South African Budget Cuts Taxes On A Wide Front

by Lorys Charalambous, Tax-News.com, Cyprus

28 February 2003

The recent South African budget saw Finance minister Trevor Manuel simultaneously increase spending and lower taxes as the economy grew by a healthy 3% last year. This has allowed for tax cuts to both lower and middle income earners, as well as offering tax breaks for business to encourage investment.

There was a heavy emphasis on health, welfare, social and educational spending, with more revenue to be distributed to the regions. The Eastern Cape and KwaZulu Natal will be the two main beneficiaries of this, receiving R26.4 billion and R32.1 billion respectively. R280 billion has been allocated to combat unemployment, currently running around 30%, with R105 billion being pumped into national infrastructure improvements. Other pledges include 2.7 billion to aid the criminal justice system, and R1bn to encourage more black ownership which is still seen as far too low for a country free from apartheid for almost 10 years.

For business, the tax breaks included raising the threshold for smaller firms qualifying for a lower rate of company tax from R3 million in revenue to R5 million. The budget also proposed a double deduction for the first R20,000 start-up costs of a new business. Also included was a four year accelerated write-off for capital expenditure relating to research and development in the field of applied natural sciences, and accelerated depreciation programs for manufacturing assets. However, corporate tax was to remain unchanged at 30%.

Offshore investors are set to benefit from Manuel's budget, with the maximum permissible investment doubling to R1 billion

Other reforms included a 20% depreciation allowance over a five-year period for tax payers undertaking property improvements, and investors buying property would be allowed a 20% write-off in the first year, followed by 5% for the next 16 years.

In total, this has allowed Manuel to offer low and middle income workers a R13.3 billion tax break. Pensioners also benefit with retirement fund tax being pegged back to 18% from 25%.

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