Edition 4 of 2018: February 2018 Budget Speech 2018: Implications for Retirement Funds SA s Finance Minister Malusi Gigaba delivered the National Budget speech on 21 February 2018. This publication summarises matters from this speech which directly impact on retirement funds. The publication also provides a summary of certain budget items which directly affect individuals. A. Proposals which impact on retirement funds, with no effective dates Change to prudential investment guidelines: increase in offshore and Africa investment limits Offshore investment limit for retirement funds are proposed to rise from 25% to 30%; and The limit for investments in Africa, are proposed to rise from 5% to 10%. Transfers to preservation funds after retirement The Income Tax Act was amended with effect from 1 March 2018, to allow deferred retirees to transfer their benefits tax-free to a retirement annuity fund after their retirement date, but before they elect to receive their retirement benefits Pension and provident preservation funds were excluded, as the administration required was considered to be too onerous. Industry consultation indicated that the system changes will not be burdensome It is therefore proposed that transfers to pension preservation and provident preservation funds be legislated, in 2018. Rectifying tax anomalies on the transfer of retirement funds The transfer of fund amounts between retirement funds operated by the same employer has inadvertently led to a tax liability for members, due to the current wording of the legislation There should be no tax consequence for members where the transfer refers to contributions already made to their fund Legislative amendments will be retrospectively introduced to correct these unintended tax liabilities. Tax treatment of preservation funds upon emigration On formal emigration, a person is able to withdraw the full value in their retirement annuity fund, after paying the applicable taxes National Treasury is considering allowing the same treatment for preservation fund withdrawals, on formal emigration.
Tax treatment of contributions to funds outside of South Africa The Income Tax Act currently exempts all retirement benefits paid from a foreign fund in respect of employment rendered outside of South Africa, from taxation The interaction of this exemption with double taxation agreements and other provisions of the Income Tax Act will be reviewed to ensure that the principle of allowing deductible contributions will be applied only in cases where benefits are taxable. Retirement funds & savings: matters unchanged There have been no changes to the lump sum tax tables for retirement and withdrawal benefits The contribution deduction limit of 27.5% of remuneration / taxable income, capped at R350 000, remain unchanged There was no adjustment to the annual tax-free contribution to a tax-free savings account, which remains at R33 000 per year, with a lifetime allowance of R500 000. B. Retirement fund reform proposals: improving the treatment of retirement fund members Government commentary on the budget speech indicates that the retirement reform program will continue in 2018. Annuitisation & matters referred to NEDLAC Government has stated that progress on the annuitisation of provident funds and preservation has been slower than anticipated, as a result of the delay in the release of the discussion paper on comprehensive social security reform As a result, consultations in the National Economic Development and Labour Council ( NEDLAC ) are still in progress and expected to be completed by the end of 2018 As soon as an initial agreement is concluded, a set of recommendations will be finalised Other issues to be referred to NEDLAC include: - Broadening retirement savings coverage to low-income earners who fall outside the collective bargaining system or who work for small employers - Bringing all public retirement funds within the same regulatory framework as private funds. Further reforms Government has directed the FSB to proceed with the following reforms: Lowering costs and consolidating funds: A key driver of costs is the large number of small and uneconomical retirement funds (there are currently 5 144 funds, of which 1 651 are active). The FSB is to oversee a significant reduction in the number of funds (preferably to less than 200) 2
Modernising and improving the governance of all retirement funds to King IV standards: All retirement funds will now need to submit annual, audited financial statements. They will also have to include a minimum number of independent trustees Ensuring benefits are claimed: The FSB estimates that in 2016, there were over R40 billion unclaimed benefits in retirement funds. The FSB is to consult with NEDLAC on more efficient measures to find beneficiaries, including centralising data and funds Strengthening enforcement measures to deal with criminal and unethical practices: The FSB will publish directives in 2018 to improve disclosures by both funds and administrators, and to outlaw unethical practices. C. Implementing Twin Peaks and improving market conduct Recap on Twin Peaks The Financial Sector Regulation Act was promulgated in 2017, bringing in the Twin Peaks system of financial regulation Under the Twin Peaks model, two regulators will be established, namely a Prudential Authority ( PA ) and a Financial Sector Conduct Authority (FSCA ) The PA will operate within the South African Reserve Bank ( SARB ) and will supervise the safety and soundness of all financial institutions providing financial products The FSB will be disbanded and will be replaced by the FSCA, which will supervise market conduct and fair treatment of consumers of all financial institutions The SARB will provide overall financial oversight of both these new regulators. National Treasury confirmed that the PA and FSCA will be established on 1 April 2018, or shortly thereafter. The FSCA will only be fully functional after all transitional arrangements are concluded by 2019. In addition, a Conduct of Financial Institutions Bill will be tabled in Parliament in 2018. This legislation will set out the market conduct principles applicable to all financial institutions. Ombud system As part of the Twin Peaks reforms, the ombud system will be overhauled. A draft policy framework was published in 2017. A new Ombud Council was established in terms of the Financial Sector Regulation Act. The Ombud Council will begin work in 2018. 3
