National Treasury has defended the tax on withdrawals from the two pot system of retirement saying that it is progressive in that it benefits low income earners.
There has been much dissatisfaction including by trade union federation Cosatu over the fact that withdrawals will be added to taxable income and could thereby push taxpayers into a higher tax bracket.
Members of parliament's standing committee on finance raised these objections during a committee meeting Tuesday with Treasury and Sars officials on the 2024 draft tax bills.
EFF MP Sinawo Thambo said the two pot system had become a “massive revenue collection” measure instead of being a progressive reform that was beneficial for workers. He pointed out that there had not been sufficient education on the tax implications of the system.
In the 2024 budget an estimate was made that R5bn in additional tax would be collected this fiscal year from the implementation of the two pot system but Treasury's acting head of tax and financial sector policy Chris Axelson said this estimate was relatively conservative compared to other estimates.
Axelson pointed out that for those with very low or no income, there would be no tax on the withdrawal if the income and the withdrawal did not exceed a combined R95 750.
“However, if you have a high income and you withdraw from the two pot system you will be taxed a higher amount to make it progressive. The whole point of the system is to be progressive and to try to help those on lower incomes. If you have a lot of income you shouldn’t be withdrawing the money. It acts as a disincentive as well.”
Tax needed to be paid at some point. “We couldn't have a system where people can withdraw money out of their funds and no tax was ever paid. In our view that is not progressive,” Axelson said. He emphasised that the two pot system was never envisaged as a revenue-raising policy.
He stressed that the amounts in the pension funds which are incorporated into the two pot system had never been taxed and that a tax deduction had applied when contributions were made to them. There was also no tax on the growth within the funds.
“Before the two pot system if any money was taken out of the funds tax would then apply,” Axelson said. In the past Sars made about R12bn a year from tax on withdrawals from pension funds on resignation or retrenchment. This tax was applied regardless of the amount of income earned.
In a statement earlier this week, Momentum Investo actuarial specialist Paul Menge warned that Sars’ annual tax assessment could result in a higher tax bill if the withdrawal pushed the taxpayer into a higher tax bracket and if the higher tax was not paid when the withdrawal was made.
“At Investo, we are also seeing the trend that clients fill in ‘nil’ when we ask them for their yearly taxable income when they do their two-pot withdrawal. The same principle may bite them when Sars does their yearly assessment. If you earn a taxable income, Sars will demand its pound of flesh, come assessment time. You are only postponing the pain or making it worse,” Menge said.
Meanwhile, finance committee chairperson Joe Maswanganyi insisted that the Treasury provide a report on what it was doing to implement the undertaking by President Cyril Ramaphosa earlier in 2024 in an address to parliament that the government of national unity (GNU) would look at expanding the basket of food items exempt from VAT. The committee adopted a resolution in November 2023 in favour of this extension to provide relief for households in distress.
“We will not as parliament have a president making a speech, the speech gets debated by parliamentarians and there is no action in regard to the policy speech by the president. Whatever he says must happen because he is the head of state, he is the head of government,” Maswanganyi said.
Axelson said the Treasury was looking at what it could do to expand the basket of zero-rated goods. In the past the Treasury has been opposed to this, pointing out that significant public resources targeted at poverty relief, including the R350 social relief of distress grant. At present, food items that do not attract VAT include brown bread, maize meal, rice, vegetables, milk, vegetable oils and eggs.
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