Changes aim to har­monise re­tire­ment tax

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

THE tax treat­ment of re­tire­ment fund­ing changed with ef­fect from March 1. Th­ese changes have al­ready been pro­mul­gated into law. The changes are in­tended to har­monise the tax treat­ment of the re­tire­ment fund­ing ve­hi­cles used in SA and to in­crease sav­ings to­wards the pro­tec­tion of re­tire­ment fund­ing for the postre­tire­ment pe­riod through forced an­nuiti­sa­tion in re­spect of prov­i­dent fund con­trib­u­tors.

Prov­i­dent fund mem­bers had been re­quired, in terms of the new leg­is­la­tion, to in fu­ture ap­ply twothirds of the fund ben­e­fit to ac­quire an an­nu­ity on re­tire­ment. Re­tire­ment funds with val­ues less than R247,500 (up from R75,000) were not re­quired to be an­nui­tised.

In a sur­pris­ing move, the Trea­sury an­nounced on Fe­bru­ary 16 that the an­nuiti­sa­tion leg­is­la­tion per­tain­ing to prov­i­dent funds would be post­poned for two years. It would be re­con­sid­ered if agree­ment on the an­nuiti­sa­tion is­sue was not reached by then.

The Trea­sury state­ment clar­i­fied that the other nonan­nuiti­sa­tion changes to the tax treat­ment of re­tire­ment fund­ing would re­main as per the new leg­is­la­tion that took ef­fect on March 1.

As a re­sult of th­ese changes, tech­ni­cal pro­vi­sions need to be catered for, such as changes to al­low­ing trans­fers from pen­sion to prov­i­dent funds.

In ad­di­tion to the changes to the new leg­is­la­tion pro­posed, Fi­nance Min­is­ter Pravin Gord­han ref­er­enced a so­cial se­cu­rity re­form pa­per, which was ready for pub­li­ca­tion and re­sulted from an in­ter­min­is­te­rial task team chaired by Gord­han and So­cial De­vel­op­ment Min­is­ter Batha­bile Dlamini. So­cial re­form would be im­ple­mented as re­sources be­come avail­able.

The new de­vel­op­ments were ap­par­ently tabled by Gord­han on Fe­bru­ary 16 in a meet­ing with the so­cial part­ners of the Na­tional Eco­nomic De­vel­op­ment and Labour Coun­cil. The main force be­hind th­ese “changes to the changes” seems to be the Congress of South African Trade Unions.

Im­por­tant changes of this na­ture, lit­er­ally days be­fore be­com­ing ef­fec­tive, are not ideal from the per­spec­tive of tax pol­icy, cer­tainty, com­pli­ance and cost.

In ad­di­tion to the leg­isla­tive costs in­volved (con­sid­er­ing that the new leg­is­la­tion has al­ready gone the full cir­cle to be en­acted), th­ese “changes to changes” po­ten­tially add costs to the pri­vate sec­tor (the fi­nan­cial ser­vices in­dus­try and em­ploy­ers), which would (at this late stage) have geared their tech­nol­ogy and education for im­ple­men­ta­tion.

It is also of in­ter­est that or­gan­ised labour does not sup­port the an­nuiti­sa­tion changes sug­gested. Forced an­nuiti­sa­tion would be in the best in­ter­est of most in­di­vid­u­als, es­pe­cially lower-in­come earn­ers. An­nuiti­sa­tion can be seen as “big brother” look­ing out for cit­i­zens to en­sure that they re­tire more com­fort­ably, with­out the risk of los­ing their hard-earned sav­ings at the end of their ca­reers to un­sound fi­nan­cial de­ci­sions.

In ad­di­tion, with the in­creased thresh­old of R247,500 un­der which an­nuiti­sa­tion is not re­quired, the an­nuiti­sa­tion will not af­fect those mem­bers of the pop­u­la­tion.

An­nuiti­sa­tion could po­ten­tially be crit­i­cised were it ap­plied to higher-in­come earn­ers who have sound knowl­edge of fi­nan­cial man­age­ment and re­tire­ment fund­ing, as an­nuiti­sa­tion would re­strict th­ese in­di­vid­u­als from ex­plor­ing al­ter­na­tive in­vest­ment op­por­tu­ni­ties at the end of their ca­reers. The R247,500 thresh­old could be crit­i­cised as it relieves lower-in­come earn­ers of the an­nuiti­sa­tion stan­dard, where it is ac­tu­ally needed.

The govern­ment should ac­tu­ally con­sider in­tro­duc­ing a ceil­ing above which an­nuiti­sa­tion would not be re­quired, to give higher-in­come earn­ers the flex­i­bil­ity to ex­plore in­vest­ment al­ter­na­tives.

The ef­fects of the new leg­is­la­tion that was im­ple­mented on March 1 are sum­marised below:

Tax de­duc­tions in re­spect of re­tire­ment fund­ing con­tri­bu­tions in­crease to 27.5% of the greater of re­mu­ner­a­tion or tax­able in­come. The 27.5% ap­plies to com­bined con­tri­bu­tions to pen­sion, prov­i­dent and re­tire­ment an­nu­ity funds. Be­fore March 1, dif­fer­ent de­duc­tion ceil­ings ap­plied to the var­i­ous fund­ing ve­hi­cles.

In­di­vid­u­als can claim a max­i­mum of R350,000, sub­ject to the 27.5% limit. Ex­cess con­tri­bu­tions can be car­ried for­ward, and un­claimed con­tri­bu­tions will not be taxed at with­drawal or re­tire­ment.

Only the em­ployee is en­ti­tled to claim the tax de­duc­tion (in re­spect of em­ployee and em­ployer con­tri­bu­tions).

The em­ployee’s monthly PAYE is cal­cu­lated based on the re­duced tax­able in­come.

Em­ployer con­tri­bu­tions are taxed as fringe ben­e­fits in the hands of the em­ployee.

Th­ese changes ap­ply to con­tri­bu­tions earned on or af­ter March 1. Con­tri­bu­tions be­fore then are gov­erned by the old rules.

The new rules do not ap­ply to prov­i­dent fund mem­bers who were 55 years or older on March 1, al­though the new rules ap­ply to con­tri­bu­tions to new funds.

The base used to cal­cu­late the tax de­duc­tion has also changed. Con­tri­bu­tions to pen­sion and prov­i­dent funds were pre­vi­ously cal­cu­lated with ref­er­ence to ap­proved re­mu­ner­a­tion and pen­sion­able in­come, re­spec­tively. The de­duc­tion is now cal­cu­lated with ref­er­ence to gross re­mu­ner­a­tion or tax­able in­come. The base has been ex­tended to in­clude rental, in­vest­ment and other non­salary in­come, which was pre­vi­ously avail­able only to cal­cu­late re­tire­ment an­nu­ity fund tax de­duc­tions.

Em­ploy­ers can de­cide to main­tain em­ployer con­tri­bu­tions and levy fringe ben­e­fits tax, with the re­sul­tant change in PAYE, or they can change to em­ployee-only con­tri­bu­tions, thereby in­creas­ing the em­ployee’s salary and em­ployee con­tri­bu­tion. This may re­quire changes to the fund rules on con­tri­bu­tions. Group life pre­mi­ums will in­crease where pen­sion­able salary in­creases, which could re­sult in big­ger cover, un­less group life de­ter­mi­na­tion is changed.

Most changes will re­quire agree­ment and com­mu­ni­ca­tion with em­ploy­ees and form part of em­ploy­ment con­tracts.

A sum­mary of what’s in the leg­is­la­tion and what’s been kicked down the road

Ferdie Schneider is head of tax at BDO South Africa.

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