Unpacking South Africa’s 2020/21 Budget Review

Budget Speech 2020: Mboweni shocks the nation

A mere three days ago, analysts across South Africa and abroad were making predictions for the 2020-21 budget speech. There seemed to be a unanimous air of discontent and foreboding as most financial experts divined outcomes for South Africa which seemed solemnly bleak.

And indeed, Minister of Finance, Tito Mboweni, did deliver a shocking address to South Africans, yet the shock was not at all what anyone had predicted.

Rand Rescue gives you a rundown of main points and more insights into the decisions which will affect South Africans – locally, abroad, or those who plan on emigrating in the near future.

 

A silver lining looms large

Undoubtedly one of the hottest topics in the run-up to every budget speech is taxation. Before the address, economic experts had widely assumed that Mboweni would increase VAT as well as personal income taxation for certain tax brackets. It has, after all, been the modus operandi of the South African government for the past few years.

And yet taxpayers are not the only ones who have noted the futility of perpetually burdening the public with the economic wellbeing of an entire nation. Instead of attempting the same tried and failed methodology, the minister had recognised past blunders and sought instead to break the stalemate of taxpayer versus state through a complete overhaul of past policies.

Not only will tax not be increased for the 2020/21 tax year, but there will be an immediate personal tax easing and restructure with corporate tax trimming planned for the near future. Added to this, the reckless overspending by government agents and on state salaries, entities and benefits will be reined in, with an estimated R261 billion to be saved through lowering programme baselines and adapting the wage bill. Costs will further be curtailed through abolishing government subsidence and travel, replacing their cellphone policy and restricting travel to economy-class.

The minister noted that the unchecked increases in governmental salaries had seen significant stagnation in job creation within government – something which has had a significant and detrimental impact on the education and health sectors in particular. For while the purses of some state employees get fatter, human resource in these aforementioned sectors becomes increasingly constrained. Once overspending and corruption has been weeded out, the government can once more focus on employing qualified staff in crucial roles within education, policing and healthcare.

It should be noted, however, that opposition parties are not too keen on the ministry’s new strategy. The EFF has been particularly vocal about their disdain for changes to the wage bill and their intent to oppose such measures suggested by the ministry. And though the EFF may not be able to directly affect monetary policy, history tells us that they are capable of crippling the economy and achieving compromise through protest action and violence. The EFF’s views were echoed by trade union Cosatu. 

In the EFF’s words, “The Budget speech is a confirmation of the surrender of the South African economy, one that is dressed in unimaginative poetry and a misplaced faith in the private sector.”

The DA is also not wholly on board with Minister Mboweni’s overhaul. For although they view his decisions and policy changes as suppositionally progressive and positive, they doubt the ministry’s clout in executing on its promises.

Freedom Front Plus, the fourth of the top parties in parliament (along with its trusty sidekick, Afrikaner interest organisation Afriforum) have noted that although tax relief and government expenditure moderation are welcome changes, the ministry has still placed the burden of rescuing floundering State Owned Enterprises on taxpayers’ shoulders. This commentary, of course, is based on the R60.1 billion allocated to assist failing SOEs SAA and Eskom.

A Pan African affair

President Ramaphosa hinted at a burgeoning Pan-African co-op in his State of the Nation Address, but we may have loafed in recognising these hints. The government’s intent to increase African cooperation was, however, once more underscored in the budget speech.

It is therefore not surprising that the economic growth forecast for sub-Saharan Africa was mentioned at the onset of Mboweni’s speech. For although South Africa has been loath to make the necessary changes to see our own growth accelerate up until now, winds of change – or perhaps we should rather call it breezes – are pointing towards Africa as our salvation.

As with the rest of the surprises to date, it is not yet clear what the extent and nature of this cooperation will be, but if current shakeups are anything to go by, it should not be taken lightly. In fact, some analysts believe that the very changes to expatriate tax and transactional treatment are aimed not at those South Africans who have left our shores to resettle on other continents, but at easing the financial and administrative burdens for those wishing to live and work across African borders.

