The Katz Commission proposals for retirement fund taxation were framed against a backdrop of two key issues.
Firstly, the tax concession to retirement funds is significant in the context of the state's overall resources, and is, arguably, misdirected towards those in the higher income brackets. This seems to have been a fundamental issue driving the Katz proposals.
Secondly, there is the need to support the State Old-Age Pension (Soap) arrangements .
Soap is a poverty relief programme that is perceived to be essential, bearing in mind unemployment and levels of poverty in the country.
It is, however, an expensive arrangement - about R10 billion a year. Maintaining it will take careful husbanding of resources. Fortunately, we do not have demographics working against us over the next 30 years, so the key issues to the continuation of this benefit at acceptable levels of cost become:
* Creating employment opportunities for a greater proportion of the population;
* Ensuring that the employed make personal provision for their retirement; and
* Ensuring that they maintain such savings through to retirement and use their accumulated savings in a sensible way on retirement.
It is on the latter two issues that the Katz proposals have a bearing.
The essential point of departure in the Katz proposals was that it is crucial to retain an incentive to accumulate a reasonable amount of retirement capital, and that it is also reasonable to expect the state to assist, but only up to a point. It is probably around the meaning of "reasonable" and "up to a point" that much dispute emerges.
The Katz proposals can be grouped into four main areas :
* Modifications to the contributions that can be deducted from taxable income. The recommendation is to limit these to 22.5 percent of taxable income, but for many, particularly the self employed, it will mean an increase in the amount that can be deducted.
Also, member-contributions to provident funds will become tax-deductible, putting something between R300 to R500 million in the pockets of that group of employees;
* Changes to the basis of determining the taxable benefits paid by retirement funds.
The two key changes are: to base the tax rate on the amount of the capital value of the benefit rather than the individual's personal rate of tax; and to tax retirement benefits in full at the date of retirement. This has come in for much criticism, but was proposed so that there would be an incentive for taking the benefit in a monthly pension rather than a lump sum.
This incentive stops when the capital sum gets to R610 000 - in current monetary values - or the equivalent of a pension of between about R3 000 and R6 000 a month, depending on the allowance made for future increases; and
* The taxation of fund income.
There seems to be widespread acceptance that the 30-percent rate proposed by the Katz Commission was too high.