BUDGET SPEECH 2021: YOUR QUESTIONS ANSWERED - BDO South ...

AUDIT • ADVISORY • TAX

BUDGET SPEECH 2021:
YOUR QUESTIONS ANSWERED
At our recent Budget 2021 event we held a live panel discussion about the actual speech
and changes or lack of. Our panel included: Busi Mavuso, CEO: Business Leadership SA,
Chiedza Madzima, Head of Operational Risk Research for SA, Kevin Lings, Chief
Economist: STANLIB and our own, Head of Technical Tax, Professor David Warneke.

Here are the questions posed to the panel as well as their answers, to bring you some
clarity post Budget Speech:

Question:
What are some immediate gains in this economy?

Answer by the panel:
The most obvious is a greater use of public private partnerships. The private sector has a balance fund that is relatively strong, and the
corporate sector balance sheet is in a reasonable state. We need to find a way to partner better. Much like we did with the Soccer World
Cup. We came together and worked towards it. Just start somewhere make progress and it will bring with it the right movement.

The government and private sector need to work with each other. We can’t function without each other. It will take reform to unlock that
dynamism in the private sector.

Question:
How can we as industry leaders and individuals, help SA to grow?

Answer by Professor David Warneke, Head of Technical Tax:
Business has to operate in an environment led by government, but it is important to realise that when it comes to corruption, there are
always two parties to that. I think business must put in ways to protect whistle-blowers and must pay their correct fair share of tax. The
SMME sector is going to be a very important sector going forward and I don’t think enough is being done to incubate and help that sector
and develop entrepreneurship. SMMEs need to be a focus area.

Question:
Are ratings agencies still looking at downgrading SA even further than they have?

Answer by Kevin Lings, Chief Economist, STANLIB:
We could see a downgrade, but the latest budget does go a long way to ease those concerns, especially the debt levels. Government debt
levels are better than what was presented in October and has stuck to its intention to be diligent on salaries, added to the fact that they
are reducing their borrowing going forward. So, I think ratings agencies will wait to see if we can deliver and can we get growth going and
widen the tax base. But it is about implementation. But we realise there are lots of risks ahead to see if this is implemented and effective.

Question:
You touched on an important point of government wanting to control most sectors where they have limited expertise with the
construction and infrastructure sector being high the list. How can this be addressed as this is what is stifling growth, causing
unemployment - this needs urgent attention?

Answer by Cheidza Madzima, Head of South Africa, Operational Risk & Research, Fitch Solutions:
The focus should be on mobilising infrastructure investment through public private partnerships, this is the model that many emerging
markets are taking on and could benefit the SA economy in the longer term. Also, there needs to be efforts to liberalising labour market
regulations as this is becoming a risk, for example: reducing their public sector wage bill as are putting pressure on the countries growth
potential. SA will likely remain on a low growth trend and investors will take a wait and see approach.

Question:
Corruption is a hinderance of service delivery on everything and a pandemic and accounts for a misdirection of funds. How is business
assisting with dealing with this and how can the ordinary person have faith that this will be tackled? Could the minister have addressed
this yesterday.

Answer by Busi Mavuso, CEO of Business Leadership South Africa:
The minister did talk about a R1.8bn allocation to the department of justice and from a business perspective there have been efforts of
working with the NPA, SARS, the Zondo commission to see how we can capacitate them to start seeing some of these cases taken to
their logical conclusion as it will do a lot for confidence. The state capture situation would not have reached the level it did without the
role that the public sector played, they aided and abetted state capture. We need to keep discussing as businesses – what extent do we
ensure our house is clean. We are going to need a discussion about the moral degeneration we are having as a country. We are a family
unit and we need to have these discussions, what are we doing that has led to this moral degeneration. To what extent are we having the
ethics discussion? Like David said, what are we doing to protect whistle-blowers as this dissuades this in the future.

Question:
What is your opinion on the Health taxes? Do you think that the increases are adequate? Will it benefit Public Health? I can give many
thoughts and facts on this. Would like to hear what you think.

Answer by Professor David Warneke, Head of Technical Tax:
The rate of levy on sugary beverages, known as the Health Promotion Levy, was not increased in the 2021 Budget. This levy is expected to
yield around 20% less in 2020/21 than it did in 2019/20.

The Excise Duties that attach to the use of alcohol and tobacco products have increased at higher than inflation for many years. The
Minister used the adverse consequences to public health from the use of alcohol and tobacco to justify the 8% increase in these duties
in 2021/22.

