FANews
FANews
RELATED CATEGORIES
Category Retirement
SUB CATEGORIES Annuties |  General |  Savings & Investments | 

Craig Aitchison, Head of Old Mutual Consultants and Actuaries comments on retirement fund tax reform proposals

21 February 2008 Old Mutual

1. Conversion of STC to a shareholders tax

We see this as positive for retirement funds. Following the relief given last year by removing Retirement Fund Tax (RFT), the removal of Secondary Tax on Companies (STC) also heralds a boost, arguably small, to the investment returns earned by retirement funds. STC is a tax on dividends that was paid by companies once they declare dividends.The second stage of this proposal was Now the proposal is to remove this tax, and rather have the shareholders pay the tax on dividends.This will be implemented in 2009. The new tax system will be good for retirement fund members by virtue of the tax free nature of such fundsFor the general investor this should result in no impact, however, retirement funds benefit because they will be exempt from the tax. Because itThis means potentially higher dividends earned on equity investments in these for retirement funds. With mediumvterm average dividend yields around 2.5% to 3%, it means a potential increase of 0.2% to 0.3% in equity returns going forward.

This also provides further incentives for retirement fund members to stick to their equity exposure despite short term volatility!

2. Retirement fund tax reforms

2.1. Simpler taxation on non retirement fund withdrawals

We welcome the moves to simplify tax on non-retirement withdrawal from retirement funds, making taxation of benefits simpler. Last year the tax on retirement benefits was simplified from a complicated formula basis to a simpler tax scale. There are now proposals to simplify taxation of other benefits such death benefits, and benefits received when members are retrenched or resign from their employer.

2.2. Taxation of Divorce Benefits

Recent amendments to the tax and pension law in 2007 allowed non-member spouses to receive a portion of a member's fund benefit immediately after the divorce is granted. (In the past the non-member spouse could only receive their share once the member actually left the fund, which could take years.)Currently the tax on the award is payable by the member. What was not clear was who paid the tax on the benefit paid to the non-member spouse. The suggestion to date was that the member may be responsible for this tax, but Tthe budget now suggests that the non-member spouse may become liable for the tax in the future. will pay the tax on the benefit they receive, which is much fairer.

2.3.Consolidation of tax relief

The Minister also proposes to simplify the tax relief granted on contributions to retirement funds. This could include collapsing the different monetary and percentage of contributions thresholds into one measure used for all funds. There is also a proposal that the separate deductions given to employers and employees be consolidated into one overall deduction regardless of who contributes. This is potentially positive for the self-employed and small business, and makes the treatment of these tax relief measures much simpler, even perhaps eliminating the need for complicated tax relief and salary sacrifice measures used by companies. The consolidation may even go as far as to specify one basis for tax relief that will apply to pension, provident and retirement annuity funds (where each is very separate right now). This could be a first step in harmonisation of taxation of retirement funds referred to in the 2007 budget speech.

2.4 Monetary Limit on tax relief for contributions

This can result in less tax relief for the wealthy. The proposal has roots in the current social reform proposals. Effectively, the proposal means that there will be a maximum rand amount of relief that can be enjoyed on contributions. This means people making very high contributions ( due to high salaries ) will not enjoy as much relief as someone with a low salary and low contributions, even if they enjoy the same percentage deduction. This effectively frees up tax revenue for government to use in other areas such as improving the amount and reach of the state old age pension.

Quick Polls

QUESTION

The South African authorities are hard at work to ensure the country is removed from the global Financial Action Task Force grey-list by February or June 2025. What do you think about their ongoing efforts?

ANSWER

But what about the BRICS?
Compliance burden remains, grey-list or not.
End-2025 exit is too optimistic.
Grey-list is the new normal.
Too little, too late.
fanews magazine
FAnews October 2024 Get the latest issue of FAnews

This month's headlines

The township economy: an overlooked insurance market
FSCA regulates crypto assets: a new era for investors
Building trust: one epic client experience at a time
Two-Pot System rollout underlines the value of financial advice
The future looks bright for construction
Subscribe now