities to address a ‘rising flood’ of unsecured debt that threatens to swamp embattled consumers.

 

Initial steps by Finance Minister Pravin Gordhan and National Treasury are welcome, but further action is required, theDCI lead a recent campaign that forced credit providers to suspend their Voluntary Debt Mediation Solution as it was judged to be in violation of the National Credit Act (NCA).

 

The recent meeting between the Minister, Treasury and banking leaders is the first implicit acknowledgement that unsecured lending is a problem and the scourge of millions of South Africans.

 

The authorities stopped short of calling it a ‘bubble’ and highlighted the rapid increase as a ‘concern’. Whether it’s a ‘bubble’ or a rising flood of unsecured debt depends on your choice of words.

 

Thankfully, the authorities are starting to listen to debt counsellors (DCs) and now acknowledge the distress we see daily. Millions are ensnared in debt and it is high time banks reviewed their lending practices. DCs know of numerous abuses and are eager to assist the authorities by providing details.

 

At the end of the banking indaba, Treasury said banks “could do more to ensure they lend responsibly”.

 

Reserve Bank statistics indicate unsecured loans rose 21% to R381 billion in the year to June. This category of lending includes personal loans, credit card debt and credit from retailers.

 

Ramped-up personal debt offsets weak corporate demand for credit while charges on unsecured loans can be five times higher than other categories.

 

Until the NCA’s introduction, banks drove up profits by giving multiple housing bonds to better-off customers. Then the economy hit trouble, higher earners became over-exposed and the NCA tightened up lending criteria on credit.

 

As a consequence banks then proceeded to aggressively market the lucrative unsecured loans sector. Millions of families now face the consequences. Reckless lending is a far bigger issue than what is currently being acknowledged.

 

Figures from the National Credit Regulator suggest 9.3 million South Africans are behind with credit instalments. The outstanding amount totals R1.36 trillion.

 

About 6400 consumers a month apply for debt counselling, the NCA-backed process that helps over-indebted people repay debt.

 

Demand for affordable ways of handling debt has risen so dramatically that theDCI, in collaboration with a leading broker and underwriter, recently launched its own group life insurance product, enabling debts owed by consumers to be provided for in the event of the death of the consumer, in a one cost-effective package.

 

The debt counselling industry works hard to assist debtors, but prevention is better than cure. We must combat reckless lending and credit extension abuses and there are many. We see cases where credit consultants don’t check application forms for obvious misstatements and lies. They focus solely on obtaining new business.

 

There are cases where instead of advising clients to get a bond at affordable rates a lender’s marketing staff encourage them to take out multiple unsecured loans. The reason? Banks make up to 32% and more in profit on these deals.

 

Contrary to misleading statements in the press of late, it is cheaper for consumers to go into debt review than to take out another loan. Debt review is a real solution that works.

PSG Konsult Corporate (PSGK Corporate) recently facilitated a discussion around decision making in the health care industry. This addressed both the draft demarcation regulations and the potential impact of these on the future of health insurance products such as gap cover.

 

Participants included Tiago De Carvalho, the Managing Director of Ambledown Risk and Underwriting Managers, who specialise in the area of health insurance underwriting and John Cranke, the head of health care at PSG Konsult Corporate. Cranke was responsible for drafting PSG Konsult Corporate’s response to the draft demarcation regulations.

 

Anton Le Roux, Head of Business Development at PSGK Corporate who facilitated the discussion says, “Decisions about health care provisions for employees can be daunting at the best of times – and doing so in a fast changing legislative environment can seem impossible. Despite there being no central repository of information in respect of health insurance products, we estimate that approximately 300 000 families currently have active gap cover policies in South Africa.”

What are the practical implications of the proposed changes to Demarcation Regulations?

According to De Carvalho, the draft regulations propose to introduce different categories of accident and health insurance policiesincluding:

•          Lump sum or income replacement policy benefits payable on a health event
•          Motor and property third party liability
•          HIV and Aids
•          International and domestic travel insurance
•          Emergency evacuation and transport.

The proposal is to outlaw gap cover in the future

De Carvalho says the effect of the proposed changes is that policies which fall outside the scope of the regulations, such as gap cover policies, will be outlawed in the future. In addition to this, exempted policies, which were entered into by an insurer after 15th December 2008 must be brought in line with the Regulations. “It is important to remember that these Regulations are only in draft stage. They were introduced on the 2nd of March this year and were open for comment until 23rd April 2012. There was an overwhelming response from both the industry and public and the Department of Treasury is currently working through the submissions and we await their response.

 

“It is not the first attempt by the Council for Medical Schemes to abolish health insurance products. A few years ago they targeted Guardrisk, by issuing an interdict against them to prohibit the marketing of gap insurance products. After a two year legal battle, the Supreme Court of Appeal found that gap cover products were lawful and in line with both the and .

