SARS going after one group of taxpayers

The South African Revenue Service (SARS) will penalise 213,654 taxpayers who understated their income to fall within a more favourable tax bracket after withdrawing money through the two-pot system.

inSite Connect communications director Sarah Heuer said that some taxpayers’ two-pot withdrawal incomes may have put them in a higher tax bracket.

The new two-pot system allows South Africans to withdraw a portion of their retirement savings yearly before retirement while another portion is kept in a vested “pot”.

The idea was to grant people early access to their retirement savings under special conditions, like emergencies.

Heuer explains that some people may have ended up in a higher tax bracket because this extra income gets added to the taxable annual personal income amount.

This two-pot system came into effect in September 2024 and South Africans have withdrawn around R42 billion from their retirement savings.

Alexforbes found that people, on average, withdrew about R19,000 from their retirement funds.

However, SARS taxes the money from retirement funds that individuals apply for and gain early access to through the two-pot system.

Therefore, if people understate their incomes, they will need to pay the outstanding tax on the income from the two-pot system and a penalty for understating their income.

This additional cost can be problematic for some people who do not have the cash to pay the penalties.

These people may need to tap into their retirement savings even more to be able to make the necessary payments.

This can be troublesome because many people made substantial withdrawals using the two-pot system.

Heuer explained how this can turn into a vicious cycle of people withdrawing more from their retirement funds to cover the accruing debt they owe SARS.

Furthermore, large asset managers have explained that while the system was designed to help people in financial emergencies, they fear that some of the money was withdrawn for wants rather than needs.

However, the sheer volume of withdrawals shows that South Africans are under immense financial pressure, with hundreds of thousands taking the opportunity to earn extra cash.

Additionally, the people withdrawing the cash from their retirement funds are often people near their retirement age and people in their thirties.

These people are still economically active but often also have families and many other financial responsibilities.

People largely withdrew funds from the new two-pot system to settle short-term debt and cover expenses related to their homes or cars.

Large asset managers also said that many people had chosen against withdrawing money through the two-pot system after hearing about the tax implications and the effect on their overall retirement fund.

Some of these costs also include the additional money that they might forego in their funds, which would create a material dent in their retirement capital.

This diminishes the growth potential of retirement funds and is reflected in the substantial opportunity cost of compounded growth that these individuals lose.

For example, withdrawing R1 from a retirement fund 30 years before retirement could reduce the future value of an individual’s savings by around R6 in real terms.

Additionally, a large portion of the early access two-pot money goes towards taxes, whereas this is not the case when someone has retired.

However, for other people, the need to withdraw money weighed heavier than the tax implications and the implications for their savings.

SARS Commissioner Edward Kieswetter said the taxpayers who tried to declare the incorrect tax amount to land in a more favourable tax bracket are intentionally involved in evading their tax obligation.

Kieswetter said that this behaviour borders on criminality.