South Africa

South Africa

Analysis: Taxing the relationship between ANC & Cosatu

Analysis: Taxing the relationship between ANC & Cosatu

T-day is coming. President Jacob Zuma has signed the Taxation Laws Amendment Bill into law and on 1 March the changes will take effect. While the Act, which most affects provident fund members, has caused a rift between Cosatu and the ANC, it's unlikely federation will follow its harsh words by shifting its voting power and campaign support. By GREG NICOLSON.

In the lead up to the 2014 general elections, Cosatu released a booklet encouraging workers to vote for the ANC. It listed the party’s achievements since 1994 – the Constitution, labour legislation and socio-economic advancements. Noting commitments in the ANC’s manifesto, Cosatu listed its own demands.

Even where there are disagreements, such as the weaknesses we have identified in some sections of the NDP, there is a clear commitment to have all our concerns properly and systematically addressed through Alliance mechanisms,” the federation told workers. “No party other than the ANC will help advance your rights as a worker.”

As another election approaches, Cosatu on Wednesday said President Jacob Zuma’s promulgation of the Taxation Laws Amendment Act has poisoned relations between the ANC government and the labour federation. Cosatu spokesperson, Sizwe Pamla, warned:

This will complicate the campaigning for the upcoming local government elections because workers will also find it hard to be persuaded to vote against their interests.”

Critics like former Cosatu general secretary Zwelinzima Vavi and the National Union of Metalworkers SA (Numsa) have been for years saying the ANC does not represent the interests of workers or the labour federation’s commitment to socialist policy. While advances have been made in implementing a national minimum wage, Cosatu’s demand to have e-tolls scrapped was unsuccessful; its fight against labour brokers led to a concession, but not a banning; the youth wage subsidy was implemented despite Cosatu’s dissent, and the NDP remains the state’s official plan for the future.

During the ANC’s birthday rally last weekend, Cosatu and SACP leaders addressed the crowd (initially they weren’t even on the line-up). Expressing support for the ANC, Cosatu President, S’dumo Dlamini, talked about unity:

We must re-learn and master the art of listening to each other.”

Dlamini took a different tone on Wednesday.

It talks to the levels of respect and the lack of consultation. We will have to address this issue sharply. This was one matter that was do-or-die for workers,” Dlamini told Business Day after the announcement that the Taxation Laws Amendment Bill was signed into law.

Cosatu’s statement was indeed scathing. It said the federation is “deeply incensed and disappointed”. It called the signing “an outrageous and blatant act of provocation by the ANC-led government” – “tyranny” – and said the state is “on a slippery slope of government autocracy”. The labour federation has consistently challenged the proposed law. When it was passed by the National Assembly in November, Cosatu called it a “declaration of war”. (Without Cosatu’s opposition, the Bill most likely would have become law a year ago.) On Thursday, the presidency issued a statement saying Zuma signed the Bill into law only after NEDLAC discussions, public comments, and approval from the National Assembly and National Council of Provinces.

While Treasury is doing a decent job explaining what the Taxation Laws Amendment Act means, it’s worth looking at what has caused the division, and what could have an influence on your retirement funds. The key changes affect provident funds. The law aims to harmonise policy on pension, retirement and provident funds in regards to annuitisation. Accessing pension and retirement funds already comes with mandatory annuitisation. That means you can get one-third of your benefits in a lump sum while the other two-thirds has to be invested in an annuity, which pays out a monthly income. Before the new law, provident fund members could access their full retirement benefit as a lump sum. If you retired, or were retrenched, you could get your full benefit, pay your debts or cover other large expenses like your bond.

The Taxation Laws Amendment Act brings provident funds in line with pension and retirement funds. The Treasury explains:

For provident funds, one-third of the retirement benefit lump sum may be taken as cash and the remaining two-thirds has to be annuitised with respect to contributions made after 1 March 2016 for those below 55 years of age. For example, with a retirement benefit of R300,000, the amount that may be taken as a lump sum is R100,000 and R200,000 would have to be annuitised, meaning the member would get a monthly income from this.”

Apart from simplifying the laws by treating the different funds the same, the change achieves a number of goals. According to Sanlam research, two-thirds of South Africans can’t maintain their standard of living when they retire. Subjecting provident fund benefits to annuitisation means you will be paid out in monthly rather than in a total lump sum, which will sustain you for longer and potentially reduce the financial burden on the state having to support those who have retired. The idea is simply that you won’t go broke after spending your retirement savings and have to rely on the state.

Across the different type of retirement funds, however, the new law has increased the amount required for annuitisation from R150,000 to R247,500. That means you can still take as a lump sum the full amount of your fund’s benefits if the total value is below R247,500. According to Treasury data, 83.5% of provident fund members earn R160,000 or less a year, and of those earners most retire with an average benefit of R300,000 or less. So based on current data most people with provident funds will still be able access their benefits in a lump sum. It is crucial to remember that the new law on provident funds will only apply to benefits accrued after 1 March, and the people over 55. All benefits from before 1 March, the so-called T-day, are treated under the old laws. The state has unequivocally said it has no intention to take over retirement fund savings, which will continue to be controlled by fund trustees. But, reportedly, tens of thousands of people have quit their jobs to ensure they can access their provident funds ahead of the change in legislation. Their fears were misguided as the new laws do not affect funds they have already accumulated.

The new Act also incentivises retirement savings. “T-Day is good news for most members because they will be able to make greater tax deductible contributions to retirement funds and they will effectively enjoy contribution flexibility for the first time,” said Kobus Hanekom of Simeka Consultants and Actuaries, in a briefing. The law allows for a 27.5% tax deduction up to a maximum of R350,000 per annum on retirement fund contributions. The increased tax breaks on contributions are estimated, according to the Treasury, to have around 1.25 million people see an increase in their take-home salaries.

The cap on tax deductions will negatively affect high-income earners, who claim more deductions, but for most it will be a positive. (Check this summary from 10X Investments on how provident, pension and retirement funds will be affected.)

While encouraging savings for retirement looks like a good thing for the state, Cosatu’s criticism is twofold. “These savings are part of worker’s hard-earned salaries and should be accessible to the workers, as and when they need them, especially in the absence of a comprehensive social security,” is the federation’s first point. Although the new law doesn’t affect any funds gained in the past, provident fund members can no longer easily access their future funds in lump sums to use how they wish. In future, they won’t be able to rely on using that full amount to pay their debt or their children’s university fees. Cosatu’s other problem is that the reforms have come before the comprehensive social security and retirement reform discussion paper has been published. It has delayed continually. That paper should provide the country with an analysis and plan on income security for all South Africans, including issues on grants and retirement savings.

It’s a good point, but once again Cosatu has lost a key debate. Its continued protests on the proposed law, while listened to, were in the end rejected. But what did the federation expect? For years it has been trying to influence government policy, sending members to Parliament, yet continues to lose out on high-profile issues. The debate over retirement savings could make it hard for Cosatu to campaign for the ANC in the local government elections, but while the labour movement is split and the party is under pressure Cosatu leaders have little choice but to flex what little muscle the federation has left before ultimately throwing their weight behind the ruling party.

Most of the reasons Cosatu told workers to vote for the ANC in 2014 arguably still stand. And when the Cosatu leadership expelled Numsa and Vavi it decided the federation’s fate. If the federation is serious, it will announce that it won’t campaign for the ANC in 2016, but Cosatu is unlikely to back up its strong statement with considerable action. Despite its protests on the new law, Cosatu will likely lose another fight and further divide the workers’ movement. DM

Photo: Cosatu President S’dumo Dlamini (Greg Nicolson)


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