The announcement of the mid-term budget by the Minister of Finance will present an ideal opportunity for government to take further concrete steps in encouraging and fostering a culture of savings in South Africa, says professional services firm Deloitte.
"Any action on promoting savings," says Delia Ndlovu, Director in Taxation Services at Deloitte, "should be seen against the background of a falling household savings rate in South Africa. With the household savings rate reported to be 1.7% last year, South Africa is rapidly losing ground against BRICS countries in the savings race.
"South Africa was ranked 19th on the African continent in terms of the percentage of adults (15 years and older) who saved money in 2010 when rated by the World Bank Findex survey released in 2011," says Ndlovu.
"It is commendable, therefore, that the Minister has indicated his intention to reverse this situation by introducing initiatives aimed at preserving retirement savings. The upcoming budget announcement will, hopefully, provide an ideal platform for additional savings measures to be announced."
Already in the pipeline for South African savers is legislation, due to take effect on 1 March 2015, that will allow individuals to deduct up to 27.5% of their retirement funding income on an annual basis for any employer and employee contributions to a retirement fund.
"However, this annual deduction will be capped at R350 000. To further encourage saving, the Minister should consider increasing the cap further so that it reflects allowances that are in line with other countries.
"In the UK, for example, the annual allowance for tax relief on pension savings in a registered scheme is in excess of R500 000 (based on the current GBP/ZAR exchange rate). In addition, the Minister could also consider allowing individuals to carry forward any unused portion of the R350 000 capped amount for contributions to retirement funds for a limited number of tax years.
"Although the Minister announced in his 2013 budget speech that the introduction of a tax preferred savings and investment account were being considered, the details and mechanisms of such an account have not yet been made clear.
"To be effective, the tax preferred investment accounts should be implemented in a way that was detailed in the Treasury technical paper dated October 2012. In terms of this technical paper, the investment account should enable individuals to save cash and also invest in stocks and shares. The benefits would be multiplied if individuals were not required to pay tax on interest or dividends received, and if profits realised from disposal of investments in the accounts were free of Capital Gains Tax. Consideration should also be given to allow individuals to use capital losses from the disposal of the tax preferred investment accounts to offset against gains from the disposal of other investments.
"As part of his strategy to encourage savings, in his mid-term budget, the Minister could also consider setting the maximum amount that an individual can contribute to such a tax preferred savings account to an amount higher than R50 000 per annum rather than the proposed R30 000."
Savings would also benefit from a decision to not subject individuals to tax on interest received. Currently, interest received by individuals is still subject to tax when it exceeds R23 800 and R34 500 for individuals under and over 65 years, respectively.
"The Minister appears determined to introduce measures that will ensure South Africa is less reliant on foreign capital. Exploring all the options available, including those mentioned above, would help drive his agenda of creating a savings culture in South Africa," says Ndlovu.