There are no measures or provisions in the 2018 Budget Review that will radically affect your investments and retirement savings, although you need to be aware of minor changes and regulatory amendments planned for this year.

The three main taxes on investments, from which retirement funds and tax-free savings accounts are exempt, are capital gains tax, dividends tax and income tax on interest. None of the provisions applying to any of these taxes has changed. Nor have the tax-deduction and contribution limits on your savings in retirement funds, nor the contribution limits to tax-free savings accounts.

What also has not changed is the taxation table applying to pre-retirement withdrawals from pension funds and the taxation table applying to lump-sum withdrawals at retirement.

Offshore allocation

One welcomed change, according to investment industry commentators, is the raising of the allocation limit for offshore investments in retirement funds, which include pension funds, provident funds and retirement annuities (RAs). 

Regulation 28 of the Pension Funds Act provides asset allocation limits for funds, which include a limit of 75% allocated to equities (offshore and local), 25% to offshore investments (which, besides equities, may include offshore bond, listed property and cash investments), and 5% to investments in Africa outside South Africa.

The offshore limit of 25% will increase to 30%, and the Africa limit from 5% to 10%, according to the Budget Review. 

Ronald King, the head of public policy and regulatory affairs at PSG Wealth, says this means that regulation 28 will have to be amended. He says that providers of RAs will need to adapt their systems to allow for this increased allocation. These systems alert you if, through your choice of underlying investments in an RA, you exceed your offshore limit. He recommends that, if you need to rebalance the underlying investments in your RA, you do this through a trusted financial adviser. 

However, King doesn’t recommend you take immediate advantage of the increased allocation, for, although he believes it to be a good thing, providing for better diversification, he says in the short to medium term you will be better off investing in South Africa, where he expects strong growth and a strong rand, as against high valuations and a possible correction in international markets.

Quaniet Richards, the head of institutional at Nedgroup Investments, also welcomes the increase. “This opens up the opportunity for retirement funds to further diversify offshore and gain access to sectors and currencies they would not have access to locally – especially in terms of the technology and consumer electronics sectors, healthcare and pharmaceutical companies, the airline industry (such as Rolls Royce and Airbus) and renewable energy. This is a very positive development for the retirement fund industry,” he says.

Retirement funds

The government will continue to roll out planned regulatory changes relating to the tax alignment of the different types of retirement funds: pension funds, provident funds, preservation funds and RAs. The Budget Review document mentions a number of regulatory changes planned for the coming tax year. They include:

• Tax treatment of contributions to retirement funds outside South Africa. “The Income Tax Act currently exempts all retirement benefits from a foreign source for employment rendered outside of South Africa from taxation. The interaction of this exemption with double taxation agreements and other provisions of the Income Tax Act will be reviewed to ensure that the principle of allowing deductible contributions only in cases where benefits are taxable is upheld,” the Budget Review says.

• Aligning the tax treatment of preservation funds on emigration. “On formal emigration, an individual is able to withdraw the full value of their RA, after paying the applicable taxes. Government will consider aligning the tax treatment of different types of retirement fund withdrawals in such circumstances.”

• Allowing transfers to pension and provident preservation funds after retirement. “In 2017, amendments were made to allow the transfer of pension or provident fund amounts to an RA after the retirement date of an employee. These amendments expanded the choice of available retirement funds if an individual decided to postpone retirement. Pension preservation and provident preservation funds were excluded, as the administration required to disallow once-off withdrawals from these funds was considered too onerous. Industry consultations indicate that the system changes will not be burdensome – thus it is proposed that transfers to pension preservation and provident preservation funds be catered for in the legislation,” the Budget Review says.

• Rectifying tax anomalies on the transfer of retirement funds. “The transfer of fund amounts between, or within, retirement funds at the same employer has inadvertently led to a tax liability for members, due to the current wording of the legislation. In principle, there should be no additional tax consequence for members if the transfers refer to amounts that have already been contributed to the retirement fund. Legislative amendments will be retrospectively introduced to correct these unintended tax liabilities,” the Budget Review says.

Other amendments

The government is also looking at:

• A repeal of the requirement that people who receive tax-exempt dividends submit a tax return. This is aimed at relieving the administration burden of submitting such returns. 

• Amendments to the tax treatment of cryptocurrency transactions. “Cryptocurrencies are addressed by existing provisions in South African tax law. Cryptocurrencies pose risks to the income tax system as they are extremely volatile and their sustainability is uncertain. At the same time, the supply of cryptocurrency can cause administrative difficulties in the VAT system. To address these issues, it is proposed that the income tax and VAT legislation be amended,” the Budget Review says.

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