Trevor Manuel was all confidence as he presented the budget for the eleventh time on Wednesday. The budget showed a surplus of 0.3% of GDP for the year - with another surplus budgeted for the 2007/2008 period.
The main budget decisions were in line with what analysts had predicted. Some eyebrows were raised at the R8.4 billion in concessions to taxpayers - although these concessions were accompanied by a stern warning from Manuel.
"I want to appeal to taxpayers to use this relief to first settle their debts or save (rather than for consumption). And the governor [Tito Mboweni] said that I should say if [you] dont listen to my pleading he will have to report [you] to the Monetary Policy Committee," joked Manuel.
There is too much budget news to cover in this short newsletter, so weve chosen to focus on items of interest to the life industry, particularly those affecting retirement and savings.
The tax on retirement funds is scrapped
Trevor Manuel announced that the 9% tax on retirement funds would be scrapped in the 2007/2008 year. This tax was introduced on 1 March 1996 and was levied against the gross interest income, net rental income and foreign dividend income earned by businesses in the life insurance industry.
The scrapping of this tax has been welcomed by the life insurance industry, which viewed the legislation as complex and expensive to administer. Individuals saving for retirement will benefit in that their retirement values will be enhanced.
Life Offices' Association (LOA) CEO, Gerhard Joubert, said:
We believe that significant strides have been made in terms of reforming the South African retirement savings environment in the past year. The combination of the much improved early termination values on retirement annuity funds implemented by the life industry as from December last year and the abolishment of the levy on retirement funds provide consumers with a strong incentive to save for their retirement.
Manuel also said they would be looking at the tax free lump sum on retirement payments which is currently set at R120, 000. Government would consider increasing this level and making the calculations simpler.
Social Security Tax is on its way
In another expected move, Manuel announced plans for a social security scheme which would be implemented by 2010 and funded by a social security tax.
"We are therefore proposing a mandatory earnings related social services scheme to provided improved unemployment insurance, disability and death benefits - targeted at the income needs of dependants and a standard retirement arrangement. This will be financed by a social security tax administered by SARS and collected in individual accounts in the name of the contributor.
While the government has now clearly stated its intention to implement this social reform, the budget disappointed by not including more specific information on the effect on individual taxpayers.
Manuel said that the social security scheme would be underpinned by equity, pooling of risk, mandatory participation, administrative efficiency and solidarity. Government will still consult widely with employers and unions (and one assumes the life industry) to finalise the workings of the scheme.
Manuel also said that "several reforms to regulate government tax treatment of occupational and individual retirement funds will be implemented over the period ahead."
Encouraging savings
There were a number of inducements to individual taxpayers to increase their savings. The most obvious of these measures was the increase in the tax free interest portion from R16, 500 for under 65s and from R24, 500 to R26, 000 for over 65s.
The Capital Gains Tax (CGT) exclusion was increased from R12, 500 to R15, 000
Manuel emphasised governments goals of eradicating poverty and protecting basic human rights. He repeated the phrase "human life has equal worth" a number of times during the budget speech.
Editor's thoughts:
The budget was rather tame, with no surprises waiting in the wings. The only concern is the lack of information on the proposed Social Security Tax which will be implemented by 2010. How do you think this tax will be best applied? Send your comments to gareth@fanews.co.za.
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