Topical Issues

South African budget presentation (26 February 2020) – Some feedback

So, the budget presented by the Minister of Finance, Tito Mboweni, was somewhat unexpected!! The general consensus amongst analysts (and me!!) was that there would have to be some interventions from a tax perspective by the Minister in his budget to shore up the government’s ever weakening finances. This didn’t happen and instead, Treasury provided relief for individuals by raising personal income tax brackets above inflation, providing a reduction of R2 billion in the forecast income tax take for 2020/21. However, this was offset by increases for the normal range of existing indirect taxes, including the fuel levy and taxes on alcohol and cigarettes. Importantly, the Value Added Tax (“VAT”) rate remains unchanged at 15% for the financial year ahead.

Minister Mboweni was quoted before his budget presentation as saying that it would be foolhardy to increase taxes in the current economic environment and that, in fact, it would be preferable to have made deeper tax cuts than he was able to provide. Unfortunately given the state of the government’s finances, this was not possible. However, National Treasury says that it intends to cut the current wage bill for 1.2 million public servants, which accounts for 35% of government’s annual spending, by a cumulative R160.2 billion over the coming 3 years, making it the majority of the government’s planned spending cuts for this period.

As has been pointed out by many economists’ ad nauseum, South Africa’s unravelling public finances must be strengthened quickly. Debt service costs are the fastest growing area of government spending and now absorb 15.2% of the government’s annual revenue compared with 9.8% a decade ago. However, given Cosatu’s response to the budget presentation, it is doubtful that the forecast spending cuts will be achieved and, frankly, given government’s performance in the area of fiscal consolidation in recent years, some doubt must exist regarding its ability to deliver in this regard. Indeed, the budget deficit is expected to have widened to 6.3% of GDP in the 2019/20 financial year (including a R63.3 billion deficit in tax revenues for this period) and is forecast to peak at 6.8% in the 2020/21 financial year. These are not pretty numbers and hence the current tough economic environment, which is characterized by low domestic investment (particularly in infrastructure spend) and failing municipalities etc (meaning poor service delivery), is likely to persist for some time to come.

Instead of an indiscriminate increase in personal and corporate income tax rates for 2020/21 and beyond, the Minister announced plans to increase South Africa’s existing tax revenue by facilitating an increase in its narrow tax base by:

  • Reconsidering incentives (both employment and industrial); 
  • Restricting interest expenditure claimable by corporates. In particular, it is proposed that the deduction of interest paid to a multinational entity by any entity forming part of that multinational group be restricted to 30% of earnings for years of assessment commencing on or after 01 January 2021; and 
  • Restricting the use of assessed losses carried forward by corporates to 80% of taxable income for years of assessment commencing on or after 01 January 2021.

In addition, it was suggested that the corporate income tax rate will be decreased over time as has been the case internationally in recent years so as to encourage investment in South Africa and to improve local economic growth.

Some other initiatives announced by Minister Mboweni in the budget included:

  • Pay As You Earn (“PAYE”) administration: Proposed changes in the administration of PAYE may result in individual salaried employees not having to file personal income tax returns in the future.
  • Foreign employment tax exemption (section 10(1)(o)(ii)): Historically, the section 10(1)(o)(ii) foreign employment tax exemption applied to remuneration that was received by South Africans in respect of services rendered outside of South Africa for or on behalf of any employer if the employee was outside of South Africa for a period or periods exceeding 183 full days in aggregate during any period of 12 months and for a continuous period exceeding 60 full days during the period of 12 months. In such a case, the individual concerned was not subject to tax on his or her foreign income in South Africa.

From 01 March 2020, the foreign employment tax exemption will only apply to the extent that remuneration does not exceed R1.25 million during a year of assessment. Any excess above the R1.25 million will then be taxable in South Africa.

The provisions of a double tax agreement should be considered when the remuneration exceeds R1.25 million. Double tax relief in the form of a foreign tax credit is available in South Africa where tax was paid in both countries on the same remuneration.

For PAYE purposes, the R1.25 million threshold should accumulate monthly and once the threshold has been reached, the income exceeding R1.25 million is subject to normal tax in South Africa. The R1.25 million threshold may not be averaged over the year of assessment.

  • Emigration: The concept of emigration will be phased out by 1 March 2020 to remove the exchange control treatment for individuals. The intention is to allow individuals who work abroad more flexibility provided funds are legitimately sourced and the individual is in good standing with SARS.  

In conclusion, I believe that whilst the budget held some positive news for taxpayers, it is unlikely to have gone far enough to address South Africa’s intractable political, social and economic problems or to appease the 3 major credit rating agencies and hence a downgrade in the country’s sovereign credit rating to “junk” status later this year appears all but inevitable.

I hope the above provides you with some insight into South Africa’s 2020/21 budget presentation but please do not hesitate to contact me if you have any questions or comments thereon, or if you require any further budget information. I can be contacted by telephone on (011) 516 9803 and / or (073) 229 8974 or by email at

Graeme Rigby
08 March 2020