“After robbing you blind for years, the government is looking for cheap capital to bail out Eskom, SAA and other state-owned enterprises (SOEs), and fund state-sponsored infrastructure and social projects.”
Have you read something like this in the press or on social media recently?
The current discourse on topics such as the government, corruption, prescribed assets, regulation 28, the taxation of South Africans working abroad, and emigration is a source of much confusion.
So let’s pause for a moment and make sense of your financial planning.
Government inefficiencies and corruption must stop, and we need urgent reform. But people use scare tactics to sell their services in financial advice, foreign exchange trading, offshore funds and other structures. Always ask — could this person benefit from scaring me in this way? Is it a genuine concern? Remember, fear and greed sell financial products.
What is important to understand?
When a government implements prescribed assets, it forces investors to save and invest their money in government bonds or specified projects and companies — normally those managed and owned by the government.
The fear is that pension funds will be forced to invest in SOEs with low investment returns, such as Eskom.
Prescribed assets were used extensively worldwide in the 1960s and 1970s, but have now largely been abandoned. In SA, between 1956 and 1989, prescribed assets for pension funds and insurance companies led to poor investment outcomes.
Regulation 28 of the Pension Funds Act determines how much a pension fund can invest in various assets — for example, no more than 10% in private equity/hedge funds. This helps protect your savings, but the regulation does not state in what assets funds you must invest.
It has been argued there is no change needed to regulation 28 because only 2.3% of pension funds have invested in private equity, leaving plenty of room for them to invest in infrastructure projects.
The government wants to encourage investment in infrastructure projects through private equity. This is an excellent idea: modern ports, railways, the Gautrain, airports and roads will propel the economy forward. The multiplier effect for investors and pension funds is clear.
The ANC mentioned the introduction of prescribed assets in its 2019 manifesto to fund infrastructure and social projects. Business and the investment industry then highlighted to the ruling party the negative impact this would have on foreign investor sentiment (foreigners own about 30% of SA government bonds) and on incentives to save into retirement funds.
Critically, a prescribed-asset policy shows that the government lacks the confidence or the ability to raise capital in the open market.
The ANC is no longer pursuing this concept. It listened to the pension fund industry, which told the party to look for investment opportunities in infrastructure — where returns could be significant. The industry is now waiting to see what opportunities are created and what governance will be put in place to ensure the money is not wasted or stolen.
Emigration, tax residence and delayed access to retirement annuities
Formally emigrating from SA is a complicated and lengthy process, requiring application via the SA Reserve Bank and the declaration of your non-resident status to the SA Revenue Service.
This triggers an “exit” tax in the form of capital gains tax on your worldwide investments and assets (excluding SA property). You then have a “blocked” rand account, which is cumbersome, and you give up your SA identification document but not your citizenship.
Most young people simply leave SA without notifying the authorities, not knowing whether they are coming back.
Many South Africans work abroad for more than 183 days a year in countries with zero or low tax rates, making them non-resident and exempt from SA tax. With little or no tax on their income, these earnings are then remitted to their families in SA, who barely contribute to the fiscus.
From March 2020, SA residents who work overseas for more than 183 days a year (of which 60 must be continuous) are taxed in SA on employment income exceeding R1.25m — but if a double taxation agreement exists (such as with the UK), they receive a tax credit in SA for any tax deducted by their foreign employer.
Simplifying emigration
The Treasury and the Reserve Bank want to simplify the process— and make it easier for former SA residents to return to the country. The intention is, from March 2021, to replace formal emigration through the Reserve Bank with a verification process based on tax residence.
As is the case for both residents and non-residents, SA-sourced income would continue to be taxed in SA — this includes rental income, living annuity income, and capital gains tax on SA property. Non-residents will apply for relief in their home country in terms of any applicable taxation agreements.
The recent draft tax-law amendments, now out for public comment, propose restricting access to retirement annuities for those leaving SA until they have been non-tax resident for three years.
This proposal has drawn criticism: the government has yet to explain its rationale, but it might well want to keep people from using emigration as an excuse to withdraw funds from their retirement annuities to settle debts. If they return years later, they could become a burden to the state in their retirement.
You will still, however, be able to draw on savings in a preservation or provident fund before leaving SA and paying the retirement tax.
Emigrants should also probably rent until they settle in a new country. Many change cities and suburbs quickly, and such moves can be expensive.
Many also pay significant amounts in retirement tax (up to 36%) when withdrawing their money, only to realise their mistake when they decide to return to SA. The retirement tax they pay is a permanent loss of capital, with a devastating effect on their retirement income.
A matter of trust
The need to focus on good governance and corruption is finally front and centre for the government. If that can be achieved, then we need public and private investment in infrastructure projects, which benefit society and can give pension-fund trustees and members the returns they want.
The ANC did consider prescribed assets, but there has been a big shift in the ideology to public-private partnerships. The investment industry knows it is important to invest in these projects, but it requires good governance.
The confusion and suspicion in the market is warranted, but at some point we need trust to be rebuilt. Only then will confidence return.
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