Glacier Quarterly 1 - 2018

TAX LANDSCAPE
Who will pay the tax?
Observations
The 2018/19 National Budget
demonstrates that increasing individual tax
rates (PIT) can no longer sustain SA, as it
has for the past 10 years. Hence there was
no option but to increase VAT to 15%.
Future increases in VAT will have to be
reserved to fund the promise of National
Health Insurance (NHI). This means
Treasury will inevitably have to seek
alternative forms of taxation to fund the
deficit.
SA’s corporate tax rate is already too
high by international and even African
standards. The corporate tax contribution
to the total revenue streams will continue
to fade, in line with the international trend.
The first immediate measure, announced
in Budget 2018/19, is the implementation of
carbon tax from 1 January 2019. But there
are many flaws inherent to the carbon tax
model that must still be addressed prior to
implementation.
Conclusion 2
There is no solution in the current tax
base to solve SA’s problems without drastic
increases in transaction taxes that will have
the heaviest impact on the poor. Treasury
will have to look for other tax solutions.
French economist Thomas Piketty
has gained traction among the world’s
politicians with his book Capital In The 21st
Century (2014). And his solution is wealth
taxation.
So when the world’s politicians
descended on Davos in January 2018,
the likes of International Monetary Fund
managing director Christine Lagarde
started advocating wealth taxes. And that
resonated with the SA delegation.
Conclusion 3
Forms of wealth taxation will almost
inevitably be implemented in the medium
to long term. And wealth taxation will have
a profound impact on financial planning
strategy in SA.
However, more than R3 trillion of SA’s
current wealth is held by retirement funds.
And more than 70% of the retirement fund
membership is the middle working class of
SA, earning below R180 000 per annum.
They are well represented by SA’s unions,
to the extent that attempts so far to
implement annuitisation of provident funds
have failed.
Conclusion 4
Retirement funds are the people’s funds.
It’s far easier for politicians to justify the
implementation of forms of wealth taxation
than to propose the use of retirement
funds as any form of tax base.
Retirement funds are the only
investment platform in SA that guarantees
a tax deduction on contribution plus a
total tax exemption on investment growth.
Yes, there is partial taxation on exit, but
the effect of that can be minimised. And
finally comes the cherry on the top, the
exemption of retirement fund benefits from
SA’s current wealth tax, estate duty.
Conclusion 5
South African retirement funds have
received fantastic concessions over the
past 10 years and have in many ways taken
over the role previously played by trusts.
SA faces an
uphill fiscal
battle in years
to come
Today many people under-utilise their
retirement fund when designing a financial
plan. This is a pity, as optimisation of
retirement fund strategy takes many years
to achieve.
‘Mind-blowing’ legacy
It’s human nature to want to leave
a legacy for our families – so much so
that we lose sight of the fact that with
increased life expectancy, our children
are today far more likely to inherit broke
parents than any money when they die.
Life expectancy for privileged South
Africans is approaching 80. Thus, most
surviving children will be over 50 before
they inherit a cent. By then they’ll be
facing their own problem of 30 years in
retirement.
So the ‘gift to last’ in estate planning
and wealth creation is no longer the
family mansion or the funding of the
grandchildren’s private education, but
rather a deposit on the retirement fund
requirements of the next generation.
What we’re actually looking for are
intergenerational retirement funds. Isn’t
that enough to blow the mind?
Glacier is saddened to hear of the sudden passing
of Professor Matthew Lester earlier in March, and
expresses condolences to his family. Matthew was
a regular contributor to Glacier’s publications and
shared his knowledge – with a touch of humour –
with our business partners at numerous events and
roadshows. His contribution will be sorely missed.
Matthew Lester
Rhodes Business School
professor and member of the
Davis Tax Committee