SOUTH AFRICA - Opposition parties have applauded the latest budget from South African finance minister Trevor Manuel, who has announced a sweeping overhaul of the country's decades-old exchange control regime and a reduction in the retirement fund tax rate from 25% to 18%.
The reduction in the retirement fund tax, introduced in 1996 as an “interim” measure at a 17% rate and then increased to 25%, was greeted with whoops of delight from economists and retirement fund managers.
Manuel indicated that the long-awaited revamp of retirement fund taxation would be wrapped up by 2004.
Life companies have lobbied hard for the reduction or removal of tax on retirement funds, arguing that it penalised the largest source of individuals’ savings in a country with a propensity to spend rather than save. It was introduced in 1996 to fill a revenue gap in the fiscus and remained in force ever since.
The 25% tax was thought to have blunted individuals’ investment returns by 1.5% compounded annually. The reduction in the tax to 18% should boost investment returns by a compound 0.42% a year, according to
Michael Fleming, managing director of employee benefits at Sasfin Investment and Asset Managers.
“An annual additional investment return of 0.42% sounds low, but in fact amounts to a very significant amount of money when compounded over 20 or 30 years to retirement,” said Fleming.
Individuals have been granted tax relief on the first R10,000 (£785) of interest earned, but few South Africans are in a position to benefit from this concession, as they do not save. However, they will continue to be taxed on interest earned in their retirement funds – an anomaly many want to see rectified.
Retirement and life funds were given leave to raise offshore asset allocations to a prudent limit of 15% of total assets (20% for mutual funds).
Previously, they were restricted to 10% of the previous year’s net inflow of funds. This was a calculated bet by Manuel, as South Africans have lost interest in overseas investments because of the strength of the rand against the world’s major currencies over the last 14 months.
A six-month amnesty was announced for those who spirited an estimated R90bn (£7.1bn) out of the country over the last two decades. Monies repatriated back to South Africa will be subject to a 5% forex charge, with assets remaining offshore subject to a 10% charge.
Empowerment is another issue that has affected South African asset management. A succession of empowerment alliances have been highly successful. A shining example of this is the Oasis Group, which was established in 1997 as an independent asset manager, wholly-owned by its staff, some 97% of whom are previously disadvantaged individuals.
Some of the businesses established a few years ago have been successful, but many failed or were taken over.
Today the opposite is true, and asset management companies are encouraging empowerment within the industry.
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