Capital gains tax hike seen as threat to savings
23 April 2012
Posted by: SAIT Technical
Business Report by Londiwe Buthelezi
Research analysts have slammed the increases in capital gains tax rates proposed by the National Treasury, saying they posed a threat to the already moribund savings culture in South Africa.
Earlier this week the Treasury released for comment the proposals on how increased capital gains tax rates would be applied to long-term insurers. Finance Minister Pravin Gordhan announced the intended move in his Budget in February.
The Treasury proposed an increase in the capital gains tax rate for corporate (shareholder) funds to 66.6 percent from 50 percent. This would apply to capital gains arising during years of assessment commencing on or after March 1.
On policyholder funds, the effective capital gains tax rate for individual policyholder funds would increase from 7.5 percent to 10 percent. The effective capital gains tax rate for company policyholder funds would rise to 18.6 percent from 14 percent. Untaxed policyholder funds would remain fully exempt from the payment of income and capital gains tax.
The proposed changes in capital gains tax inclusion rates would take effect for all disposals of assets from March 1 this year without regard to the years of assessment at issue.
Stephen Meintjes, the head of research at Imara SP Reid, said he did not think tax on life companies was a good idea. He said the increase of the capital gains tax rate for individual policyholder funds would have a negative impact on savings.
"We need to be encouraging savings not discouraging them. But increases like this will actually do the opposite.”
PSG Konsult analyst Dimitri Mitropapas said the proposal was not positive given that people already paid high taxes.
He said the 15 percent tax on dividends did not go down well, and along with escalating electricity costs, e-tolling charges and other levies, the increases in capital gains tax would dampen investment growth.
"Initially it will have a knock-down effect but because we as South Africans have gotten used to the constant increases and additional taxes, we'll learn to live through it.”
The Treasury acknowledged that any change in effective capital gains tax rates for policyholder funds tended to create complications for insurers as trustees, regardless of whether the change was triggered by disposals from a specified date or in respect of disposals occurring from a specified year of assessment.
In particular, if the higher rates applied only from a later date, the policyholders notionally affected by the asset disposal bore the rate of increase not only for the period of that policyholder's notional ownership but also in respect of all prior periods of notional ownership by other policyholders.
So the Treasury proposed that in order to remedy this misallocation of additional capital gains tax among policyholders, a deemed disposal and re-acquisition be applied to all policyholder fund assets. Under this approach, long-term insurers would recognise all unrealised gains and losses arising before March 1.
The new higher inclusion rates apply from March 1.