implementation of tax related retirement reforms delayed for two years
New tax provisions relating to retirement fund contributions were introduced into the Income Tax Act in 2013 and were expected to take effect on 1 March 2015. However, National Treasury and SARS have announced that the implementation date of all the tax related retirement reforms has been postponed until 1 March 2017.
The postponement of the implementation of these changes was announced on 15 October 2014 in the Draft Response Document from National Treasury and SARS on the Draft Taxation Laws Amendment Bill, 2014. The reason given for the postponement was “to allow for additional time to more effectively communicate the importance of the reforms that were enacted in 2013 and further refined this year”. The Response Document noted that the original proposed date for implementation was 1 March 2016 but it was brought forward at the request of the previous Standing Committee on Finance.
The current position is that employer contributions to pension funds or provident funds, which an employer is required to make in terms of the rules of the applicable fund in respect of its employees, do not constitute a taxable benefit under the Seventh Schedule. However, employer contributions to a retirement annuity fund of an employee are taxable benefits. The tax deductions available to individuals in respect of contributions to a pension fund, provident fund and retirement annuity fund are contained in separate provisions of the Income Tax Act.
In terms of the proposed tax changes, a taxable fringe benefit will arise in respect of any employer contribution to a pension fund, provident fund or retirement annuity fund in respect of an employee. The new rules provide for the method in which the taxable value attributable to such employer contributions must be determined under the Seventh Schedule.
The effect of the proposed consolidated deduction for individual taxpayers is that retirement annuity fund contributions will no longer be considered for a tax deduction in isolation, but will have to be aggregated together with contributions to any pension or provident fund to determine the tax deductibility thereof.
In terms of the 2013 amendments, the valuation of the taxable benefit arising in respect of employer contributions to retirement funds is determined based on the concepts of a “defined contribution component”, a “defined benefit component” or a combination of both components.
However, the Draft Taxation Laws Amendment Bill, 2014 (issued on 17 July 2014) contained proposed amendments to the valuation provisions currently contained in the Seventh Schedule, and Draft Regulations regarding the manner in which a fund must determine the defined contribution and defined benefit components of a fund and the formula for valuing employer contributions in respect of a defined benefit component. The draft amendments are based on the concept of a “fund member category” and would require the retirement fund to determine the separate components of the retirement benefits to which each category of members is entitled, and which comprise defined benefit, defined contribution, underpin and risk components.
A number of the public comments received have been accepted in the Draft Response Document. Some of these comments refer to the valuation methodology in respect of risk benefits which are fully insured by the retirement fund with an external service provider and the exclusion of additional voluntary contributions from the calculation of the notional employer contribution fringe benefit. In addition, the Draft Response Document clarifies that contribution certificates will not be required in respect of defined contribution funds (except in relation to self-insured risk benefits) or a group of fund members who only have a defined contribution component.
Given the complexities of the fringe benefit valuation methodologies which have been proposed and the variations in terms of retirement benefits offered by hybrid funds, the postponement of the implementation of the above tax-related changes is to be welcomed. Individuals should consider the overall level of their retirement funding to both employer retirement funds and their personal retirement annuity fund in order to determine the extent to which the proposed changes will impact on the tax treatment of their contributions. It is hoped that the retirement fund reforms will be finalised as soon as possible so as to eliminate the present uncertainty surrounding planning for one’s retirement.
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