By Mike Benetello, Robyn Berger, Roné la Grange and Yasmeen Suliman
As we wait for the 2025 Budget Speech to be approved in South Africa, we look back with some longing on the boring and predictable Budgets of the past.
Institutional investors, the kind the country is desperate to attract, loved them.
According to economist Francois Fouche, who spoke at a recent Bowmans Tax webinar, steps to bring back boring budgets include reverting to the discipline of three-year budgeting; aligning the policy agenda to the country’s limited fiscal resources; reviewing expenditure with a view to closing non-performing programmes and entities; dismantling costly bureaucratic architecture; and making far-reaching structural reforms that are ready to be implemented.
Until dull, predictable Budgets are restored, South African taxpayers will have to deal with the latest crop of surprises, not least the controversial VAT increase.
While the VAT debate has been the centre of attention, certain other Budget-related tax developments also warrant discussion. Some of these are taxpayer unfriendly, some mixed and a few will be welcomed.
On the positive side, some business taxpayers will be breathing a sigh of relief over the postponement of amendments on limits to the deduction of interest.
New rules on deduction of interest delayed
Currently, there are two sets of rules on interest deductibility – one for local businesses with loans from foreign creditors, with interest deductions limited to 30%, and the other for businesses acquiring certain assets or shares. The limit for the latter is approximately 47%.
Last year, Government promulgated amendments to align the two sets of rules, limiting the deduction of interest to 30% of ‘adjusted taxable income’.
This caused great concern, which has been allayed for the time being by the news that Government will review the amendments in 2025 with the potential of a proposal in the 2026 Budget. The amendments will then come into effect on 1 January 2027.
Sun goes down on energy incentives
Businesses that have not yet invested in renewable energy-generating assets are bound to be disappointed that the incentives available for these projects have ended.
The favourable 125% allowance for renewable energy-generating assets ended on28 February this year after a two-year run.
Government has also retracted its 2024 announcement that it would consider raising the1 megawatt limit for PV solar-generating assets that qualify for a 100% allowance.
In another disappointment, Government is not reconsidering changing the 50%/30%/20% allowance restrictions that apply where the taxpayer leases the energy assets.
Personal income tax base broadens slightly
South Africa’s shrinking tax base has long been cause for concern, so a welcome development is the projected growth in the personal income tax base in 2025/26.
An estimated 7.9 million individuals are expected to pay personal income tax this year, compared with 7.1 million individual taxpayers in 2024/25. This means 54% of the country’s14 million registered taxpayers will be paying tax, up from 48.5% in 2024/25.
The number of taxpayers earning ZAR 1.5 million or more a year has also jumped from 163 000 (1.12% of registered taxpayers) to 224 000 (1.6%). This group of taxpayers will shoulder an even bigger tax burden than before, contributing 37% of personal tax compared with last year’s 29.8%.
The million-rand question is whether the expansion of both taxpayer groups is the result of more people in higher-paying employment or the effect of fiscal drag, given that tax rebates and thresholds are not being adjusted for inflation. (Bracket creep alone is expected to bring in an additional ZAR 19.5 billion for the fiscus this year.)
Income from foreign retirement funds may be in jeopardy
Currently, South African residents do not pay tax in South Africa on lump sums, pensions or annuities from foreign retirement funds for previous employment outside the country. That may change.
Government proposes changing the rules that exempt these payments, the reason being that the current treatment may result in double non-taxation, especially where South Africa has taxing rights in terms of a double tax treaty. This could cause some pain for these taxpayers.
No change can still have tax consequences
There are a number of other proposed tax changes that merit a closer look, along with the impact of some apparent non-changes.
For example, motorists might have rejoiced in the news that the general fuel levy will be unchanged in 2025/26. Even so, tax as a percentage of pump price will rise from 27.5% for 93 octane petrol to 28.1%, while the price of diesel, currently at 30%, edges up to 30.2%.
Similarly, medical aid credits – which many observers feared would be axed in this Budget – are not being removed this year. However, not adjusting credits for inflation is expected to raise an additional ZAR 1.5 billion in revenue.
This demonstrates the ravages of inflation in a low-growth economy where borrowing and tax increases are habitually used to make up revenue shortfalls, resulting in Budgets that are full of surprises and insidious consequences for taxpayers.
Bring back boring Budgets!
Mike Benetello, Co-head of Tax, Robyn Berger, Tax Executive, Roné la Grange and Yasmeen Suliman, Partners, Bowmans.
BUSINESS REPORT