Changes aim to harmonise retirement tax
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.