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Incentivising non-retirement savings

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5 Oct 2012 On 4 October 2012 National Treasury released a proposal called "Incentivising non-retirement savings". The main positive of the proposal is that it allows more tax-efficient investment in Collective Investment Schemes which hold JSE listed equities or directly own property. However, the proposal in its current form discriminates directly on the basis of age, making younger people worse off (and indirectly discriminates against black people, as they form a smaller portion of the older population).

It places poorer people collecting rentals from hiring out rooms in their houses (sometimes the only reason they can afford their houses) in a worse tax position than the wealthier who invest in unit trusts holding direct property.

The proposal is great for the asset management industry, as it places those wanting to cut them out & invest directly in stocks & property in a relatively worse position.

National Treasury's proposal

National Treasury points out that the current tax-free interest income threshold restricts investment options to those that are interest-bearing, and proposes replacing it with a vehicle comprising:

"Earnings & capital growth within these tax-preferred savings vehicles will be exempted from income tax. Contributions will be made from after-tax income, and will be capped. The proposed initial combined annual limit will be R30,000 & a lifetime limit of R500,000 per individual...Annual & lifetime limits on the amount invested will work on a gross basis i.e. withdrawn funds cannot be replaced."

"Consideration may also be given to appropriate transition mechanisms, including allowing taxpayers aged 45 to 49 to invest up to one quarter of their lifetime limit, 50 to 59 years to invest up to half of their lifetime limit and for those aged 60 years and older to invest the maximum of their lifetime limit during the transition period."

Interest income tax exemption

In the example "the tax free interest income thresholds are to be reduced by 50% during the first year, and then phased out during the following year".

The younger you are the worse off you are

Currently there is a tax-free interest income threshold of R33,000 for those aged 65 and higher and R22,800 for younger. The maximum interest you can earn on SA Retail Bonds is 7% on a 5-year fixed rate. This means you can invest up to the following amounts on a tax free basis:

Provided interest rates don't fall, those aged 60 and older are in a better position, as they can immediately move their lifetime limit (currently R500,000) into these new vehicles.

Those aged 50 to 59 may move half their lifetime limit, currently R250,000, so they would be in a worse position if they were enjoying the tax benefits on the full R325,714.

Those aged 45 to 49 may move 25% their lifetime limit, currently R125,000, so they would be in an even worse position if they were enjoying the tax benefits on the full R325,714.

Those aged below 45 are in the worst position, as no allowance to shift current savings has been made.

The change seems unlawful

To my untrained legal eye, the change seems unlawful.

According to the Bill of Rights the state may not unfairly discriminate on the basis of age or race ("The state may not unfairly discriminate directly or indirectly against anyone on one or more grounds, including race, gender, sex, pregnancy, marital status, ethnic or social origin, colour, sexual orientation, age, disability, religion, conscience, belief, culture, language and birth").

As demonstrated above, the state is proposing to placed younger people in a worse financial position than they are currently, and considering that younger people are disproportionately black, it's indirect discrimination against black people (35% of whites are over the age of 45, but only 16% of blacks. Caveat - source is Wikipedia Demographics of South Africa).

How to make the change lawful

In order to avoid discriminating on the grounds of age & indirectly by race, everybody (regardless of age) should be allowed to immediately move their lifetime limit into the new vehicles, during the transition period.

Restriction to Collective Investment Schemes

At the moment, from a tax point of view, the playing field is more or less level between (1) Collective Investment Schemes investing in JSE listed shares & (2) investing directly in JSE listed shares through a broker account. The proposed change would mean that up to your limits it would be more beneficial, from a tax point of view, to invest in Collective Investment Schemes. This is great for the asset management industry (their lobbyists should keep doing whatever they're doing) who run the Collective Investment Schemes, but is a rotten deal for those who are trying to avoid incurring asset management fees and invest on their own steam.

As the Constitution requires the encouragement of human freedoms, it is suggested that broker accounts which only allow invest in JSE listed shares also be included.

Many poor people rent out the rooms in their properties long before they think of purchasing CISs owning direct property. The fact that their rental income will attract tax, whilst the CISs investing in direct property wont, is a perverse punishment of the methods more accessible to poorer folk.

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