Gord­han re­mod­els re­tire­ment land­scape

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - AN­TON LOCKEM

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.


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