CAPE TOWN — Finance Minister Trevor Manuel has halved the tax on retirement funds in a move expected to significantly increase the level of savings in the country.

The measure announced in the 2006-07 budget tabled in Parliament yesterday will cost the state R2,4bn, and is a prelude to far-reaching changes which are pending in the structure of the life industry.

Government hopes the tax cut from 18% to 9% — which the life industry has fought to achieve for many years — will assist in redressing SA’s notoriously low savings rate.

The tax cut will benefit retirement fund policyholders rather than life companies themselves as it applies to the investment built up in the funds. Lowering the tax will, however, make retirement products more attractive to investors and thereby boost the business of the industry.

Manuel also maintained the momentum of foreign-exchange control relaxation by raising the limit on amounts individuals can take offshore.

His announcement comes in the wake of last year’s liberalisation measures, and is in line with government’s commitment to gradually lift existing controls on the movement of funds.

Individual foreign-exchange control limits will be raised from R750 000 to R2m, while the minimum foreign direct investment in Africa has been lowered from a 50% shareholding to 25% to encourage business activity on the continent.

The R41bn additional tax generated in this fiscal year by a booming economy allowed Manuel to lighten the tax load on individuals (poor to middleincome earners) by a net R12bn.

The corporate tax rate remained unchanged, but companies will pay R7bn less tax this year — an effective two percentage point cut in the rate — because of the abolition of the regional services levies in July, which Manuel said would not be replaced “for the foreseeable future”. Over the next three years companies will pay R24bn less tax because of this.

A tax amnesty for small businesses was another feature of the R446bn budget.

Total tax relief of R19bn also included the R4,5bn abolition of transfer duty on the sale of houses at less than R500 000.

Manuel was optimistic, saying “this is the year of plenty when all South Africans will reap the fruits of economic growth”.

“Business confidence is strong, investment and employment creation have gained momentum, inflation and interest rates remain moderate. The economic outlook is exceedingly favourable — more promising than has been seen in 40 years”.

Government is projecting a growth rate of 4,9% in the coming year, and an average of 5% over the next three years.

Despite a budget deficit of 0,5% of gross domestic product in the current year and a forecast 1,5% deficit in the next fiscal year, the budget was expansionary, Manuel said, as it provided for a real growth in noninterest government expenditure of 7,9% as well as tax relief.

The economy will also be stimulated by medium-term investment of R372bn to be made in infrastructure by the public sector.

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