Budget Review 2021/2
The COVID-19 pandemic has placed severe strain on the economy, resulting in many business closures and job losses. To support households, businesses and the economy, in the context of relatively high-income tax rates, Government did not introduce measures to increase tax revenue in the 2021 Budget.
Previously announced increases (in the June 2020 special adjustments budget), amounting to R40 billion over the next three years will be withdrawn. This change is expected to support economic recovery by reducing financial pressure on households and businesses.
The main tax proposals for 2021/22 include:
- An above-inflation increase of 5% in personal income tax brackets and rebates.
- An inflation‐linked increase in the general fuel levy of 15c/litre for petrol and diesel, and an above‐inflation increase of 11c/litre in the Road Accident Fund levy.
- An 8% increase in alcohol and tobacco excise duties.
The following proposals are relevant to the employee benefits industry:
2. Proposals affecting the retirement industry
2.1 Allowing members to use their fund benefit to acquire annuities at retirement
At retirement, a member of a retirement fund may receive an annuity (pension). The annuity is to be provided with the balance of the member’s retirement benefit after commutation of a maximum of one-third of the member’s retirement benefit. The retirement fund can provide the annuity by paying it directly to the member, if allowed in its rules, or by purchasing it from a South African registered insurer in the name of the fund, or in the name of the retiring member. However, a member is prohibited from using their retirement benefit to acquire various annuities. To increase flexibility for a retiring member and maximise the retirement capital available to provide an annuity, Government proposes expanding the amount of the member’s retirement benefit that may be used to acquire annuities.
Comment: If the intention is that a retiree can combine an annuity provided by the fund with an annuity provided by a long-term insurer (a combination of in-fund and out-of-fund annuities), this is to be welcomed.
2.2 Applying tax on withdrawals of fund benefit when an individual ceases to be a tax resident
When an individual ceases to be a South African tax resident, retirement funds are not always subject to withdrawal tax in terms of the Income Tax Act. The taxation of withdrawal benefits when an individual ceases to be a South African tax resident, but retains his/her benefit in a South African retirement fund, and only withdraws from the retirement fund when he/she dies or retires from employment, is of concern to Government. Section 9(2)(i) of the Income Tax Act deems such amounts to be from a South African source, thus remaining within South African tax jurisdiction, despite the individual no longer being a South African tax resident.
The challenge arises when the individual ceases to be a South African tax resident before he/she retires and becomes a tax resident of another country. When that individual withdraws from the retirement fund, due to the application of the tax treaty between South Africa and the other country, the fund benefit will be subject to tax in the other country as the individual will, in terms of the tax treaty, be regarded as a tax resident in that other country. The provisions of the tax treaty between South Africa and the new resident country will result in South Africa forfeiting its taxing rights.
To address this anomaly, Government proposes changing the legislation as follows: When the individual ceases to be a South African tax resident, the withdrawal benefit will form part of the assets that are subject to retirement withdrawal tax. The individual will be deemed to have withdrawn from the fund on the day before he/she ceases to be a South African tax resident. If the individual ceases to be a South African tax resident, but leaves his/her benefit in a South African retirement fund, and only withdraws from the retirement fund when he/she dies or retires from employment, then the retirement withdrawal tax (including associated interest) payment will be deferred until payments are received from the retirement fund as a result of retirement. When the individual eventually receives payment from the fund, the tax will be calculated based on the prevailing lump sum tables, or in the form of an annuity. A tax credit will be provided for the deemed retirement withdrawal tax as calculated when the individual ceased to be a South African tax resident
Comment: The practical implications and/or implementation of this proposal remains to be seen.
2.3 Transfers between retirement funds by members who are 55 years or older
The Income Tax Act stipulates that any transfer by a member of a pension, provident or retirement annuity fund (who has opted to retire early) into a similar fund would be considered a taxable transfer. The policy in this regard is not intended to tax transfers from a less to a more restrictive fund, or between similar funds. To address this anomaly, Government proposes allowing tax-free transfers into more or similarly restrictive funds by members who have already opted to retire.
Comment: It seems that Government is intending to rectify certain anomalies in the Income Tax Act regarding such transfers, and this is welcomed.
2.4 Retirement reform
The COVID-19 pandemic has influenced many countries to consider allowing individuals to access their retirement savings as an interim relief measure. Alongside the 2020 Medium Term Budget Policy Statement, National Treasury published an explanatory note with financial sector updates that noted numerous requests to allow limited pre-retirement withdrawals from retirement funds under certain conditions, such as disasters. Government continues to engage with trade unions, regulators and other stakeholders to discuss how to allow these withdrawals, together with mandatory preservation requirements.
Comment: It seems that the intention is to link access to retirement savings in the event of unforeseen crises such as COVID-19, to new provisions regarding mandatory preservation. A development of this nature will have major implications for retirement funds and members and will have to be subjected to extensive consultation.
2.5 The minimum value for paid-up retirement annuities
The minimum value for paid-up benefits in retirement annuity funds has not been adjusted since 2007/08. This value will increase from R7 000 to R15 000 as from 1 March 2021.
Comment: If a member of a retirement annuity fund ceases contributions and his/her fund value is less than R15 000, he/she will be able to withdraw the benefit.