Perhaps it is the exploitation of African resources for millennia, or perhaps the fractured relations with foreign territories and governments, such as the Trump administration whose latest intention to strangle an economy already gasping for air with regulation, restriction and reduction has prompted this renewed interest in African unity. Perhaps we’ll forever remain in the dark as to the true motivations of our Treasury – but it seems patently clear that Africa is looking to Africa to solve its own problems.

The 4th industrial revolution

If one mulls over SONA and the budget speech and considers our previous point, it seems quite intuitive that one of the first items on the agenda is a new and renewed focus on technological catchup. Although Africa has made ground-breaking progress with fintech initiatives and telecoms suited to our own continent, most progress has been stifled by the demands of poverty and socio-economic development piled atop meagre budgets. Has Africa realised that it can no longer acquire skills, services and products at exorbitant costs from abroad?

No matter our sentiments about our country, one cannot help but feel elated for the first ever Space-Science institute in South Africa – a product of the Pan-African university.

Other initiatives include:

  • the introduction of Coding and Robotics into the school curriculum for foundation phase
  • a new University of Science and Innovation in Ekurhuleni
  • expanded access to technical and vocational education and training (TVET) colleges
  • the development of ‘smart’ cities around key access areas such as OR Tambo International Airport, Lanseria, King Shaka airport and Cape Town International
  • a voucher system to allow households acquisition of digital devices
  • a spectrum licensing plan for the auctioning of high-demand spectrum through ICASA

Weeding out corruption

One matter which Minister Mboweni has made blatantly clear is that corruption will no longer be tolerated. Given the ongoing findings and deliberation on state capture and other corruption scandals, the ministry not only announced that it will (not only) employ approximately 800 investigators and 277 prosecutors to assist with expediting the scrutiny and prosecution of corruption and corrupt individuals and entities, but it is probing the very profession responsible for uncovering corruption.

Legislation has already been passed to strengthen the Independent Regulatory Board of Auditors with further legislation in the pipeline. Additionally, an independent panel of experts will shortly be appointed to review the practices, procedures and qualifications within the auditing profession itself.

The elephants in the room

As with SONA, it is telling that there are certain contentious issues which the ministry barely touched on in its speech. This includes further elaboration on land reform, National Health Insurance (NHI), violent crime and the restructure of State Owned Enterprises.

In the medium term R500 million has been reprioritised for finalising outstanding land restitution claims. Table 5.12 of the 2020 Budget Review document indicates a R1.7 billion allocation to land reform over the medium term. It is unclear whether the R500 million mentioned in the budget speech is part of the R1.7 billion or additional. The document further notes:

To give effect to the department’s mandate and some of the proposals in the Treasury discussion document, including plans to reprioritise funding towards investments in agriculture, a significant increase in the budget allocation to the Department of Agriculture, Land Reform and Rural Development for the medium term is proposed.”

There is no clarity as yet on which part of this proposed reallocation is intended for agricultural development, and which is intended for land expropriation.

Of violent crime such as gang violence, farm murders, cash in transit heists, hijacking and so forth, there is little clarity on the government’s approach or how the ministry plans to curtail such crime and fund resources to the effect. The only criminality mentioned with some elaboration are those of gender-based violence, sexual offences, tax evasion, nefarious religious organisations and corruption – with resource and funding allocation to combat and prosecute these crimes more efficiently.

As for State owned Enterprises, the ministry still refers to the Eskom road map of 2019 for direction on the restructure and notes the state’s intention to assist Eskom, SAA and other SOEs with their debt. But what information is available is vague and lacks critical timelines and direct mention of incumbents and entities. These burdens and their unpacking seem almost too complex to even warrant explicit mention in parliament, which is worrisome.

Those seeking clarity on the NHI were also left wanting. For now, all we know is that the NHI is going ahead, that medical aid tax rebates will not be increased in preparation for the NHI and that, over the medium term:

  • R55.6 million has been reprioritised for ‘strengthening the capacity of the NHI’
  • R3.3 billion has been allocated to ensure medical internships and training
  • R25 million is reprioritised for the non-personal services of the NHI, and
  • R800 million has been reprioritised for its HIV/AIDS component

The common thread in all these announcements is the word ‘reprioritise’. For one has to mull over what the aim of a budget is if all funding can be reprioritised at will. How is such a progressive and seemingly deliberate budget incorruptible if it is simultaneously malleable?

