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Warning Over Government’s Plans to Change South Africa’s Emigration Finance Rules

A number of tax and financial groups have issued warnings over a new draft bill which will introduce changes for South Africans looking to take their retirement funds out of the country.

Under the current system, members of preservation funds and retirement annuity funds may withdraw from such funds if they formally emigrate from South Africa for exchange control purposes and their emigration is approved by the South African Reserve Bank

However, changes in the draft Taxation Laws Amendment Bill (TLAB) will effectively phase out the concept of emigration for exchange control purposes.

The amendment will mean that South Africans emigrating from the country will only be able to make a withdrawal when a retirement fund member has ceased to be an tax resident and has remained so for a consecutive period of at least three years.

The change has come under fire as the TLAB was the subject of public hearings in parliament on Wednesday (7 October).

Impractical and draconian

“The proposed requirement that an individual be non-resident for a period of three years prior to being entitled to access retirement funds is impractical, draconian and will present administrative difficulties for both SARS and taxpayers,” said professional services firm PwC in its submission.

The firm said that where an individual permanently departs from South Africa, the proposed rules could – depending on the particular circumstances of that individual – result in considerable financial hardship for an extended period of time before retirement funds are available.

“Under the current rules, a person who emigrates is entitled to withdraw their retirement funds immediately. Under the proposed rules, they would now need to wait for at least three years before being able to do so,” the firm said.

“Retirement funds are frequently required by emigrants to make emigration financially viable and the proposed rules will severely impact this.”

As an alternative, PwC recommended that the proposed three-year residence rule should be replaced with another ‘more practical rule’.

“For example, it could be linked to a person ceasing to be ordinarily resident in South Africa – as opposed to necessarily not tax resident,” it said.

The opposite of modern

In its submission,  Tax Consulting SA said that the amendment is at ‘cross purposes’ to its intended goal of a more ‘modern’ exchange control system.

It highlighted that under the new system , retirement benefits will effectively be locked in and will be inaccessible to the individual in question for a minimum period of three years, even after they have left South Africa permanently.

This restriction will only be lifted once the taxpayer in question is able to prove they have been non-resident for an uninterrupted period of at least three years.

“By any measure, this new test is the opposite of modernisation and a step back towards locking in retirement funds after becoming non-resident for tax and exchange control purposes,” it said.

“Furthermore, if the test is to be based on residency, it is not clear why withdrawal is subject to a period of three full years. If the taxpayer has ceased residency, why impose a punitive lock-in of this extent?,” the firm asked.

Tax Consulting SA that the proposed amendment will do away with a well-established process that allows emigrants to freely expatriate their retirement benefits with one that is far more restrictive and less transparent.

 

For information as to how Relocation Africa can help you with your Mobility, Immigration, Research, Remuneration, and Expat Tax needs, email info@relocationafrica.com, or call us on +27 21 763 4240.

Sources: [1], [2]. Image sources: [1], [2].

Finance Minister Tito Mboweni Tries to Keep the South African Reserve Bank from Being Nationalized

Finance Minister Tito Mboweni took to Twitter recently to ask what the ANC wanted to achieve by nationalizing the bank.

The African National Congress (ANC) has cautioned Finance Minister Tito Mboweni to be aware of the implications of his comments about the party’s position to nationalize the South African Reserve Bank.

Mboweni, who is also an NEC member, has tweeted that the ANC adopted the wrong resolution during its policy conference in 2017 by wanting the central bank to be nationalized.

The issue of what purpose the reserve bank should and should not serve has once again played out within the ANC.

Mboweni took to Twitter recently to ask what the ANC wanted to achieve by nationalizing the bank.

“As a long standing member of the ANC and its leadership structures, I know and understand our resolutions. I don’t need lectures on that. But on the SARB, I am convinced that we adopted a wrong resolution. What do we want to achieve? Our Strategic focus: Structural Economic Reforms,” Mboweni said recently.