2.6 Regulation 28 – infrastructure investment
The Minister indicated that National Treasury will publish draft amendments to Regulation 28 of the Pension Funds Act for public comment. The proposed amendments seek to make it easier for retirement funds to increase investment in infrastructure and improve the measurement of infrastructure investment by the FSCA. The proposed amendments refer to infrastructure investment already permitted through various asset classes and suggest delinking the asset category related to “hedge funds, private equity funds and other assets not referred to in this schedule”. Delinking this asset category will make private equity a separate asset class with a higher investment limit.
These proposals were made in response to the report of the Standing and Select Committees on Finance on the 2020 second Revised Fiscal Framework. The committee is of the view that Government should engage with all stakeholders, including the private sector on how to unlock domestic investment through impact investments and Regulation 28 of the Pension Funds Act. The majority in the committee believes there should be more engagement on the feasibility of prescribing assets for retirement funds and will request a presentation by the Financial Sector Conduct Authority (FSCA) and NT on this when the FSCA releases their policy paper.
Comment: The proposal to amend Regulation 28 rather than introduce prescribed assets is welcomed by the industry.
The Minister indicated that NEDLAC constituencies have agreed to accelerate the introduction of auto-enrolment for all employed workers, as well as the establishment of a fund to cater for workers currently excluded from pension coverage, as an urgent intervention towards a comprehensive social security system.
Comment: This has been proposed previously but will remain challenging to implement, as it will, amongst others, increase the cost of employment.
2.8 Clarifying the calculation of the fringe benefit in relation to employer contributions to a retirement fund
From 1 March 2016, all employer contributions made to a retirement fund on behalf of employees were considered taxable fringe benefits for the employees. If the contribution contains a defined benefit component, the fringe benefit is to be calculated in accordance with the seventh schedule of the Income Tax Act and the employer must provide the employee with a contribution certificate. An anomaly arises in instances where a retirement fund provides both a retirement benefit in relation to the defined contribution component and a self-insured risk-benefit. The current interpretation of the legislation would result in the classification of the total contribution to the fund as a defined benefit component, because self-insured risk benefits are not considered a defined contribution component. It is proposed that self-insured risk benefits be classified as a defined contribution component to ensure that retirement funds that provide both defined contribution component retirement benefits and self-insured risk benefits can provide the fringe benefit value based on the actual contribution.
3. Other matters of interest
3.1 UIF contribution ceiling
The ceiling for contributions to the Unemployment Insurance Fund (UIF) has not been increased in the last four years, despite the increase in the benefit ceiling. The UIF’s benefit provision in the last year has assisted 13.9 million workers. In these circumstances, the continued relief for employees who retain jobs and higher salaries is no longer appropriate. The contribution ceiling will therefore return, to be in line with the benefit ceiling and set at R17 711.58 per month from 1 March 2021.
Comment: The maximum UIF contribution, based on the new increased benefit ceiling, will increase.
3.2 Financial sector levies
With the implementation of the Twin Peaks regulatory system since 1 April 2018, regulated companies in the financial sector will be expected to pay a levy towards the regulatory costs. A Bill to impose levies on the financial sector is expected to be tabled in early 2021, and the resulting revenue will fund the Prudential Authority, the Financial Sector Conduct Authority and other entities and activities outlined in the Financial Sector Regulation Act.
3.3 Social Grants
Social grants are increased by less than inflation as per the table below:
Average monthly social grant values
Source: National Treasury
3.4 The Conduct of Financial Institutions (COFI) Bill
The second draft of the COFI Bill was published in 2020 for public consultation. National Treasury is engaging stakeholders to discuss and clarify comments received. A revised draft of the Bill will be tabled in Parliament in 2021.
3.5 Transformation and financial inclusion
The Financial Sector Transformation Council established seven sub-committees to review the targets in the Financial Sector Code to strengthen transformation. The sub-committees are developing targets for management control and skills development, socio-economic development and consumer education, retirement funds and ownership, access to financial services, preferential procurement and empowerment financing. This year, the sub-committees will finalise and submit the revised targets to the Financial Sector Transformation Council for approval and then to the Department of Trade, Industry and Competition to publish for public comment.
3.6 Reimagining the financial sector for a more inclusive economy
In 2021, the Reserve Bank will review the feasibility of a retail central bank digital currency or digital cash, which is a digital form of currency that would be issued to the public. The review, which will be published after completion, will assess potential effects on financial inclusion, monetary policy, financial stability and financial intermediation.
3.7 Responding to climate risks and building a sustainable economy
In May 2020, National Treasury published a draft paper, “Financing a Sustainable Economy”, as a framework for financial institutions to disclose and report on issues related to climate risk, and highlighting opportunities for the sector to support the transition to a low-carbon and climate-resilient economy. The key recommendations include developing a green finance taxonomy, creating technical guidance for disclosures (such as the Task Force on Climate-related Financial Disclosures), and developing a climate risk scenario for use in stress tests.
Comment: This development on the sustainability of investments is welcomed and boards of management are encouraged to engage asset managers- and consultants on these developments which are in line with UN PRI recommended best practice.
4. Personal Income Tax
4.1 Personal income tax and medical tax credits
The personal income tax brackets and rebates will increase by 5%, providing relief to households by ensuring that inflation does not automatically increase the individual tax burden.
An inflationary adjustment will apply to the value of medical tax credits, which will increase from R319 to R332 for the first two members, and from R215 to R224 for all subsequent members.
Personal income tax rates and bracket adjustments