Although the Taxation Laws Amendment Bill was summarised in a publication provided last year, this Act has a significant impact on the way in which retirement funds are to be structured going forward. Thus, the final changes affecting retirement funds and implemented in this Act, are set out in this publication.
*All changes affecting retirement funds will take effect from 1 March 2015
1. Tax on contributions
| Current(old tax regime) | Changes effective 1 March 2015(new tax regime) | |
|---|---|---|
| Employer contributions | Employer contributions to pension and provident funds, medical schemes and benefit funds are tax deductible up to 20% of an employee’s “approved remuneration” and do not lead to fringe benefit tax in the hands of employees | - Tax deductions for all contributions, whether by the members or by the employer will be limited to the higher of 27,5% of taxable income or remuneration- Contributions to pension and provident funds made by the employer will be taxed as a fringe benefit in the hands of employees |
| Member contributions | Tax-deductible member contributions to pension, provident and retirement annuity funds vary | -Tax deductions for all contributions made to all funds, whether made by the members or by the employer will be limited to the higher of 27,5% of taxable income or remuneration- There will be an overall tax deductible limit of R350 000 per annum- Contributions over the annual rand limits may be rolled over to future years, but will be subject to the limits applicable in those years |
Employer contributions to defined benefit & hybrid funds: Changes effective 1 March 2015 (new tax regime)
| Employer contributions to defined benefit funds | Hybrid funds |
|---|---|
| Fringe benefit tax in respect of employer contributions to a defined benefit fund which are not allocated to a specific member, will be calculated based on a formula. | Contributions will be split between the defined benefit and the defined contribution components. The defined benefit component will be calculated according to the formula. |
Formula to calculate lump sum employer contributions to defined benefit schemes
A complex formula is proposed to calculate the monthly value of individual member benefits in the case of lump sum employer contributions to defined benefit schemes. This new formula is set out in the Act.
2. Retirement benefits paid by provident funds
| Current(old tax regime) | Changes effective 1 March 2015(new tax regime) | |
|---|---|---|
| Cash portion on retirement: members younger than 55 at 1 March 2015 | 100% of members’ fund credit may be paid out in cash at retirement | - Cash lump sums paid by provident funds on retirement will be limited to 1/3 of the member’s fund credit from 1 March 2015- Vested benefit rights are protected – only fund credits accumulated after 1 March 2015 will be subject to the new tax regime- In practice, fund administrators will now be compelled to keep two separate accounts for each member younger than age 55 on 1 March 2015, as follows:- The first account contains the value of the member’s share of fund as at 1 March 2015 (and subsequent return thereon), 100% of which can be paid out in cash on retirement, in accordance with tax regime applicable before 1 March 2015- The second account is to contain the member’s fund credit accumulated from 1 March 2015 onwards, 1/3 of which can be taken as cash and 2/3 of which must be used to purchase an annuity on retirement, in with the new tax regime |
| Cash portion on retirement: members older than 55 at 1 March 2015 | 100% of the member’s fund credit may be paid out as cash at retirement | Members who are 55 and older on 1 March 2015 will not be affected – 100% of their fun d credit may still be paid out in cash at retirement |
3. Provident funds and benefits on transfer
| Current(old tax regime) | Changes effective 1 March 2015(new tax regime) | |
|---|---|---|
| Benefits on transfer: members younger than 55 at 1 March 2015 | Member contributions are taxed on transfer from a pension to a provident fund | The above-mentioned set of separate accounts will have to be retained upon a member’s transfer to another fund and no tax will be applied on transfer. |
| Benefits on transfer: members older than 55 at 1 March 2015 | Currently member contributions are taxed on transfer from a pension to a provident fund | The tax treatment of benefits in respect of members who are 55 and older on 1 March 2015 is not clear. It is possible that should members transfer to a new fund, their transfer value would be subject to the old tax regime on retirement whilst contributions to the new fund would be treated under the new tax regime. This will need to be clarified by the Authorities. |
4. Commutation of small annuities
Fund credits of R75,000 can be taken as cash on retirement (currently this applies to pension funds only)Fund credits of R150,000 can be taken as cash on retirement. This will apply to both pension and provident funds
5. Disability policies
| Current(old tax regime) | Changes effective 1 March 2015(new tax regime)* |
|---|---|
| - Taxation of premiums and pay-outs in respect of both lump sum (group life) and income replacement disability policies are not aligned- Premiums paid on lump sum disability policies are not tax deductible, pay-outs are tax-free- Premiums paid on income replacement benefits are tax deductible, monthly income benefit payments to members are taxable in their hands | - In order to align the tax treatment, all disability and life policies will now be taxed in the same way- Premiums paid to both lump sum (group life) and income replacement disability policies will not be tax deductible, but pay-outs will be tax-free- If the policy is in the name of the employer and the premiums are taxable as a fringe benefit in the hands of employees, benefit pay-outs will be tax-free in the hands of employees |
*At this point, the industry is under the impression that this new tax regime applies immediately on 1 March 2015, even to existing disability income claimants, despite the fact that premiums may have been deductible.
