A sensible 2020 Budget, focused on growing the SA economy

Finance Minister Tito Mboweni’s 2020 Budget demonstrates a welcome shift in emphasis towards measures to stimulate the South African economy rather than increase tax collections.

Government’s emphasis is now on more efficient collection as well as protecting the South African tax base from potential erosion as a result of cross-border debt-funding transactions. Heightened customs and excise duties and increased enforcement are also intended to yield additional revenue for the fiscus in future.

Tax rates: personal and corporate

Finance Minister Tito Mboweni announced no big changes to personal and corporate tax rates and did not, as some analysts had suggested, raise the VAT rate, which is a relief.
Small adjustments to individual tax thresholds and brackets will result in slightly lower effective rates but they are unlikely to stimulate consumer spending.

The most significant comment on tax in the Budget was the minister’s promise to widen the corporate tax base and limit the offsetting of carried forward losses to 80% of taxable income, which is likely to result in additional corporate tax collection.

SA’s corporate tax rate has remained at 28% for about a decade and reducing the rate would be beneficial. However, the minister appears to be hinting that some incentives will be removed and stated that the plan is to limit the deductibility of interest in certain cross-border situations involving companies. Those measures could offset any advantages to businesses of a lower future tax rate.

Section 12J Venture Capital Funds

The allowance under Section 12J of the Income Tax Act, which allows investors in a venture capital fund to deduct their contribution from their taxable income in that year, was due to expire in June 2021. The minister has indicated he may consider extending that date, which would be beneficial for the private equity sector.

Exchange control easing

The minister announced changes to move SA’s exchange control regime from direct controls to a risk-based system over the next 12 months. However, there is little detail available at this stage.

Depending on the details of the proposal, this could be beneficial for both inward and outward investment by reducing the administrative burden. If the plan is merely to devolve more responsibility from the SA Reserve Bank to the Authorised Dealers for approval of cross-border transactions, it will make little difference. What would make a difference would be to restrict transactions requiring SARB approvals to those on a high-risk list.

Limiting tax deductibility of interest to align with OECD recommendations

Proposals to further limit the tax deductibility of interest expenses would not be a revolutionary move, since it tracks the trend in many other countries, but it could affect a lot of SA companies negatively.

There has long been a focus on limiting the tax deduction for interest expenses paid on a loan by a related party outside South Africa. However, the proposals will limit not only the deductibility of interest on external party loans but also on third party loans.

As with exchange control changes, the devil will be in the detail on interest expense deductions and we wait to see exactly what will be implemented after taxpayer consultation.

Effect on sovereign rating

Whether this Budget will stave off a sovereign rating downgrade by Moody’s Ratings Agency to below investment grade depends on the extent to which government can rein in spending. Cutting the public service wage bill will be politically difficult, although measures taken so far to tackle ailing state-owned entities such as SAA and Eskom are reassuring.

The projected increase in the government deficit over the next few years remains concerning and raises the question whether government will need to take more decisive action to cut expenditure.

Our conclusion: government is listening

The Budget underlined government’s recognition that without economic growth, tax revenue will not grow. This is a sensible approach and indicates government has listened to warnings over many years about the dangers of over-taxation.