However, it is not clear to what extent an increase in these duties leads to a reduction in the use of alcohol and tobacco products.
For example, if users of alcohol products are unable to bear the increase in the duties, the vast majority would likely be in a position to
downgrade to less expensive brands rather than decreasing their consumption. An increase in duties on tobacco products may fuel the
illicit trade in tobacco.

The Minister promised that the policy framework for both alcohol and tobacco will be reviewed during 2021/22.

Revenue generated from these levies and duties is not ‘ring-fenced’ such that it is used to specifically fund public health.

Question:
SA has 7m taxpayers. How does SA compare to other countries in terms of its individual taxpayer base against total population? Is this
purely a factor of our unemployment rate or is there a systemic issue of tax avoidance by a large proportion of the population?

Answer by Professor David Warneke, Head of Technical Tax:
SA has around 14 million registered taxpayers, of whom only around 7 million pay any tax at all because the balance of the taxpayers
earn below the tax threshold. Around 300 000 of the taxpayers (around 1 in every 200 of SA’s population) earn in excess of R1 million in
taxable income per annum and account for around 40% of the personal income tax take.

The above are very worrying statistics and are illustrative of the vast disparity of earnings in the SA personal income
tax base.

The Gini coefficient is a statistical formula that measures relative income or wealth distribution in a given population. The Gini coefficient
ranges from 0 (0%) to 1 (100%). 0 represents perfect equality and 1 represents perfect inequality. If every resident of a population had
the same income, the Gini coefficient would be zero. If one resident earned all of the income in a population and the rest earned zero, the
Gini coefficient would be 1. According to worldpopulationreview.com, South Africa (0.625) is second behind Lesotho (0.632) in the list of
nations with the highest Gini coefficients. By comparison, the USA has a Gini coefficient of 0.480.

Question:
How far will the funding gap for SME's increase with cancelling of S12J? Was it not irresponsible to abolish it without having an alternative
in place?

Answer by Professor David Warneke, Head of Technical Tax:
According to the Budget Review, the s12J Venture Capital Company incentive was not achieving its aim of boosting
economic growth in the SME sector. National Treasury conducted a VCC survey during 2020.

It states:

“The results [of the survey] showed that R11.5 billion had been invested at VCC level (on which a 100 per cent tax deduction was applicable),
with R4.2 billion invested at qualifying company level. The total tax contribution from qualifying companies was R207 million for 2019/20,
half of which was VAT. Qualifying companies employed 8 239 people, of which 4 035 people were in direct employment. In total, only 37
per cent of qualifying companies added new jobs after receiving VCC funding. Over 50 per cent of the investments appeared to be in low-risk
moveable asset rental structures, low-risk income-producing investments and guaranteed-return real estate investments. The National
Treasury findings broadly correspond with the 12J Association’s own survey but differ from modelled predictions on job creation and tax
estimates, with the association’s estimates more optimistic than the actual responses.

Since 2015/16, total tax revenue foregone due to the incentive was R1.8 billion, of which R1.7 billion went to individuals who had a taxable
income and VCC investment above R1.5 million per year. Revenue foregone in 2018/19 was R745 million before the deduction cap of R2.5
million was introduced. Based on this information, the incentive seems to give a significant tax deduction to high net-worth taxpayers that
cannot be justified given its limited economic impact.”

Question:
What effect is the restriction on interest and assessed loss deductions going to have on small business?

Answer by Professor David Warneke, Head of Technical Tax:
Regarding the proposed restriction of interest deductions, National Treasury promised that discussions would continue this year. The
proposal is currently only at discussion stage. From the Budget review it appears that the limitation would only apply to interest incurred
on loans from ‘connected persons’. From the public consultations that were held last year it also seems likely that there will be a
minimum rand amount of net interest expense below which the restriction will not apply and that it may not apply to certain industries.
The details have not been decided yet.

Many small companies, especially, have incurred substantial assessed losses due to the general lack of economic growth in the
economy and/or the impacts of COVID. When these companies hopefully begin to recover, they would certainly benefit from a full
set-off of assessed losses brought forward against current year taxable income. The proposal in this regard was announced at Budget
2020 and together with the proposal to restrict interest deductions, was deferred to 1 January 2022 at the earliest. The proposal was that
companies would in future be restricted to a maximum offset of brought forward assessed losses against 80% of their taxable income so
they would be fully taxed on 20% of their current year’s taxable income.

