Palesa Mokoena, Business Development Technical Support Specialist at Glacier

In the Budget Speech held on 12 March 2025, the Minister of Finance, Mr Enoch Godongwana announced an increase in the value-added tax (VAT) rate from 15% to 15.5% effective from 1 May 2025. Palesa Mokoena, Business Development Technical Support Specialist at Glacier, takes a look at what this means for your clients’ investments.

VAT is the indirect tax levied on the supply of taxable goods or services by a vendor to any person. The supply of goods or services could be exempt from VAT (i.e. not subject to VAT) or levied at

• the standard rate(15.5% from 1 May) or
• a zero rate (i.e. 0%).

VAT is not unique to South Africa and is charged in more than 150 countries worldwide.

The supplier of goods or services must pay the tax over to SARS while the user pays the VAT when acquiring the goods or services. The VAT vendor mostly only acts as the collector of the tax, which is really paid by the financial consumer. VAT is a tax on the consumption of goods and services in South Africa, as well as goods imported into South Africa. VAT is also an inclusive tax, the price charged by the vendor mostly already includes the VAT.

Financial services and VAT

Financial services providers, such as asset managers, fund administrators, and financial advisors, charge clients for the administration, management, and advice related to the financial services supplied. Depending on the VAT status of the supply, these costs are either subject to VAT at the standard rate or exempt from VAT.

The supply of“financial services”, as defined in the VAT Act, is exempt from VAT.  One must therefore consider how “financial services” is defined.

The definition of “financial services” in the VAT Act:

• includes the provision, or transfer of ownership, of a life insurance policy but
• excludes the supply of discretionary investments and retirement funds.

Certain financial services are exempt from VAT

However, the charging of a separate fee for providing advice, in connection with the defined “financial services”, are specifically excluded from being “financial services”.

This means that an insurer’s supply of a life insurance policy (for example, a life annuity, living annuity, or endowment policy) is not subject to VAT.  The supply of a life insurance policy specifically relates to the provision of the policy. The supply does not include the other fees or commissionscharged on the policy, and as seen above was therefore specifically excluded from being part of the exempted financial services.

Given the above:

• VAT will not be charged on the administration fee (i.e. the fee charged for the supply of the policy) on a life policy.
• VAT will however be charged on financial intermediary fees as they do not fall within the scope of the provision of a life insurance policy.

For life insurance policies the VAT increase will therefore increase the financial intermediary fees but not have an impact on the administration fees.

Financial services that are subject to VAT

While some financial services, as defined in the VAT Act, are VAT-exempt, all costs, fees, commissions and similar fee-based charges relating to financial services that do not fall under the definition of financial services are subject to VAT at the standard rate.

As the supply of discretionary investments and retirement funds are not included in the VAT Act’s definition of financial services, all investment costs (e.g. administration, investment management, intermediary commissions and similar fee-based charges) associated with these types of investments will therefore be subject to VAT at the standard rate.

The VAT increase will therefore impact the cost of the administration fees and advice fees paid by clients with discretionary investments and retirement funds.

Summary

The rise in the VAT rate will impact clients’ investments by increasing the costs related to the financial services that attract VAT at the standard rate (unless the financial service provider absorbs the increase). Furthermore, it’s important to note that a small increase in VAT can compound over time and lead to lower investment growth as higher investment costs reduce the overall returns on investment over time.

For more information on how the Budget process works and the process of its approval, visit the Parliament website: https://www.parliament.gov.za/press-releases/parliament-and-budget-what-you-need-know

ENDS