SA salary-earners miss big tax breaks on bonus culture

The trend to a ‘bonus culture’ is not only evident among British bankers. Many local salary-earners now receive a large variable component within their remuneration package yet often fail to optimise the tax advantages this can entail.

The mis-match between available tax relief and sub-optimal structuring has been highlighted by Imara Asset Management, South Africa.

“The media has focused on risk-taking by UK bankers to maximise incentives,” says Mark Cunningham, a director of Imara Asset Management. “But the bonus culture is much more widespread. An increasing number of local companies incentivise executives and others through a large variable portion of total remuneration.

“The surprise locally is not that excessive risk is taken to optimise total rewards, but that so many bonus- and commission-recipients fail to optimise their rewards by maximising the tax relief available to them.”

In South Africa, Cunningham believes talent retention programmes drive the so-called bonus culture. The trend is therefore expected to continue.

One knock-on effect should be growing demand among salary-earners for financial advice on smart tax planning and astute retirement provision. But this is just not happening.

“The recession obviously puts a brake on bonus payments,” adds Cunningham. “But with total remuneration under pressure, these salary-earners would presumably be more eager than ever to optimise the net benefit to themselves, but there has been no pronounced uptick in demand for financial planning expertise.”

Yet substantial tax advantages are available to bonus-earners in the retirement planning area in view of the distinction between retirement fund income (RFI) and non-retirement fund income (NRFI).

Cunningham explains: “RFI is the money committed from your basic salary to the company retirement fund on which tax relief of 7,5% can be claimed.

“NRFI is money committed to outside retirement products from bonuses or commission. If you work for yourself or your company offers no pension plan, your entire earnings may be NRFI.

“Tax relief of 15% can be claimed when NRFI is ploughed into a product like a retirement annuity or RA.”

Today’s RAs can be highly flexible. The underlying investments (often unit trusts) can be tailored to an individual’s risk profile and needs. A financial service provider like Imara Asset Management that is often consulted by high net worth individuals can also link RAs to a personal share portfolio that is tailored to the individual’s personal risk profile or specific needs.

“An RA need not lock a bonus-earner into a fixed long-term commitment,” says Cunningham. “Modern RAs are run on a month-to-month basis. You can vary the annual cash commitment, suspend contributions if necessary and then resume them when able.

“This is ideal for variable remuneration earners. Incentive payments may be high one year, low the next. High flyers looking to secure long-term advantage from their big-earning years are well served by a vehicle like this.

“But there seems to be quite low awareness of the tax relief available to high flyers via well-structured RAs. For an optimum outcome, a bonus culture should go hand in hand with quite a cultured approach to tax liability and long-term financial planning, but this remains the exception rather than the rule.”