Fiddling while Rome burns
TFSAs do not tackle real issues
A critique of the thinking behind and the applicability of the tax-free savings plans toSouth Africa’s circumstances
Given the reality of unemployment, levels of poverty and the indebtedness, was the launch of the tax-free savings accounts (TFSAs) ever a good idea? It was stated to be an effort to address
South Africa’s widely publicised “lack of a savings culture”. But in reality are we as a nation perhaps guilty of “fiddling while Rome burns”.
Our unemployment, in particular youth unemployment, has been well documented. Out of a population of about 56-million people there are nearly 40-million who are unemployed, too old or too young to work. The World Health Organisation estimates that
about 13-million of our fellow South Africans go to sleep hungry every night. The argument is that this part of our population is the target of our extensive grants system and that the tax-free
savings plan is more upmarket.
In this upmarket area of the “working minority” we are however not much better off. According to the National Credit Regulator there are 19-million credit active South Africans. If this figure
is to be believed and the fact that there are 16-million people in employment, it implies that 3-million jobless people are in debt, assuming that all with jobs have some form of debt. Even more frightening is that, of the credit active population, 11-million are debt stressed, which means they are more than two months in arrears with repayments.
Tax-free savings accounts
So into this morass of no income and definitely no saving, we introduce the tax-free savings account. Conventional wisdom in the financial planning world is that clients should be encouraged to pay off debt, especially debt on-call, before entering a formal savings vehicle like a savings plan endowment, etirement annuity or indeed a TFSA. The thinking is that one is lowering the client’s risk and in effect earning a tax-free interest rate equal to the interest on the debt. The challenge is, if the stats are to be believed, almost every South African is in debt and about two thirds of working South Africans are debt stressed, so the only
possible sales of TFSAs are the result of misdirected selling campaigns.
What is the benefit?
The promised benefit is that a TFSA is exempt from all taxes but limited in the amount that can be invested. Unfortunately, the first R23,800 of interest earned on cash is already tax free, so from an interest point of view the prospective client will need to have paid off all debt and hold about R340,000 invested and
earning interest before there is a benefit. Likewise the first R40,000 of capital gains is exempt so the investor would have to,
again, have repaid all debt and have more than about R330,000 invested in growth assets before there is a net benefit!
It would have
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tax rate on
What is really driving savings in South Africa?
The big gorilla of saving in South Africa is without doubt the massive volume of funds introduced to contractual, monthly paid, retirement annuities and endowment-based savings plans issued by the large insurers. Over the past 12 months more than 900,000 new contracts were entered into by savers of all types. If one accepts that there are only 5.5 million taxpayers it means that statistically all possible savers are sold a contract in a five-year cycle. The value of these contracts represents about R500m a month of new savings. This eclipses the total TFSA sales.
The tragedy is that the endowment, which is rolled out at about 50,000 contracts per month, is internally taxed at a confiscatory 30% and 10% capital gains tax with no primary exclusions. It is estimated that the new tax take from endowments is about R36m a year, added to tax from the in-force book of business. Surely it would have been better to lower the tax rate on endowments to, say the average personal income tax charge of 19%, and harness the well-established marketing, distribution and demand for great savings products rather than cynically launch a poorly constructed and undermarketed competitor.
• Came is a wealth planner at Sasfin and board member of the Financial Intermediaries Association.