Gordhan remodels retirement landscape
THE proposed changes to the taxation of retirement fund contributions announced by Finance Minister Pravin Gordhan in his February budget speech could change the retirement landscape. These changes, if the proposals are accepted, are expected to come into operation on March 1 2012.
At present employer contributions to pension and provident funds are not subject to fringe benefit tax in the hands of participating employees. On the other hand, employee contributions toward a pension fund qualify as a tax deduction provided the contribution does not exceed 7,5% of pensionable earnings, while employee contributions to a provident fund do not qualify for any tax relief.
Therefore many employer provident funds are structured on a noncontributory basis, that is only the employer contributes to the fund, while pension funds are structured on a contributory basis, that is both the employer and employee contribute to the fund. This is done in order to optimise the tax efficiency of the current retirement contribution regime.
The minister now proposes that all employer contributions should attract fringe benefit tax, and that employees will be allowed to deduct up to 22,5% of their taxable income for contributions to a retirement fund, with a cap of R200 000.
Should the proposed changes come into effect, most employer funds, including umbrella funds, would have to change their existing contribution design should they wish to optimise the tax benefits available.
From a legal perspective, the implementation of such changes could prove to be more challenging than meets the eye. Not only will the fund rules have to be amended to reflect the changes, the consensual framework that governs the relationship between the employer and employee would also have to reflect the changes.
From a practical perspective, employers would have to ensure that their payroll parameters and remuneration frameworks are adjusted to accommodate a new contribution regime, all of which will add further to the increasing cost of administration and compliance for business.
It is proposed further that lump sum withdrawals from provident funds be subject to the same one third limitation that currently applies to retirement annuity and pension funds.
The proposed one third limitation on the commutation of provident fund lump sum benefits will not only undermine the reason why these funds were chosen as retirement vehicles in the first place, but ignores the reality that pensioners may have budgeted capital requirements at retirement.