NEWSLETTER NOVEMBER 2016

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MTBPS HIGHLIGHTS

Finance Minister Pravin Gordhan delivered his Medium-Term Budget Policy Statement

(MTBPS) to Parliament on Wednesday, 26th October 2016.

Unlike South Africa’s annual budget, this is usually a relatively low-key event, but this year, set

against a backdrop of political and economic uncertainty, the MTBPS attracted widespread

interest.

Emphasizing the need for government, business and all South Africans to work together to

revitalise the economy, Gordhan quoted a Pedi saying: "Lions that fail to work as a team will

struggle to bring down even a limping buffalo”.

Here is a summary of some of the key points from the MTBPS:

• South Africa’s economic growth estimate for 2016 has been revised downwards to 0.5

% from 0.9 %.

• National Treasury forecasts a moderate recovery over the next three years, with GDP

growth reaching 2.2 % in 2019.

• The inflation forecast has been revised down to 6.4 % for 2016. Inflation is expected to

remain around 6 % annually over the medium term, with upward pressure from

electricity prices.

• Government has budgeted R987.4 billion for infrastructure over the next three years,

with large investments continuing in energy, transport and telecommunications.

• Investment by general government is expected to average 4.8 per cent growth over

the medium term, with investment by public corporations reaching 2.3 per cent

growth in 2019.

• Government predicts that there will be R23 billion less in revenue than what was

initially forecast in the 2016 Budget Speech in February.

• It is proposed that an additional R43 billion Rand will be raised through tax measures

over the next two years, R28 billion of this will be raised in the coming financial year.

• The expenditure ceiling will be lowered by R26 billion.

• Consolidated government expenditure will rise by 7.6%.

• Additional allocations for tertiary education, healthcare services and social

protection have been proposed.

• A further R9 billion for the National Student Financial Aid Scheme (NSFAS) over the

period ahead (an additional 18% a year) has been proposed.

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FURTHER CHANGES TO THE PROPOSED TAXATION OF TRUSTS

National Treasury and the South African

Revenue Service (SARS) recently published

the second draft of the 2016 Draft Taxation

Laws Amendment Bill (TLAB) for public

comment.

The initial proposals have been

considerably toned down in the second

draft of TLAB.

A reminder of the initial proposals in the first draft of TLAB (July 2016):

• In the case of an interest-free loan to a trust, the lender would be deemed to

have received interest at the official interest rate, and this interest would be

included in his taxable income.

• In the case of a low-interest loan, the difference between the interest

charged and the official interest rate (currently 8%) would be added to the

lender’s taxable income.

• The R100 000 annual donations tax exemption would no longer apply.

These are the latest revised second draft proposals (September 2016):

With effect from 1 March 2017:

• The deemed interest on interest-free and low interest loans will be treated as

an on-going annual donation.

• The R100 000 annual donations tax exemption may still be used, provided that

the deemed interest on the remaining loan is included.

Public comments on the initial TLAB proposals emphasised the fact that interest-free

or low interest loans to trusts are not only used to avoid estate duty, but also provide

an important vehicle for many other objectives such as: to protect assets, to provide

maintenance for disabled children, to serve as employee incentive trusts and as

public benefit organisations (PBOs). Treasury agreed with this and said it would

narrow the scope of the proposed amendment and that it will specifically exclude,

among others, loans to:

• Special trusts (established solely for the benefit of minors with disability)

• Trusts that are legally defined as public benefit organisations (PBOs)

• Vesting trusts (where the vesting rights and contributions of the beneficiaries

are clearly established)

• Loans used by a trust to fund the acquisition of the lender’s primary residence

• Loans that constitute affected transactions and that are subject to transfer

pricing provisions

• Loans to a trust in terms of a Sharia-complaint financing arrangement

The Treasury has clarified that the draft proposals will apply to all loans advanced to

trusts, including those in existence before 1 March 2017.

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THE MEDIUM-TERM BUDGET POLICY STATEMENT (MTBPS)

The MTBPS is a government policy document that

outlines the government’s fiscal policy objectives and

spending priorities over a three-year period. The MTBPS

also sets out the economic context in which the

forthcoming budget (February 2017) will be presented.

With the slow-down in the South African economy, tax

revenues have fallen short of expectations. This means

that government spending will need to be cut and taxes will need to be raised.

• The anticipated budget shortfalls are R36 billion and R52 billion in the next two

years.

• Following a series of expenditure cuts, the MTBPS proposes a further R26 billion

in reductions to the public expenditure ceiling over the next two years.

• New proposed tax measures amount to R13 billion in the 2017-2018 financial

year. Together with the higher taxes indicated in the 2016 budget, total

revenue increases will amount to R43 billion over the next two years.

With a great deal of pressure on the budget, government spending will be focused

on core priorities, and existing resources will have to be shifted to deal with more

critical needs.

Credit ratings agencies have taken careful note of the contents of this MTBPS. Fitch

has just issued a report stating that “South African MTBPS Measures Will Not Stem

Rising Debt”. This does not bode well for December 2016 when ratings agencies will

reassess South Africa’s credit rating. A further downgrade in our country’s credit

rating would indicate a higher investment risk, prompting higher borrowing costs and

large capital outflows.

The MTBPS typically does not include specific tax announcements, but it does give

an indication of future tax amendments. It is unlikely that the additional measures

such as the proposed changes to trust legislation, sugar tax, the tyre levy and the

Special Voluntary Disclosure Programme will be enough to achieve the additional

R43 billion tax revenue which is required.

With our tax-base already under great pressure, it will be interesting to see exactly

how National Treasury intends to collect this extra tax revenue. It seems likely that

taxpayers could be facing some unwelcome tax increases in February 2017, when a

new blend of tax proposals will be announced.

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GOVERNMENT FUNDING OF POST-SCHOOL EDUCATION AND TRAINING

In the MTBPS, Pravin Gordhan announced that

the government has provided for an increase

in spending on university fee subsidies in

response to the large-scale student protests.

On top of the extra R16 billion funding

allocated in February 2016, the government

has now increased funding to higher

education by allocating a further R17.6 billion

over three years to subsidise poor students.

The movement of university students demanding “fees must fall” has placed the

issue of education funding at the centre of the policy debate.

Two concerns lie at the heart of the issue. First, despite massive increases in

allocations to the National Student Financial Aid Scheme (NSFAS), the enrolment of

academically deserving students from poor communities has grown faster than

available funding. Secondly, there is no clear national framework for financing

students who – although not affluent – are above the modest threshold established

by the NSFAS means test. As a result, many students face financial hardships that

undermine their ability to succeed academically.

Over the past 20 years, government has significantly expanded funding of

education. Basic education is the largest item in the national budget. However, the

education system is not achieving the desired outcomes. Priorities for government in

the years ahead include expanding access to and the quality of early childhood

development, overcoming institutional weaknesses in basic education, broadening

access to effective vocational and technical skills, and improving the impact of

resources devoted to vocational training. In all these areas, additional resources

may be needed – and strong interventions to unblock institutional constraints are

required.

Government’s current policy framework calls for the progressive expansion of post-

school education within available resources. The largest gains in student access are

envisaged in technical and vocational colleges. Improving the quality of teaching

at these colleges and building stronger links with industry – so that skills are relevant

and can support economic growth – are policy imperatives.