In addition to land reform and the NHI, funding in the medium term has been reprioritised (among other things) for:

  • The Competition Commision (R60 million)
  • Refurbishing industrial parks in townships (R107.1 million)
  • Subsidising devices that allow analogue televisions to receive digital signals (R1.9 billion)
  • The SAPS for the implementation of the integrated criminal justice strategy f(R1.8 billion)
  • The Directorate for Priority Crime (R985 million)
  • From the SAPS to the departments of Defence and Home affairs for safeguarding country borders (R831 million)
  • Statistics South Africa for 2020/21 census (R3.1 billion)
  • Information communications technology capacity and operations for SARS (R74.5 million)
  • Agricultural production boost, health and safety and biosecurity upgrades (R495.1 million)
  • Geological mapping, mineral assessment and groundwater exploration (R345.8 million)

Further reprioritisation includes non-profit organisation support, social workers, provincial conditional grants, expanding tertiary services in certain provinces, sports development, sanitation, water, public transport, infrastructure development and so forth.

We have the additional red flag of banking licences now being authorised for State Owned Enterprises and a state bank in the pipeline. Though Minister Mboweni seems tenacious in cleaning up corruption and mismanagement, it’s questionable that banking licences would be authorised before such overhaul has been achieved.

Consider, for instance, that certain municipalities have now been deliberately cut from the Eskom grid due to debt owed. And then when we scrutinise municipal debt, it’s alarming that much of this debt had been incurred through unrecovered loans extended by the municipalities and that R10 billion of the R120 billion municipal debt is, in actual fact, owed to municipalities by the government itself.

The establishment of a state bank and sovereign wealth fund are therefore commendable initiatives, but the timing for launching such institutions seems utterly miscalculated and premature. And we’d be wise to be weary of any such undertakings.

The unbearable ‘lightlessness’ of Eskom

As mentioned above, Eskom is a thorn in our side which will not be expelled soon, and this thorn is set to haemorrhage South Africans’ funding and capacity for years to come.

What should be noted, however, is the government’s intent at incorporating renewable energy into the grid, and its latest reprieve which allows municipalities with clean audits to choose providers of their choice. This, at least, authorises zonal expulsion of Eskom and its crippled service provision. It also offers incentives for municipalities to up their game.

Sadly, though the ideal is honourable there are very few municipalities with existing independent infrastructures which would allow independent operations from Eskom’s grid. And since Eskom has not yet been dismantled into its three independent bodies, infrastructure usage can hardly be segregated from Eskom’s existing amalgamated service.

The drawback is therefore that municipalities who are already showing principled and reputable management of their service delivery and expenditure will need to fork out more to initiate and develop the necessary resources and infrastructures to support independent energy provision while Eskom is being dissolved and restructured. 

Giving expats a break?

Some of the more pivotal points for emigrants mentioned in the budget speech were the focus on ease of cross-border transacting as well as raising the exemption cap for the new expat tax from R1 million to R1.25 million.

The ministry has indicated that it wishes to simplify cross-border trade and financial flow. It pointed at the African free-trade area encompassing 54 countries as a motivator for new policies and measures. In this context and for this purpose, the Treasury has proposed modernising the foreign-exchange system by introducing a new capital flow management system in the next 12 months.

This system will allow all foreign-currency transactions which had previously been restricted, excluding a risk-based list of capital flow measures which include:

• South African corporates will not be allowed to shift their primary domicile, except under exceptional circumstances approved by the Minister of Finance.

• Approval conditions granted by the Minister of Finance for corporates with a primary listing offshore, including dual-listed structures, will be aligned to the current foreign direct investment criteria and/or conditions to level the playing field.

• Cross-border foreign-exchange activities will continue to be conducted through dealers authorised and regulated by the Reserve Bank.

• Prudential limits on South African banks and institutional investors will remain, but the limits will be reviewed regularly.

• Banks’ unhedged foreign-currency exposures will remain limited to 10% of liabilities (net open foreign exchange position) and will remain regulated by the Prudential Authority of the Reserve Bank.

• The domestic treasury management company policy, which allows South African companies to establish one subsidiary as a holding company for African and offshore operations without being subject to exchange control restrictions, will remain in place, as will the international headquarter company regime.

