The Value-Added Tax (VAT) is a tax levied on the value added to goods and services at each stage of production and distribution. In South Africa, the current VAT rate is 15% and the proposed increase is 15.5%. This new tax will affect various aspects of South African life, including investments and living costs.
- Investors may experience a reduction in the purchasing power of their invested capital due to the VAT increase.
- The VAT hike adds to the overall inflation rate, which could lead to higher living costs and reduced purchasing power.
- The impact on living costs will be felt by consumers, particularly those spending R25,000 a month on VAT-rated items, which will increase to R3,875 a month in VAT from May this year.
- Investors need to consider the impact of the VAT increase on their investment portfolios, particularly those that grow capital at a pace that offsets the inflation rate and price-level rise in sticky expense items.
- Investors should think about diversifying their portfolios to minimize the negative impact of the VAT increase.
- Investors can also explore tax-efficient investment options to mitigate the effects of the VAT increase.
| Scenario | VAT Rate | VAT-Exclusive Fee |
|---|---|---|
| A 1% management fee scenario | 15% | R1,000 (exclusive of VAT) |
| The new VAT rate of 15.5% | 15.5% | R1,155 (with VAT) |
“With the new VAT rate of 15.5%, the VAT would be R155, bringing the total fee to R1,155. This represents a modest increase of R5 on a R100,000 portfolio under a 1% management fee scenario.”
Mark Phillips, head of portfolio management and analytics at PPS Investments, explains the impact of the VAT increase on investment portfolios. The VAT increase is expected to have a negative impact on growth, inflation, and consumers’ disposable income. Retailers are likely to pass the VAT increase to consumers, resulting in higher prices. Investors holding retailer stocks such as Shoprite or Pepkor will see an immediate impact in terms of prices at the tills. Examples:
- Shoprite and Pepkor are two of the largest retailers in South Africa.
- A Shoprite store might increase its prices by 0.3% to account for the VAT hike.
Reza Hendrickse, portfolio manager at PPS Investments, highlights that VAT is charged only on the actual fee amount, not on the total value of the investment portfolio. “Based on the proposed VAT increase from 15% to 15.5%, all VAT-inclusive fees, including investment management fees, would increase slightly. However, VAT is charged only on the actual fee amount, not on the total value of the investment portfolio,” Hendrickse says. The impact of the VAT increase will be felt by consumers, who will have to pay more for VAT-rated items. This will result in higher living costs, particularly for those spending R25,000 a month on VAT-rated items. Example:
- A consumer spending R25,000 a month on VAT-rated items will see an increase in their living costs.
- The VAT increase will result in a R875 increase in living costs per month.
- Investors need to consider the impact of the VAT increase on their investment portfolios, particularly those that grow capital at a pace that offsets the inflation rate and price-level rise in sticky expense items.
- The VAT increase will have a negative impact on growth, inflation, and consumers’ disposable income.
- Investors can explore tax-efficient investment options to mitigate the effects of the VAT increase.
- VAT stands for Value-Added Tax, which is a tax levied on the value added to goods and services at each stage of production and distribution.
- VAT rate: the percentage at which VAT is charged on goods and services.
Mark Phillips, head of portfolio management and analytics at PPS Investments, emphasizes the importance of considering the VAT increase when investing in the South African market. “The VAT increase will have a significant impact on investors, particularly those with portfolios that are heavily weighted towards retailer stocks,” Phillips says.
