Important notes and reminders

Increase in local asset allocation from 1 January 2018

NAMFISA issued a circular in June 2017, referring to a proposed staggered increase in the domestic asset requirement from 35% to 40% from 1 January 2018. The next increase will be to 42.5% effective 1 April 2018. This requires an amendment of Regulation 28 to become effective. To date no amendment to Regulation 28 has been promulgated yet. As a result the increase effective 1 January 2018 is not a legal obligation yet and it remains to be seen whether Regulation will be amended in time for the next proposed increment.

Newsletter

Dear reader

In this newsletter we examine whether it is better to invest yourself than investing through traditional investment institutions; we examine whether or not SSC benefits need to be declared on your tax return; we caution on the effect of pensioners having sources of income other than their pension; in the Benchmark column we explain why the Fund has discontinued providing pension backed housing loans; we give a brief insight into RFS’ corporate governance processes. We report on developments at RFS and in our business environment, and in our Benchmark Monthly Performance Review of 31 December 2017, we take a look at what 2018 may hold in store for us and the possible implications of this for investment markets and currencies.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals...

...and make a point of reading what our clients say about us in the ‘Compliments’ section. It should give you a good appreciation of who and what we are!

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Monthly Review of Portfolio Performance
to 31 December 2017

In December 2017 the average prudential balanced portfolio returned (-1.49%) (November: 0.40%). Top performer is Metropolitan (-0.60%); while Investec (-2.73%) takes the bottom spot. For the 3 month period, Stanlib takes top spot, outperforming the ‘average’ by roughly 1.13%. On the other end of the scale Allan Gray underperformed the ‘average’ by 1.34%.

What will 2018 hold in store?

The US tax code revision, the backlash against unfettered globalization, Bitcoin, the prospective withdrawal of quantitative easing by the ECB, the steep increase in crude oil prices, the possible return to a gold standard and the Korean crisis currently are probably the hottest topics that may impact financial and investment markets in 2018 and beyond.

The backlash against unfettered globalization has already led to the election of Donald Trump as president of the US in 2015 true to the adage that the wheel keeps turning. When the largest global economy is moving towards more protectionism and less globalization, other smaller economies will have to move towards more protectionism as a matter of course. Whatever one may think or say about president Trump’s lack of diplomacy and finesse, he is a businessman and not a diplomat unlike his predecessor, and he is starting to make an impact on the US economy that will reverberate on the global economy, with his America first credo. In its December 2017 approval of the most extensive tax-code revisions since 1986, the US Congress scrapped the previous international tax system for corporations - an unusual arrangement that allowed companies to defer U.S. income taxes on foreign earnings until they returned the income to the U.S. That “deferral” provision led companies to stockpile an estimated $3.1 trillion offshore and many were criticized for the moves.

Read part 6 of the Monthly Review of Portfolio Performance to 31 December 2017 to find out what our investment views are. Download it here...

Are Social Security benefits taxable?

The fact that SSC may not have deducted PAYE from any benefits paid to you, does not necessarily mean that they are not taxable. Whether or not a person is required to determine and withhold PAYE from any amounts it pays to another person is set out in Schedule 2 of the Income Tax Act. Schedule 2 of the Income Tax Act only requires a person to determine and withhold PAYE, if the amounts it pays meet the definition of ‘remuneration’ in the schedule.

In respect of social benefits, this schedule specifically excludes from this definition ‘any pension or allowance under the Social Pensions Act, 1973… or any grant or contribution under the provisions of section 89 of the Children’s Act, 1960…’. Evidently this does not refer to the Social Security Act, Act 34 of 1994.

Remuneration as per the definition ‘means any amount of income which is paid or is payable by any person by way of any salary, leave pay, allowance, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend…’ Without going into too much detail, in our opinion all these terms relate to an employer – employee relationship. There is clearly no employer – employee relationship between a recipient of maternity or sick leave benefits and the SSC.

But hold it, the definition now specifically includes any amount received or accrued by way of annuity, certain other amounts arising out of employment and certain amounts arising from membership of approved funds. Considering that amounts from employment are the responsibility of the employer while amounts from an approved fund are the responsibility of the fund administrator, the only remaining possible obligation for SSC to withhold PAYE can arise if the benefits would fall under the definition of ‘annuity’. The term ‘annuity’ is not defined in the Income Tax Act so one needs to refer to the common understanding of this term. The Oxford English dictionary defines an annuity as ‘fixed sum of money paid to somebody yearly, usually for the remaining part of his/her lifetime…’ Inland Revenue in fact has established the principle that an annuity requires a minimum payment period of 5 years. It is clear to me that neither any maternity –, nor any sick leave benefit falls into this definition as they are only paid for a limited period of less than 5 years. I therefore conclude that SSC is under no obligation to withhold PAYE.

As pointed out above this does not necessarily mean that these benefits meet the definition of ‘gross income’ and are therefore taxable. Looking at this definition it broadly includes anything derived from a source in Namibia, but specifically excludes amounts of a capital nature, and then goes on to include a whole list of specific amounts.

