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South Africa Consults On Savings Tax Incentives

by Lorys Charalambous, Tax-News.com, Cyprus

08 October 2012


The South African National Treasury has released two discussion papers for public comment and consultation, one with proposed measures for the promotion of household savings, and the other looking to strengthen and reform the retirement industry.

The paper to incentivize non-retirement savings sets out proposals for savings products supported by tax incentives, to give tax-free returns, growth and withdrawals. The savings vehicles will have to be registered with the South African Revenue Service.

The aim of the savings products is to support voluntary savings by households, especially those on low and middle incomes, and to complement retirement savings. Higher levels of savings, it is said, can strengthen the resilience of households to unexpected declines in income, help households avoid excessive reliance on debt, and reduce the country’s reliance on volatile short-term inflows of foreign capital.

Contributions, made from after-tax income, would be limited to ZAR30,000 (USD3,400) per year and ZAR500,000 over the lifetime of an individual. During a transition period of two years, taxpayers aged 45 to 49 may be allowed to invest up to a quarter; those aged 50 to 59 to invest up to half; those aged 60 to 65 to invest up to three-quarters; and those above 65 to invest up to the full amount of their lifetime limit.

The current tax-free interest income regime would be expanded with the introduction of products to offer more investment options. Among the products that would qualify for tax incentives would be a range of collective investment schemes (unit trusts), savings accounts offered by banks and retail savings bonds. Unit trusts investing directly in property may also be permitted.

On the other hand, the Treasury believes that the current tax regime for contributions to retirement funds is too complex, results in increased administrative costs, and is open to abuse through excessive contributions by employers and high-income individuals. The need for reform is considered to be evident, as most South Africans do not save adequately for retirement and only about half of the country’s workers belong to a retirement fund.

Under the current retirement savings regime, the tax exemption has no nominal monetary cap in the case of higher-income employees, allowing them to make tax-exempt contributions thought to be well in excess of the amount required to maintain a reasonable standard of living in retirement. Tax-exempt employers are also able to assist employees in postponing tax by making large contributions to pension or provident funds rather than by paying cash income.

The government now proposes a uniform retirement contribution model, under which all contributions to retirement funds – including annuities, pension and provident funds – and all benefits from those funds will be subject to the same tax treatment.

To simplify the current regime and address its deficiencies, it is therefore proposed that all contributions by employers to retirement funds remain tax deductible for taxable employers, and that employer contributions be taxed as a fringe benefit in the hands of the employee. Employee contributions, for tax purposes, would be deemed to be made up of both the employee and the employer contributions.

Individuals would be permitted a deduction allowance, capped at ZAR250,000 or 22.5% of taxable income, for taxpayers aged 44 and younger, and ZAR300,000 or 27.5% of taxable income, for those aged 45 and above. A minimum monetary deduction of ZAR20,000 will apply to allow low-income earners to contribute in excess of the above percentage limits.

The treatment of defined benefit and hybrid funds is still under discussion, as care needs to be taken in apportioning contributions to individual members to ensure fairness between different individuals and different cohorts of individuals, while the income base to which the percentage and monetary thresholds will be applied still needs to be exactly defined.

The government has confirmed that final proposals will only be made after the consultation processes are completed, and that it will also consider how best to protect vested or accrued rights of current retirement fund members. "These urgent interim retirement reform measures will complement the more fundamental and comprehensive social security reforms,” it stated.

The closing date for comment on the two papers is November 30, 2012.

TAGS: individuals | South Africa | tax | investment | pensions | tax incentives | banking | financial services | employees | retirement | tax breaks | individual income tax | services | Africa

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