BD SIGNPOST Vusi Maswili: Long-term prospects make changes to tax laws short-sighted.

The Taxation Laws Amendment Act passed last year has changed the definitions of various retirement investment vehicles, and the terms under which investors in a retirement vehicle may withdraw funds should they decide to emigrate.

Previously, section 1 of the Income Tax Act of 1962 let emigrants withdraw a single lump sum from their pension preservations, provident preservations or retirement annuity funds on their departure from the country. Many used this as capital to start up new lives abroad.

This is in addition to the Income Tax Act prohibiting retirement annuity members and preservation fund members who have already exercised their right to a first withdrawal from withdrawing their investment before retirement age, which is at the earliest 55.

The objective of these restrictions was to prevent members making premature withdrawals from their funds, in the hope that this would prevent them from squandering their retirement investments before they really needed them, resulting in dependence on the state.

In terms of the 2020 act, emigrants can take that lump sum benefit only when they are no longer SA tax residents, which the act defines as having been nonresident for an uninterrupted period of three years or more.

While the government’s intention with these amendments is to modernise the foreign-exchange control system and encourage South Africans to save for their future rather than spend on the present, the change in legislation whips the proverbial rug out from under those who had included this lump sum withdrawal in their future plans and dreams.

DAMAGE PERCEPTIONS

Those who are leaving surely come from the 5.8% of South Africans who pay 92% of personal tax in SA (according to Econometrix’s Azar Jammine). There can be little doubt that this group accounts for most of the brain drain.

With about 23,000 professionals leaving the country annually and SA Medical Association research adding that nearly 40% of medical professionals would leave if the National Health Insurance strategy were to be implemented, it makes no sense to damage these people’s perceptions of the country even further by refusing them access to their own funds.

While this approach may aid pension funds in the short term — the more assets they hold, the better for them — an unintended consequence is that it is likely that South Africans intent on emigrating or planning for their retirement will seek other investment vehicles that will help secure their financial future, without their funds being locked away when they need them most — such as when they make the huge financial and emotional decision to leave the country of their birth.

This is why we believe the changes included in the Taxation Laws Amendment Act are short-sighted.

In the short term, they may protect pension funds by allowing them to retain emigrants’ funds even when investors are no longer resident in the country and have no intention of returning. In the short term, the changes perhaps also provide a potential resource to fund the government’s infrastructure development plan.

THE THREE-YEAR DELAY FOR EMIGRATING MEMBERS DOESN’T SEEM TO ADDRESS THE CONCERN OF STATE DEPENDENCY

In the long term, they will alienate departing citizens even more, making it yet more unlikely that these skilled professionals will ever return to SA, and they actively discourage investors from trusting pension funds as the type of investment that will protect their future, whatever that future may look like in an increasingly volatile and unpredictable environment.

MINIMISING EXITS

The three-year delay for emigrating members doesn’t seem to address the concern of state dependency, particularly as those withdrawing funds are leaving the country, including emigrating financially, and have no stated intention to return. Instead, the new legislation appears to be another bid by the government to prevent the leakage of funds from the country due to emigration.

This is in tandem with the regulation 28 stipulation of increasing a fund’s maximum limit on infrastructure development from 10% to 45%, which seems intended to grow the pool of funds available for this imperative by minimising potential exits.

This continues to expand the current agenda driven by the governing ANC of implementing regulations that will prescribe how retirement fund managers should make investment choices.

If this agenda proceeds, it is plausible that funds could be compelled to invest in projects or initiatives that are not necessarily in the investors’ direct best interests.