Conclusion

In short, I do not find any clause specifically including the SSC benefits. It then remains to consider whether it falls under the broad inclusions or the exclusion of amounts of a capital nature. The list of specific inclusions appears to implicitly exclude the SSC benefits as they do not derive from anything otherwise considered to constitute gross income. Generally receipts will only constitute gross income if they are the consequence of a deliberate effort to generate an income or to make a profit.

The flip side of this argument would be that the contributions by the employee towards these benefits are not made in the production of income and should thus not be tax deductible as required by section 17 of the Act. There is also no other specific deduction for these contributions in the Income Tax Act.
Having studied the SSC Act, it does not contain any overriding clause impacting the prescriptions of the Income Tax Act.

I thus do not believe SSC benefits fall into this category and am hence of the opinion that they do not constitute gross income and are not taxable.

Other income can result in tax surprises for pensioners

As administrator of a number of pensioner payrolls, RFS is deemed by Inland Revenue to be the employer of the pensioner. For income tax purposes pensioners are treated in the same manner as employees. The employer (RFS) is required to determine the monthly income tax to be deducted, from the PAYE 10 tables issued by Inland Revenue from time to time. These tables are based on the official tax scales that require progressively higher tax percentages to be applied as the taxable income increases from one level to the next. These tables assume that the only income of the pensioner is the pension/ annuity paid by RFS to the pensioner. Very often however, pensioners earn other income that will be added to the total pensions paid by RFS, when the pensioner needs to submit his/her tax return for a tax year. RFS as pension payroll administrator is obliged by the Income Tax Act, to only take into account the pension it pays and no other income.

In the Benchtest 09.2017 newsletter we pointed out that the social old age pension of N$ 1,200 per month is taxable. Since RFS does not take this into account, a pensioner paying tax at the minimum tax rate of 18% will be required to pay up an additional amount of N$ 2,800 on or before 28 February of any year, if he/she wants to avoid paying interest and penalties. At the maximum tax rate of 37% this surprise amounts to an additional tax of N$ 5,800.

Other income that may be the reason for such a ‘tax surprise’ at the end of a tax year is any business income, rental income or any interest earned that is not subject to withholding tax. Fortunately interest earned that is subject to withholding tax can be ignored as the 10% withholding tax is a final tax.

Other income in the form of ‘remuneration’ as defined in the Income Tax Act, e.g. trustee fees or directors’ fees, is subject to PAYE. However the person paying this ‘remuneration’ is also obliged to only deduct PAYE as if this was the pensioner’s only income. When this income is added to the pension the pensioner’s total income might be in a higher tax bracket and thus means that both RFS and the other person have deducted too little tax resulting in a ‘tax surprise’ for the pensioner at tax year end.

Any pensioner who earns other taxable income may request RFS in writing to deduct PAYE at a higher rate in order to avoid a ‘tax surprise’ at the end of the tax year.

Should the converse apply to a pensioner, i.e. a pensioner incurs losses in respect of another business run by him/her, RFS will require a tax directive from Inland Revenue instructing it to deduct at a lower rate than the PAYE 10 table prescribes or to deduct no tax at all.

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Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

The Benchmark Retirement Fund
Flagship of umbrella funds in Namibia
By Paul-Gordon, /Guidao-Oab, Benchmark Product Manager

The problem with pension backed housing loans

The trustees of the Benchmark Retirement Fund recently resolved to no longer grant pension backed housing loans as these pose a risk to the Fund.

In terms of the Income Tax Act, the Receiver of Revenue has a first right to claim against any pay-out from any approved retirement fund. Where an employer entered into an agreement with the Fund and a Bank to offer pension backed housing loans to its employees the employer and the fund are contractually bound to redeem any outstanding housing loan balance in the event of the termination of fund membership of a person who had taken up a pension backed housing loan from the Bank. In such an instance, the administrator of the Fund is required to obtain a tax directive from Inland Revenue prior to paying out any portion of the member’s benefit if the total benefit is more than N$ 40,000. Any amount to be paid to the Bank constitutes a termination benefit and therefore requires the administrator to obtain a tax directive. Where the member owes Inland Revenue tax, the tax in excess of the net after tax benefit payable to the member, remains due to the Bank in terms of the agreement between Fund, Bank and employer. Attempts would now have to be made to recover this money from the former member, between the Fund and the employer.

The situation with direct housing loans is quite different. In such cases the member borrows against his own interest in the fund. The maximum amount that is available to cover any tax debt of the member is the net after tax benefit of the member after the outstanding loan balance has been ‘offset’. Neither the Fund nor the employer faces any risk of recovering any remaining loan balance from the member.

The Fund will in future only grant direct housing loans where the member borrows against his own benefit in the fund. In the next newsletter I will expand on the conditions for granting direct housing loans.

Paul-Gordon /Guidao-Oab joined RFS as Manager: Audit and Compliance in May 2016 and has then moved into the position of Benchmark Product Manager. Paul holds a B Compt degree from Unisa and has completed his articles with SGA

1. Lack of empathy;
2. Fear of change;
3. Too willing to compromise;
4. Too bossy;
5. Wishy-washy;
6. Poor judge of character;
7. Out of balance;
8. Lack of humility.