posted Nov 20, 2012, 1:19 AM by Dean Wicks
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updated Nov 20, 2012, 1:25 AM
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Impact of the Proposed Changes in Tax Incentives for Retirement Savings Prepared by Liberty Corporate Consultants and Actuaries.IntroductionIn May 2012, following on from the 2012 Budget Speech by the Minister of Finance, the department of National Treasury (“National Treasury”) released a paper “Strengthening retirement savings”which gives an overview of government’s proposals to promote household savings and reform the retirement industry. In this paper, an overview of the technical discussion papers to be released in 2012 was also provided and four of these papers have since been released for comment.
We have focused on paper E, “Improving tax incentives for retirement savings” in this article. The paper focuses on how the tax treatment of the retirement contributions, currently split between separate dispensations for pension, provident and retirement annuity funds could be simplified. It also focuses on the establishment of a uniform retirement contribution model.
It is important to note that the papers have been released for comment and are merely indicative of National Treasury’s future proposals on retirement savings. They are therefore subject to change. Current dispensationA) Tax Treatment of Retirement Fund ContributionsAs outlined in the Income Tax Act, No. 58 of 1962, as amended (ITA), there are currently three separate tax dispensations for the treatment of contributions to and benefits from retirement funds i.e. for pension funds, provident funds and retirement annuity funds. The ITA outlines the tax treatment from both the point of view of the employer and the employees as explained below: - Employer taxpayers are permitted to deduct contributions to pension or provident funds of up to 20% of the “approved remuneration as defined in the ITA” of employees as a business expense against tax.
- Employer taxpayers are permitted to deduct contributions to retirement annuities as part of salary expenses;
- There is no Rand value cap to the deductions that can be claimed.
2. Employees
- Employer contributions to pension and provident fund contributions are not included in the employee’s income as taxable fringe benefits. Employer contributions to retirement annuity funds will be included in an employee’s income as taxable fringe benefits;
- Employees can claim a deduction on employee contributions to a pension fund, up to a cap of 7.5% of “retirement funding employment income”, which is essentially the pensionable salary definition found in the rules of most pension funds. There is no Rand value cap to the deductions that can be claimed.
- Employees cannot claim a deduction on employee contributions to a provident fund. Their non-deductible contributions may however, be used to increase the tax-free portion of the lump sum on exit from the provident fund;
- Individuals do not have to be employed to contribute to a retirement annuity fund. They can claim deductions to the greater of:
- 15% of “non-retirement funding employment income;
- R 3,500 less deductible pension fund contributions; or
- R 1,750
3. Problems with the current dispensation
National Treasury has identified a number of issues within the current dispensation which it believes need to be addressed. National Treasury’s views are listed below:
The current structure of tax relief for retirement fund contributions, in which three different sets of limits and income bases apply, creates undesirable complexity, with the result that: - The current tax-regime requires administrators to monitor the original dispensation under which the contributions were made, which increases administration costs.
- The current tax regime restricts movement between the different fund types.
- The current system is open to abuse by higher income employees, who can make contributions way in excess of the amount required to maintain a standard of living in retirement.
- Tax exempt employers may also abuse the system by assisting employees to postpone tax by making large contributions to pension or provident funds rather than paying cash income.
Proposed DispensationThe new tax regime is proposed to come into effect with effect from 1 March 2014. Under this new tax regime which is intended to make the retirement savings more effective and equitable, a uniform retirement fund contribution model is proposed, as explained below: - Employers will be entitled to claim a deduction for all contributions to a retirement fund for the benefit of its employees. No limitations will apply in respect of the amount that may be deducted; and
- Any amount contributed by the employer to all types of retirement funds will be taxed as a fringe benefit and will be deemed to be employee contributions.
- Employees (‘taxpayers’) will be permitted a deduction for both employer and employee contributions, up to specific percentage caps. The percentage caps will be equal to 22.5% of the higher of employment or taxable income, for those taxpayers below 45 and 27.5% for those taxpayers 45 and above.
