The implementation of a new tax regime for retirement savings has been delayed until the 2004 tax year, and even then it is likely to be introduced in stages.
According to Finance Minister, Trevor Manuel's Medium Term Budget Policy Statement tabled in Parliament on Wednesday, a thorough review of the taxation of retirement savings is underway, "with a view to a legislative overhaul in 2004".
A policy blueprint detailing the new tax structure for retirement savings should be ready in time for Manuel's budget speech on February 26 next year, Martin Grote, the chief director of tax policy at the National Treasury, told Personal Finance this week.
However, the necessary legislation would only follow in the 2004 budget, Grote, who headed a recent government/financial sector symposium on the taxation of retirement funds, said.
A total overhaul of retirement savings taxation was recommended more than six years ago by the Katz Commission of Inquiry into the restructuring of the tax system.
To date, the government has only made one move to tax retirement savings. This has been to dip into the back pockets of people saving for retirement by taxing - initially at 17 percent and then at 25 percent - any interest and net rental income in the build up of retirement savings. This tax was not applied to the funds of people who had already retired.
The retirement industry has strongly objected to this tax, saying it is unfair to lower income people who pay no or little tax. The industry also says the tax has a significant adverse affect on the final capital available for retirement.
Reduction considered
Grote says consideration is being given to industry requests to reduce the tax rate on the build up of retirement funds from 25 percent to the minimum tax rate of 18 percent. He says, however, that the effect of this reduction on government revenue still has to be established.
Grote also says no decisions have yet been made on such things as the taxation of foreign pensions and the current moratorium on capital gains tax (CGT) on retirement savings.
He says a great deal of work is currently being done to establish the inconsistencies in the taxation of retirement savings.
Grote says the treasury is attempting to avoid a repetition of the problems that occurred with CGT, where the legislation was introduced but two years later, adjustments were still needed to the legislation.
According to sources in the retirement industry, the Department of Finance did not show its hand at the recent two-day symposium on retirement fund taxation. The media was excluded from the meeting, and a special appeal was made for the media not to be informed of what was discussed at the meeting.
State's intentions unclear
However, Personal Finance can disclose that the Department of Finance has not made its intentions clear to the industry on whether it is looking for a way to equitably tax retirement savings while still encouraging retirement savings, or whether it is simply looking for another source of revenue.
A number of academics at the symposium pointed out that tax incentives do not necessarily encourage savings of any kind.
They said it may be better to make retirement fund savings compulsory for all employed people, and for fund members to be forced to draw an on-going pension with a major part of their retirement savings and that lump sum withdrawals be limited.
When Manuel announced six years ago that he would go ahead with tax reform of the retirement industry, he also said it would be done according to certain principles. These included:
- That one type of savings, such as those for retirement, should not be given precedence over other types of savings;
- That vested rights would be protected. In other words, tax advantages already accrued will not be reversed;
- There should be consistency between different types of retirement savings. There are currently significant differences between the taxation of pension and provident funds; and
- The withdrawal of lump sums at retirement should be discouraged and that consumers should use retirement savings to buy pensions.
All these issues were dealt with at the symposium as well the detrimental effects that CGT will have on investment policies.