By Alastair Morphet (DLA Cliffe Dekker Hofmeyr Tax Alert)
Executive summary (SAIT Technical)
Alastair Morphet discusses the fourth paper released by National Treasury dealing with encouraging a greater level of saving in South Africa. The interest exemption for individuals has had little impact on the countries savings culture. In the UK, Individual Savings Accounts (ISAs) have attracted a large number of low to moderate income earners.
The fourth paper (Paper) in National Treasury's series of discussion papers dealing with changing the retirement provision system in South Africa, focuses on encouraging a greater level of saving in South Africa, it being a key economic policy item for Government. As such, there is nothing controversial about this policy goal.
The interesting thing that flows from the research in the Paper is that the tax exemption in respect of interest (currently limited to R22 800 for individuals under 65 and R33 000 for individuals 65 years or more), has had little impact on the savings culture in South Africa. This is so despite the fact that the limit has been substantially raised since the change of government in 1994.
The English have what is called Individual Savings Accounts (ISAs) and readers will no doubt have seen these advertised in UK publications. There are two types of ISAs namely cash ISAs, which are deposit accounts that are risk free and provide for savings. The second is stocks and shares ISAs, which are funds intended for longer term investments similar to our unit trust funds. What I think has been most persuasive to Treasury in wanting to shift towards an ISA type account is that the British research shows that these accounts have attracted a large number of low to moderate income earners whereas the interest exemption does not seem to have attracted savings and is thus really only of benefit to high net worth individuals.
The British research shows that high income individuals have accessed the ISAs by shifting existing savings into the tax favoured accounts. In Government's mind, they estimate the cost of the tax free interest threshold at R3 billion in the 2008/09 fiscal year. This is admittedly a substantial cost if the savings policy aspects of the exemption are not filtering into the wider economy. One of the issues that Government wishes to achieve from introducing such an ISA based account is to try and get the tax exemption shifted from pure interest deposit accounts into a wider ranging account where the exemption will apply to longer dated savings for instance in a balanced fund unit trust. In this way, National Treasury sees the exemption as integrating better with the new Dividend Withholding Tax and the Capital Gains Tax system.
The National Treasury’s proposal is that this ISA type account would be exempt from all taxes, and you could make an annual contribution of up to R30,000 into this account. There will be a lifetime contribution limit of R500,000. They are considering allowing older taxpayers to effectively top up their ISA account so that the R500,000 limit could be accessed up to one quarter by people aged 45 to 49; those in the 50 to 59 age bracket up to half their lifetime limit and for those aged 60 to 65 three quarters of their lifetime limit. People of 65 could invest the full R500,000 into the tax free account. Government would then look to phase out the interest income tax exemption over a transition period.