Key financial planning take outs from Budget Speech 2019: Nedgroup Investments

Denver Keswell

• Lack of incentives to save is disappointing
Disappointingly, this budget has not highlighted any significant attempts to further encourage savings. There is no mention of any increases to the limits on tax-free investments or incentives to promote retirement fund savings, which seems mismatched to the president’s approach to growth and savings.

• Tax brackets not adjusted for inflation
South Africans should be aware that even though there wasn’t any movement in the tax brackets - the table certainly has not been adjusted for inflation. This could catch people off guard from a personal finance point of view if they assume that their position is unchanged. Many South Africans will receive inflationary-linked salary increases. This will result in a higher effective rate of tax which in turn means more tax payable. Some people could end up in a higher tax bracket without any tax relief.

 The wealthy breathe a sigh of relief
Another interesting observation is the absence of any notable attempts to further introduce what is often referred to as wealth taxes (example: transfer duty, estate duty, CGT, donations tax etc.). 

• Some key changes to taxation of annuities from provident funds, foreign employment and spousal pensions

• Change in approach to taxation of collective investment schemes

While Eskom and widespread cost cutting was the primary focus of Tito Mboweni’s budget speech, there are also some interesting points raised from a financial planning perspective.

Denver Keswell, Senior Legal Advisor at Nedgroup Investments says it is disappointing that this budget has not highlighted any significant attempts to encourage savings. “Disappointingly, there is no mention of any increases to the limits on tax-free investments or incentives to promote retirement fund savings, which seems mismatched to the president’s approach to growth and savings. Another interesting observation is the absence of any notable attempts to further introduce wealth taxes,” he says.

Keswell also cautions South Africans that even though there wasn’t any movement in the tax brackets - the table certainly has not been adjusted for inflation. “This could catch people off guard from a personal finance point of view if they assume that their position is unchanged,” says Keswell.

Further to this, Keswell, highlights the below four take-outs from the speech that affect South African investors and planners:

1. Refining the foreign employment income tax exemption for South African residents: From 1 March 2020, South Africa residents who spend more than 183 days in employment outside the country, will be taxed on foreign employment income of more than R1 million. This is an important point for any South Africans working abroad to keep in mind when planning their finances in the medium to long term,” says Keswell.

2. Reviewing the tax treatment of surviving spouse pensions: Treasury has recognised the hardships caused for surviving spouses who are often liable for tax on income in their personal capacity as well as any spousal pension received. Often this can push the surviving spouse into a new tax bracket which one has not accounted for. “To address this, Treasury is aiming to introduce a flat rate on spousal income which should make the system fairer. However, the exact mechanisms through which this will be achieved is yet to be clarified so we will watch developments closely here,” says Keswell.

3. Exemption relating to annuities from a provident or provident preservation fund: It has been proposed that non-deductible provident fund contributions can be used against income received. “Currently, any non-deductible contributions for members of retirement funds are tax-exempt against any lump sum or income derived from the retirement fund so this proposal is aimed at extending the exemption to members of provident funds as well. We welcome this development for members of provident funds who choose to take an income.”

4. Taxation for Collective investment schemes: The previously suggested taxation of collective investment schemes has been re-looked at and will be re-considered. “Following feedback from industry based on last year’s proposals, Treasury has acknowledged industry’s concerns that introducing the taxation for collective investment schemes as previously proposed would cause more hardship than positives. After reviewing the comments government has proposed that they will need to work with industry. This is an encouraging development for the financial industry indicating that the taxation will be introduced in a constructive and collaborative way.”