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Calls to Release Plans on Pension Funds Tax 

Professional Services Editor, the Sanchia Temkin

South Africa

February 7, 2006

The treasury should release planned proposals for reforming the taxation of retirement funds at next week's budget, say tax analysts. 

Tax reforms will finally bring an end to industry concerns about the taxation of retirement funds and pension-fund savings. 

The tax, levied on interest, net rental and foreign dividend income of all retirement funds, is expected to be overhauled this year. 

Ian Wilson, a partner at PricewaterhouseCoopers, said the retirement fund tax had been controversial since its introduction in 1996. 

Many say the imposition of additional taxes on the savings of the elderly is unfair and its effect of decreasing the overall savings rate goes against government's aim of boosting savings. 

The tax was introduced in 1996 as a temporary measure and has to date taken almost R40bn out of the pockets of ordinary members of pension and provident funds.

It was introduced at a rate of 17%. A shock increase in the tax to 25% in 1998, followed by a retreat in 2003 to the current level of 18%, coupled with what some would argue are vague statements of reform, suggests a vacillating approach to the tax on the part of the state.

Overall taxes on retirement funds constitute a big money spinner for government, bringing in close to R7bn annually. 

This compares with the R10bn government gets from excise duties on alcohol and cigarettes. 

The treasury intends developing a framework with stakeholders from the retirement fund industry to develop proposals regarding savings and pension fund tax reform. 

Wilson said a standard system for taxation of all retirement funds should be developed. 

Retirement funds should be placed on a similar footing to other long-term investment vehicles with which they compete for a share of private investment capital, he said. 

"This would involve not only examining the elements of the income and growth of funds, but also the treatment of investments made by members," Wilson said.

Billy Joubert, a tax partner at Deloitte, said talks between government and the retirement fund industry on the controversial tax on pension funds were likely to continue for another year before a new tax dispensation was introduced. 

SA's life industry has long demanded a review of the 18% tax on the increases that pension, provident and retirement funds generate.

The tax is regarded as one of the most significant costs of preparing for retirement.

For several years government has promised a review of the tax but there had been no indication of whether there this will be included in this year's tax proposals, which are scheduled to be announced in next week's budget, Joubert said.

Finance Minister Trevor Manuel has frequently indicated that the taxation of retirement funds will be reviewed, both from the side of investment houses providing retirement products and actual payouts released from such funds. 

Wilson said that reforms should include revision of the rating formula set out in the Income Tax Act and finality on the taxation of people who fell within sight of retirement.


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