Wealth creation and tax reform
31 July 2013
Posted by: Author: Hanneke Farrand
Author: Hanneke Farrand (ENS)
Families all over the world are under pressure to save.South Africa is no exception and it is a challenge for most income earners to create long-term wealth.It is, therefore, encouraging that government has in the past few months made some proposals to encourage savings.Also, in the recent Taxation Laws Amendment Bill, 2013 (the Bill), proposals were made to enable employers to contribute more towards education costs for employees’relatives and for employees on lowerincome levels to purchase homes from their employers at below market value, without attracting fringe benefits tax.
To encourage greater saving by individuals, the government has proposed the introduction of tax preferred savings and investment accounts.According to the 2013 Budget Review, it is intended to introduce these new tax-preferred savings and investment accounts byApril 2015.What this means for the individual is that, subject to an annual investment limit of R30 000 and a lifetime limit of R500 000, all returns accrued from these accounts would be exempt from tax.It has been proposed that these monetary limits will be adjusted for inflation.
As part of the reform of retirement savings, concessionary tax rates for retirement fund lump sums (and including severance benefits) were introduced in March 2011. The government has continued to acknowledge that the retirement fund industry is crucial to the South African economy.Not only does it hold more than half of the savings that South Africans make, but it is also the major source of investment capital for future economic growth, infrastructure funding and job creation.The challenge facing government is how to improve the structure of the retirement fund industry to ensure that a greater number of workers participate in the system, at a lower cost.
The government’s retirement reform agenda was set out in a document titled"Strengthening Retirement Savings:Overview of the 2012BudgetProposals”, on May 14, 2012.Thereafter, the National Treasury released four technical discussion papers: Enabling a better income in retirement;Preservation, portability and governance for retirement funds (both released on September 21, 2012);Incentivising non retirement household savings and Simplifying the tax treatment of retirement funds (both released on October 4, 2012).Following further consultation with industry stakeholders, the proposed reforms were announced in the 2013 Budget and have been introduced in the Bill.
The Bill confirms previous proposals made by National Treasury and proposes to change the tax treatment of contributions to retirement funds and to align provident funds with pension funds and retirement annuity funds.For example, in future, the annuitisation requirements applicable to pension funds will also apply to provident funds.The aim of this proposal is to ensure that these funds are preserved for individuals’ retirement.However, this means that those individuals who wish to manage their own investments and who could have done so with the lump sum received from the provident fund upon retirement, will no longer have this flexibility.
A significant change is that employer contributions to any retirement fund (i.e.pension and provident funds) will be taxed as a fringe benefit in the hands of the individual.Once implemented, the total contributions made by an individual and his/her employer will be deductible in his/her hands up to 27.5 percent of the greater of taxable income or remuneration, or up to an annual monetary cap of R350 000, whichever is the lowest. There will be no maximum limit on the contributions that an employer can deduct for tax purposes.The latter proposal will provide welcome relief for employers who wish to contribute more towards their employees’retirement savings.
Those taxpayers who are currently contributing in excess of the proposed caps will be negatively affected during the years in which the contributions will be made as they would not be able to claim their full contribution as a deduction for tax purposes.These contributions will, however, be paid tax-free when paid out during retirement. These amendments will apply from March 1, 2015
Employer owned housing
The Bill has also introduced measures to incentivise employers to provide their low income employees with housing.This is currently hindered by the fringe benefits tax levied on housing acquired at less than market value. The Bill has proposed to allow employers to provide low-income housing with a cost of up to R350 000 to employees earning less than R200 000 a year, without the employee incurring fringe benefits tax.
Educatiion costs for relatives of employees
In addition, government has acknowledged the increasing costs of education and wants to encourage employers to assist employees with the costs of education for schooling and on a tertiary level.
There is already some scope for assistance in the Income Tax Act, subject to certain monetary limits. These limits have, however, not kept up to date with inflation.The Bill therefore proposes to increase the monetary limits on bona fide bursaries and scholarships to relatives of employees.Currently, a bursary or scholarship of up to R10 000 for relatives of an employee to study is tax free when that employee earns R100 000 or less in the relevant tax year.This limit has been extended to employees who earn up to R200 000 with a tax exemption limit of R10 000 for studies up to Grade 12, and R30 000 for any further education.
The Tax Review Committee
It must be accepted that reforms that only benefit those in employment can have limited impact in a country with a high unemployment rate.The 2013 OECD Economic Survey of South Africa noted that SouthAfrica’s employment rate is dismally low, with just over 40 percent of the working-age population employed. With this in mind, the Minister of Finance announced in the 2013 Budget that a tax review would be undertaken on what role the tax system can play as part of a coherent and effective fiscal policy framework in addressing, inter alia the challenges of persistent unemployment, poverty and inequality
The terms of reference of the tax review committee are to inquire into "the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability.The committee will take into account recent domestic and international developments and, particularly, the long term objectives of the National Development Plan.”Certain issues will receive specific attention such as the evaluation of the economic and social impact of the tax system and whether the current tax structure is able to generate sufficient and sustainable revenues to fund the government’s current and future expenditure priorities. Other key issues include the impact of the tax system on small and medium enterprises, which will entail an analysis of tax compliance costs and could result in proposals for further streamlining tax administration and simplifying tax law.
Despite the Minister of Finance’s warning that taxes might have to be raised if the projected economic growth rate did not materialise and tax revenue declined as a result, the Chairman of the tax review committee, Judge Dennis Davis, has rejected the suggestion that the committee’s role is to find out how the government can collect more money from taxpayers.Judge Davis is quoted in Business Day explaining that:"I think what they are saying is that there are some very significant issues which government has to achieve in order to fulfil SA’s constitutional objectives.That raises a number of questions, such as whether we are raising enough money and if we raise more, would we jeopardise economic growth and therefore be counterproductive.
It is encouraging to notice that the current tax reforms and policies incentivise savings and the creation of long term wealth.The most significant of these proposals is, however, the appointment of the tax review committee and its stated objectives. Encouraging entrepreneurs to employ more people and making business easier by streamlining tax administration and simplifying the tax law, will go a long way to generate wealth for individuals on all income levels.
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