The above two proposals are part of the current base-broadening initiative whereby the corporate income tax rate is to be reduced over
time in a revenue neutral manner, commencing with a reduction from 28% to 27% for companies with years of assessment commencing
on or after 1 April 2021.

Question:
If 38% of Tax is generated from PIT, what will the impact of unemployment be on tax generation, as COVID has resulted in a broad
spectrum of the unemployed including highly skilled/ high earners.

Answer by Professor David Warneke, Head of Technical Tax:
It is well known that South Africa had a chronic unemployment problem even before COVID. It is interesting to note that at February
2020 it was expected that personal income tax would generate R546 billion of revenue in the 2020/21 fiscal year and R581 billion in the
2021/22 fiscal year. This year’s budget expects the revenue collections from personal income tax to be R482 billion in the 2020/21 fiscal
year and R516 billion in the 2021/22 fiscal year. So, for both of these fiscal years the estimate has been revised downwards by a significant
amount (R64 billion in 2020/21 and R65 billion in 2021/22).

Question:
Was there any mention of changes to estate duty and CGT in this budget?

Answer by Professor David Warneke, Head of Technical Tax:
No. The Budget Review states that SARS will gather data to, among other things, investigate the feasibility of a wealth tax in South Africa.
It seems unlikely that there will be major changes to Estate Duty in the short term while the feasibility of a wealth tax is investigated.

Question:
Do you think that if government relaxes the laws and regulations around exchange control it will be able to boost foreign investment.

Answer by Professor David Warneke, Head of Technical Tax:
This does seem likely as it is certainly an impediment to the ease of doing business in South Africa. Mauritius, for example, does not have
exchange controls. On the other hand, the continued existence of exchange control suggests that there is a concern around a flight of
capital were exchange control rules to be abolished entirely.

Question:
SARS under collects between R50 billion and 100 billion each year. Thus, RSA is short R300 billion this year. Whilst
Tax-dodging, high-net worth South Africans keep getting away with this. How can this be addressed decisively by all the
powers that be?

Answer by Professor David Warneke, Head of Technical Tax:
In his Budget speech the Minister stated that in the 2021/22 fiscal year, “SARS will establish a dedicated unit to improve
compliance of individuals with wealth and complex financial arrangements. This first group of taxpayers have been identified
and will receive communication during April 2021. In support of these efforts, we request that this House approve an additional
spending allocation to SARS of R3 billion over the medium term.”

The Budget review also stated that “following the recommendations of the Davis Tax Committee, SARS will focus on
consolidating wealth data for taxpayers through third-party information. This will assist in broadening the tax base, improving
tax compliance, and assessing the feasibility of a wealth tax.”

AUDIT • ADVISORY • TAX

CLOSING STATEMENT FROM PANEL ON HOW CAN WE BETTER PERSUE CLARITY FOR SA:
Chiedza Madzima, Fitch Solutions:
Looking ahead for government and businesses the focus will be on agility and operational resilience, sustainability so from
the perspective of investors there is a need for the government to make good on what they have said. The real challenge
will be implementation when you consider political and economic challenges the country is facing.

Kevin Lings, STANLIB:
Look at the Open Budget Index, in terms of that index we rank number one in the world in terms of transparency in relation
to our budgeting process, the fact that we know as much as we do is promising. The outcome of this budget could have
been a lot worse; can you imagine if we were discussing tax increases and government not being mindful. The minister did
well with what he was working with and it was a good initiative overall, but it is about implementation. I have become more
positive as a result of this budget.

Busi Mavuso, BLSA:
I really think that the GDP of 3.3% is really elusive if you look at our unemployment rates. I worry about the projected
declining revenues as a percentage of GDP that the minister spoke about. Without the implementation of structural
reforms and without the support of the public sector to accelerate the policy reforms then all those numbers that the
minister threw out, it won’t be achieved.

I think that communication, communication, communication is key for clarity. We need to offer help to government to see
how we can accelerate reform and some of the shifts we need to make. We need to get buy in from everyone. We need to
remind ourselves of the imminent risk as we as a country have. Without clarity, we face becoming another failed
African state.

David Warneke, BDO:
You achieve clarity, when you stand back and break a problem down into its pieces. In this budget there wasn’t a capacity
to raise revenue and maybe one can do that in the future when the tax gap is bridged. We need to focus on limiting
expenditure and the public sector wage bill is coming down and the spend wont be there and this is important as even
R1 that is wastefully spent in terms of a bloated public sector wage bill is taking R1 away to grow the economy.

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