“As of now, 90% of the SARB profits are handed over to the National Revenue Fund. So? What do we want to achieve? Tell the public. Lets debate. Don’t say internal debates, this is a fundamental National debate. Answer the question. What do you want to achieve by nationalizing the SARB. Don’t tell me about internal debates, NEC, etc. what do you want to achieve? Lets answer that fundamental question. Party spokesperson Pule Mabe said that the leadership of the ANC was expected to be consistent, coherent and united on policy positions. The leadership of the ANC is expected to appreciate the need to articulate a consistent, coherent and unified message on policy positions. Unfortunately, public spats initiated without any provocation feeds into the narrative of lack of policy certainty,” he continued.

ANC leaders counter-attacked each other last year about the mandate of the central bank, with some saying the mandate of the institution should be expanded to include job creation.

The party said that only the ANC national conference had the right and power to change any decisions.

 

For information as to how Relocation Africa can help you with your Mobility, Immigration, Research, Remuneration, and Expat Tax needs, email info@relocationafrica.com, or call us on +27 21 763 4240.

Sources: [1], [2]. Image sources: [1], [2].

Key Facts to Know About the SA Reserve Bank, and Its Potential Nationalization

Public debate about the Reserve Bank is never too far away, and went up a notch higher in the run-up to the recent South Africa’s May 2019 national elections.

The ruling African National Congress said it intends to nationalize the central bank. “There is no hidden agenda, there is no manga-manga business,” President Cyril Ramaphosa told a parliamentary question and answer session in March 2019.

The ANC’s push for nationalization is supported by the Economic Freedom Fighters, the second largest opposition party. In August 2018, the EFF tabled the South African Reserve Bank Amendment Bill, which seeks to make the state the sole owner of the bank. It is still under consideration by the National Assembly.

Nationalization is opposed by the Democratic Alliance, the official opposition. And several economists, including Reserve Bank governor Lesetja Kganyago, say the bank should remain independent.

Yet others have argued nationalization will not make much difference.

But what does it all mean? Below is some key info that is worth knowing about the Reserve Bank, and its possible nationalization.

1. What is the South African Reserve Bank?

The Reserve Bank is the central bank of South Africa.

It was established in 1921 to protect South Africa’s commercial banks after a rise in the gold price following World War I put them at risk. It took over responsibility for holding gold and issuing bank notes.

The bank has since taken on a number of other duties and its mandate is protected by the South African constitution.

2. What does the Reserve Bank do?

Its main function is to protect the value of the rand, South Africa’s currency. The bank says a stable currency reduces uncertainty in the economy.

One way to protect a currency’s value is by controlling inflation – an overall increase in the price of goods and services.

Inflation is measured by defining a basket of goods and services that a typical person would buy. The increase or decrease in the cost of that basket over time gives you the inflation rate. A positive inflation rate means people have to pay more for the basket, even though no extra items have been added. It also leads to other “distortions” in an economy.

The Reserve Bank tries to control inflation by setting a target for price increases from one year to the next. Currently, the inflation rate should range between 3% and 6%. The bank tries to meet this target using policies such as setting the rate at which commercial banks can borrow money or requiring them to keep a cash reserve.

But why is a stable currency important?

“It ensures that what I can load in my supermarket trolley this month can also be afforded next month or in six months from now without me having to adjust my budget,” Charles Wait, professor emeritus in the economics department at Nelson Mandela University, told Africa Check.

This is particularly important for people who can’t increase their income when prices rise. “Think of pensioners or those relying on social grants from the state.”

A stable currency also helps businesses plan for the future with greater certainty. “There are less concerns about… the prices of inputs and outputs or the cost of expanding activities,” Wait said. The same is true for the government when it draws up its medium-term budget of costs for the next three financial years.

“One complication in estimating costs in year three is the degree of inflation that is likely to occur between year one and two… for example, the budget presented to parliament in February 2019 was planned during 2018 but has to forecast until [the] end of March 2022.” An unstable currency would complicate this further, Wait explained.

3. How does the bank function on a day to day basis?

The bank also provides some banking services to the central government and oversees the movement of currency between countries.

It is also the banker for commercial banks. It provides banks with cash when there are cash shortages, holds some of their cash reserves and supervises the South African banking system in general.

The Reserve Bank also issues banknotes and coins. Commercial banks then make these available to the public.

4. Is the Reserve Bank independent?

The bank enjoys a “considerable degree of autonomy”, it says on its website. Its mandate and independence are guaranteed by the constitution, which says the bank “must perform its functions independently and without fear, favor or prejudice”.

