Finance Minister Trevor Manuel has raised uncertainty about the future taxation of the retirement industry by the arbitrary way he hiked the tax on the gross interest and net rental income of funds from 17 to 25 percent in the Budget.
On top of this the basis of taxing retirement funds was still part of an investigation in the National Retirement Consultative Forum, Clive Hill, a senior legal adviser at Southern Life told a Saturday Paper/NBS Investors Club meeting.
He said the higher tax would have a negative effect on retirement savings, particularly for low income earners to participate in retirement fund vehicles.
Manuel had deemed it appropriate to raise the tax rate almost to the level originally suggested in the Katz Commission into the restructuring of the tax system, but without the attendant adjustments proposed to benefit low income retirement fund members, Hill said.
"The arbitrariness of the percentage rate raises uncertainty about possible future increases".
Hill said it was ironic that Manuel had laid emphasis on the importance of savings to the economy, and on his concerns for low income earners by not applying the full force of the Katz recommendations on medical aid contributions, yet the proposals on retirement fund tax ran counter to his expressed concerns.
The extent to which retirement fund returns would be affected by the increase in tax would depend on the asset mix of the fund.
"It may be expected that, if this has not already been done, the interest and rental-bearing assets of funds will be reduced to the absolute minimum compatible with compliance with the investment regulations under the Pension Funds Act."
Property investments were particularly threatened, he said.
The effect on defined contribution funds would be a lower rate of benefit accumulation for the member.
The effect on defined benefit funds would be a likely increase in the cost to employers of providing promised benefits.
Hill also touched on a proposed investigation by the South African Revenue Services (SARS) into the taxation of trusts later this year.
The government's view was that trusts had become popular to avoid paying income tax by using them to split income. This was achieved by allowing income to flow through the trust to several beneficiaries, who would then each be taxed at their marginal rate.
Collectively, the beneficiaries would pay less tax when the trust rather than the beneficiaries does the paying.