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Sunday Times STLive By Matthew Lester, 2012-03-18

Endowment policies need health warnings

Matthew Lester
Image: Business Times

Jeremy Clarkson reckons that if they invented the motor car today, it would never be allowed on the road. "Too dangerous, too environmentally unfriendly and generally antisocial," politicians would shout.

So now we tax fuel at R43-billion a year. And then add VAT, excise duties and carbon-emission taxes. Call me Bob if that's not R70-billion a year all in.

If someone suddenly invented booze today, the health authorities would ban it on the spot. But if you put an age restriction on the bottle, South Africa can collect R14-billion a year in sin tax, plus VAT. And smokers pay R12.5-billion a year in sin tax - plus VAT.

By justifying the unjustifiable, the state must collect R100-billion a year. So, if VAT only amounts to R210-billion in 2012, it would require a 50% increase in the VAT rate to replace sin taxes on cars, booze and smokes.

Now imagine if some bright spark said, "I've got a killer new concept for investment. Why not invest through an insurance policy. We can call it an endowment policy! We can tell investors their returns are tax-free. But actually returns will be paid through the individual policyholders' fund of the insurance company at a flat rate of 30% and capital gains tax at 10%.

"We can sell the product to buy out of after-tax income. When they could be making tax-deductible contributions to retirement funds where investments grow tax-free.

"Advisers will make fortunes. And when investors get tired of the sport, we can buy the policies back and sell them second-hand. And hit the investor with commission and capital gains tax again."

The 2012/13 individual taxpayers' tax table shows that the 30% tax bracket only kicks in at R250000 taxable income a year. And the 35% rate, at which level a tax saving is actually achieved after costs, only applies from R346000 a year.

There are only about 500000 South Africans who earn that much.

Ten years ago, taxpayers attained a 30% tax rate very quickly. So investment through insurance policies was fair game for many. But recent tax reforms have changed that for most.

If booze and cigarettes must carry health warnings, then so should endowment policies: "Not for sale to anyone who has taxable income below R346000 a year." And advisers should have to sign a declaration that they have examined the taxpayer's most recent tax assessment before the investment is placed.

  • Lester is a professor at the Rhodes Business School, Grahamstown. See www.criticalthought.co.za