Understanding the budget 2021

SA focuses on vaccine spending and plays the ‘balancing act’ whilst addressing debt worries.

Finance Minister Tito Mboweni delivered the Budget speech on Wednesday, 24 February 2021. The Budget was more optimistic than expected, against the COVID-19 pandemic environment, with tax increases being kept to a minimum.

The fiscal position of South Africa, which is the African country hardest hit by the pandemic, was already weak before the COVID-19 crisis and has deteriorated sharply over the past year, according to the 2021 budget presented to parliament. The deficit is forecast to more than double to 14% of gross domestic product (GDP) in the 2020/21 fiscal year, from 5.7% the previous year.

Treasury stated that South Africa could spend up to R19.3bn over the course of the following three years to vaccinate most of its population. Also mentioned is that a mass vaccination programme could help spur GDP growth to 3.3% this year following a severe contraction of 7.2% in 2020.

To support the economy, the Treasury did not pencil in any additional tax revenue over the medium term, withdrawing previously proposed tax measures of R40bn.

The government is also facing growing needs from struggling state-owned companies such as power utility Eskom. The budget allocated R31.7bn to Eskom for 2021/2022 while the Land Bank, which supports farmers, was allocated R5bn in 2021/22 and R1bn in each of the two previous years.

The Treasury said efforts to cut the public service wage bill remained on course.

Understanding the background as we unpack the tax implications from the 2021 Budget Speech.

South Africa is benefiting from a commodity price boom. Compared to the predictions in the October 2020 Medium-Term Budget Statement, tax collections are now expected to be higher by R100bn in 2020/21 and R86bn in 2021/22. Higher revenues have provided space for the Treasury to withdraw the proposed R40bn tax increase in 2021/22 and provide some tax relief for companies. Most important is the government’s decision to persist with its fiscal stabilisation programme.

The key changes from this year’s Budget are summarised below:

Clarity on Industry Specific key changes

ANNUITISATION OF PROVIDENT FUNDS

The long-awaited changes to provident funds are effective 1 March 2021, with no other announcements and confirmation as reflected in the Taxation Laws Amendment Act 23 of 2020. The protection to existing rights and the simplification of retirement funds. For more information on these changes please refer to GIB Retirement Services communication, click here.

END OF THE ROAD FOR SECTION 12J COMPANIES

The Minister announced the end of the tax incentives afforded to Section 12J companies. This was based on the assessment by National Treasury that these vehicles had not had the intended effect on small enterprises. The sunset date is 30 June 2021 and will not be extended. For more information on section 12J companies please refer to GIB Retirement Services communication, click here.

What remains unchanged?

Conclusion

After a very difficult year, the National Treasury delivered a positive message, urging South Africans to look past the current difficulties and to work for a better future. The concern from the October Medium-Term Budget Policy Statement (MTBPS) forecasts was that the debt levels would spiral excessively and this did not occur. February 2021 reflected higher than expected revenue collections for the current fiscal year than forecast in the MTBPS. Treasury is intending to use the bulk of this windfall to consolidate South Africa’s immense debt burden.