Taxation is a multi-purpose weapon in the hands of governments. The main purpose of taxation is to collect money to pay for everything from roads to hospitals. But it can also be used to change the behaviour of taxpayers or economic sectors.
Behaviour can be changed by tax incentives and penalties. The behavioural aspects of tax policy feature strongly in the Revenue Laws Amendment Bills, which went before Parliament's portfolio committee on finance in September.
And taxation is not only used to influence the behaviour of local taxpayers. It is also used to influence the behaviour of foreigners, for example, by designing tax structures, including double-taxation agreements, to encourage foreign investment.
The best example in the Bills of government influencing behaviour at the level of individuals is the taxation of retirement savings. The government provides various incentives to encourage us - and even employers on our behalf - to save for retirement. Tax is deferred until you receive your pension payments. The consequence is that you are receiving investment returns on money on which you would otherwise have paid tax. The tax breaks include:
- Contributions within predetermined limits to registered retirement funds can be deducted from taxable income. So, if you are on the top marginal tax rate of 40 percent, the taxman is effectively contributing 40 cents for every R1 you save.
- The investment income received on your accumulated savings is untaxed, both while you are saving for retirement and in retirement.
- No capital gains tax (CGT) is payable.
- At retirement, you can withdraw a tax-free lump sum of R300 000. You pay tax of 18 percent on the next R300 000, 27 percent on the next R300 000 and 36 percent on any further amount. This is within the maximum of two-thirds permitted for a lump sum withdrawal from a pension fund.
But you are penalised if you withdraw any cash from your retirement savings before retirement. Currently, you receive the first R1 800 tax-free, and the balance is taxed at your highest average rate in the year of the withdrawal or in the previous year.
From March 1, 2009, the National Treasury wants to change this to a calculation that will see you pay 18 percent on the first R600 000 you withdraw, 27 percent on the next R300 000 and 36 percent on any further amount you withdraw before retirement. The amount is cumulative, so once you have used the first R600 000, any further withdrawals will start at a tax rate of 27 percent.
Although the government is simplifying the taxation structure for early withdrawals, the message remains clear: the government does not want you to withdraw your savings before retirement.
The objective of the National Treasury is two-fold: one, it does not want the state to support you in retirement, and two, it wants you to save to make money available for investment in the broader economy, thus driving development and job creation.
Tax is used as a blunt instrument to transfer wealth from the rich to the poor, or rather to assist the poor. But it can be more subtly used to spread wealth more effectively. For example, a few years ago the government slammed the door on the wealthy enriching themselves even further by being awarded massive share options. These options were initially tax-free, then they were subjected to CGT and then finally to harsher income tax.
While cracking down on the rich, the government gave tax breaks to broad-based share incentive schemes for employees. In such schemes, the first R9 000 in share value over three years is tax-free. This is to be increased to R50 000 over five years.
The objective of the National Treasury is again two-fold. First, to stop the wealthy using share option schemes as a tax dodge. Second, to spread wealth and broaden ownership of the economy.
We report on two significant moves by the government to use the tax system to encourage small and medium business.
The first article is on tax incentives to encourage investment in small and medium enterprises; the second is on changes in the way small businesses can be taxed. The government sees the development of small and medium business as a key way to create jobs and wealth.
This article was first published in Personal Finance magazine, 4th Quarter 2008. See what's in our latest issue