Some controversy surrounds one of the most significant amendments that would have been effected by the Taxation Laws Amendment Act, 25 of 2015, and the Tax Administration Laws Amendment Act, 23 of 2015, being how retirement type funds would have been taxed in future. This includes both the taxation of proceeds from funds, as well as the extent to which the amounts contributed to funds throughout will be deductible for income tax purposes.
Although the reform process has been the subject of consultation since 2012, certain key proposals have recently, due to lobbying from the trade union movement specifically, been postponed to 1 March 2018 to allow for further consultation.
What was proposed initially and has been enacted since:
It is important to distinguish upfront between 3 types of funds, being pension funds, provident funds and retirement annuity funds. Historically, in terms of the Income Tax Act, 58 of 1962 (the Income Tax Act), contributions made to pension funds were deductible, limited to 7.5% of the individual’s particular annual pensionable salary. Whereas pension funds are designed to allow for the accumulation of wealth of salaried individuals towards retirement, retirement annuity funds aim to provide for non-salary income to be saved towards retirement. To this end, 15% of non-pensionable income (e.g. income from an own business) contributed to a retirement annuity fund were previously allowed as income tax deductions.
Both retirement annuity and pension funds, however, had certain limitations imposed on them which restricted access to the capital accumulated in these funds only until after retirement, and even then not all capital would have been accessible as a lump sum withdrawal: realisation would generally take place through monthly annuities received from such funds. In this sense, provident funds differed and capital accumulated in such funds were accessible even before retirement. To discourage use of such funds, though (and to encourage a long term savings culture), no income tax deductions were historically allowed for provident fund contributions.
The new amendments now seek to harmonize the tax treatment of these 3 types of funds, and specifically as relates the differentiation on the tax treatment of contributions, as well as access to the fund capital together with the tax consequences of lump sum withdrawals. The single, encompassing provision now dealing with fund contributions is section 11(k) of the Income Tax Act. Section 11(k) now allows for a deduction of any fund contributions up to 27.5% of the higher of an individual’s i) remuneration received from an employer or ii) his or her taxable income for the year in question. The deduction is limited, though, to R350,000, meaning that individuals earning more than R1,272,727 will effectively have a lesser rate applied to them. (Note that the 27.5% will include contributions made by an employer on an employee’s behalf, which amount is also included as part of the individual’s remuneration for income tax purposes in the form of a fringe benefit.)
All of the above proposals have been left unchanged and were signed into law and have become effective.
Legislative reform that has been delayed:
The main concern raised by trade unions was access to the capital of specifically provident funds. It was proposed initially that all funds going forward would fall under the umbrella of what had up to now been the regime for pension funds, i.e. that a capital amount is available for withdrawal at retirement, but the major portion of accumulated wealth is annuitised and only receivable in the form of monthly annuities being paid out going forward. This specific ‘annuitisation requirement’ has drawn the ire of COSATU, especially of provident funds been built up by members which could have been drawn in one lump sum on resignation from an employer. What the effect of annuitisation would be effectively, therefore, is to ensure that not all savings may be withdrawn as one lump sum, but only a percentage thereof. From Treasury’s side, this is obviously to encourage saving for retirement. One also has sympathy for the counter-argument though, being that a savings product intentionally sought out by employees to allow them to access all capital on retirement (e.g. to start an own business at some stage) has now with one foul swoop of the legislative pen been prevented.
It remains to be seen in the coming months and years how this political hot potato will play itself out, especially in the context of looming elections with COSATU publicly reconsidering its support for the ruling party.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)