Jacob Zuma has realised that he’s running the country dry, so has done what he does best: change some laws in his favour. The President has given the go ahead for the implementation of the 2015 Tax Laws Amendment Act and Tax Administration Laws Amendment Act, which will both come into effect on 1 March 2016. And you know he knows he has done something wrong when he doesn’t even send out his usual press release regarding the subject to the media. Tut tut, JZ. But if you read into it, all the government is really trying to do is to get you to save so that you don’t have to rely on anyone else when you get to retirement age and can therefore live a pretty decent life.
The news, however, was underhandedly released on the national treasury’s website, after they were assented on 24 December 2015. The presidency has sided with him, obviously, stating that he did not act unilaterally.
It was also discussed openly in parliament. It was passed by both the National Assembly and the National Council of Provinces following public hearings.
1. Which tax law is the Government passing that affects retirement policies?
Updating a law it passed in 2013 that harmonised the tax treatment of contributions to retirement funds, the law allows for a 27.5% tax deduction up to a maximum of R350,000 per annum. The key condition for enjoying the tax deduction is that members take a lump sum up to one-third, with the rest to be annuitised. It should have been implemented on 1 March of last year, but was delayed by a year to into account the concerns of some stakeholders. So the only change is that it will actually take effect.
The only change to the law that the government says it is considering this year is to confirm that the new law will take effect on the scheduled date of 1 March 2016 alongside an increase in the threshold above which members are required to purchase an annuity.
2. How will the tax and retirement reform benefit workers?
Well, it is envisaged that workers will be encouraged to save (more) through retirement funds. This will curb old-age poverty and excessive dependency on relatives. Members of provident funds will be able to claim a tax deduction on their contributions to their funds. Around 1.25 million are likely to see an increase in their take home salaries, and many more will receive the tax deduction if they decide to save more for their retirement.
However, low savings can also result in excessive indebtedness, as individuals have to borrow to meet unexpected expenditure.
3. Will these changes make the tax system more equitable and progressive?
Basically, the government is concerned about those who are avoiding tax deductions by structuring remuneration packages to reduce their tax liability out of proportion to what it considers fair. “The abuse/avoidance is mainly by high income earners in provident funds, who exploit the fact that the employer contribution is a non-taxable fringe benefit, and hence have funds where employers make a 20 to 30% contribution with no contribution from the member.”
It says that the new tax law will make the tax system more progressive, by improving vertical equity between high income and low income taxpayers, as it limits the tax deduction to R350,000.
4. What are the objectives of the tax and retirement reforms?
The reforms seek to achieve the following:
The Government is encouraging everyone who has a job or income to save for their retirement, and does so by allowing a tax deduction up to 27.5% of income (up to R350 000) on all contributions made towards a retirement fund.
5. How will the new legislation apply to provident funds?
Taking a long time to have an impact on members, it will not affect provident fund members who are currently close to retirement. They are able to take all their retirement savings that would have been accumulated as at 1 March 2016 as a cash lump sum whenever they go into retirement. Ultimately, it will only apply to those younger than 55 when the law comes into effect.
For most low- and middle-income workers, it will take several years (more than five up to fifteen) years to reach the above threshold, and hence many years before they are asked to annuitise at retirement.
6. Does the new law mean that provident funds will be abolished?
The government says it recognises the hard-won rights to secure provident funds for workers. Provident funds will continue to exist, but will evolve in the long term to have the same tax treatment of contributions and benefits as pension funds, i.e. a one-third retirement lump sum and a requirement to buy an annuity with the remainder if above R247,500.
Current members of provident funds will still be entitled to take their contributions up to 1 March 2016 plus growth (vested rights) as a cash lump sum.
7. What are the economic implications of retirement reform?
South Africa has had a persistently low savings rate in the last two decades. In 2014, our gross (i.e. household, government and corporate) savings rate stood at about 15% of GDP. Low savings create a shortage of funds for investments, resulting in South Africa having to rely excessively on volatile short-term capital inflows, which can affect the Rand’s purchasing power.
Secondly, low savings rate create a funding gap for investments – investments are important for economic development and growth.
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