The constitution is the highest law of South Africa. Any changes to the constitution require support from two-thirds of the National Assembly and six out of nine delegations from the National Council of Provinces.

So changing the founding structure of the Reserve Bank would not be easy. Some people, including the reserve bank governor, believe this is rightly so.

“A central bank has normally got a monopoly in producing the country’s banknotes and coins,” Wait said. “It holds the key to the printing press. That key must be kept under a safe lock because if too much money is printed and put into circulation, we can get a situation where too much money chases too few goods.”

This could result in hyperinflation, seen in Zimbabwe and, more recently, Venezuela.

This could especially be the case where a government, not understanding the risks of inflation and overspending, sees a country’s central bank as a source of funding for its budget deficit.

A budget deficit is when a government expects to spend more money than it collects, according to a guide to South African government budgets.

“The SARB is legally restricted in its ability to bailout the government in cases of the latter’s budget deficits. When [Tito] Mboweni was the president of the SARB he spoke about the need to tighten these screws,” said Wait.

“At times of undesirably high levels of inflation, this independence is essential for the bank to be able to carry out its constitutional mandate of protecting the value of the currency.”

5. Who owns the Reserve Bank?

The bank is owned by about 750 private shareholders who together hold 2 million shares. Most shareholders are individuals but some shares belong to companies, trusts, provident funds and unions.

For example, Anglo American, a multinational mining company, and Discovery, a South African financial services group, own 10,000 shares each. The National Library of South Africa owns 200 and the Nelson Mandela Children’s Fund owns 100.

During the March 2019 parliamentary question and answer session, Ramaphosa expressed concern about the bank’s “external shareholders who live in various countries in the world”. The bank’s latest Shareholder Index report shows that about 11% of its 2 million shares are foreign-owned.

6. Who can buy shares?

Anyone can buy shares over the counter. The bank regularly publishes the price of its shares and the number of shares available.

As at 7 May 2019, shares were trading at R8 each. There are currently 3,786 shares on offer to sell.

Investors may not buy more than 10,000 shares each. And a prescribed maximum yearly dividend has been set at 10 cents per share. This means that even if an investor owns 10,000 shares, the most they can make in a year is R1,000.

7. What powers do shareholders have?

Shareholders have the power to:

  • Elect seven of 15 board members
  • Attend the annual “ordinary meeting of shareholders” at the bank
  • Approve the annual report on the state of the economy
  • Appoint external auditors

Shareholders do not have the power to:

  • Influence monetary policy
  • Instruct the day to day management of the bank
  • Appoint executive board members.

These last three functions are carried out by the Monetary Policy Committee, the bank’s governors, and the South African President respectively.

8. What other assets does the Reserve Bank have?

The bank is almost 100 years old. In that time it has built up a portfolio of assets that include shares, gold and foreign exchange reserves.

As at March 2019 these assets totaled R793 billion.

9. What would ‘nationalizing’ the Reserve Bank mean?

Nationalizing the bank would make the government its sole owner. According to Ramaphosa, this would “confirm” South Africa’s sovereignty.

Prof Jannie Rossouw, head of the school of economic and business sciences at Wits University, wrote in August 2018 that a change of ownership would not necessarily be a bad thing.

“A large number of central banks have been nationalized since 1945,” he told Africa Check. “So the world trend is in favor of nationalization with shareholding becoming a rare exception.”

(Disclosure: Jannie Rossouw was previously employed by the Reserve Bank and owns shares in the bank.)

There is a misconception that ownership would give the government control over the bank’s monetary policy. “The shareholding structure and whether we nationalize or not will have no impact whatsoever on the constitutional mandate of the bank,” Rossouw said.

Prof Andrè Roux, head of the Futures Studies programs at the University of Stellenbosch Business School, agreed.

“Shareholders actually have very limited rights,” he said. “So nationalizing the reserve bank won’t make much difference unless the Constitution is changed, which I think is very unlikely.”

 

For information as to how Relocation Africa can help you with your Mobility, Immigration, Research, Remuneration, and Expat Tax needs, email marketing@relocationafrica.com, or call us on +27 21 763 4240.

Sources: [1], [2]. Image sources: [1], [2].