Retirement contribution tax benefit under scrutiny

There is scope to relook at the roughly R72bn in tax revenue the fiscus forgoes each year due to the retirement contribution benefits enjoyed by high-income earners, a Stellenbosch University professor suggests. 

In terms of the benefit, taxpayers can deduct up to 27.5% of their taxable income if they make an equivalent contribution to a retirement fund. 

The Institute for Economic Justice (IEJ) has long called for a reduction of this benefit as a way of generating more funds for the fiscus. 

In a panel discussion on raising revenue and reducing inequality in SA organised by Southern Africa — Towards Inclusive Economic Development, Stellenbosch University professor and dean of the faculty of economic and management sciences Ingrid Woolard said there was probably a better way of dealing with the tax benefit on retirement contributions. 

As a result of the tax benefit, those in upper income tax brackets avoided a 45% tax rate as a result of their retirement contribution, whereas those at the bottom end avoided only an 18% marginal tax rate. 

“But that is not saying we should try to get our hands on all the R72bn and do away with retirement contributions (tax benefits). The savings rate in SA is incredibly low. I would be very, very anxious if we said let’s not incentivise retirement fund contributions at all. I think this is where the balances come in. It is more nuanced than just looking for revenue or just worrying about redistribution.” 

In a February 2024 paper titled “Alternatives to Austerity — revenue options to raise the maximum available resources”, the IEJ suggested that upwards of R50bn could easily be raised by reducing retirement fund contribution benefits. 

Questioned about whether the National Treasury was looking into this or was concerned about it, Treasury acting head of tax and financial sector policy Chris Axelson said: “We try to look at the research that comes out on these types of issues, including on medical tax credits and retirement contributions, but we haven’t made any announcement that we are looking to change them.” 

Tax loopholes

Axelson said during the panel discussion that the Treasury had gone to extraordinary lengths to close tax loopholes, for example through a very broad fringe benefits taxation regime and capital gains tax. “There is no low-hanging fruit any more,” he noted. 

He said previous increases in personal income taxes — in 2017 the top marginal tax rate was increased from 41% to 45% for those earning above R1,5m — had resulted in shortfalls. The amount of income reported by top earners above the threshold dropped sharply.

“The impact we found was that there was a much larger behavioural response than we thought.”

Revenue was actually being lost because taxpayers dropped their reported taxable income — particularly allowances and bonuses — and that which was dropped was no longer taxed. There was also a switch to dividend income despite the increase in the dividend tax rate from 15% to 20% at the time to prevent arbitrage.

Axelson said the Treasury’s approach to this problem was to not adjust the tax brackets to take account of inflation. 

Tax ombud and former Treasury chief director of legal tax design Yanga Mputa said it was clear that nothing more could be done on the personal income tax side to raise revenue.

SA Revenue Service (Sars) deputy commissioner for taxpayer engagement and operations Johnstone Makhubu said there was increasing noncompliance on the part of provisional taxpayers which required that Sars refine its strategies for enforcement, especially through expanding the use of data.

Woolward pointed out that SA had “an extraordinarily well- developed and clean personal income tax system”. Progressive reforms had been made over the years to ensure there were fewer exemptions in the system and the tax system transparent, fair and well administered. 

ensorl@businesslive.co.za