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Effects of Budget Speech on healthcare and retirement funding

15 April 2015 Myra Rego
Myra Rego, FAnews Journalist

Myra Rego, FAnews Journalist

It has been high on National Treasury’s agenda to solve the problem of South Africans cashing in on their retirement savings when changing jobs, in so doing paying tax and not having anything left for their retirement savings.

Following the National Budget Speech and amendment on March 1, clients are subject to changes in tax treatment and as such may find themselves in a better position financially after the tax changes, than before the tax changes.

A mixed message

According to Gavin Griffin, Business Unit Head of Aon Hewitt’s Employee Benefits Solutions division, South African taxpayers will be paying more taxes on their personal incomes to help the government raise revenue. However, the message for individual tax payers is a bit mixed in the sense that there will be relief for low- to middle-income earners, but an increased income tax burden for the middle-to high-income earners. 

“Medical scheme contribution tax credits have also been increased marginally and while this is a form of some tax relief, it needs to be considered in the context of what potential increases in fringe benefit taxation on employer contributions to medical schemes means for tax payers. The 2015 budget confirmed that the medical scheme contribution tax credit increased with R13, from R257 to R270 per month for the first two beneficiaries and R9 from R172 to R181 per month in respect of each additional beneficiary,” he said. 

Up until the end of the tax year (2014), taxpayers were entitled to a deduction for qualifying medical expenses - other than medical fund contributions – that were not recovered from the medical scheme. The deduction was determined using a specific formula in the Income Tax Act. 

“However, this deduction has been replaced by a credit, which is more favourable to taxpayers who are 65 years and older and taxpayers below age 65 who are disabled or who have a dependent with a disability,” said Griffin. 

Griffin mentioned that the budget also referenced that health spending will reach R178 billion between 2017 and 2018. However, what is still a concern is the fact that the State’s total healthcare spend versus the outcome is still higher than that of World Health Organisation (WHO) spend and outcome figures, which in Griffin’s opinion does not deliver the same Return On Investment (ROI) that is expected. 

“No comment was made on the funding of the proposed National Health Insurance (NHI) project, other than a mention about a discussion paper on financing options that will be released shortly by the National Treasury to accompany the NHI white paper,” he added. 

Investment returns

Leslie Primo from Aon Hewitt’s Retirement Funding division says the announcements that were made at the Budget Speech relating to the retirement fund industry are very scant. “Following the amendment on March 1, the new Tax-Free-Savings and Investment Accounts (TFSAs) are available to the South African market, allowing individuals to invest in tax-exempt savings accounts. These accounts have an initial contribution limit of R30 000 per annum, to be increased regularly in line with inflation, and a lifetime contribution limit of R500 000,” said Primo.

“The investment returns on these savings will not be subject to income or dividends tax. Individuals will be allowed to open multiple TFSAs and can withdraw funds from the TFSAs, although these withdrawals could affect these individual's lifetime limit,” continued Primo. 

Primo further added that if individuals make contributions into their TFSAs which are over the annual or lifetime contribution limit in any year, additional income tax of 40% on the excess contributions must be paid by the individuals to South African Revenue Service (SARS). 

Tax-free benefits

Looking at retirement benefits that came into effect on 1 March, Primo said lump sum retirement benefits will accrue for tax purposes on the date that members elect to receive their lump sum retirement benefits. “Funds will need to apply to SARS for a tax directive on the retirement benefit at the date the member makes his or her election. The lump sum benefit communicated to SARS must match the amount in the fund at the date of the member's chosen date of retirement,” he said. 

Other changes that have come into play include amendments to disability and life policies. Primo mentioned that employees will no longer be able to claim deductions on premiums paid to both lump sum (group life) and income replacement disability policies. However, the benefits will be paid out to employees tax-free. 

“If the policy is in the name of the employer (i.e. employer owned) and the premiums are paid by the employer in terms of the policy, the premiums will be taxed as a fringe benefit in the hands of the employee. However, the benefits will be paid out to the employee tax-free,” he added. 

During the Budget Speech Nhlanhla Nene, Minister of Finance reiterated that reforms have one central objective, namely to maximise the long-term benefits to retirement fund members to enable them to retire comfortably. 

The importance of retirement investing has often been highlighted, and is not a decision which should be taken lightly. This shows the value of proper advice and the need for advisers to go into great detail regarding all implications relating to tax changes on retirement and healthcare funds. 

Editor’s Thoughts:
Clients need to be informed to make sound financial decisions. This is where financial advisers play important roles to ensure clients are fully educated and aware of what products are available to them. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za

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