• The export of intellectual property for fair value to non-related parties will not be subject to approval.

• The current policy of certain loop structures, which relates to the acquisition by private individuals of equity and/or voting rights in a foreign company, will remain until tax amendments are implemented to address the risks.

In line with this new approach, the government has proposed removing exchange control treatment for South African tax residents who receive remuneration outside the country. That said, government has also indicated that they plan on strengthening the tax treatment for these individuals.

Mboweni made an example in his address of two individuals who had received lengthy prison sentences for tax evasion – and one can assume that the tax strengthening along with new financial surveillance measures will see to it that all taxpayers pay their dues.

From 1 March 2021 transfers exceeding R10 million offshore per annum will be subject to more stringent verification and will trigger risk management tests which include tracing the source of funds and verifying tax certification.

The new system will do away with divergent treatment of residents and emigrants and includes:

  • repealing restrictions to investment by emigrants
  • repealing borrowing restrictions for emigrants
  • removing the requirement for a blocked account
  • phasing out the concept of financial emigration
  • enhancing the automatic tracing and surveillance of South African tax residents’ transactions and investments across the globe

All good news for those who are abroad or wish to exit the country. Well, on paper at least. For those who wish to return to SA at some stage or are merely working across jurisdictions, it seems the answer is clear – one needn’t make any drastic changes.

A matter of concern which we’ve noted in previous articles, however, is the determination of tax residency. We’d detailed cases where persons who had been outside SA borders for several years were deemed tax residents of SA and forced to pay penalties along with unrecovered taxes to SARS. 

The Automatic Exchange of Information which launched in 2019 under the OECD gives us a clue as to SARS and the SARB’s confidence in opening borders for financial transacting. By removing the cumbersome process of exchange control, emigrants will surely see a relief in administrative red tape, but this will also make it far more difficult to challenge one’s tax status in South Africa.

If you are deemed a tax resident, you could be liable for taxes, and should SARS truly succeed in automating its vetting and recovery processes, such taxes could possibly be recovered automatically in future.   

One should also consider that although the Treasury’s efforts and sentiments demonstrated in the budget speech show a progressive approach to economic development, Mboweni had indicated that South Africa’s economic growth had been dismal. We’d seen growth of merely 0.3% for 2019 and 2020’s growth has been revised downwards from 2.1% to 0.9%. He has also reiterated that one of the main causes for this stagnation, our electricity supply, cannot be swiftly addressed and restored. Though the government has every intention of overhauling our energy supply, it will be a long and cumbersome process.

The widespread and increasing unemployment problem is also something which will not see a silver lining soon. Indeed, the government is making an effort to offer opportunities for employability to the youth, but the rate of job creation does not correlate to the rate of population growth and the reality of the HIV/AIDS epidemic which is impeding households across the country. It is a tricky conundrum – wishing to employ more people when so many households are headed by children who do not have the necessary age requirements, skills or training to be employable. And this places an increasing burden on our economy, as there it is often not feasible to expect employability and upskilling of such individuals and struggling households.

That leaves us with the question whether it is prudent to retain our funds within South African borders or move it offshore. And furthermore:

  • Will your return on investment be equally fruitful in South Africa as an investment abroad?
  • Are you confident in your tax residency status?
  • Are your tax affairs in order to such an extent that SARS would not be able to challenge your cross-border transactions or demand recovery of taxes?
  • For those transferring amounts in excess of R10-million – are you prepared for the stricter vetting and invasive monitoring of your funds?

Rand Rescue is, of course, content with the Treasury’s olive branch towards South African expats. Having assisted thousands of South Africans with their cross-border transacting, we are aware of the emotional strain which past financial barriers have placed on our clients.

And with this relief in mind, we are eager to assist South Africans in managing their foreign exchange as an authorised forex dealer, in assisting clients abroad with their tax clearance and tax residency confirmation, to provide information about double taxation agreements and assistance with filing the necessary paperwork and making the necessary enquiries on their behalf with SARS, the SARB, their banks, insurers and investment houses.

As we wait for the Treasury to sculpt and publish definitive amendments, we encourage you to get in touch and discuss your financial concerns, questions and needs with us. Feel free to leave your details below and we’ll contact you for an obligation-free consultation.

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