The announcement of changes in the tax treatment of provident funds led to a flurry of resignations and withdrawals from members of such funds who feared that their ability to withdraw all their capital would be revoked.
Below is an extract from the media release which also summarises the two options on which comment is sought:
At the request of some members of the Labour constituency at NEDLAC during 2014, the retirement-related reforms in the 2013 TLAA were postponed by a year to 1 March 2016 to allow for further consultations between Government and NEDLAC. The process of consultation was not concluded in time for the 2015 Taxation Laws Amendment Bill (TLAB).
An urgent request for public comment was issued by the national treasury on 27 October 2015 with a closing date for comments of today, 2 November 2015.
Option 1, which is the preferred option of the National Treasury and many stakeholders (including some labour federations), entails proceeding with TLAA 2013 tax and retirement reform provisions on 1 March 2016 as legislated, with the only adjustment being to increase the de minimis to R250 000. Contributions by employers to pension, provident and retirement annuity funds on behalf of employees will become a taxable fringe benefit. Further, vested rights are preserved and those over 55 years are exempted from the requirement to annuitise. The higher de minimis from R75 000 to R250 000 will effectively mean that many members of provident funds who do not have a retirement benefit exceeding R250 000 will not need to annuitise, and in the event that they need to annuitise, it will take several years before their savings would reach R250 000.
Option 2 proposes a phased-in approach for annuitisation, together with limits to the tax deduction for member contributions from year 2 onwards if there is no annuitisation, and other adjustments, as follows:
- Year 1: 2016 and adjustments
TLAA 2013 will come into effect for all retirement funds (including provident funds), with the total tax deductible retirement contributions capped at the lesser of: 27.5% of the greater of taxable income (remuneration) or R350 000. Provident funds will not be required to annuitise. The de minimis will be further increased to R250 000 for all retirement funds. These adjustments will deal with concerns around late adjustments to legislation, the short consultation period and related systems implication.
- Year 2: 2017 and adjustments
As from 1 March 2017, the waiver of annuitisation for provident funds will continue, but the tax deductible retirement contributions for provident funds will be capped at the lesser of: 10% of the greater of taxable income or remuneration; or R125 000. Important: this provision in the TLAB 2015, or year 2 (i.e. 2017) and its adjustments, will fall away if there is agreement on the need to annuitise for provident funds in 2016. This would mean that the requirement to annuitise for provident funds will come into effect in 2017, including also the higher tax deductible contribution rate of 27.5% (up to R350 000).
- Year 3: 2018
Full alignment between provident, pension and retirement annuity funds. This means that provident funds will be required to annuitise, as with other retirement funds. Full vested rights, as legislated in TLAA 2013, will apply.
Important: Year 3 will depend on whether the agreement to annuitise is reached or not in 2017. If no such agreement is reached, then year 2 with its adjustments continues.
Government will only consider this second option if the benefits of this option are clearly demonstrated for members of provident funds, as the priority for Government is to act in the interest of the member. The period for any delay will also need to be motivated.
The specific proposal is expected to be discussed on Wednesday, 4 November at the Standing Committee of Finance Parliamentary hearing on the 2015 TLAB.