D. Health reform Splitting of medical fees and tax credits The Income Tax Act provides a tax rebate (medical tax credit) for individuals The medical tax credit consists of two components: medical scheme fees for approved medical scheme contributions and additional medical expenses for out-ofpocket medical payments Government is concerned that some taxpayers may be excessively benefiting from this rebate, specifically in instances where multiple taxpayers contribute toward the medical scheme or medical expenses of another person (for example, adult children jointly contributing to their elderly mother s medical scheme) Where taxpayers carry a share of the medical scheme, contribution or medical cost, it is proposed that the medical tax credit should also be apportioned between the various contributors. National Health Insurance ( NHI ) Government has continued progressively on the path towards NHI NHI has been allocated an additional R4.2 billion to be funded through an amendment to the medical expenses tax subsidy. This will be achieved via below-inflation increases in medical tax credits over the next three years The NHI Fund as well as related management structures, will be established soon There are to be a number of Personal Services provided by NHI, to be funded through a grant, including: expanding access to school health services focusing on optometry and audiology, contracting general practitioners on a capitation basis, community mental health services, maternal care for high risk pregnancies, screening and treatment for breast and cervical cancer, hip and knee arthroplasty, cataract surgery and wheelchairs NHI s Non-Personal Services to be funded through a grant, include: expansion of centralised chronic medicines dispensing and distribution programme, development and roll-out of health information systems, capitation model for purchasing primary health care services, monitoring and supporting the ideal clinic programme The balance of the NHI funding is to be used for: - 7 Ministerial advisory committees - Strengthening of health technology assessment - Programmes related to prevention of non-communicable diseases. Part of the health promotion levy to be implemented on sugary beverages, is also to be used to fund these programmes. 4
E. Key matters affecting Individuals VAT increases from 14% to 15%, with effect from 1 April 2018 There is only partial relief for bracket creep, to the tune of R6.8 billion. This means that higher earners who have salary increases will pay higher tax, during this tax year. The bracket creep relief granted in this budget was aimed at poorer households. Tax rates for higher income earners have barely been adjusted for bracket creep Most tax rates remain unchanged: the corporate income tax rate remains at 28%, the capital gains tax inclusion rate for companies and individuals remains unchanged, the dividends tax rate remains at 20%, and the maximum marginal income tax rate for individuals remains at 45% The official rate of interest will be increased, to bring it closer to the prime rate rather than the current repo rate plus 1% There has been a 52c/l increase in the general fuel levy (22c/l), a 30c/l hike in the Road Accident Fund levy and a 6% to 10% increase in alcohol and tobacco excise duties Wealth taxes: estate duty for estates greater than R30 million will increase from 20% to 25%, donations tax rate will increase from 20% to 25% and excise duties on luxury goods will increase from 7% to 9% The health promotion levy which taxes sugary drinks, has a proposed implementation date of 1 April 2018. F. Highlights: matters affecting individuals Grants and social security limits (increases effective from 1 April and 1 October 2018) Above inflation increases granted, as follows: 2017/18 (Per Month) 1 April 2018 1 October 2018 State old age grant R1 600 R1 690 R1700 State old age grant over 75 R1 620 Disability grant R1 600 R1 690 R1 700 Child support grant R380 R400 R410 Foster care grant R920 R960 R960 Care dependency grant R1 600 R1 690 R1 700 War veterans grant R1 620 Tax rebates Primary Rebate Secondary Rebate (for taxpayers 65 and older) Tertiary Rebate (for taxpayers 75 and older) R13 635 R7 479 R2 493 R14 067 R7 713 R2 574 5
Taxable threshold (below which tax is not payable) Taxpayers under 65 Taxpayers between 65 and 74 Taxpayers 75 and older R75 750 R117 300 R131 150 R78 150 R121 000 R135 300 Monthly medical tax credits Member First beneficiary Additional beneficiaries R303 R303 R204 R310 R310 R209 Personal tax tables (natural persons) Taxable income Tax rates Taxable income Tax rates 0 -R 189 880 18% of taxable income 0 R195 850 18% of taxable income R189 881 - R296 540 R34 178 + 26% of taxable income above R189 880 R195 851 R305 850 R35 253 + 26% of taxable income above R195 850 R296 541 - R410 460 R61 910 + 31% of taxable income above R296 540 R305 851 R423 300 R63 853 + 31% of taxable income above R305 850 R410 461 - R555 600 R97 225 + 36% of taxable income above R410 460 R423 301 R555 600 R100 263 + 36% of taxable income above R423 300 R555 601 - R708 310 R149 475 + 39% of taxable income above R555 600 R555 601 R708 310 R147 891 + 39% of taxable income above R555 600 R708 311 - R1 500 000 R209 032 + 41% of taxable income above R708 310 R708 311 R1 500 000 R207 448 + 41% of taxable income above R708 310 R1 500 001 and above R533 625 + 45% of taxable income above R1 500 000 R1 500 001 and above R532 041 + 45% of taxable income above R1 500 000 6