 

The Court acknowledged that the definition of a medical scheme had been drafted deliberately to take into account the definition of ‘Accident and Health Policy’ in the Short Term Insurance Act and to allow both definitions to co-exist amicably. Over and above this, the judge stated that practically there was a need for this type of insurance.

 

However, now regulators are trying to change the definition of a medical scheme in order to get around the issue.”

Turning the screws…

Following the publication of the draft regulations, the Minister of Finance, Pravin Gordhan, stated that the draft regulations seek to address the risk of possible harm caused by health insurance products drawing younger and healthier members away from medical aid schemes. However, many have vehemently denied this. De Carvalho and Cranke agree that the lines mustn’t be blurred between medical aid schemes and gap cover.

 

Gap cover is a complementary medical scheme product and it is a condition of cover that a person is also a medical scheme member. Other health insurance products, such as hospital cash plans are intended for those who cannot afford medical scheme cover. This is important as only 15% of South Africans belong to a medical aid scheme, the remainder seek other products.

The argument that that the draft regulations serve to strengthen and preserve the social solidarity principle that underpins medical schemes is also countered by De Carvalho and Cranke.

They say that gap products are not priced on traditional pure insurance principals at individual level – but across a risk pool at either employer or product specific level (although it is accepted that in some cases there is premium differentiation based on age). It can therefore be argued that gap products also uphold the social solidarity principles of cross subsidisation.

Do members opt for a cheaper medical scheme when they buy gap cover?

The argument that members buy-down to a cheaper medical scheme option once they have a gap cover policy in place does not sit well with Cranke. He says, “In our experience very few medical scheme members select cover based purely on need and, rightly or wrongly, often the most important consideration is affordability. Medical Schemes offer an annual opportunity to upgrade and most gap products are only considered after the option choice has already been made. The reason for this is that across all medical schemes there are very few (if any) options that can guarantee members no shortfalls in respect of in-hospital cover.”

 

Cranke backs this up with stats from a recent review of 11 medical schemes conducted by PSGK Corporate. These represent approximately 90% of the open medical scheme market in terms of membership and it indicated that only 36% of the options in the 11 schemes reviewed provided cover in excess of the base medical scheme reimbursement tariff and that four of the schemes do not provide any cover in excess of the base medical scheme reimbursement tariff.

Does this mean that members on one of these schemes are not able to buy-up to obtain more cover even if they could afford it?

Members will almost definitely be faced with shortfalls says Cranke. Depending on their reason for being admitted to hospital, the shortfalls in respect of the service providers can run into several thousand rands. So we are back at the affordability issue.

Why are there buy downs then?

It makes more sense that buy-downs are driven by the consistently higher than inflation increases declared by the medical schemes. This is particularly relevant for pensioner members, who increasingly have no post-retirement medical aid subsidy to rely on, and struggle to keep up with a variety ofdemands (e.g. escalating electricity and transport costs) on incomes that are tied into very low interest rates.

 

Neither Cranke nor De Carvalho believe that health insurance cover impacts negatively on medical schemes. Carvalho says,

There have not been any studies or surveys undertaken to investigate the impact of gap cover products on medical schemes and it is actually one of the recommendations that we made in our submission to Treasury. It is difficult to find a qualitative or quantitative measurement. The health insurance industry would welcome a study of this nature.

Cranke says that without a study, it would be difficult to make anyconclusive findings as to the impact of gap cover products on medical schemes. Added to this is the fact that medical schemes themselves have taken opposing views. "Not all schemes are opposed to gap cover; there are in fact schemes that support gap cover products to the extent that they have their own products in place!”

Does the draft demarcation regulations infringe on consumers’ constitutional rights?

De Carvalho says that, “In terms of Section 33 of the Constitution we (the public) are given the constitutional right to just administrative action, which imparts the right to challenge administrative action and in so doing it compels us, as a society, to ensure that government is democratic, accountable, open and transparent.

 

Unjustly denying the policyholder of gap cover is infringing on the individual’s right to choice. Particularly, because no evidence exists or was provided by the regulators showing that gap cover policies compromise the key principles of social welfare, solidarity and cross-subsidisation found in medical schemes. In this instance, administrative decision adversely affects the rights of South Africans by denying consumers their democratic right to provide properly for an unforeseen event that may lead to financial difficulty. There is potentially a case to be made.”

So where does South Africa stand in respect of draft regulations?

De Carvalho says, “We are waiting for a response, in the form of a second round of Draft Demarcations – hopefully before year end. As it stands now gap products are legal. The response from both industry stake holders, as well as members of the public was overwhelming and the Treasury are considering all submissions. They met with stakeholders, such as the South African Insurance Institute and underwriting managers, such as ourselves, in August, but they were carefulnot to divulge too much. One must also remember that the effective implementation of the draft demarcation regulations, in their current form, requires that the definition of a medical scheme, as outlined in the Medical Schemes Act, be amended. This is being done via the General Law’s Amendment bill which was tabled in parliament recently.”

