The Taxation Laws Amendment Act No. 31 of 2013, published in Government Gazette No. 37158 on 12 December 2013, contains very important changes to the tax treatment of contributions to retirement funding.
Hettie Joubert, Legal Adviser at Momentum Employee Benefits, kindly gave us permission to use information contained in legal updates she wrote. The information below is summarised from a more extensive document which includes examples to illustrate the impact of the amendments. We provide a link below to the full document.
From 1 March 2015, employer contributions will be taxed in the hands of the member and the member will get a tax deduction on the total contribution towards retirement funds, subject to an annual percentage and monetary limits.
Current position for retirement fund contributions
There are three types of retirement funds with recurring contributions: pension and provident funds, which are employment-based, and retirement annuity funds, which are retirement funding vehicles for individuals. There are different tax deductions that apply to contributions to these funds.
|Pension fund||Provident fund||Retirement annuity fund|
|Deduction on member contribution||Up to 7.5% of *“retirement-funding employment”.||None||Up to 15% of non-*“retirement-funding employment”.|
|Deduction on employer contribution||Up to 10% of **“approved remuneration”.
In practice SARS allows up to 20%.
|Up to 10% of **”approved remuneration”.
In practice SARS allows up to 20%.
* “Retirement-funding employment” is defined as income consisting of “remuneration” as defined; it is the income taken into account in determining the contributions made by the employee or employer for the benefit of the employee to a pension fund or provident fund.
**Approved remuneration” is defined as follows in section 11(l)(iii) of the Income Tax Act: so much of the total remuneration accrued to such employee during such year of assessment in respect of his employment by the employer concerned as the Commissioner considers to be fair and reasonable in relation to the value of the services rendered by such employee during such year of assessment to the employer and having regard to other benefits, if any, derived by him from his employment by the employer.
Position from 1 March 2015 for retirement fund contributions
|All retirement funds (pension, provident, retirement annuity)|
|Deduction on member contribution||Up to 27.5% of the greater of ***remuneration or taxable income, subject to an annual monetary limit of R350 000.|
|Deduction on employer contribution||Unlimited deduction. Employer contributions taxed as a fringe benefit in employee’s hands and deemed to be employee contributions.|
***Remuneration refers to the payment made to an employee (their salary) and for the purposes of this calculation will exclude any retirement fund lump sum, lump sum withdrawal benefit or severance benefit. Taxable income is a person’s total income, from all sources, less the allowable deductions and exemptions. An employee, who receives a salary from their employer but also has other sources of income, can potentially have a taxable income that is higher than their remuneration. In that case, the maximum deduction will be based on their taxable income instead of just their remuneration.
From 1 March 2015, the contributions paid by an employer for the benefit of their employee to a retirement fund will be deemed to be an employee contribution and will be taxed in the employee’s hands. These contributions however, together with the member’s other retirement fund contributions, will qualify for a deduction of up to 27.5% of their remuneration or taxable income, whichever is the higher, subject to an annual maximum of R350 000. By implication, the maximum amount that can be taken into account for calculating the maximum retirement fund contributions in a specific year is R1 272 727. Any contribution over that amount will not qualify as a deduction in that year of assessment, but will be carried forward to future years of assessment, once again subject to the annual limits. Whatever the member is not able to claim as a deduction before leaving the fund, can be claimed as a deduction in terms of the Second Schedule to the Income Tax Act when they leave the fund or alternatively, as a reduction in taxable annuity income.
While the deduction of employer contributions in a defined contribution fund is fairly straight-forward (being equal to the value of the amount contributed by the employer for the benefit of the employee – the employer contribution), that is not the case in a defined benefit fund. In the latter, the cash equivalent of the amount that the employee can deduct is the total of the value of the employer contribution to the defined contribution component of the fund and the employer contribution to the defined benefit component of the fund in accordance with the formula X = Y ((A x AF) + (L x LF)) – V as set out in the newly introduced paragraph 12D of the Seventh Schedule to the Income Tax Act.
The deduction of the employer contribution is still allowed. In fact, the employer’s position as far as the deductibility of contributions towards a retirement fund will be even better from 1 March 2015. The 10% limitation of section 11(l) of the Income Tax Act has been removed. This means that the employer has an unlimited retirement fund contributions deduction; they can deduct whatever they contribute for the benefit of their employees to a pension, provident or retirement annuity fund.
We were sceptical when changes to the tax deductibility of retirement funding were first mooted. It appears that we were wrong. The actual legislation contains good news for both advisors and their clients.
While the changes only become effective from 1 March 2015, advisors can start educating clients about the benefits in order to reap the benefits next year.
Click here for link to Momentum article.