- In addition to the percentage caps, taxpayer’s deductions will also be subject to annual monetary caps. The annual deductions will be limited to R 250,000 for those taxpayers below 45 and R 300,000 for those taxpayers 45 and above.
- A minimum monetary threshold of R 20,000 will apply, allowing low income earners who have exceeded their thresholds to deduct up to R 20,000 per annum.
- A roll-over dispensation, such as that already in place for retirement annuity funds, which allows flexibility in contributions for fluctuating income earners.
- Non-deductible contributions (i.e. the amounts annually in excess of the percentage or monetary caps) will be tax-exempt if, they are held to retirement, whether lump-sum or annuitised.
- Contributions towards risk benefits and administration cost will be included in the maximum percentage allowable deduction.
- A roll-over dispensation, such as that already in place for retirement annuity funds, which allow flexibility in contributions for fluctuating income earners.
Impact of the Harmonised benefits and contribution modelGeneral CommentsThe proposals being advanced in the technical discussion papers are aimed at encouraging retirement fund savings and improving preservation of retirement savings among employees when they leave employment.
The ultimate aim seems to be to simplify the tax regime applicable to retirement funds and standardise their tax treatment. Revision of the tax regime is therefore one of the various measures that will be used to achieve this.
This paper addresses the treatment of the contributions under the new dispensation. The issue of how the accrued benefits will be dealt with is discussed in the other paper “preservation, portability and governance for retirement funds”. Impact on the EmployerThere have been concerns that the new dispensation dilutes the incentive for the employer to maintain an employer affiliated fund. According to the department of National Treasury, this is unlikely to be the case as the employers have other reasons for providing retirement benefits such as: - Enhanced deductibility for retirement fund contributions
- Retention of services of good quality employees
- Employer sponsored schemes allow access to cheaper risk benefits for employees and the tax treatment of risk benefits paid from the retirement funds has not changed.
- The presence of employer schemes removes the need for marketing and distribution costs as membership is compulsory as a condition of employment.
- Removes the preference for either pension fund, provident funds or retirement annuity funds.
Impact on the EmployeeThere have been concerns that the new dispensation will act as a disincentive for retirement savings and preservation of fund benefits for high income earners resulting in: - Long term savings finding their way into discretionary, short term investment vehicles.
- Excess contributions being invested outside South Africa.
- Some of the contributions being consumed rather than saved.
This will however be offset by the benefits of the new regime such as: - The new tax regime will make it easier for individuals to accurately calculate the maximum contribution eligible for deduction.
- Lower costs due to less administration requirements.
- Increased costs savings will enable individuals to aggregate their retirement savings into one vehicle.
Historically, a disparity existed where low income earners would foregore the annuitised income and contribution tax deductions that are offered under a pension fund in preference for provident funds whereas the high earners did the opposite. The new regime will address this disparity by harmonising the tax treatment among all retirement funds.
The monetary caps may also affect the cross subsidy implicit in the cost of risk benefits. Impact on Service ProvidersThe harmonised tax incentive system will certainly reduce monitoring and system costs, since the need to disaggregate employee benefits along tax differential lines will be removed.
There may be scope to enhance product offerings to high-earners, as research by National Treasury shows that a small proportion seems to use up the deduction limits. This might become more of a focus point when the single tax regime and monetary limits of deductions are applied.
The extent will however depend on which of the various options is chosen for the treatment of accrued benefits. We anticipate that there might be some costs associated with the running of hybrid schemes which will initially offer provident fund benefits for accrued benefits and pension fund benefits for all future benefits. ConclusionThe intention of National Treasury’s proposal is to harmonise the treatment of retirement savings and benefits using a single tax model, and a uniform benefits model. Complications such as the treatment of Defined Benefit funds’ in the new model, and how service providers can realign their service offerings to cope with some of the implications are still to be sorted out.
