The new changes in tax taking effect on 1 March 2016 has been a buzz in the world of finance and in households alike. This tax reform has been long awaited and was a burst of good news for South Africans that are saving towards their retirement.
We know that tax can be complicated and we at Fincheck want to make all things money simple and understandable to all South Africans. So let’s take a simple look at the changes to take place on 1 March, what this means for you and for South Africa.
But first, why such a long awaited change?
Why a new tax dispensation?
The 2013 Taxation Laws Amendment Act has been updated and this new tax dispensation harmonised the tax treatment of contributions to retirement funds. Previously, different types of retirement funds used to have different rules that applied to them and provident fund members did not have the advantage of receiving a tax deduction for their contributions. Considering the fact that there are over 2.5 million provident fund members that contribute to a provident fund, it was necessary to make sure that these contributions also received tax advantages.
The changes, in short
The Taxation Laws Amendment Act, 2015 allows for up to 27,5% of the greater of remuneration or taxable income to be contributed to a Pension Fund, Provident Fund and Retirement Annuity. Such contributions will then be tax deductible to the limit of R350 000 per year. Importantly, it is not only the employee’s contributions that will be deductible, but also employer contributions, as employer contributions to retirement funds will be classified as a fringe benefit in the hands of employees.
This means that the tax deductible margin for many individuals will be almost double from 1 March 2016, so if you invest more in your retirement, you’ll pay less tax! This means South Africans can invest more in their future instead of spending more on tax now. A pretty easy tradeoff in what to do with your money!
But the good news does not stop here!
Even though the annual deduction cap is R350 000, if you contribute more than this in a year, the amount that could not be deducted in this year can be carried over and be deducted next year (to the limit of R350 000 per annum of course).
It is important to note that these new rules only applies to contributions that will be made after 1 March 2016 and that a key condition for enjoying this tax deduction is that members take a lump sum up to one-third, with the rest to be annuitized.
Essentially, the tax reform aims to achieve the following:
- Simplify the tax treatment of contributions to retirement funds where the current system is complex and confusing
- Improve vertical equity between high and low-income taxpayers by imposing a limit on the total allowable deduction to high-income taxpayers
- Improve horizontal equity by harmonising the same deduction across all retirement funds
- Enhance post-retirement income by extending the requirement to purchase an annuity to provident funds
- Vested rights are protected, ensuring that the impact of annuitization takes longer to be felt by provident fund members.
Impact on South Africa and South Africans
The National Treasury explains that the 1 March 2016 tax changes will encourage workers to save more through retirement funds, enabling them to provide for their own retirement and help combat old-age poverty and excessive dependency on relatives or the Government. According to Brian Butchart (MD of Brenhurst Wealth), only about 5% of South Africans save enough to be able to retire adequately. Members of provident funds will also now be able to claim a tax deduction on their contributions. Through this, around 1.25 million people will be likely to have increased take home salaries.
The treasury also explains that this tax reform has important economic implications, as domestic savings have generally been low and needs to be better harnessed to promote economic growth. In 2014, the household savings rate stood at 0.1% of GDP and South Africa’s gross savings rate (household, government and corporate) was 15% in comparison to other countries with a rate between 18% and 50%. The reason savings need to increase is because low savings create a shortage of funds for investments, meaning that South Africa has to rely too much on volatile short-term capital inflows. This can badly affect the Rand’s purchasing power. A low savings rate could also create a funding gap for investments, which is important for economic development and growth.