T-DAY CHANGES TO PENSION, PROVIDENT AND RETIREMENT FUNDS
A set of legislative changes implemented through the Taxation Laws Amendment Act (TLAA) are due to come into effect on 1 March 2016 (T-Day). According to David Geral, partner in Bowman Gilfillan Africa Group’s Pensions & Financial Services Regulation team, the changes were designed to harmonise the tax treatment of the different types of retirement funds and encourage retirement saving in a way that secures people an income stream into retirement.
“Part of Government’s broader aim with regards to these changes was to push for more effective financial security for individuals and attempt to manage the pressure on the national social security system,” Geral says.
He notes that it is important for South African employers to understand and engage with these reforms because retirement and risk benefits (including medical aid) are often the biggest component of the suite of benefits provided by an employer to an employee.
“The differential tax treatment of contributions and benefits usually influences the way employers and employees design their pay packages. Employers essentially administer the tax consequences on contributions for employees through the deduction and payment of tax. This may ultimately be about employees’ taxes but getting PAYE and the recording of fringe benefit tax right is a compliance issue with direct consequences for employers and their relationship with SARS,” explains Geral.
On 16 February 2016, National Treasury issued a statement noting that the alignment of the tax treatment of contributions between funds would proceed as planned on 1 March 2016. The National Treasury noted in that statement that changes to the tax deduction rate for retirement saving would also proceed and stated that it would look at a “formula that will allow a technically appropriate way to allow the tax deduction to provident members for two years”.
It further stated that the annuitisation of benefits would be postponed for a period of two years and that if no agreement on how to proceed emanates from the National Economic Development and Labour Council (Nedlac) after two years, “the tax deduction will fall away to get the right balance”.
Cabinet has now confirmed that it supports the postponement of annuitisation for a period of two years and the necessary amendments to the TLAA will be enacted urgently to reflect this.
National Treasury has also indicated that technical provisions would be put in place to prevent tax abuse. For example, with the postponement of annuitisation for provident funds, no transfers from pension to provident funds would be allowed for the next two years, “to avoid weakening the current pension system”. What is not clear at this point is if there will be any changes to the tax deductions permitted specifically for provident funds while annuitisation has been put on hold.
Tashia Jithoo, Of Counsel in Bowman Gilfillan Africa Group’s Pension & Financial Services Regulation team, explains that also among the changes set to come into effect on 1 March 2016 is an increase in the minimum benefit which triggers annuitisation in pension and retirement annuity (RA) funds, That amount will increase from ZAR 75 000 to ZAR 247 500. “Notably, this means that it is likely that more retirement annuity members will be able to take their benefits in cash as opposed to as annuities,” says Jithoo.
"The new provisions for the deduction of contributions in funds allow for employers to claim the employer contribution as a deductible business expense, as before,” notes Jithoo. “However, the employer contribution is now considered a taxable fringe benefit in the hands of the employee, because the employee derives value from this.”
This means that the employer contribution is deemed to be made by the employee to the extent that the contribution is included in the employee’s income as a taxable benefit. Jithoo explains that this should not disadvantage employees as they will still be able to claim a tax deduction on the amount of any amount regarded as a fringe benefit.
“Its purpose is more to create greater transparency with regard to contributions made and who derives value from this,” she says.
Another key change coming into effect on 1 March 2016 is that there will be a single aggregated tax deduction rate that applies across all the funds that an employee contributes to.
Jithoo explains that this means that the employee is notionally able to add together all the fund contributions that he or she makes and claim a deduction in respect of all these amounts. The total deduction is limited to the lesser of ZAR 350 000 or 27.5% of the higher of remuneration or taxable income.
“One consequence of this,” explains Jithoo, “is that is that it will likely cause employees to look holistically at the retirement fund arrangements and reconsider the best way to maximise this deduction.
“For lower income earners it could prompt more saving in retirement funds in order to maximise the tax deduction – which would be exactly the outcome that Government is hoping for. But there is also the possibility that high income earners who are contributing more toward retirement saving that the ZAR 350 000 per annum cap would seek to restructure their retirement arrangements and their compensation packages at work.
“Employers would need to be alive to this possibility and ensure that such requests are managed within the bounds of the law as it applies to retirement funds and employment,” Jithoo adds.