South Africa Budget 2023: I Dreamed a Dream

It has been a full week since South African President Cyril Ramaphosa delivered his State of the Nation (“SONA”) address, one in which he took the bold and unprecedented step of declaring a national state of disaster to deal with our energy crisis. And yet, as if to demonstrate precisely how and why we now have reached this point since load shedding first began some 15 years ago, there has been no further action by the President and his cabinet.

Looking forward to the impending Budget Speech then, it is difficult for us to expect meaningful, tangible, and significant policy proposals to address the many challenges our country now faces from a government that has become notorious for lack of meaningful action.

To misquote the lyrics from the rather famous song: “We had a dream our life would be, so different…”

With this in mind then, we dreamed a dream that our Minister of Finance would propose, and then expeditiously implement, the following in next week’s budget speech.

1. Household investments in rooftop solar

In the same SONA referred to above, the President re-affirmed his commitment to proceed with the rollout of rooftop solar panels and, of particular interest to South African taxpayers, promised that households (and not only businesses) will be assisted, presumably via tax breaks and concessions. It is thus expected that the Minister of Finance will provide more detail about this assistance in his 2023 Budget Speech.

Clearly, to be as effective as possible, any proposed tax break for households should actually put cash back into households that have invested in rooftop solar. We submit that it will be wholly ineffective if the only tax break provided is that households with rooftop solar can claim higher primary residence exclusion at some point in the future if and when the property is sold. On the contrary, households should simply be permitted to claim the cost of the rooftop solar equipment, including all related installation costs, as a tax deduction against any form of taxable income, and particularly against employment income. Employers should also be given leeway to withhold fewer employees’ tax where any employee benefits for the tax break, thus ensuring that households do not have to wait for their tax return to be submitted, assessed, and the refund to be paid by SARS before they actually see the cash. Households should also be able to claim any value-added tax paid on such equipment or, probably more effectively, the Minister of Finance should allow suppliers to levy 0% VAT on the supply of rooftop solar equipment to households.

Another related, but necessary, tax concession is that any income generated by households selling electricity back to the national grid should not be taxable, and, equally importantly, households should have no compliance burden arising from such activity.

The Minister would also do well to backdate any tax breaks in recognition of the fact that so many households have already invested in rooftop solar as a consequence of our energy crisis.

2. South Africa’s narrow tax base

When it was first proposed by the National Treasury/SARS that the well-known exemption from tax on foreign employment income be mostly removed, many commentators noted that the only likely impact of this proposal would be that affected taxpayers working abroad would ensure that they are no longer tax residents in South Africa. On the face of it, these concerns proved accurate given the significant amount of activity relating to financial emigration, and the reserve bank’s insistence that SARS be primarily responsible for the necessary processes and approvals required.  It should also be appreciated that the increased prevalence of remote working makes it easier for individuals to reside in a different and work in a different country.

It is no surprise to anyone to learn that South Africa has seen a mass exodus of individuals in the last two or three years, and its incredibly narrow tax base simply cannot shrink further. National Treasury/SARS should re-instate the allowance as it existed until recently and not continue to force the hands of individuals to cease being tax residents here and move all of their assets abroad. These individuals can then continue working abroad but with their families still residing in South Africa.

3. Using tax policy effectively to create employment

One can be forgiven for asking precisely how tax policy is actually being used to create employment? How simple would it be if, for example, corporate investors in South Africa are given a tax holiday based solely on how many locals jobs their investment will create? It should however be noted that SARS recently introduced an employment tax incentive but then saw it as a slap in the face when companies dared to come up with novel ways to employ people who would not otherwise have been employed in an effort to make use of the incentive.

4. Building SARS capacity

SARS should receive recognition for its attempts to rebuild capacity following the years of state capture that saw it become a shadow of its former self, but such efforts to recapacitate should be ramped up as much as possible. The already narrow tax South African base simply can’t bear more taxes and the only realistic hope SARS has to increase tax revenues is to ensure that all taxpayers pay their fair share and to pick up on overly aggressive schemes implemented to take wealth and assets abroad without paying tax.

5. Taxing the digital economy

Finally, one also has to ask how much longer South Africa can and should wait before implementing a digital tax in some form. We have has thus far held back on implementing any form of unilateral taxation due to our undertaking to implement the OECD’s proposed Pillar 1 and 2 solutions, which in turn seems to be going nowhere in no particular hurry. Perhaps the time has come for South Africa to look to implement some form of digital tax, as has been implemented by Kenya and Nigeria for example, until the OECD actually makes headway and a firm date is provided for the implementation of its proposed Pillar 1 and Pillar 2 solutions.