Keith Engel: only one way to stop average tax rates rising

Keith Engel believes many South Africans are paying way too much in tax and did not expect to see effective tax rates creep higher this Budget.

A professor of tax, he previously helped develop tax policy at the National Treasury. Now, as chief executive officer of the South African Institute of Taxation, he tells Smart About Money editor Laura du Preez in an interview that there is no more tax to collect from honest taxpayers - they cannot be expected to bear the full weight of a misdirected government.

What is your reaction to no increase the tax brackets in the Budget?

I was surprised there was no relief from bracket creep as I expected at least some relief. There was no inflation adjustment of the primary rebate, so tax now applies at a lower level after inflation. The 18% marginal tax rate applies to taxable income over R95 750 a year, which is around R8000 a month. Read more: How do the income tax brackets work and what is my marginal tax rate?

There were no inflation adjustments to any of the thresholds – the medical tax credits, the annual capital gains tax (CGT) exemption and CGT exemption on death, the estate duty exemption, the annual and lifetime tax-free savings contributions or the R1.25 million foreign income exemption for South Africans who work abroad. The tax-free sum on retirement was the same for many years and only adjusted last year.

The steady erosion of these thresholds is a cheap way to raise revenue. Inflation is the classic hidden method that governments have used to raise revenue since the time of Rome.

Raising VAT would have been stupid and raising tax rates wouldn’t generate enough revenue because there are too few taxpayers in the high-income brackets. The South African Revenue Service (SARS) Tax Statistics released in January shows there were only 113 000 taxpayers earning more than R1.5 million in 2022 (1.6% of South African taxpayers).

A wealth tax would take two years to take effect and it can be argued that CGT, estate duty, donations tax and transfer duty are already wealth taxes.

Bracket creep gives the government the money they need, without making voters as angry as they would have been if tax rates were increased.

Are rising rates on such a small tax base a big problem?

NUMBER OF TAXPAYERS IN THE 2020/2021 TAX YEAR
Taxable income	Number of taxpayers	Percentage of tax base
R0 - R80 000	7 183 913	0%
R80 000 - R150 000	1 855 292	26.7%
R150 000 - R250 000	1 691 889	24.3%
R250 000 - R350 000	1 283 954	18.4%
R350 0000 - R500 000	981 993	14.1%
R500 000 - R750 000	612 177	8.8%
R750 000 - R1 000 000	262 643	3.8%
R1 000 0000 - R1 500 000	159 127	2.3%
R1 500 000 +	113 192	1.6%
Total paying tax	6 960 267	100%
Total registered	14 144 180
Source: SARS Tax Statistics 2024

The tax rates are high for working South Africans. The top tax rate now applies to someone who earns R1.8 million a year – that is about $100 000 a year. In the US, the top federal tax rate is 37% and it is applied from $539 000 a year for a single taxpayer and $693 750 a year for married couples filing jointly. In South Africa people earning more than R512 000 a year (about $26 500) pay a marginal tax rate of 36% and a 26% rate applies at R273 000 a year (about R20 000 a month).

Many countries have tried to tax the rich more, but there are just not enough rich people and when rates are too high, they increasingly choose to live elsewhere.

This government only has a small income-producing population – only around 6.9 million people pay income tax. And the government is doing far too much. It needs to spend on things like infrastructure and redistribution to prevent a revolution. But the problem is that there is a lot of wasteful expenditure and spending on services that should be privatized like the post office.

We need to determine what the bare minimum is that government should do. Currently, government is driving increased expenditure based on ideology regardless of the merits or the practical implications.

Has there been no inflation tax relief before?

In 1994 South Africa was really only taxing ordinary revenue. There was no CGT, which allowed the wealthy to avoid tax.

Former Finance Minister Trevor Manuel introduced CGT and adjusted the tax brackets to ease the burden on salaried taxpayers. Since 2008, however, this tax relief for employed taxpayers has been reversed mostly through partial relief only at the official rate, which rarely reflects salaried people’s inflation. In one year under Pravin Gordan there was also no inflationary relief.

Even if Treasury gives inflation relief next year, it will only be for next year. Future inflation adjustments will not reverse the lack of adjustment this year.

Is the honest salary-earning taxpayer getting a raw deal?

The income of higher-earning working professionals is fully reported to SARS and so they get hit hard. And that's the international problem.

Independent businesses can more readily under-report income and SARS doesn’t seem to pick up things like companies dedicated to government tenders that terminate after being paid.

There are also landlords who do not report rental income.

SARS is finding more tax evaders, but one of my pet peeves is that too much time is spent on rules and not enough on enforcing them.

What can taxpayers do about their heavy tax burden?

They really can’t do a lot. You can get a tax deduction for saving in your retirement fund or retirement annuity (RA). It is a good deal if you have the money to save.

A tax-free savings account can help you a little but not that much because of the contribution limits are low. 

Saving in a collective investment scheme is a good idea because you earn little taxable income. Most of the tax is deferred and paid when you sell your units.

Endowments are also good if you are on a higher marginal tax rate as the insurer pays tax at 30% on individual policyholder funds.

You can try to do a side business but it does introduce a lot of risk. It is stupid to lose money in order to save tax.

Investing offshore may still trigger tax depending on the structure of the investment.

Is SARS harassing law-abiding taxpayers and letting evaders get away?

SARS has improved in recent years.  The revenue authorities of many other countries don’t compare favourably.

People feel harassed when SARS asks for verification of income and deductions. Some of this is a necessary evil, but some of the documents SARS has anyway. 

And it is frustrating when certain SARS officials repeatedly asks for the same thing or fail to explain what they are looking for. At times you need to interact with a knowledgeable human, but SARS does not have enough people for that.

Sometimes people change addresses and tax practitioners, which creates problems. 

The revised SARS penalty system is better than the previous standard 200% penalty which was excessive. However, penalties are still high and interest owed to SARS is not deductible.  Excessive penalties can lead to more taxpayer resistance.

Penalties should not be included in SARS’s revenue collection targets.

Do tax practitioners charge too much - especially for small businesses?

Between R2 000 and R5 000 a return is not a lot. If practitioners charge too little, they become sloppy.

The tax system is at fault when very small businesses are forced to pay tax. Provisional income tax was not designed for the low earner who is living hand to mouth and cannot set aside the tax due.

The problem is that government is living beyond its means. Taxpayers can only afford so much, no matter how worthy the cause.