Budget 2023 – key take-outs for financial planning
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There were two notable tax relief measures in the budget – namely the rooftop solar panel tax incentive and the adjustments to transfer duty and tax incentives on retirement fund lump sums. Clarity was also provided in terms of governments proposal regarding the two- pot retirement system and there was some indication that further tax incentives would be removed for non-tax residents.
- Rooftop solar tax incentive
Government has recognised the need to incentivise South Africans to increase electricity generation by installing solar panels. Individuals will be able to receive a tax rebate to the value of 25 per cent of the cost of any new and unused solar PV panels.
The budget speech focused on this section of the tax relief. It’s encouraging to see this relief come through as there is clearly a massive power generation issue in South Africa so any incentive that encourages people to generate their own power is welcomed. It’s important to note that this incentive is very much focused on power generation and therefore does not apply to things like inverters or batteries. Furthermore, the benefit is valid from 1 March 2023 to 29 February 2024 so anyone who wants to benefit from the tax incentive must ensure that they obtain their certificate of compliance in this timeframe.
This rebate is for the solar panels, so if you install around 12 solar panels (which is the average amount required for a household), you could qualify for a tax deduction up to R15 000. At a personal tax rate of 45%, this amounts to just under R7 000 coming back into your pocket which is more incentive than if there was no rebate at all.
- Adjustment of transfer duty and retirement tax tables
Government has also decided to review the tax advantages provided to retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits which will all be adjusted upwards by 10 per cent to compensate for inflation.
There is also an adjustment to the transfer duties which will be a welcome relief for first-time property buyers.
The most significant benefit however is for retirees. The tax-free portion for retirees has increased from R500 000 to R550 000, which is the first increase to the tax-free portion in many years. All the tax brackets for retirees have also shifted by 10% to provide relief. While some commentators may want to see a larger increase in these brackets and the tax-free amount, any relief is better than nothing and could go a long way to helping many people.
The fact that the amendments to the withdrawal brackets were less significant is entirely intentional as government does not want to encourage withdrawals. This is no surprise and is a sensible move.
TWO POT RETIREMENT SYSTEM
In last year’s budget, government indicated that they planned to introduce the two-pot system. Following extensive public consultation, it was decided to postpone the implementation until 1 March 2024.
The proposal is for retirement funds to cater for 2 separate pots made up of one third and two thirds of all retirement fund contributions. Members will be able to access the one third pot (savings pot) at any stage prior to retirement as a lump sum. However, they will not be able to access any portion of the two third pot (retirement pot) as a lump sum (even on resignation). This will only apply to new contributions made after the implementation of the two-pot system. The intent of these amendments is to enable pre-retirement access to a portion of one’s retirement assets, while preserving the remainder for retirement.
Retirement fund contributions will remain deductible up to R350 000 per year or 27.5 per cent of taxable income per year – whichever is lower.
Permissible withdrawals from funds accrued before 1 March 2024 will be taxed according to the lump sum tables. Withdrawals from the “savings pot” before retirement will be taxed at marginal rates. On retirement, any remaining amounts in the savings pot will be taxed according to the retirement lump sum table (for example, R550 000 is a tax-free lump sum on retirement).
This is a very encouraging move as it is essentially aiming to solve two problems: 1. People can still get access to some of their retirement money in tough times, and 2. The integrity of longer-term retirement savings is also preserved. Currently, many people are accessing their full retirement savings which leaves them in severe financial distress when they retire.
Government has indicated that four areas of this proposal require additional work: a proposal for seed capital, legislative mechanisms to include defined benefit funds in an equitable manner, legacy retirement annuity funds and withdrawals from the retirement portion if one is retrenched and has no alternative source of income. The first three matters will be clarified in forthcoming draft legislation. The final matter will be reviewed as a second phase of implementation.
APPORTIONING TFI INVESTMENT CONTRIBUTION LIMIT AND RETIREMENT FUND CONTRIBUTIONS DEDUCTION LIMIT FOR NON-TAX RESIDENTS
In 2022, government introduced legislation that meant when an individual ceases to be tax resident then the annual interest exemption was apportioned and the capital gains tax annual exclusion applicable to individuals in was limited. To ensure there is alignment with the Act’s other provisions for individuals ceasing to be tax residents, government has proposed that further changes be made to section 12T(4)(a) to apportion the tax-free investment contribution limitation and section 11F(2)(a) to apportion the annual limit on the deduction of the retirement funds contributions.
Again, this is a sensible move as it prevents people who are not tax residents in South Africa benefitting from tax provisions.