Question:
Explain donation PBO’S, retirement annuity fund contributions and pension fund contributions with the aid of an example for each.
Answer:
Cynthia,
What PBO’s (public benefit organisations), retirement annuity fund and pension funds have in common is that for each you may deduct your contributions for tax purposes, within limits. To understand these limits, consider the following example: You earn an annual salary of R100 000 pa, on which you pay a pension contribution of 7.5%. You also earn a non-pensionable bonus of R10 000, from which you pay R1 500 into a retirement annuity.
You may deduct your 7.5% contribution to the pension fund for tax purposes from your pensionable income of R100 000 (ie R7 500). Your employer may deduct a further 20%, but we have ignored this for this example.
You may deduct contributions to a retirement annuity up to 15% of your non-pensionable income of R10 000, ie R1 500.
Your taxable income thereafter is R92 500 (R100 000 – R7 500) plus R8 500 (R10 000 – R 1500), ie R101 000.
You can deduct contributions to an approved PBO that has donor deductible status, up to 10% of your taxable income. You can therefore deduct a R10 100 contribution to the PBO in the above example (10% of R101 000). The PBO must meet the requirements of the Income Tax Act.
In terms of proposed legislation, the deduction base for both RAs and pension funds will change to 22.5% of the higher of taxable or employment income if you are below 45, and 27.5% if you are 45 or older.
