South African Budget 2009 Review

The Budget and Your Finances

what does South African budget 2009 mean for you? For the last few years, we've 'paid less, and collected more'. The Minister of Finance has been able to submit budgets strong on tax relief, and increased efficiencies at SARS plus a widened tax net has led to revenue collection targets being exceeded.

However, with the current worldwide economic climate resulting in reduced profits from the corporate sector this year we will be running a budget deficit for the first time in many a year. The deficit is projected at 3.8%.

Does this mean that we are going to need to raise taxes to meet this shortfall?
Simply put – no. The government is going to need to borrow in order to finance this, and most likely borrow from offshore.

Does this offshore borrowing spell doom and gloom for our personal finances?
Not necessarily. Over the past eight years, the tax paid as a percentage of our gross income has decreased significantly, and the tax brackets have increased substantially. To put this in context, in 2000 the top rate was 45%, and this was for a taxable income of R120,000. In the new budget, the top rate is 40%, and this is for a taxable income of R525,000. So not only has the top tax rate decreased, but also the income level where this kicks in has increased markedly. To demonstrate this better - if you grew R120,000 by CPIX from 2000 to 2008, you would have needed to earn only R200,000 to be in the top tax bracket. The top level is now R525,000. You can see therefore that there has been significant tax relief over a number of years.

So what does this all mean to us, specifically from a financial planning perspective?

I’d like to focus on four aspects of the South African budget 2009:

1. Primary rebates

Primary rebates have increased by 18%, from R8,280 to R9,756. Add to this the secondary rebate available to those over 65 (up by 7% from R5,040 to R5,400) and retired individuals are 14% better off on their rebates.

2. Interest Exemptions

The interest exemptions themselves are not significant, but taken in the context of falling interest rates, they are important from a financial planning perspective. The interest exemption has increased marginally: from R19,000 to R21,000 for those under 65, and from R27,500 to R30,000 for those over 65. So what, you might say. Well, if you are over 65, and assuming an interest rate of 12%, your optimal interest-bearing investment in 2008 was R229,000. Now, in 2009, with an assumed interest rate of 9%, your optimal interest-bearing investment has increased to R333,000. This may make a significant difference to how you structure your investments.

3. Tax in retirement

I often speak to retired clients who are concerned about the tax burden on them after retirement. But interestingly, it is not the tax that they should concern themselves about, but more the capital needed to retire according to their lifestyle wishes. For example, let us take a married couple, bond-free, 65 years of age, with 30 years of retirement ahead of them. They have medical expenses of R2,000 per month and they both earn an income of R126,200 per annum (including R30,000 interest). This means they have a joint income of R21,033 per month. How much tax would they pay?
The answer is nothing.
However, the catch is that to maximize this tax-free income, the capital required at age 65 is R5.7 million. So, potential retirees should really concern themselves more with the capital required to retire, as opposed to the tax they will pay on retirement.

4. Estate planning

Estate planning has also been simplified, with the possible consequence of removing the need for trusts over time. Let us assume a husband dies with an estate of R10m. Where previously a sum of R3,5m would have been bequeathed to a trust and the balance to the wife, who would then use her R3.5m deduction on her death, SARS has now proposed that the husband and wife can jointly utilize the R7m, which to a large extent diminishes the need for a trust.

There is a lot of justifiable concern about the state of the world economy. This has placed national treasuries and central banks under significant pressure.

Despite this, the Minister of Finance has managed to produce a caretaker South African budget 2009, offering some tax relief and increasing expenditure in certain areas.

The Budget has provided us with some relief, and some options to further optimize our financial affairs. Coupled with decreasing interest rates, a petrol price that is showing signs of stability, and falling inflation, it appears as if the severe pressure that households have been experiencing over the last 6 to 12 months may be lessening.

Perhaps this is a good time to review your financial affairs, and make sure that you are ready to take advantage of the opportunities that may present themselves over the next few years.

Netto-Jonker, CFP, is founder of Netto Financial Services and was financial planner of the year in 2001. Her business partner Ian Beere, CA(SA) CFP was the financial planner of the year in 2007.