Black Tax: What to look out for

What is black tax?

Wealth creation is elusive when one earner supports many – this is the current dilemma faced by many young black South Africans when it comes to Black Tax. Black Tax is a term coined by many to define financial support to extended family within black communities.

Head of Financial Education at Old Mutual Limited, John Manyike says that Black Tax can cause problems. “Whilst the efforts made through Black Tax benefit individuals and communities, these very same efforts can also inadvertently create a cycle of financial adversities for families.”

The conversations around Black Tax should be centered around shattering the shackles of poverty within previously disadvantaged families. Black Tax is often linked to complicated emotions and should be approached delicately.

“The issue of Black Tax is a complex one characterised by a balancing act between the responsibility felt to immediate and extended families and the desire to attain financial freedom,” said Manyike.

While many people contribute to their families in this way, in some instances, it can cripple the future financial aspirations of an individual, especially in the case of the youth. Young professionals who come from previously disadvantaged backgrounds often remain in the same financial position for an extended period because they need to support their parents, siblings and extended family on a single salary. This is further compounded by the fact that South Africa’s economy is currently severely strained – compounded by rising fuel process and increasing living costs.

According to research conducted through the Old Mutual Savings & Investment Monitor (OMSIM), Black Tax is one of the biggest causes of financial distress among South Africa’s middle-class.

Black Tax stems from the origins of the African family, where families originally shared a commonwealth. Families co-existed and their wealth was distributed amongst themselves. This was disrupted by colonisation and apartheid, which separated and pulled families apart. Essentially, it left families operating in miniature silos. This meant that the large wealth reserves Africans initially had to distribute, were now significantly minimised to individual salaries of working family members. It has made it more expensive to survive, spreading the available wealth considerably thinner.

Findings from the 2018 round of OMSIM noted the following:

  • 72% of working metro South Africans are currently supporting, or foresee that they will have to support older family members in the future (70% in 2017). The equivalent numbers for Black respondents was even higher: 83% foresee that they will have to support older family members in the future (79% in 2017).
  • For Black respondents, support for parents was the most prevalent, followed by siblings. This is apart from respondents supporting their own children.
  • Nearly 1 in 5 Black working metros South Africans regularly support at least one sibling

How to manage the financial distress of Black Tax 

Manyike provides a simple answer to what we can do to combat the financial distress caused by Black Tax, with the core being a focus on proper financial planning. “In instances where an individual is regularly contributing towards family needs, it must be factored into the person’s financial plan. This is where sound financial planning becomes critical. With a good financial plan, the person would be able to still attain their lifetime financial goals,” advises Manyike.

He adds that monthly budgeting is an important aspect to decrease levels of financial distress.“Knowing your financial status will help so many youths stifle the frustration of having to pay for things they don’t feel responsible for, which often times lead to tensions in families. These are the main issues raised by clients in our research.”

It becomes a burden when individuals don’t have the proper financial literacy and acumen to differentiate between what they can and can’t afford.

“One needs to understand and maintain their own financial health and limits before they can offer up a helping hand,” says Manyike. “Once you know your financial limits, it makes it much easier to establish how much you are able to contribute on a monthly basis when it comes to assisting family members,” said Manyike.

Source: Old Mutual Limited South Africa