How tax on interest will affect you

INTEREST earned on bank accounts and unit trusts is to be taxed soon.

From March 1, banks and unit trust managers have been instructed to withhold ten per cent tax on all interest earned to pay over to the Ministry of Finance’s Inland Revenue Service.
Although a more extensive response from the Banker’s Association of Namibia is expected before the end of the week, Standard Bank’s Finance Director Andrew Wilson was this week able to give a little more insight to Namibian bank account holders who may be concerned about how this development will affect their savings and pension plans.
He pointed out that the tax on interest earned will affect all individuals with bank accounts and all non-Namibian companies but will not target Namibian companies.
Wilson does also not expect the new tax to lead to significant increases in bank charges.
‘It is not a loss to the banks so I don’t think they are likely to increase bank charges. I think we will see the introduction of new competitive products that mitigate the losses to customers, possibly products that feature the waiving of certain charges,’ he said.
Although the new tax will certainly have some effect on savings, the good news about the new tax is that it is a final tax, meaning no other tax will be levied on top of the ten per cent, Wilson said.
Also heartening is the fact that most Namibian banks, together with the Banker’s Association, the Ministry of Finance and the Receiver of Revenue, have been preparing for months for this announcement, which follows amendments to the Income Tax Act made early last year.
Asked whether this new tax may prompt people to move their money out of bank accounts to alternative saving options such as Nampost saving books, Wilson said it depends on the general level of awareness among the public.
He say he hopes it will not lead to a significant outflow of money into other sectors within the common monetary area.
The other area affected by the new tax is unit trusts. According to Gunton Cloete, who currently chairs the association of unit trusts of Namibia, ‘it’s a new thing for us and there will be some system changes. It will be a trail period this year.’
However, Cloete is confident that most of the local managers will be able to handle the extra responsibility of withholding the ten per cent tax on interest earned and paying it over to the Receiver on time, thanks to the fact that many of the local asset-management firms are branches of bigger firms based in South Africa who all feature sophisticated back offices and have the systems needed to capture and deal with this data.
Cloete also pointed out that some of the funds operating in Namibia are pure equity funds that do not pay interest. However, the bulk of the funds in the country are money-market funds and will be affected.
The difference will be whether the fund pays out interest monthly or twice annually.
Cloete is confident the local industry will be able to identify affected clients and deal with the withholding of tax upon the declaration of interest income.
Asked whether this new tax will harm the desirability of unit trust investments, Cloete said the decision still lies in the hands of the investor.
‘Ten per cent is still less than the tax on affluent individuals who pay thirty-five per cent [personal income] tax,’ he said.
Local economist Emile van Zyl has another take on the situation. He explained that currently only N$500 of interest earned is exempted from tax.
‘Depending on the tax position of individuals, the current arrangement will most probably benefit most individuals, although those whose income is below the minimum tax threshold will be worse off,’ he said. ‘For many retirees, savings with banks were never really an option because of the taxability of interest earned with investments at banks,’ he said.
Investments in money-market unit trust schemes have become very popular investment instruments over the last number of years but as ten per cent of interest income may theoretically disappear, retirees will have to look at new or alternative investment opportunities that will offer higher after-tax returns, he said.
A large portion of savings have been relocated to money-market unit trust schemes since 2000, Van Zyl pointed out, and most unit trust companies have already restructured their investment products to make it tax efficient so the impact will not be that significant.
‘One benefit of the change in legislation is that it has evened the playing fields between banks and unit trust schemes. After-tax returns on investments at banks will become relatively much more comparable with those offered by unit trust companies and other alternative investment products. I do not expect any significant impact on savings for average Namibians,’ Van Zyl said.
‘People who do not have access to the more sophisticated non-bank investment products may now consider to open savings accounts with banks, although the tax issue will play a role for those who did not pay any tax before. Individuals with large savings may consider moving their money outside of the borders of Namibia in products which are either not taxable or returns on investments are not traceable,’ he said.
‘The introduction of taxation on money-market unit trust dividends will obviously have a negative impact on the industry as there was no tax issue before. The industry has already reacted by offering alternative products with similar risk profiles with quite attractive after-tax returns. The negatives for the industry are therefore limited.’ Van Zyl does not expect much impact from this move on Namibian attitudes towards saving.
‘Not much, although those who do not currently pay any tax will be discouraged to save in conventional instruments. This may result in the establishment or strengthening of the informal savings market,’ he said.