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How Mboweni could raise R10bn from potentially willing tax payers

Investors could end up with a much higher fund value, and the minister with a bit more cash in the kitty.

I have often wondered whether the penalties on excess contributions to tax-free investments are worth gaming. At the moment, any excess contribution over the annual limit of R33 000 is taxed at 40%. So, if an investor inadvertently transferred R330 000 to their tax-free investment, Sars would levy a tax or penalty of R118 800 on that contribution. It seems harsh at face value.

However, I recently played with the idea of an investor contributing the lifetime limit of R500 000 in one year, and calculating whether or not the net investment (R500 000 less penalty) could be worth more than if the investor were compliant and simply contributed the annual limit. A fairly basic calculation assuming an 11% per annum return shows that the investor, who takes the penalty, could actually end up with a balance of roughly 18% more than their compliant counterparts.

Net investment in year one: R313 200 (R500 000-R33 000)*(1-40%)

Expected average annual return: 11% pa

Term: 15 years (period for compliant investor to make life time limit contributions)

Expected value of non-compliant investor TFSA portfolio: R1 663 372

Expected value of compliant investor TFSA portfolio: R1 404 447

The non-compliant investor is potentially better off having paid the penalty. But the margin of outperformance is too small to incentivise any astute investor to take the risk. However, that margin improves at higher returns as follows:

12% average return: 24%

13% average return: 29%

Arguably, an investment with a 15-year horizon should be able to target and achieve an average return of 11% to 13% per annum.

But, what if the Honourable Finance Minister Tito Mboweni, who is looking for ways to increase revenues, decided to reduce that penalty for a period? Based on my experience in dealing with high-net worth investors (HNWIs), many have opted not to invest in tax-free savings because the R33 000 per year is an irritation factor and not worth the additional administration of completing forms every year.

A number of these investors have indicated that they would consider a once off contribution of R500 000.

A reduction in the penalty from 40% to 30% would increase the additional return of a non-compliant investor from 18% to over 36%! That would potentially be enough to galvanise a number of high-net worth individuals to take the penalty. If they achieve a 13% pa average return, the additional return would increase to over 48%. So, investors would end up with a much higher fund value, and the minister with a bit more cash in the kitty.

Net investment in year one: R359 900 (R500 000-R33 000)*(1-30%)

Expected average annual return: 11% pa

Term: 15 years (period for compliant investor to make life time limit contributions)

Expected value of non-compliant investor TFSA portfolio: R1 911 391

Expected value of compliant investor TFSA portfolio: R1 404 447

How much tax could Mboweni raise?

According to 2018 tax statistics, there were just over 260 000 individuals who earn more than R1 million per annum. When factoring in trust fund babies and other wealthy individuals who earn primarily from dividend income, that number could increase further but there would likely be a big overlap. Let’s assume that 75 000 high-net worth individuals sign up for this incentive. At a 30% penalty, the minister could raise over R10 billion in revenues. That number climbs to R14 billion if 100 000 HNWIs sign up.

Given that a 30% penalty could result in the tax payer ending up with potentially 36% more capital in their investment than if the status quo remained, this could be a win-win situation.    

Craig Gradidge is executive director of Gradidge-Mahura investments. 

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COMMENTS   13

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Surprised if there are any ‘willing tax payers’ left in the country. Then again to call it ‘tax’ is a joke, more like a donation to a criminal state.

Hello Craig: This is undoubtedly the strangest or most original investment and tax collection proposal I have seen in my life. I am 73.

I could not agree more. When on pays tax one actually feels that one is supporting corruption and wastage.

Expected average annual return: 11% pa HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA
Those days are gone. Great example in a year where many LOST money on their retirement benefits. Hyperbole at its best.

Haha this was my reaction too. I love how the article makes it sound so casual like “yeah so if you just get 11% return consistently over a period of 15 years, you’ll be fine”.

Here’s a better solution….just take the R500 000 offshore NOW and your returns are likely to be double that of the JSE, CGT will be lower and there is no VAT payable on advisors’ fees. Why still mess around with the local funds?

Find me a willing tax payer and I will find you a non-corrupt ANC cadre.

They do not exist.

Dear Mr Mboweni, an easy way to get additional funds for Treasury is to declare interest on RSA Retail Bonds tax free. These bonds it will become extremely popular overnight.

Government intends to prescribe (nationalize) your retirement savings soon and we’re practically at junk status.

If you’re thinking of 15 year investment horizons, you should be thinking 3 instead. Also you should have at least 50% of savings abroad while you play the slot machine of local funds with the other 50%.

You certainly don’t want to be fiddling with getting money out when Rome starts burning. And if the pessimists are wrong, at least you’re diversified.

10 billion is pocket change. Stop the regime and hundreds of billions will return to the economy.

Stop squeezing those who keep the economy running and go after those who have sabotaged it!

If Tito followed this advice and the investors supported it, this would show the first bit of good faith between SARS and the taxpayer plus would probably encourage outside investment in this market – money is flowing out because there is no confidence in corporate SA OR political SA. It would take A HUGE leap of faith to support this, but might just be the tonic we need! Otherwise, I agree, if we’ve really given up totally, it’s better to take the cash offshore and rely on the devaluation of the Rand to give you a better return.

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