The premiums on long term insurance policies are the only financial service to fall outside the VAT net.
Confusion reigns as the government seeks to dip deeper into your pocket with the extension of 14 percent VAT to financial services from October 1. The raid this time includes a hit-and-run attack on your savings.
Apart from the recently reported extension of VAT to all your bank charges, Deborah Tickle, tax partner at accountants KPMG says also targeted are:
Up to five percent initial charges on unit trust investments;
A wide range of fees for the management of retirement annuities, pension and provident funds and benefit funds, including medical aids; and,
Fees on a wide range of transactions associated with various aspects of arranging, varying or renewing debt, including raising fees for mortgage bonds.
Tickle says even services incidental to the supply of financial services, like any charge on the issue of a cheque book, will also be caught up in the VAT net.
Escaping the net are premiums on long term insurance policies.
Quite how much the taxman will rake in from you with the extended VAT charges is not clear although an amount of R150 million for the last five months of this tax year was estimated in this year's budget. But, industry sources say they expect the figure to be much higher, although no one really knows.
There is confusion in the retirement industry, the unit trust industry and the banking industry about how the VAT will be applied and collected.
Objections to different aspects of the extension of VAT have come from the unit trust industry and the life assurance industry on behalf of retirement funds.
The life assurance industry says the extension of VAT has introduced a double taxation on retirement and benefit funds, while the unit trust industry believes that no VAT should be applicable to initial costs on unit trust investment because it is not a service.
Colin Woodin, executive director of the Unit Trust Association, confirmed to Personal Finance that discussion s were under way with the Receiver of Revenue but he declined to give details.
The VAT on the unit trust industry, and in some cases on the retirement industry, is a real bonanza for the taxman. Unlike bank charges, which have fixed limits, the unit trust initial charges and some management charges on retirement funds work on percentages of the funds invested. So the more you save the more VAT you pay.
In other words, if you invest R200 a month with the maximum initial charge of five percent, the unit trust company receives R10. On this amount the taxman will get 80 cents which the unit trust fund pays on your behalf.
But if you invest R2 000 a month, the unit trust company takes R100 and the taxman receives R8.
David Yeo of Old Mutual Employee Benefits said VAT will now be payable on all management services provided to retirement and benefit funds. All those funds which pay an administrator to administer their benefits and investments will pay VAT on the wide range of services used by retirement funds from management and administration, to actuarial and valuator fees, through to portfolio management fees.
In addition, retirement funds will also be liable for the payment of the financial services levy which was introduced as a proxy for VAT this Yeo says amounts to double taxation. However, it appears the Commissioner for Inland Revenue has agreed and will now consider dropping the levy in next year's budget.
Tickle says financial institutions will now be able to claim input costs against the VAT which should be passed on to consumers in the form of lower charges which in turn will also mean you pay less VAT, effectively under 14 percent.