BUDGET 2016 - No Shocks for the Property Industry

26 Feb 2016

As we all know the Minister of Finance presented his budget for the period commencing 1 March 2016.
It is common knowledge that our government has for some time been spending more than it earns and that we as a nation were coming close to being viewed as being over-indebted (junk status!).
In this regard I assume it is understood that to balance the budgets our government was borrowing and doing so quite heavily. Being awarded the status of “junk” by the international financial rating agencies has terrible consequences for a country and even the most stubborn and reckless government would not wish to see this happen. Our government was therefore forced to review its management of our country’s fiscal affairs.
Most right thinking people assumed and believed that the government would be forced to turn to us taxpayers and to give us a jolly good squeeze. It didn’t happen! Instead the government decided to balance its budget by curbing its own expenditure and thereby proving to the rating agencies that we are able to live within our means. When I say able to live within our means it must not be understood that we are really doing so.
Our government will still be borrowing money to sustain its activities but will be doing so in percentages and on terms which the international rating agencies find acceptable.
Whether our government will be able to curb its expenditure is another matter entirely and in this regard I am personally very doubtful. One of the largest components (if not the largest) of government expenditure is its salary bill. The government has thus far proved itself incapable of standing up to the unaffordable salary increases demanded by the unions and furthermore incapable of halting the cash haemorrhaging from its parastatals. There is sadly no reason to believe that the situation can or will change. I suspect that the government itself appreciates this and that it knows that it is only postponing the inevitable increase in personal income taxes. I suspect further that this budget was introduced to improve the government’s prospects in the forthcoming local elections and nothing more than that. I am therefore fully expecting the government’s bankrupt buck to eventually land in our laps within the next two budgetary years and for personal (and probably corporate) taxes to be significantly reviewed at that time. I really hope that I am wrong.

Insofar as the property market is concerned the budget has reached out to influence that market in the following respects:

1. Increase in Capital Gains Tax

The formula for calculating Capital Gains Tax as set out in the tax legislation is quite complicated but boils down to an effective percentage of the total profit (gain) made by a tax payer. Until yesterday that rate for human beings was 13.7%, for companies and close corporations was 18.6% and for trusts was 27.3%. From 1 March 2016 the new rate will be: 16.4% for human beings, 22.4% for companies and close corporations and 32.8% for trusts. The R2 Million exemption on gains made on the sale of one’s primary residence remains unchanged. The government budgets to receive an extra R1 Billion of Capital Gains Tax from ordinary human being taxpayers and another R1 Billion from corporate tax payers.

2. Transfer Duty.

The transfer duty tables which previously applied (thankfully) remain the same save that a new category at the top end of the market has been introduced whereby every Rand of purchase price over R 10 Million will attract transfer duty at the rate of 13% (was 11%). The new tariff will apply to sales made on or after the 1st March 2016.You will see that some (in fact most) are quite significant increases but you will also see that they are unlikely to affect anyone other than the wealthier members of our society. This reinforces my suspicion that this budget is a political budget and not an economic one.

Although not particularly relevant to the property market the budget speech and some of the explanatory documents make it clear that the government has set its eye firmly on discretionary trusts (i.e. the normal family trust) and views such trusts as cash cows needing to be milked! Insofar as these trusts are concerned this is what our government has to say:

“An important role of the tax system is to reduce inequality. Some taxpayers use trusts to avoid paying estate duty and donations tax. For example, if the founder of a trust sells his or her assets to the trust, and grants the trust an interest-free loan as payment, donations tax is not triggered and the assets are not included in his or her estate at death. To limit taxpayers’ ability to transfer wealth without being taxed, government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder at death, and to categorise interest-free loans to trusts as donations. Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered.”