So what should employers who offer employees gap cover and hospital cash plans do?

Cranke says, “It certainly is not an ideal situation, but we are recommending that employers and members alike sit tight for the time being. Despite the current discussions, gap cover still has legal standing. We believe gap cover has a place, given the current uncertainty regarding tariff negotiations between providers and medical schemes, gap is more relevant than ever. As long as the products remain legal, keep your cover in place.”

 

De Carvalho adds that he remains positive that the regulators, after considering submissions, will realise that there exists a real need for these types of products and that removing them will place policy holders at risk. “At the very least, policy holders will have cover until 31 December 2012, after which the policy will either be renewed in its current form, cancelled or amended as required by the regulations. We however remain hopeful that sanity will prevail.”

Unemployment is not only a South African problem, and it has been exacerbated by the recent economic crises which saw half of the 1.9 million jobs created before the crises, lost in the country's first recession in almost 20 years. France, Germany, Spain and the United Kingdom have all implemented new measures over the last two years. Several countries with smaller economies have adopted wage subsidies in light of rising unemployment during the global economic crisis, including Chile, Korea, Mexico, the Slovak Republic and Turkey. The policies in Chile and Turkey have been specifically targeted towards younger workers.

The reason why the level of employment is high amongst the youth is due to that fact the there are few jobs that are available and the jobs that are available require a specific skill set which the youth do not possess. The only way that they are going to acquire these skills is if companies are prepared to take these individuals on and train them. This would obviously incur additional costs for employers but this could be offset by the subsidy that they would receive for employing these individuals. In an economy where skills are in short supply it is imperative that employers start looking to use the current workers that have with the necessary skills to train our youth to ensure continuity in the future. The skilled workers employers currently have will one day exit the workplace and with them will go all the knowledge and skills. Employers need to start planning today for this inevitable event and ensure that their businesses are able to continue indefinitely by facilitating the transfer of skills and knowledge to the youth of today.

The new Youth Wage Subsidy proposal is for the South African National Treasury to implement a R5-billion youth employment subsidy, which would compensate employers for taking on young employees for 12 or 24 months. The subsidy aims to compensate employers to offset the costs of training or risk incurred, especially for small enterprises as it gives them access to cheaper labour. So it is intended to be a win - win situation for employers as well as work seekers. It is planned to work through the Pay As You Earn (PAYE) tax system and to qualify, individuals will have to be aged between 18 and 29 and their salary will need to fall below the personal income tax threshold. It is estimated that 178 000 new jobs can be created at a cost of R28 000 per job.

Recently, Finance Minister Pravin Gordhan stated that unemployment was a serious problem in South Africa and that R150 billion had been set aside to create more jobs. Only 41% of South Africans are employed and this is most evident amongst the youth below 25 years old, where approximately only 50% are employed. This is far less than the global average for emerging nations where the figure for employment is in the high fifties, sixties and even 70 percent. In order for South Africa to achieve the global average of around 56%, 5 million more people will need to be employed.

However, arguments against the proposal are that employees will lay off existing workers to take on subsidised ones in order to save costs. They argue that this will also lead to wage lowering by effectively sourcing cheap (subsidised) labour. The argument goes further to say that the idea does not guarantee that training and skills development will take place in the workplace, and that this will lead to inexperienced individuals being abused and 'recycled' through the system of labour brokers and employers without training as well as being fired when the subsidies end.

It would seem that the simple act of working as an employee in any industry would constitute training and experience to further better the candidates possibility of finding other or higher earning positions and proponents of the policy argue that it will relieve unemployment amongst the youth, stimulate the economy and that many businesses will find it self defeating to fire good, skilled employees.

It is clear however, that it would not make sense for every employer to become involved in the youth employment subsidy. Employers would need to examine their workforces and identify those employees who skills are scarce and who may be nearing retirement age. It would be these types of positions that would make it feasible for an employer to consider partaking in the subsidy scheme. There would therefore need to be qualifying criteria by an employer before they could be considered for the subsidy scheme. The effect on this scheme would have on the number of unemployed youth would depend on the willingness of employers to partake in the scheme and the willingness and determination of the youth to genuinely want to learn a specific skills set. This cannot be regarded as a welfare or charity scheme in order to give money to unemployed individuals and this will always remain the risk of implementing such a scheme.

Amongst all the back and forth between proponents and detractors of labour brokers, youth subsidies and BEE policies, we are still left with a very real unemployment problem that needs to be dealt with. Despite making up just 0.5 per cent of the global labour force, South Africa accounts for 2 per cent of global unemployment.

Needless to say, doing nothing will only keep us where we are and possibly see the situation slide backwards. Currently the employment growth rate is quite sluggish, not initiating some or other effective solution only means it will remain this way while the high unemployment rate means employers are still able to decrease wages and exploit desperate work seekers. One thing is definite though, some action needs to be taken in order to combat the plight of the unemployed in the country and the youth subsidy policy seems like a good place to start.