The new tax bracket, which was previously set at 41%, applies to annual incomes of more than ZAR1.5m ($114,000, £91,000) and is expected to hit around 100,000 people, including some of the thousands of British expats living in South Africa.
Gordhan is under pressure to target the wealthy as he battles weak tax receipts which, during the current financial year, have been R30bn rand less than expected.
During his Budget speech on Wednesday, the finance minister, who has been locked in political infighting with the nation’s president Jacob Zuma, revealed that government debt had risen to ZAR2.2trn rand.
The shortfall in tax revenue was the largest since 2009-10, with the biggest gap coming in personal income tax, which brought in ZAR15.2bn rand less than expected.
The country’s 100,000 – or 0.18% – top earners are expected to contribute up to 40% of the ZAR28bn additional taxes that Gordhan needs to raise in the 2017/18 fiscal year.
As Africa’s most industrialised economy, South Africa is currently facing a ‘perfect storm’ of low commodity prices, sluggish global demand and the worst drought in more than a century.
Dieter Schulze, regional managing partner of RSM South Africa, said there has only been a “partial relief for bracket creep, meaning that the tax burden will be felt by all taxpayers,” adding that personal income tax proposals are expected to generate R16.5bn in revenue collections.
Dividends Withholding Tax (“DWT”)
Schulze said the next most significant Budget proposal related to an increase in the rate of dividends withholding tax (DWT) to 20%.
“This is intended to limit the ability of tax arbitrage after the increase in personal tax rates,” he explained, adding that the proposal is expected to generate ZAR6.8bn in tax revenue.
The exemption and rate of tax for foreign taxable dividends will also be revised in line with the new DWT rates whereby the maximum rate of effective tax will be 20%. This will be effective as from 1 March 2017.
Trust tax rate
Speaking to International Adviser earlier this month, Schulze predicted an overhaul to the treatment of trusts.
It follows a report published last year by the country’s Davis Tax Committee (DTC) – tasked with reviewing and making recommendations on South Africa’s tax system.
The report urged the South African Revenue Services (SARS) to investigate the taxation of offshore retirement funds.
As a result, the rate of tax applicable to trusts (other than special trusts) will be increased to 45%.
This means that the effective rate of capital gains tax (CGT) on the disposal of a capital asset in the hands of a trust increasing to 36%, said Schulze.
“By comparison, the maximum effective rate of tax on capital gains in the hands of a natural person will be increased to 18% driven by the increased maximum marginal personal tax rate,” he added.
continued on the next page