Retirement reform gives tax relief
WHILE jury is out on provident fund lump sums, retirement reforms are a step in the right direction Errol Meyer Senior Manager, Advisory Propositions at Standard Bank
THE Taxation Laws Amendment Act, 2015 has passed some of the government’s retirement reform proposals into law, though some confusion still persists with regard to the new tax relief available to retirement fund members and the lump sum treatment of provident fund members.
However, it must not be forgotten that salaried taxpayers have limited income tax relief available to them and these changes can provide them with some much-needed relief.
According to the changes, the tax deduction for contributions to all retirement funds (including provident funds) will increase increased to 27.5% of the greater of remuneration or taxable income up to a cap of R350,000 per year, from 1 March 1 2016. So this This rate applies to the aggregate of contributions made to an individual’s pension, provident and retirement annuity (RA) funds —. In the past, different contribution caps and deduction bases applied to the three types of funds previously.
Tax relief of 27.5% is substantial since it is calculated with reference to the remuneration of an employee, which essentially includes all his income received from an employer. If one considers that tax relief for salaried taxpayers, such as car allowances, are is mostly for expenditure incurred, the retirement fund relief aims to increase the investment of a taxpayer in a tax-effective manner.
While the annual limit is set at R350,000 in order to claim the deduction, it doesn’t mean taxpayers are penalised if they contribute more (unlike other instruments like tax-free savings accounts, where tax is paid if the annual limit is breachedthey pay tax on breaching the annual limit). So if If you contribute more, the portion you cannot claim is referred to as the "unclaimed contribution", which can be built up in a tax-free environment.
When you do retire you then have to take up to one-third, to a maximum tax-free portion of R500,000, as a lump sum. and with With the two-thirds you are compelled to purchase buy an annuity; and disallowed contributions can be set off against the annuity as an exemption too.
Importantly, the annuitisation threshold for pension and RA fund members increases increased to R247,500 on 1 March 1 2016 from R75,000 before.
It is also worth noting that retirement funds are not subject to estate duty. However, any unclaimed contribution at the date of death will be subject to estate duty. So you can either increase the tax-free lump sum on retirement, or the unclaimed contribution can be set off against any annuity income after retirement until the unclaimed portion is exhausted.
The changes now also include any outside income in taxable income. The recent amendments were suggested to ensure that passive income may be included in the definition of taxable income. Previously, the taxable portion of interest income, as an example, could be taken into consideration to calculate the maximum tax-deductible contribution. Since 1 March 1 2016 the amended section required requires that the taxable income must be from trade. This unintentionally excluded passive income such as interest and royalties.
The latest bill — the Draft Taxation Laws Amendment Bill — proposes to rectify the anomaly and will have the effect that passive income may now be included in taxable income to calculate the maximum tax contribution.
On the other hand, Taxable capital gains, such as the gain made on the disposal of collective investments, remains excluded.
The proposed amendments will be made retrospectively with effect from 1 March 1 2016.
It is important to remember that the maximum tax deductibility of contributions to pension, provident fund and retirement funds were treated differently prior to before March 1 2016. Previously, the employer’s’ deduction of provident fund contributions was limited to 10%; however, in practice SARS the South African Revenue Service allowed a higher amount reaching up to 20%. As a result, the employee did not qualify for a tax deduction if he made any contributions. However, The corresponding advantage was that the full benefit could be taken as a lump sum. Since 1 March 1 2016, provident fund members may also contribute the maximum amount of 27.5%, but then subject to the rule that the lump sum be limited to one-third in respect of the value built up after 1 March 1 2016. This, however, did not appeal to taxpayers, who wanted full access to their funds and therefore so the implementation in respect of provident fund lump sum requirements are is has been postponed until 2018.
It is equally important to understand how employer contributions will be treated in future and how salaried taxpayers can optimise these changes.
Employers and employees contribute to the retirement fund. Prior to 1 March 1 2016, the employer was entitled to claim a tax deduction for contributions up to 10%. The deduction is now deleted and any contribution made by the employer, irrespective of the amount, is treated as a fringe benefit in the hands of the employee. The contribution by the employer is deemed to be a contribution by the employee and together with the employee’s own contribution will be limited to the 27.5%. The employee will thus ensure that the tax relief is obtained when submitting his personal income tax return.
Keep in mind that the annual deduction cap is R350,000, including the cost of risk benefits. Premiums for approved group life are included, but bear in mind that the proceeds will be subject to retirement tax when a member withdraws from the retirement fund. Also note that the cap of R350,000 may be increased for future years as because in the second interim report of on estate duty, the Davis Tax Committee (24 August 24 2016) recommends that the cap be increased to take account of inflation.
Before 1 March 1 2016 retirement annuity RA contributions that were above the allowable deductible amounts were allowed to could be rolled over to the following year and considered for tax relief. This was not allowed for pension fund contributions. From 1 March 1 2016 all excess contributions to retirement annuity RA and pension funds can be rolled over and deducted in the following tax year.