Wednesday, 23 June 2021

Reform black tax, make it less taxing

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Reform black tax, make it less taxing

Ntombizamasala Hlophe
Strategy Director, Yellowwood

Black tax, in equal measure is both fit and fatalistic. Fit because it is a generational affirmation of the spirit of Ubuntu when you can pay forward the support received within the same lifetime; and yet it has become fatalistic in many ways as it has been attributed with knocking down the chances of building generational wealth. While it is a common practice in many cultures, with black Africans it has become an increasingly burdensome obligation on the income earner to look after a widening list of direct and indirect dependents.

It has become a harsh reality about being black in South Africa, each generation that is swallowed into the worsening consequences of a sluggish economy to do the heavy lifting of mitigating the effects at a social level. The effect of this pressure will no doubt be fatal to the fitness of Ubuntu.

In truth families should help each other, importantly though families should be able to help each other. From the many conversations to the books that have been written on the subject, it is evident that our current approach to families helping each other has become fundamentally flawed.

Today’s black tax model is largely a cash transfer system, with an increasingly complex network of dependents and extending list of needs for arguably diminishing base of income.

The time is ripe to advocate reforms to black tax that preserves the spirit of Ubuntu and gives the current income earning generations (Millennials / Gen X and Z) a fighting chance at building wealth.

Our answer to this pressure may lie in the holy grail of wealth creation, long-term thinking beyond cash. If we accept that ultimately black tax at its core is investing with a long-term view; then that same model has the potential to reform black tax as well as provide the next generation with the foundation they need to succeed.

If we reframed the definition of the assets available from the income earner (supporter or primary provider in visual 1) beyond just cash to the broader financial participation that includes property assets, access to finance, credit behaviour, access to medical insurance; the resources available to fund black tax could be significantly expanded.

Consider the effect of reframing the homeownership to a scenario where a black professional instead of handing out monthly payments to the family back home, invests in a property and uses the rental income to pay for the lack of a better word his or her share of the black tax. What used to be an out-of-pocket expense is now essentially an investment towards an income generating asset.

We could argue over the simplicity of the suggestion but there is no debate in the discussion that access to financial services is the passport to the modern economy. But despite the progress over the last decade, majority of families are still left out of the financial services mainstream. Herein lies a key opportunity for financial services providers (FSPs) to democratise black tax.

Traditional approaches to wealth management dictate that a wealth manager carefully assess an individual’s financial situation and execute a holistic plan. In this process FSPs focus merely on affordability and net pay rather than on the collective wealth of the family and earning potential in the long term.

For more disruptive FSPs, black tax presents an unbridled opportunity if they show a refined understanding of how a black family’s wealth is distributed among different age cohorts – from school going children, to the unemployed, the employed and retirees. Unlocking this inherent value needs a new model and demands of FSPs to build products appropriate for the family’s circumstances and around people.

In simpler terms, when you pay tax over to the government, it works for you through infrastructure development, medical care, education, policing etc. There is no reason why black tax cannot be used in a similar fashion with focus only and squarely on all the members of a single family and move them towards financial stability in the long term.

It is about time to start looking at black tax with the end result in mind.

There is no one-size-fits-all plan for building generational wealth. However, one social model that holds promise needs partners in FSPs that can look at generational segmentation within a family. There is evidence to show that the financial, behavioural, and life-stage attitudes of different generations are unique and together can be leveraged tacitly for wealth creation.  This is one way we can make black tax less taxing for modern generations.

The current model is not fit for purpose. For example, the cohort of children currently in the schooling system in over two decades will without constructive disruption simply replace their parents. By which we mean, secure a job and continue to support their family through black tax and never really get off the starting blocks towards a healthy financial run.

A new socio-financial model which champions “greater familial financial inclusion” is possible and could be the reform that black tax needs. A household with full access to the financial system through the collective power of all the family members – affordable banking, debt consolidation, insurance against key risks, access to credit and a savings strategy stands the best chance to create wealth. While many families take these services for granted, for black families gaining access to the whole puzzle is the best pathway to success.