Corporate Benefits Quote RequestGoogle Spreadsheet Form Get a Corporate Benefit Quote Now!For more information and or assistance with regards to the above, please do not hesitate to contact us or just leave your details and one of our skilled Corporate Benefits Brokers will get back to you shortly to give you advice and a no-obligation Corporate Benefit quote . |
posted Feb 27, 2012, 4:24 AM by Lance Robert
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updated May 11, 2012, 2:44 AM
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The following is a summary of the tax implications on corporate benefits with regards to contributions and premiums:
Employers need to ensure that contributions and premiums are loaded correctly on the company payroll. Employer Contributions and Premiums:- Employer contributions to a Pension, Provident or Approved Risk Scheme (risk benefits that form part of a retirement fund) are tax deductible up to a maximum of 20% of remuneration.
- Premiums paid by employers on behalf of employees to an unapproved risk scheme (including disability income insurance) are tax deductible for the employer.
- Premiums paid by employers on behalf of employees to an unapproved risk scheme (including disability income insurance) are taxed in the hands of the employee as a fringe benefit.
- Premiums paid by employers on behalf of employees to disability income insurance schemes may be deducted before calculating tax on the employee’s remuneration.
Member (Employee) Contributions and Premiums:- Member contributions to a Provident Fund are not tax deductible.
- Member contributions to a Pension Fund are tax deductible up to maximum of the greater of 7.5% of his/her retirement funding income or R1 750
- Premiums paid by employers on behalf of employees to disability income insurance schemes may be deducted before calculating tax on the employee’s remuneration.
As proposed in the 2011 budget speech and confirmed in the 2012 budget speech the taxation of employer and member contributions to pension and provident funds are subject to change with effect 1 March 2014. We will communicate the implementation and effects of these changes in due course.
Lump sum benefit payments:The following is a summary of the tax implications on lump sum group benefits payments from a Pension, Provident or approved group risk scheme (risk benefits that form part of a retirement fund):
Members need to be aware of the tax implications on withdrawal from a fund and/or risk benefit payments.
- Lump sum retirement, death, disability and involuntaryretrenchment benefits from a retirement fund or approved risk schemes are taxable as follows:
| Taxable income from lump sum benefits
| Rate of tax
| | Not exceeding R315,000 | 0 per cent of taxable income | Exceeding R315 000 but not exceeding R630 000 | R0 plus 18%of taxable income exceeding R315 000 | Exceeding R630 000 but not exceeding R945 000 | R56 700 plus 27% of taxable income exceeding R630 000 | Exceeding R945 000 | R141 750 plus 36% of taxable income exceeding R945 000 |
- Lump sum withdrawal benefits, including voluntary retrenchment benefits from a retirement fund are taxable as follows:
| Taxable income from lump sum benefits | Rate of tax | | R0 - R22,500 | 0% of taxable income | R22,501 - R600,000 | R0 plus 18% of taxable income exceeding R22,500 | R600,001 - R900,000 | R103,950 plus 27% of taxable income exceeding R600 000 | R900,001 and above | R184,950 plus 36%of taxable income exceeding R945 000 |
NB: The non-taxable amounts as per both the above rates tables are cumulative.
In other words, the tax exempt amounts of R22 500 in case of withdrawal and R315 000 in case of retirement/severance due to redundancy/death is a lifetime amount, so when applying the tax tables, previous lump sums received from a pension of provident fund are taken into account.
- Lump sum benefits from unapproved risk schemes are tax free.
- Monthly income from a disability income benefits scheme is taxed as a normal monthly salary.
For more information and or assistance with regards to the above, please do not hesitate to contact us. |
posted Feb 17, 2012, 2:06 AM by Lance Robert
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updated Feb 27, 2012, 4:03 AM
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The Financial Services Board (FSB) issued Directive PF No. 6 late in December 2011.
This Directive deals with the transfer of business from one retirement fund to another in terms of section 14 of the Pension Funds Act, 24 of 1956 and replaces Directive PF No. 2, which was issued in 2008. The impact of the Directive on Section 14 transfersEffective from 1 January 2012 transfers between retirement annuity funds and transfers between preservation funds are exempt from the provisions of section 14(1). This means that these transfers do not need to be submitted to the FSB for approval. It is no longer relevant whether the retirement annuity funds or preservation funds involved in the transfers are valuation exempt or not.
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