Taxing Retirement Funding in a Nutshell – why it is not going ahead

retirement 4The tax treatment of retirement funding will change with effect 1 March 2016. These changes were already promulgated into law. The changes intended to (i) harmonise the tax treatment of the various retirement funding vehicles used in South Africa, and (ii) increase savings towards the protection of retirement funding for post-retirement through forced annuitisation in respect of provident fund contributors. Provident fund members were, in terms of the new legislation, required to in future apply two-thirds 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, National Treasury (NT) announced on Monday 16 February 2016, that the annuitisation legislation pertaining to provident funds will be postponed for 2 years (to 16 February 2018), or at least for 2 years it seems. The NT statement clarified that the other non-annuitisation changes to the tax treatment of retirement funding will remain as per the new legislation to take effect on 1 March 2016. However, with regards to the provident annuitisation and linked tax deductibility, NT made it clear that the Minister of Finance, Mr Pravin Godhan, would present the dilemma to Cabinet and Parliament to expedite these changes to ‘reverse’ before 1 March 2016 (less than 2 weeks). The Minister will make a more formal announcement on these issues in his Budget Speech on 24 February 2016. Regarding the tax deductibility of provident fund contributions, NT advised that the new legislation will remain in tact for the 2 year period and will be reconsidered if agreement on the annuitisation issue is not reached by then. 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, the Minister referenced to a Social Security Reform Paper which was ready for publication and resulted from an inter-Ministerially chaired (Messrs Godhan and Dlamini) task team, which will be implemented as resources become available. National Treasury has not made a final decision on the R247 500 or whether it will remain R75 000.

These new developments were apparently tabled by Minister Godhan on 16 February 2016 in a meeting with the social partners of the National Economic Development and Labour Council (NEDLAC). The main force behind these ‘changes to the changes’ seem to be the Congress of South African Trade Unions (COSATU).

Important changes of this nature, literally days before becoming effective is not ideal from a tax policy, certainty, compliance, and cost perspective. 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’ would potentially also add additional cost (or may already have done so) to the private sector (financial services industry and employers) who would (at this late stage) have geared itself IT, education, and otherwise for implementation.

The effects of the new legislation that may remain and still come into effect on 1 March 2016 are briefly summarized 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. Pre-1 March 2016, different deductions ceilings apply to the various funding vehicles. Individuals will be able to 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 will be entitled to claim the tax deduction (in respect of employee and employer contributions). The employee’s monthly PAYE will be calculated based on the reduced taxable income. Employer contributions will be taxed as fringe benefits in the hands of the employee.

These changes apply to contributions earned on or after 1 March 2016. Pre-1 March 2016 will be governed by the old rules. The new rules will not apply to provident fund members who are 55 years or older on 1 March 2016, although the new rules will 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 will now be calculated with reference to gross remuneration or taxable income. The base is therefore extended to include rental, investment, and other non-salary type income, which was previously only available to calculate Retirement Anuuity Fund tax deductions.

Employers can decide to maintain employer contributions and levy fringe benefits tax, with the resultant change in PAYE or they can also opt to change to employee-only contributions only, thereby increasing the employee’s salary and employee contribution. This may require changes to the fund rules as far as contributions between employer and employee go. Group life premiums will increase where pensionable salary increased which could result in bigger cover, unless group life determination is changed. Most changes would require agreement and communication with employees and form part of employment contracts.