Government closes retirement-savings tax loopholes used by wealthy

National Treasury is rapidly closing down open-ended gaps in retirement-saving taxation that it views as being abused by the wealthy to reduce their tax obligations.

The latest move, contained in the Taxation Laws Amendment Bill for 2015, published this week, is to clamp down on mainly wealthy people who overcontribute to retirement funds to reduce their tax and estateduty commitments.

Currently, you can contribute 7.5 percent of your pensionable income to an occupational retirement fund and 15 percent of your taxable income, less your pensionable income, to a retirement annuity (RA) fund without any rand cap.

Many senior executives structure their packages so that, on top of these deductions, they receive the maximum of 20 percent that an employer can contribute to retirement savings, allowing them to contribute as much as 27.5 percent of their pensionable income to an occupational fund. This provides a number of tax-saving opportunities, including not paying income tax, dividends tax or capital gains tax (CGT) on the investment returns, and, at retirement, beneficial tax exclusions and estate duty planning opportunities.

Under the new retirement fund contribution regime scheduled for implementation on March 1 next year, the maximum you will be able to deduct against your taxable income will be 27.5 percent, but contributions will be limited to R350 000 a year.

And in a new move, Treasury is closing another loophole the wealthy use to reduce, in particular, estate duty obligations.

In a memorandum accompanying the draft tax legislation, Treasury says the loopholes were created in 2008 with the removal of the limitation that required RA members to take a pension before age 70 and an amendment to the Estate Duty Act that excluded all lumpsum retirement assets from estate duty.

Treasury says the aim of the amendment to the Estate Duty Act was to “alleviate financial difficulties that a family may face on the death of the family’s income provider”.

But the two amendments “opened up the opportunity for individuals to use RA contributions to avoid estate duty”.

Wealthy people started contributing more than the maximum deductible contribution of 15 percent to RAs. Although they could not get the tax deduction on the additional amounts, the money in the RAs was not subject to taxation on investment returns and it could be passed to beneficiaries “free from estate duty”.

Treasury says the same abuses could potentially exist in occupational retirement funds.

So Treasury is slamming the door. From January 1 next year, when you die, any retirement fund contribution you made from March 1 this year that cannot be deducted from your income tax will be included in your estate for estate duty purposes.

Initially, Treasury intended the legislation to apply to all nondeductible contributions back to 2008, but it reconsidered the move after receiving submissions from the industry.

Jenny Gordon, Alexander Forbes’s head of retail legal support, says this means that if your beneficiary takes a lump sum that arose from not being a tax-deductible or exempted contribution, the cash will still be tax- and CGT-free, but not estateduty free. There is no tax payable, because the money was, in effect, taxed before the contribution was made, and it retains its nature on death.

If the lump sum came from contributions that were tax deductible or exempted, it will be estate-duty- and CGT-free but not tax-free. It will be subject to the lump-sum tax tables that apply at retirement or on the death of a fund member: the first R500 000 is tax free, the next R200 000 is taxed at 18 percent, the next R350 000 at 27 percent, and any amount over R1 050 001 at 36 percent.

Gordon says it is pleasing that the legislation will not be introduced retrospectively, so that people who arranged their matters within the framework of the law and made large after-tax contributions, which they were entitled to do under the law at the time, are not prejudiced.

OVER-65s’ MEDICAL COSTS

The over-65 age group is to see some alleviation in dealing with their medical costs. Currently, the additional medical expenses tax credit from qualifying medical expenses that exceed three times the credit for people over the age of 65 are not incorporated in monthly pay-as-you-earn (PAYE) and provisional tax calculations. The claims can be made only at the end of the tax year.

Treasury says that, as a result, employees over the age of 65 are experiencing a decrease in their take-home pay throughout the year.

The draft legislation allows medical tax credits related to medical scheme contributions by those over the age of 65 to be taken into account for both PAYE and provisional tax.

LEAVING EXPATS

If the tax bill is passed as tabled, from March 1 next year, expatriates who work in South Africa but leave the country after their contracts or work visas have expired will be allowed to take the full value of their RA funds with them as a cash lump sum, after tax.

Currently, only people emigrating from South Africa have been allowed to cash in their RAs and take them offshore in terms of exchange controls.